RETAIL MARKETING – NOTES

INTRODUCTION TO THE WORLD OF RETAILING

ANNOTATED OUTLINE INSTRUCTOR’S NOTES

I. The World of Retailing

 Retailing is evolving into a global, high-
tech business.
 When today’s consumer makes a Ask students about where they bought their
purchase in their local store, that purchase textbook for the course. One will likely get a mix
is often made possible through the use of of responses, including the college bookstore or
sophisticated communications and the downtown store, in addition to the Internet or
information systems. The use of new
technologies helps retailers reduce their even from another student. Question students on
operations costs, while better serving the pros and cons of each type of transaction.
their customers.
 Retail managers today must make
complex decisions on selecting target
markets and retail locations, determining
what merchandise and services to offer,
negotiating with suppliers and
distributing merchandise to stores,
training and motivating sales associates,
and deciding how to price, promote and
present merchandise.

II. What Is Retailing? See PPT 1-5, 1-6

 Retailing is the set of business activities
that adds value to the products and Ask students to give examples of retailers.
services sold to consumers for their
One ice-breaking activity is to ask each
personal or family use.
student to list as many retailers as they can
think of in a specified period of time. Ask the
student with the most listed retailers to read
his or her list to the class.
Generally, the student will think of traditional
retailers that sell through stores. By the
definition we propose here, many retailers do
not sell through stores and/or sell services
rather than merchandise. Be sure to discuss
the many other examples such as Quizno’s,
QVC, Avon, Jiffy Lube, Pizza Hut, and
airlines.
Certainly students should be encouraged to
 consider Internet retailers and multi-channel
retailers like Amazon.com or Barnes and Noble
and BN.com.

As part of your discussion you may also wish

to include universities and colleges. These
organizations sell some services to end users
and thus are retailers, but they also sell some
services to businesses and thus are channel
members, but not retailers.
A. A Retailer's Role in a Supply Chain See PPT 1-7, 1-8, 1-10
 Retailers are the final business in a supply
chain that links manufacturers with
consumers. A supply chain is a set of A typical supply chain network is illustrated in
firms that make and deliver a given set of PPT 1-7
goods and services to the ultimate
consumer.
 Manufacturers make products and sell Discuss how, in some channels, consumers
them to retailers or wholesalers. can perform some of the functions performed
Wholesalers engage in buying, taking by retailers, wholesalers, and manufacturers
title to, often storing, and physically in other channels.
handling goods in large quantities, then
For example, assembling furniture or toys is
reselling the goods (usually in smaller
quantities) to retailers or industrial or
a function frequently performed by
business users. manufacturers (providing services).
Consumers who buy through discount stores
 Some retail chains are both retailers and have to discover information about products
wholesalers. They’re performing on their own. When buying at warehouse
retailing activities when they sell to
stores, consumers might buy in large
consumers and wholesaling activities
when they sell to other businesses like
quantities and repackage the food into
building contractors or restaurant owners. smaller packages (breaking bulk and holding
inventory.)
 In some supply chains, manufacturing,
wholesaling, and retailing activities are
performed by independent firms.
 But most supply chains have some
vertical integration. Vertical integration
means that a firm performs more than one Why is Victoria’s Secret vertically integrated
level of activity in the channel. For while the local department store is not?
example, most large retailers--such as
Safeway, Wal-Mart, and Office Depot -- Advantages:
do both wholesaling and retailing
Develop unique merchandise only sold in
activities
your stores.
 Backward integration occurs when a
retailer performs some distribution and Better coordination between manufacturing
manufacturing activities, such as and retailing.
operating warehouses and/or designing
 private label merchandise. Disadvantages:

 Forward integration occurs when a Higher costs because retailer might not be an
manufacturer undertakes its own retailing efficient manufacturer.
activities, such as Ralph Lauren opening
its own retail stores.

B. Retailers Create Value PPT 1-11, 1-12, 1-13 illustrate the value
question for retailers.
 Retailers undertake business activities
and perform functions that increase the
value of the products and services they
Note that retailers and distributors account
sell to consumers.
for a lot of the cost of a product. A retailer's
 These functions are: markup of 50% adds half of the cost in
making and getting the product to the
consumer.
Students could be given a hypothetical issue to
debate: Suppose the local grocery store markups
all its products by about 50%? Is the grocery
store profitable?

Some students may confuse the markup of 50%

with profits. The various functions performed by
retailers as noted below would help students
understand the costs borne by retailers.

As an aside, standard industry average profits for

grocery retailing are only in 1-3% range.

1. Providing Assortments
 Offering an assortment enables customers Ask students to describe the difference in the
to choose from a wide selection of assortments of bicycles provided by Wal-Mart
brands, designs, sizes, colors, and prices and the local bike shop. What is the
in one location. difference in assortment of body lotions and
 All retailers offer assortments of creams provided by Bath and Body Works
products, but they specialize in the and Kmart?
assortments they offer. Supermarkets
provide assortments of food, health and
beauty care (HBC), and household
products; while Abercrombie and Fitch
provides assortments of clothing and
accessories.

2. Breaking Bulk How many students have made purchases at

Sam’s Club/BJ’s/Costco? What items have
 To reduce transportation costs,
the students or family members purchased in
manufacturers and wholesalers typically
bulk? Discuss the advantages of buying in
 ship cases/cartons of products to retailers. bulk. For what purchases and what types of
consumers does buying in bulk make sense?
 Retailers then offer the products in
smaller quantities tailored to individual
consumers’ and households’ consumption
patterns.

3. Holding Inventory Discuss product categories for which holding

inventory is particularly appealing (e.g.,
 A major function of retailers is to keep
holiday decorations, seasonal gear).
inventory so that products will be
available when consumers want them,
reducing the consumer’s cost of storing
products.

4. Providing Services Ask the students what kind of services

retailers provide. Some services are:
 Retailers provide services such as credit,
acceptance of credit cards, alteration of
product displays, and sales staff to make
it easier for customers to compare, buy merchandise, assembly of merchandise,
and use products. bridal registry, check cashing, child-care
facilities, credit, delivery to home,
demonstrations of merchandise, displaying
merchandise, dressing rooms, gift wrapping,
lay-away plans, parking, personal assistance
in selecting merchandise, personal shoppers,
play areas for children, presentations on how
to use merchandise, provisions for customers
with special needs (wheelchairs, translators),
repair services, rest rooms, special orders
and warranties.

Which of these services do students believe offer

the greatest value to the consumer? Do their
opinions differ for different retailers?

5. Increasing the value of products and Ask students how a computer retail store can
services. increase the value of a computer for a
consumer. Compare the service of a
 By providing assortments, breaking bulk,
holding inventory, and providing computer store with an on-line store like Dell.
services, retailers increase the value
consumers receive from their products
and services.

III. Social and Economic Significance Of See PPT 1-14

Retailing

A. Social Responsibility Ask students which retailers are actively

engaged in CSR.
  Retailers are socially responsible
businesses. Corporate social
responsibility describes the voluntary
actions taken by a company to address the
ethical, social and environmental impacts
of its business operations and the
concerns of its stakeholders.

B. Top 20 Global Retailers

 Retailing is becoming a global industry as See PPT 1-17
more retailers pursue growth by
expanding their operations to other
countries. Are students surprised by any companies on
the list? Why or why not?
 Large retailers in particular are becoming
increasingly international in geographic
scope.
Ask what companies will be in the top 5 in 5
 Exhibit 1-3 lists the 20 largest global years.
retailers.
Why?
 The exhibit includes companies that Discuss how some companies are doing a
compete on the basis of price (such as good job of dealing with changing customer
Wal-Mart), firms that are known for
needs and others are not.
specific categories (such as Safeway for
groceries and CVS for drugs), and firms
that sell a wide variety of merchandise
through different retail formats (such as What global retailers have students experienced
Target). while traveling abroad? How do these
experiences compare to the students’ experiences
 The 20 largest retailers account for about in the local marketplace?
35% of the world market. Of the top
global retailers, 36% are headquartered in
the U.S., 36% in Europe and 14% in
Japan.

C. Structure of Retailing and Distribution PPT 1-18, 1-19, 1-20 illustrate these different
Channels Around the World distribution channels
 Compared with distribution channels in Ask students to consider several reasons for
the European Union, China and India, the differences in distribution systems in various
US distribution system has the greatest nations.
retail density with the greatest
concentration of large retail firms. The
combination of large stores and large
firms results in a very efficient How do differences in distribution systems lead to
distribution system. differences in retail experiences for consumers?

 The Chinese and Indian distribution

systems are characterized by small stores
operated by relatively small firms and a
large, independent wholesale industry.
 As a result, a larger percentage of labor is
employed in distribution and retailing
than in the US.
 Northern European retailing is most
similar to the US system. Southern
European retailing is more fragmented
across all sectors. Central European
retailing has changed from a highly
concentrated structure to one of extreme
fragmentation (involving small family
owned stores).
 Factors that have created differences in
distribution systems include: (1) social
and political objectives, (2) geography,
and (3) market size.

IV. Opportunities in Retailing

A. Management Opportunities See PPT 1-21 for more information and

examples of opportunities in the retailing
 Retailers employ people with expertise
field
and interest in finance, accounting,
human resource management, logistics,
computer systems, and marketing.
Ask students what they think of retailing as a
 A typical buyer in a department store career. If there are many opportunities and
earns $50,000 to $60,000 per year. Store they seem to pay well, why do most students
managers often make over $100,000. think that retailing is not a good job to get
after graduation?
B. Entrepreneurial Opportunities Examples of entrepreneurs in retail are
shown in PPT 1-23
 Retailing provides opportunities for
people wishing to start their own
business. Many retail entrepreneurs are
among the wealthiest people in the United
States. What are some ideas that a retail
 The successes of Jeff Bezos entrepreneur might consider now near the
(Amazon.com), Anita Roddick (The Body campus or in the students’ hometowns?
Shop), Ingvar Kamprad (IKEA) and (Sam
Walton (Wal-Mart) show how each
capitalized on entrepreneurial
opportunities.

V. The Retail Management Decision Process

 The book is organized around the Use this to discuss the organization of the
management decisions retailers make to course and the book
provide value to their customers and
develop an advantage over their
 competitors.

A. Understanding the World of Retailing See PPT 1-25 for the Retail Management
(Section I) Decision Process
 Retail managers need a good Ask students about some changes occurring
understanding of their environment, in the environment now that will affect
especially their customers and retailing in general and specific retailers.
competition, before they can develop and Corporate Social Responsibility may come up
implement effective strategies. as an answer and the impacts of CSR on the
 The critical environmental factors in the practice of retailing could be discussed in
world of retailing are: (1) the detail.
macroenvironment, and (2) the
microenvironment. The impact of the
macroenvironment includes
technological, social and
ethical/legal/political factors on retailing.
The retailer’s microenvironment includes
the retailer’s competitors and customers.

1. Competitors
 A retailer’s primary competitors are those In going through this section, you might pick
with the same format. Thus, department a specific local retailer. Ask students to
stores compete against other department identify the retailer’s customers, intratype
stores and supermarkets compete with competitors, intertype competitors, and
other supermarkets. This competition environmental trends affecting the retailer.
between retailers with the same format is
called intratype competition.
 To appeal to a broader group of
consumers and provide one-stop Ask students to give an example of intratype
shopping, many retailers are increasing
competition – local department store
their variety of merchandise. Variety is
the number of different merchandise
competing against another department store
categories within a store or department. in the same mall
The offering of merchandise not typically
associated with the store type, such as
clothing in a drug store, is called
scrambled merchandising. Ask students to compare the different types of
 Competition between retailers that sell merchandise offered at Wal-Mart to those
similar merchandise using different offered at, say, Bath and Body Works or
formats, such as discount and department McDonald's.
stores, is called intertype competition.
 Increasing intertype competition has
made it harder for retailers to identify and
monitor their competition. In one sense,
all retailers compete against each other
for the dollars consumers spend buying Ask students to give an example of intertype
goods and services. competition – drug store and discount store
  Since convenience of location is
that sell the same brand of cosmetics.
important in store choice, a store’s
proximity to competitors is a critical
factor in identifying competition.
 Management’s view of competition also
can differ, depending on the manager’s
position within the retail firm.
 The CEO of a retail chain may view
competition from a much broader
geographic perspective as compared to a
specific store's manager or a departmental
sales manager within the store.

2. Customers
 Retailers are responding to broad Query students on the specific impacts of an
demographic and life-style trends in our aging population or dual-income households on
society, such as the growth in the elderly retailing, including retail location, store layout,
and minority segments of the U.S. etc. What needs for specific types of merchandise
population and the importance of and services do these markets create?
shopping convenience to the rising
number of two-income families.
 To develop and implement an effective
strategy, retailers need to know why
customers shop, how they select a store,
and how they select among that store’s
merchandise.

B. Developing a Retail Strategy (Section II)

 Understanding of the macro- and See PPT 1-27
microenvironments is needed to
formulate and implement a retail strategy.
How can one retailer gain long-term
 The retail strategy indicates how the
firm plans to focus its resources to
competitive advantage over competitors in the
accomplish its objectives. The retail marketplace? (Potential areas for discussion
strategy identifies: (1) the target market, may include: location, customer
(2) the nature of merchandise and relationships, technology, merchandising,
services to be offered, and (3) how the etc.)
retailer will build a long-term advantage
over competitors.

1. Strategic Decision Areas

 Key strategic decision areas include the
determination of market strategy,
financial strategy, location strategy,
organizational structure and human
resource strategy, information systems
and supply chain strategies, and customer
 relationship management (CRM)
strategies.
 When major environmental changes
occur, the current strategy and the
reasoning behind it are reexamined. The
retailer then decides what, if any, strategy
changes are needed to take advantage of
new opportunities or avoid new threats in
the environment.
 The retailer’s market strategy must be
consistent with the firm’s financial
objectives. Location decisions are
important for both consumer and
competitive reasons. A retailer’s
organizational design and human resource
management strategies are intimately
related to its market strategy. Retail
information and supply chain
management systems will be significant
opportunities for retailers to gain strategic
advantage in the coming decade.
 Basic to any strategy is understanding the
customer so as to provide them with the
goods and services they want. Customer
Relationship Management (CRM) is a
business philosophy and set of strategies,
programs, and systems that focus on
identifying and building loyalty with the
firm's most valued customers.

2. JCPenney Moves from Main Street to

the Mall. See PPT 1-30, 1-31 to review the strategic
 In the late 1950s, Penney was one of the evolution of JCPenney.
most profitable national retailers. Its
target market was small towns. In its
Main Street locations, Penney sold staple
soft goods at low prices with minimal
service. All sales were cash; the company
didn't offer credit to its customers.
 Organization structure was decentralized.
 In spite of its success, there was a
growing awareness among company
executives that macroenvironmental
trends would have a negative impact on
the firm.
 In the early 1960s, Penney undertook a
new strategic direction that was consistent
 with changes it saw in the environment.
 All new Penney stores were located in
regional malls across the United States.
Penney opened several mall locations in
each metropolitan area to create
significant presence in each market.
 To effectively control its 1,500 stores,
Penney installed a sophisticated
communication network.
 Penney launched its catalog operations
and has recently moved aggressively into
selling merchandise over the Internet
(www.jcpenney.com). The firm's multi-
channel strategy has been very successful,
with the average customer that shops
across all its channels – stores, catalogs,
and the Internet – spending four times
more than the firm's average single
channel customer.
 To compete effectively with the retailers
targeting Penney’s middle-income
customers, the company has made some
radical changes in how it operates, its
organizational structure, and where it
locates its stores.

C. Implementing the Retail Strategy (Sections See PPT 1-33 for Key Decision Variables for
III and IV) Retailers
 To implement the retail strategy,
management develops a retail mix that
Ask students what McDonald’s needs to do to
satisfies the needs of its target market
better than its competitors. implement its strategy effectively. Have them
discuss each of the elements of the retail mix
 Elements in the retail mix include the used by McDonalds. Compare the retail mix
types of merchandise and services elements used by McDonalds to the retail mix
offered, merchandise pricing, advertising elements used by an upscale restaurant in
and promotional programs, store design,
town. Why the retail are mixes of these two
merchandise display, assistance to
customers provided by salespeople, and types of restaurants different? – [They have
convenience of the store’s location. different target markets with different needs.]

1. Whole Foods Market: An

Organic and Natural Food Supermarket See PPT 1-32
Chain
 When John Mackey, founder and CEO of
Whole Foods Market, found that
textbooks weren’t going to provide the Ask students what Whole Foods needs to do
 answers he was looking for, he dropped to implement its strategy effectively. Have
out of college, lived in a vegetarian them discuss each of the elements of the retail
housing co-op, and worked in an Austin mix used by Whole Foods. Compare the
natural food store. retail mix elements used by Whole Foods to
the retail mix elements used by a traditional
 After he opened his own health-food store
supermarket in town. Why are the retail
and restaurant, he teamed up with a local
organic grocer to open the first Whole mixes of these two types of food retailers
Foods, which was an instant success. different? – [They have different target
markets with different needs.]
 Whole Foods stores, at 25,000 to 60,000
square feet, are much larger and carry a Additional 1 PPTs illustrate the retail mixes of
much broader assortment than the typical several well known retailers. Use these
natural and organic grocery store. illustrations to guide discussion on various
strategic choices for different types of retailers.
 The stores offer vegetarians as well as
health-conscious nonvegetarians a one-
stop shopping experience.
 The flower power of the 60’s is reflected
in Mackey’s guiding management
principles – love, trust, and employee
empowerment.
 Mackey also has an old fashioned
competitive drive to dominate Whole
Foods’ segment of the supermarket
industry.
 Whole Foods’ latest venture is the
opening of new, exciting 50,000 square
foot versions of its stores pioneering a
new lifestyle concept that synthesizes
health and pleasure.

VI. Ethical and Legal Considerations Ask students who have worked for retailers
whether the firm had a code of ethics. What
 Retail managers need to consider the
were some common elements of those codes?
ethical and legal implications of their
decisions in addition to the effects those
decisions have on the profitability of their
firms and the satisfaction of their See PPT 1-35 for a review of ethical decision
customers. making situations and ethical decision strategies.
 Ethics are the principles governing the
behavior of individuals and companies to
establish appropriate behavior and Discuss recent news articles relating to retailers
indicate what is right and wrong. and legal/ethical issues.
 Determining appropriate ethical
principles is a difficult task. Ethical
principles can vary from country to
country and can also change over time.
  Many companies have developed codes
of ethics to provide guidelines for their
employees.

VII. Summary
 Retailing provides considerable value to
consumers while giving people
opportunities for rewarding and
challenging careers.
 The key to successful retailing is offering
the right product, at the right price, in the
right place, at the right time, and making
a profit. To accomplish this, retailers
must understand what customers want
and what competitors are offering.

VIII. Appendix 1A: Careers in Retailing

 Retailing offers exciting and challenging See PPT 1-37
career opportunities. Few other industries
grant as many responsibilities to young
managers.
 Retailing offers a variety of career paths
such as buying, store management, sales
promotion and advertising, personnel,
operations/distribution, loss prevention,
and finance in several different corporate
forms such as department stores, specialty
stores, food stores, and discount stores.
 In addition, retailing offers almost
immediate accountability for talented
people to reach key management
positions within a decade. Starting
salaries are competitive, and the
compensation of top management ranks
among the highest in any industry.

A. Career Opportunities
 Career opportunities in retail firms occur
in merchandising/buying, store
management, and corporate staff
functions.

 Primary entry-level opportunities for a

retailing career are in the areas of buying
and store management. Buying positions
are more numbers oriented, whereas store
 management positions are more people
oriented.

1. Store Management
 Successful store managers must have the
ability to lead and motivate employees.
Store management involves all the
disciplines necessary to run a successful
business: sales planning and goal setting,
overall store image and merchandise
presentation, budgets and expense
control, customer service and sales
supervision, personnel administration and
development, and community relations.

2. Merchandise Management
 Merchandise management attracts people
with strong analytical capabilities, an
ability to predict what merchandise will
appeal to their target markets, and a skill
to negotiate with vendors as well as store
management to get things done. Many
retailers break the merchandise/buying
function into two career paths: buying
and merchandise planning.

3. Corporate Staff
 Corporate staff opportunities include
positions in MIS, operations/distribution,
promotions/advertising, loss prevention,
finance/control, real estate, store design,
and human resource management.
 Career opportunities for corporate staff
positions are more difficult to break into.

B. Myths About Retailing

1. Sales Clerk Is the Entry-Level Job in
Retailing

2. College and University Degrees Are

Not Needed to Succeed in Retailing

3. Retail Jobs Are Low Paying

4. Retailing Is a Low Growth Industry

with Little Opportunity for Advancement

5. Working in Retailing Requires Long

 Hours and Frequent Relocation

6. Retailing Doesn’t Provide

Opportunities for Women and Minorities

ANSWERS TO SELECTED “GET OUT AND DO ITS”

3. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the
Census Internet site at http://www.census.gov/retail/#ecommerce. Look at the Estimates of
Monthly Retail and Food Services Sales by Kind of Business for the most recent year. In which
months are sales the highest? Which kinds of businesses experience the greatest fluctuations in
monthly sales? List reasons that help to explain your findings.
Students should notice the importance of the 4th quarter for retail sales during the winter holiday
season. The second largest sales increase is timed with back to school.
Many types of US retailers posted their highest sales in the 4th quarter including Home Furnishings
Retailers, Electronics and Appliances Retailers, and Jewelry Stores. In fact, Jewelry Stores posted
sales for the month of December alone at 37% of their total sales.

4. INTERNET EXERCISE Go to the Macy’s Careers After College homepage:

http://www.macysjobs.com/college/, Sears Holdings Corporation College Programs homepage:
http://www.searsholdings.com/careers/college, and the National Retail Federation Retail Careers
Center: http://www.nrf.com/RetailCareers/ to find information about retail careers with these
companies/organizations. Review the information about the different positions described. In
which positions would you be interested? Which positions are not of interest to you? Which
employer would interest you? Why?
Students’ answers will vary considerably here. Some students may take a more long-term view
looking to Buyer or Planner positions which call for a variety of skills including strong organizational
and analytical skills, excellent verbal and written communication skills and extensive computer
experience. These positions also require several years of prior experience in lower-level buying
positions. Other students may find these positions to be more quantitative or analytical than their
interests lie.
Students looking at entry-level positions, as well as those seeking more creative positions or those
with a broader focus may be attracted to the entry-level Fashion Assistant or Product Assistant
positions. These positions request a less comprehensive skill set as well as less emphasis on prior job
experience.

5. INTERNET EXERCISE Choose one of the top 20 retailers (Exhibit 1-3). Go to the company’s Web site
and find out how the company started and how it has changed over time?

From the Exhibit of the Top 20 retailers, students can see that in general, European retailers have
been more successful in expanding to more countries as compared to U.S. retailers. In general,
given smaller sizes of the countries in which these retailers originated, they had to expand to other
country markets to sustain their growth strategies. By contrast, the U.S. retailers have enjoyed a
larger market size within the U.S. alone, thereby rendering global expansion less of a priority for
them. Students will also note that food retailing dominates among the largest retailers, as 8 of the
top 10 sell food products.
6. INTERNET EXERCISE Go online and find an example of a retailer involved in corporate
social responsibility. In a brief paragraph describe how this retailer is taking steps to contribute
to a social or ethical cause.
2
TYPES OF RETAILERS

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Retailer Characteristics
 The 1.9 million U.S. store-based retailers Ask students to compare the four elements of
range from street vendors selling hot dogs the retail mix -- the type of merchandise sold,
to Internet retailers like Amazon.com to the variety and assortment of merchandise
multichannel retailers like Best Buy that and/or services sold, the level of service
have both an extensive physical store provided to customers, and price -- of two
presence and an active Internet site. women's specialty stores in a local mall.
 The retail industry is always evolving. As Now compare the retail mixes of one of the
consumer needs and competition within specialty stores and the local discount store
the industry change, new retail formats (e.g., Wal-Mart). Use this comparison to
are created to respond to those changes. illustrate how the competition between the
 The most basic characteristic of a retailer two specialty stores is stronger than the
is its retail mix – the elements used to competition between the specialty store and
satisfy its customers’ needs. the discount store.
 Four elements of the retail mix that are
particularly useful for classifying retailers
are: (1) the type of merchandise sold, (2)
the variety and assortment of merchandise
and/or services sold, (3) the level of
customer service, and (4) the price of the
merchandise. PPT 2-5 illustrate classification of retailers by
merchandise offering and by variety and
assortment.

A. Variety and Assortment. See PPT 2-8

 Variety is the number of merchandise
categories a retailer offers. Assortment is Ask students to give examples of local
the number of different items in a
retailers with low variety and high
merchandise category. Each different item
of merchandise is called a SKU (stock assortment, with high variety and low
keeping unit). assortment.
 Variety is often referred to as the breadth
of merchandise and assortment is What benefits does high variety offer to
referred to as the depth of merchandise. customers? What is the benefit of high
assortment?
 Ask student to give an example of an SKU.
B. Services Offered See PPT 2-10
 Retailers also differ in the services they
offer customers. Customers expect Discuss the different customer service policies
retailers to provide some services--
of a national specialty store like Victoria’s
accepting personal checks, displaying
merchandise, providing parking, and Secret and a local department store or an
being open long and convenient hours. Internet retailer.
 Some retailers charge customers for other
services, such as home delivery and gift Discuss the type of customer that would shop
wrapping, although upscale retailers offer in each store. How do these customers differ
customers these services at no charge.
and what types of services would these
customers expect?
C. Prices and the Cost of Offering Breadth See example in PPT 2-12 for illustration
and Depth of Merchandise and Services
 Stocking a deep and broad assortment is Customers like wide variety, deep
appealing to customers but costly for
assortments, and a lot of service, though some
retailers. When a retailer offers many
SKUs, inventory investment increases customers appreciate having the retailer edit
because the retailer must have back-up the assortment for them. Ask students why all
stock for each SKU. retailers don’t have this type of offering?
(Can’t be everything, have constraints of
 Similarly, services attract customers to the money and size of store.)
retailer, but they are also costly.
 To make a profit, retailers that offer
broader and deeper assortments and Why don't discount stores offer more
services need to charge higher prices. services? (They appeal to a target segment
 A critical retail decision involves the that does not want to pay the cost for more
trade-off between costs and benefits of service options.)
maintaining additional inventory or
providing additional services.
PPT 2-14 shows a comparison of sales and
growth rates in various retail sectors

II. Food Retailers See PPT 2-15, 2-16

 Twenty years ago, consumers purchased
food primarily at conventional Where do students make the majority of their
supermarkets. Now conventional
off-campus food purchases? What are the
supermarkets account for only 56 percent
of food sales. pros and cons of these different food retailer
formats?
 Supercenters, warehouse clubs,
convenience stores and extreme value
food retailers are significantly changing
consumers' food purchasing patterns
 because they too sell food. At the same
time, traditional food retailers carry many
nonfood items.
 The world's largest food retailer is Wal-
Mart with supermarket-type sales of more
than $134 billion.

A. Supermarkets See PPT 2-17

 A conventional supermarket is a self-
service food store offering groceries, Ask students to consider the retail mixes of
meat, produce, and limited non-food
the major supermarkets in the area
items.
surrounding campus. Which compete on
 A limited assortment supermarket (also price? On merchandise? On service? A
called an extreme value food retailer) combination?
only stocks about 2,000 SKUs. The two
largest US examples of these stores are
Save-A-Lot and ALDI.
 Limited assortment supermarkets are
designed to maximize efficiency and
reduce costs through limited assortment
and service offerings. These cost savings
and efficiencies allow the stores to charge
significantly lower (40-60% lower) prices
than conventional supermarkets.

1. Trends in Supermarket Retailing Ask students about why they would continue to
shop at conventional supermarkets. Alternatively,
 Today, conventional supermarkets are why would they shop for food at supercenters,
under substantial competitive pressure. warehouse clubs or convenience stores? What
Supercenters are attracting customers with types of needs are fulfilled by conventional
their broader assortments and general supermarkets that can’t be filled through other
merchandise at attractive prices. Full-line food retailing formats? Based on these
discount chains and extreme value discussions, will conventional supermarkets be
retailers are increasing the amount of driven out of business by competing formats?
shelf space they devote to consumables.
 Competitive pressure also comes from
convenience stores who are selling more
fresh merchandise. See PPT 2-20 for coverage of Trends.

 Low cost competitors are especially

challenging for conventional
supermarkets because of their superior
operating efficiencies.
 To compete successfully with intrusions
by other types of retailers, conventional
supermarkets have taken steps to
differentiate their offerings, such as
emphasizing their “power perimeters”
 (areas around the outside walls with fresh
perishables such as dairy, produce, florist,
deli and bakery departments), targeting
health conscious and ethnic consumers,
providing a better in-store experience, and
offering more private-label brands.
 Conventional supermarkets are also
offering more natural, organic, and fair
trade foods for their increasingly health
and environmentally conscious
consumers. Fair trade means purchasing
from factories that pay workers a living
wage, well more than the prevailing
minimum wage, and offer other benefits
like onsite medical treatment.
 Through adjustments to the traditional
merchandise mix, conventional
supermarkets are also targeting more
ethnic shoppers.
 Conventional supermarkets chains are
leveraging their quality reputations to
offer more private-label merchandise.
Private-label brands benefit both
customers and retailers. (Branding
strategies are covered in depth in 14.)
 The online grocery market also represents
a growing category.
 Creating an enjoyable shopping
experience through wider variety, better
store ambiance, and customer service is
another approach supermarket chains may
use to differentiate themselves from low-
cost, low-service competitors. Some have
begun to integrate “food as theater”
concepts, such as cooking and nutrition
classes and food tastings.

B. Supercenters See PPT 2-22 for an illustration of the

characteristics of supercenters and
 Supercenters are the fastest growing
warehouse clubs.
retail category. At 150,000 to 220,000
square foot these stores offer a wide
variety of food and non-food
merchandise. The largest supercenters are The supercenter is one of the fastest growing
Wal-Mart supercenters, Meijer, Kmart, retail formats. Why is the supercenter more
Fred Meyer (a division of Kroger), and attractive than a hypermarket in the U.S., but
Target. not in Europe? What are benefits to
 By offering broad assortments of grocery consumers shopping in supercenters versus
 and general merchandise under one roof, conventional supermarkets? What are the
supercenters provide a one-stop shopping disadvantages?
experience.
 However, since supercenters are very
large, some customers find them Where do students fall on the debate over the
inconvenient because it can take a long proliferation of supersize stores? Have any of
time to find the items they want. their hometowns faced a battle over the building
of a Wal-Mart or other supercenter? Ask students
 Hypermarkets are also large (100,000 to why they believe feelings run so deep on this
300,000 square feet) combination food particular retailing issue.
and general merchandise retailers. They
typically stock fewer SKUs than
supercenters.
 Popular in both Europe and South
America, hypermarkets are not common
in the United States. Located in large,
warehouse-type structures with large
parking facilities, hypermarkets typically
carry a larger selection of food items than
supercenters with a focus on perishables.
 Supercenters place greater emphasis on
general merchandise and dry grocery
items such as breakfast cereals and
canned goods.
 Although supercenters and hypermarkets
are the fastest growing categories in
global retailing today, these retailers do
face challenges in finding and acquiring
appropriate land for building (particularly
in Europe and Japan), along with backlash
against these supersize stores, particularly
in the U.S.

C. Warehouse Club See PPT 2-22 for an illustration of the

characteristics of supercenters and
 A warehouse club is a retailer that offers
warehouse clubs.
a limited and irregular assortment of food
and general merchandise with little
service at low prices to ultimate
consumers and small businesses. Ask students to give local examples of
warehouse clubs. What is the target market
 Stores are large (at least 100,000 to for warehouse clubs? (Consumers with larger
150,000 square feet) and located in low families and small businesses.)
rent districts.
 Warehouse clubs reduce prices by using
low-cost locations and inexpensive store
designs, and offering little customer
service. They reduce inventory holding
costs by carrying a limited assortment of
 fast-selling items and buying merchandise
opportunistically.
 Most warehouse clubs have two types of Are warehouse clubs wholesalers or
members: wholesale members who own retailers? (When they sell to small businesses
small-businesses and individual members they are wholesalers. When they sell to
who purchase for their own use.
individual members for personal or household
Typically members must pay an annual
fee of approximately $50.
use, they are retailers.

D. Convenience Stores See PPT 2-23 for an overview of the

characteristics of convenience stores
 Convenience stores provide a limited
variety and assortment of merchandise at
a convenient location in a 2,000-to-3,000-
Ask students to give examples of local
square-foot store with a speedy checkout,
with higher prices than supermarkets. convenience stores.
They are a modern version of the
neighborhood mom-and-pop
grocery/general store. Which products do they tend to buy most often
at convenience stores?
 Convenience stores enable consumers to
make purchases quickly without having to
search through a large store and wait in What do they like/dislike about them? In
long checkout lines.
general, what is so "convenient" about
 Convenience stores are facing increasing convenience stores?
competition from other retail formats,
especially from supercenters and
supermarket chains who have added
gasoline to their merchandise offerings,
offering tying gasoline sales to their
frequent shopper programs.
 In response to these competitive threats,
convenience stores are taking steps to
decrease their dependency on gasoline
sales by tailoring their merchandise
assortments to local markets, making their
stores even more convenient to shop, and
adding new services. What services do students believe would make a
convenience store more “convenient”?
 To increase convenience, some
convenience stores are opening smaller
stores close to where consumers shop and
work. Others are exploring the use of
technology to increase shopping
convenience such as self-service kiosks.

III. General Merchandise Retailers See PPT 2-24

 The major types of general merchandise PPT 2-24 compares the various types of general
retailers are department stores, full-line merchandise retailers along several
discount stores, specialty stores, category
 characteristics.
specialists, home improvement centers,
off-price retailers, and extreme value
retailers.

A. Department Stores See PPT 2-25, 2-26, 2-27

 Department stores are retailers that carry Ask students to give examples of local
a broad variety and deep assortment, offer department stores. Why do customers go to
some customer services, and are department stores? What do they like/dislike
organized into separate departments for about them?
displaying merchandise.
 The largest department store chains in the
U.S. are Macy’s, Sears, JCPenney, and
Kohl’s, Nordstrom, Dillard’s and Saks
Fifth Avenue.
 Today, most department stores focus Ask students to give local examples of specialty
almost exclusively on soft goods. The stores. What are the differences between specialty
major departments are women’s, men’s, stores, department stores, and discount stores?
and children’s clothing and accessories; Where do students buy business suits, dresses,
home furnishings; cosmetics; and jeans, computers, electronics? Why do they go to
kitchenware and small appliances. that type of store?
 Each department within the store has a
specific selling space allocated to it as
well as salespeople to assist customers,
often resembling a collection of specialty Which department store tier do students prefer?
shops. Which tier do they shop most often? Discuss
differences in these responses.
 Department store chains can be
categorized into three tiers: (1) upscale,
high fashion chains with exclusive
designer merchandise and excellent
customer service (Neiman Marcus,
Nordstrom); (2) traditional chains with
more moderately priced merchandise and
less customer service (Macy’s and
Dillard’s); and (2) value-oriented chains
catering to price-conscious consumers
(Kohl’s and JCPenney).
 Today many customers question the
benefits of shopping at department stores
due to: (1) lack of convenient locations,
(2) decreases in customer service and (3)
relatively high prices.

B. Full-Line Discount Stores

 A full-line discount store is a retailer that Discuss the target markets of the three largest
offers a broad variety of merchandise, full-line discount store chains (Wal-Mart, Target
limited service, and low prices. They offer and Kmart). How will the category specialists
both private and national brands. (Toys R Us) affect the retail strategy of full-line
 discount store chains? What about Internet only
 The big three full-line discount store
retailers? Are discount stores going to succeed in
chains are Wal-Mart, Target and Kmart.
the “clicks” environment?
 A significant trend in this sector is Wal-
Mart’s conversion of discount stores to In general, what are the factors that contribute to
supercenters as a result of increased the success of discount stores despite increasing
competition faced by the full-line competition from other formats?
discount stores, as well as the significant
operating efficiencies realized by
supercenters.
 As Wal-Mart closes its full-line stores,
Target is becoming one of the most
successful retailers in terms of sales
growth and profitability, succeeding
because its stores offer fashionable
merchandise at low prices in a pleasant
shopping environment.

C. Specialty Stores See PPT 2-29, 2-30

 A specialty store concentrates on a Why do customers go to specialty stores?
limited number of complementary What do they like/dislike about them?
merchandise categories and provides a
high level of service in a relatively small
store. Specialty stores tailor their retail strategy toward
 Specialty stores tailor their retail strategy a very specific market segment. One specialty
toward very specific market segments by retailer, Hot Topics, focuses on selling licensed,
offering deep but narrow assortments and music- inspired apparel to teenagers in mall-
sales associate expertise. based stores. Ask students what retail strategy
elements must be in place for a retailer like Hot
 Today, competitors from other countries Topics to remain successful.
also are making some of the most
successful specialty stores in the U.S. Discuss the “fast fashion” specialty store model
rethink how they satisfy their customers’ with students. Which of these stores have they
needs. For instance, Zara and H&M have visited? What do they like/dislike about the
introduced “fast fashion” to the U.S. concept? Ask which target market(s) this concept
market. Fast fashion is cheap and chic is best suited for.
offering new, fresh merchandise 2-3 times
per week.

D. Drugstores See PPT 2-31

 Drugstores are specialty stores that Ask students if they have shopped online for
concentrate on health and personal drugstore products. What has been their
grooming merchandise. Pharmaceuticals experience? Do they think the Internet is a viable
often represent 50 percent of drugstore channel for drugstore merchandise?
sales and an even greater percentage of
their profits.
 Drug stores, particularly the national
chains, are experiencing sustained sales
growth because the aging population
 requires more prescription drugs.
Prescription pharmaceutical margins are
shrinking due to governmental health care
policies and HMOs.
 Drugstores are also being squeezed by
competition from pharmacies in discount
stores and supermarkets, as well as
prescription mail-order retailers.
 In response, drug store chains are building
larger stand-alone stores offering a wider
assortment of merchandise, more
frequently purchased food items, and
drive-through windows for picking up
prescriptions. Also, drugstore retailers are
encouraging pharmacists to take the time
to provide personalized service.

E. Category Specialist See PPT 2-32, 2-33

 A category specialist is a big box Ask students to give local examples of
discount store that offers a narrow variety category specialists. How are they similar to
but deep assortment of merchandise. specialty stores? Discuss the differences and
These retailers predominantly use a self- similarities with discount stores.
service approach, but they offer assistance
to customers in some areas of the store.
 By offering a complete assortment in a
category at low prices, category
specialists can "kill" a category of
merchandise for other retailers and thus
are frequently called category killers.
 Because category specialists dominate a
category of merchandise, they can use
their buying power to negotiate low
prices, and assured supply when items are
scarce.
 One of the largest and most successful Ask students to describe an experience at a home
types of category specialist is the home improvement center such as Home Depot in terms
improvement center. A home of merchandise, atmosphere and salesperson
improvement center is a category service.
specialist offering equipment and material
used by do-it-yourselfers and contractors
to make home improvements.
 While merchandise in home-improvement
centers is displayed in a warehouse
atmosphere, salespeople are available to
assist customers in selecting merchandise
and to tell them how to use it.
  Competition between specialists in each
category is very intense (Staples vs.
Office Depot; Home Depot vs. Lowe’s) as
firms expand into the regions originally
dominated by another firm. Direct
competition focuses on price, resulting in
reduced profits because the competitors
have difficulty differentiating themselves
on other elements of the retail mix.
 In response to this increasing competitive
intensity, the category killers continue to
concentrate on reducing costs by
increasing operating efficiency and
acquiring smaller chains to gain scale
economies, although some category
killers, like Home Depot and Lowe’s are
attempting to differentiate themselves
with service through licensed contractors.

F. Extreme Value Retailers See PPT 2-34 for a summary of issues facing
extreme value retailers.
 Extreme value retailers, such as Family
Dollar Stores and Dollar General, are Ask students to name the extreme value
small, full-line discount stores that offer a retailers in the local marketplace. How many
limited merchandise assortment at very have shopped at one of them? For what types
low prices. of merchandise? What is the primary appeal
 By offering limited assortments and of these retailers?
operating in low-rent locations, extreme
value retailers are able to reduce costs and
maintain very low prices.
 Despite some of these chains’ names, few
just sell merchandise for $1. Rather, the
names imply a good value but do not limit
prices to the arbitrary dollar price point.
 The growing popularity of extreme value
retailers has led some vendors to agree to
create special, smaller packages just for
them.
 Once considered low-status retailers
catering to low-income consumers,
extreme value retailers have broadened
their appeal to higher-income consumers
by offering exciting bargains and unique
merchandise.

G. Off-Price Retailers Ask students to give examples of local off-

price retailers. What do consumers like about
 Off-price retailers, also known as close-
off-price retailers? What don't they like?
out retailers, offer an inconsistent
 assortment of brand name merchandise at
low prices.
 Off price retailers can sell brand name See PPT 2-35 for a summary of the issues
and even designer-label merchandise at facing off-price retailers
low prices due to their unique buying and
merchandising practices. Most
merchandise is bought opportunistically
from manufacturers or other retailers with
excess inventory at the end of the season.
 End of season merchandise that will not
be used in following seasons is called
close-outs. The merchandise may be in
odd sizes or unpopular colors or styles, or
it may be irregulars, merchandise that
has minor mistakes in construction.
 Typically, merchandise is purchased at
one-fifth to one-fourth of the original
wholesale price. Off-price retailers can
buy at low prices because they don't ask
suppliers for advertising allowances, Ask students which type of off-price retailer
return privileges, markdown adjustments,
offers consumers truly the best value? Why?
or delayed payments.
 Due to this pattern of opportunistic
buying, customers can't be confident that
the same type of merchandise will be in
stock each time they visit the store.
 Outlet stores are off-price retailers
owned by manufacturers, or by
department or specialty store chains.
 Outlet stores owned by manufacturers are
frequently referred to as factory outlets.
 Manufacturers view outlet stores as an
opportunity to improve their revenues
from irregulars, production overruns, and
merchandise returned by retailers. Outlet
stores also allow manufacturers some
control over where their branded
merchandise is sold at discount prices.

H. Differences between Services and

Merchandise Retailers PPT 2-36
 Four important differences in the nature
of the offering provided by services and
merchandise retailers are: (1)
intangibility, (2) simultaneous production
and consumption, (3) perishability, and
 (4) inconsistency of the offering to
customers.

1. Intangibility
 Services are generally intangible -- Ask students how customers can evaluate the
customers cannot see, touch, or feel them. quality of an intangible service offering. What
Services are performances or actions problems does intangibility cause for the
rather than objects. services retailer?
 Intangibility introduces a number of
challenges for services retailers. It is
difficult for customers to evaluate
services before they buy them, or even
after they buy and consume them.
Services retailers often use tangible
symbols to inform customers about the
quality of their services.
 Services retailers also have difficulty in
evaluating the quality of services they are
providing. To evaluate the quality of their
offering, services retailers place emphasis
on soliciting customer evaluations and
complaints.

2. Simultaneous Production and

Consumption What problems does simultaneous production
 Service providers create and deliver the cause for the services retailer?
service as the customer is consuming it.
The simultaneity of production and
consumption creates some special
problems for services retailers.
 First, the customers are present when the
service is produced, may have an
opportunity to see it produced, and in
some cases, may be part of the production
process.
 Other customers consuming the service at
the same time can affect the quality of the
service provided.
 Finally, the services retailer often does
not get a second chance to satisfy the
needs of their customers. While
customers can return damaged
merchandise to a store, customers that are
dissatisfied with services have limited
recourse. Thus it is critical for services
retailers to get it right the first time.
  Because services are produced and
consumed at the same time, it is difficult
to reduce costs through mass production.

3. Perishability
 Because the creation and consumption of Give examples of retailers for which
services is inseparable, services are perishability is a real problem? [movie
perishable. They can't be saved, stored, or theaters, airlines, cruise lines, public golf
resold. This is in contrast to merchandise, courses] What do these retailers do to
which can be held in inventory until a minimize the problem?
customer is ready to buy it.
 In addition, the demand for a service
varies considerably over time. Thus, What actions have students seen services retailer
services retailers often have times when take to make waiting time more enjoyable for
their services are underutilized and other customers?
times when they have to turn customers
away because they cannot accommodate
them.
 Services retailers use a variety of
programs to match demand and supply.
They also attempt to make customer
waiting time more enjoyable.

4. Inconsistency What problems does inconsistency cause for

the services retailer? Are there services
 Merchandise is often produced by
retailers whose inconsistency is acceptable?
machines with very tight quality control.
Because services are performed by (Custom designers, hair “artists”)
people, no two services will be identical.
 Thus, an important challenge for service
retailers is providing consistently high-
quality services.

VII. Types of Ownership See PPT 2-39

 Another way to classify retailers is by
their ownership. The major
classifications of retail ownership are: (1) .
independent, single-store establishments,
(2) corporate chains, and (3) franchises.

A. Independent, Single-Store Ask students to give examples of local

Establishments independent, single-store retailers. Do they
shop at independents? Why or why not?
 Retailing is one of the few sectors in our
economy in which entrepreneurial activity
is extensive. Many of these retail start-ups
are owner managed which means Do students believe national chains will drive
management has direct contact with their all independents out of business?
customers and can respond quickly to
 those customers’ needs.
 While single-store retailers can tailor their
offering to their customers' needs,
corporate chains can more effectively
negotiate lower prices for merchandise
and advertising due to their larger size.
 To better compete against corporate
chains, some independent retailers join a
wholesale-sponsored voluntary chain. A
wholesale-sponsored voluntary
cooperative group is an organization
operated by a wholesaler offering a
merchandising program to small,
independent retailers on a voluntary basis.

B. Corporate Retail Chains Wal-Mart has pursued a strategy of opening

stores on the outskirts of small rural towns
 A retail chain is a company operating
with populations between 25,000 and 50,000.
multiple retail units under common
ownership and usually having some These stores offer broader selection of
centralization of decision making in merchandise at much lower prices than
defining and implementing its strategy. previously available from local retailers.
Discuss the pros and cons of this strategy in
class. What ramifications may result?
(Monopolizing market, demise of small stores,
potential to become major employer in rural
area).
C. Franchising Ask students to give examples of local
franchises. If they wanted to own a retail
 Franchising is a contractual agreement
business, would they want a franchise or their
between a franchisor and a franchisee that
allows the franchisee to operate a retail own store? Why? What are the advantages
outlet using a name and format developed of being a franchisee?
and supported by the franchisor.
Approximately 40% of all US retail sales
are made by franchisees. PPT 2-39 provides a brief introduction to the
Franchising form of retail ownership.
 In a franchise contract, the franchisee
pays a lump sum plus a royalty on all
sales for the right to operate a store in a
specific location. The franchisee also
agrees to operate the outlet as per the
procedures prescribed by the franchisor.
The franchisor provides assistance in
locating and building the store,
developing the products and/or services
sold, management training, and
advertising.
 The franchise ownership format attempts
 to combine the advantages of owner-
managed businesses with efficiencies of
centralized decision-making in chain store
operations.

VIII. Summary
 Over the past 30 years, U.S. retail markets
have been characterized by the emergence
of many new retail institutions.
Traditional institutions have been joined
by category specialists, hypermarkets and
superstores, extreme value retailers, and
nonstore retailers among others.

IX. Appendix 2A: Comparison Shopping

For an exercise on comparison shopping see
 All retailers learn about their competitors
Ancillary Exercise 2-2. Breaking the class
through comparison shopping. It might
be as informal as walking through a into groups and having each group do a
competitor's store and looking around. comparison shopping exercise is a good way
However, a structured analysis is more to get students to understand the difference
helpful in developing a retail offering that between retailers and the types of decisions
will attract consumers from a competitor's retail manager make. Have each group
store. compare different institutions selling the same
 The first step is to define the scope of the merchandise category. For example, men's
comparison; the comparison might be suits in a department store and men's
between two retail chains, two specific specialty store, athletic shoes in a discount
stores, two departments, or two categories store and specialty shoe store, CD's in a
of merchandise, depending on discount store and a specialty music store.
responsibilities of the person undertaking
the comparison.
 Comparisons might also focus on chains'
financial resources, inventory levels,
number of stores and employees, store
locations, merchandise sold, employee
compensation programs, and return
policies.

ANSWERS TO SELECTED “GET OUT AND DO ITS”

2 GO SHOPPING Go to an athletic footwear specialty store such as Foot Locker, a sporting goods
category specialist, a department store, and a discount store. Analyze their variety and assortment of
athletic footwear by creating a table similar to that in Exhibit 2–2.
Students should be able to fill in this type of table and explain their findings.
Variety of Athletic Footwear Assortment of Athletic Footwear
 Breath of Merchandise Depth of Merchandise
Footlocker
Specialty Store
Sporting Goods Category
Specialist

Department store

Discount Store

3 GO SHOPPING Keep a diary of where you shop, what you buy, and how much you spend for two
weeks. How did each retailer meet your shopping needs? Get your parents to do the same thing.
Tabulate your results by type of retailer. Are your shopping habits significantly different or are they
similar to those of your parents? Do you and your parents’ shopping habits coincide with the trends
discussed in this chapter? Why or why not?
Students should keep a list of places shopped. Results can be compared to a parent or another
classmate. Thais assignment should give student insight to their own consumer buying behavior
and how they select merchandise and retail formats.

4 GO SHOPPING Describe how the supermarket where you shop is implementing organic, locally grown,
ethnic and private label merchandise. If any of these categories of merchandise are missing, explain how
this could be a potential opportunity for growth for this supermarket.
Responses here will vary. Some stores have big commitment to organic, locally grown, ethnic
and private label merchandise. Students should consider the demographics of the store’s
customers to evaluate the potential demand for these categories.

5 INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the Census Internet
site at www.census.gov/mrts/www/mrts.html. Look at the unadjusted monthly sales by NAICS. Which
categories of retailers have the largest percentage of sales in the fourth quarter (the holiday season)?

Students will notice that many retail categories generate their largest percentage of sales in the fourth
quarter. Some 2007 examples (in $millions) are:

(443) Electronics and Appliance Stores: 34,764

(44312) Computer and Software Stores: 6,698

(4453) Beer, Wine and Liquor Stores: 11,289

(44812) Women’s Clothing Stores: 11, 913

(45111) Sporting Goods Stores: 10,355

(454) Nonstore Retailers: 87,696

7 INTERNET EXERCISE Go to Entrepreneur Magazine’s Franchise Zone web page at

http://www.entrepreneur.com/franchise500 and list the top 500 franchises for the past year. How
many of these retailers in the Top Ten have you patronized as a customer? Did you know that they were
operated as a franchise? Look at the list for previous years to see changes in the rankings. Click on the
link, About the Franchise 500, and describe what factors were used to develop the list. Finally, what is
the nature of the business that seems to lend itself to franchising?
The Top 10 Franchises for 2008 include many familiar names. Students will likely report having visited a
Subway, McDonald’s, Sonic, or 7-Eleven. Students should uncover some notable changes in the Top 10.
Perhaps most significant, Subway has been moved into the number 2 spot after many years at number
1. An interesting point for discussion of competitive strategy is the reintroduction of fast food retailers
like McDonald’s and KFC to the top 10, as well as the new entrance of Sonic. What do students believe
are behind the reinvigoration of these fast food franchise retailers? Will they be able to maintain these
positions in the face of changing trends in consumer lifestyles and food retailing?

The web site notes that the list of the Top 500 franchises is based on quantifiable measures such as
financial strength and stability, growth rate, size of the system, and number of years in business.
Students will likely notice that service-based retailers tend to lend themselves best to the franchise
system, particularly those services that allow for standardization of business practices and retail
operating formats.

8 Bed Bath & Beyond is the number one superstore domestics retailer in the US with about 930 stores
throughout the US and Ontario, Canada. This retailer sells domestics (bed linens, bathroom and kitchen
items) and home furnishings (cookware and cutlery, small household appliances, picture frames, and
organizing supplies). What are the SIC and NAICS codes used by this retailer? What other retailers
compete against Bed Bath & Beyond and which store format is implemented by each competitor?

Primary SIC Code 5023: Home furnishings

Primary NAICS Code 442299: All Other Home Furnishings Stores

Other SIC Codes

2273 Carpets and rugs 3635 Household vacuum cleaners

2391 Curtains and draperies 3639 Household appliances, nec

2392 House furnishings, nec 3661 Telephone and telegraph apparatus

2519 Household furniture, nec 5021 Furniture

2844 Toilet preparations 5641 Children's and infants' wear stores

3631 Household cooking equipment 5719 Misc. home furnishings stores

3633 Household laundry equipment 5722 Household appliance stores

3634 Electric housewares and fans 5947 Gift, novelty, and souvenir shops
Key Competitors

Macy's Department store

Target Discount Store

Wal-Mart Discount store

 Other Competitors

Anna's Linens J. C. Penney

Art.com Kmart Macy's

Babies "R" Us Pier 1 Imports

Burlington Coat Factory Ross Stores

The Children's Place Saks

Container Store Sears

Cost Plus Sensational Beginnings

Dillard's Target

Euromarket Designs TJX Companies

Garden Ridge Tuesday Morning Corporation

Gymboree Wal-Mart

IKEA Williams-Sonoma

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

1. 1. Distinguish between variety and assortment. Why are these important elements of
retail market structure?

The main difference between variety and assortment is that variety refers to the number of different
merchandise categories a retailer sells, whereas assortment is the number of different items or SKUs
in a merchandise category. In addition, variety is often referred to as the breadth of merchandise
carried by the retailer, and assortment is referred to as the depth of merchandise. These elements
form an integral part of the retail market structure, since it is the retail offering that ultimately
distinguishes one retailer from another.

2. 2. Choose a small, independent retailer and explain how it can compete against a large
national chain.
It is very difficult for independents to compete against chains on price. Corporate chains can buy
merchandise at lower cost because they buy in large quantities. Thus, they can offer the same
merchandise at lower prices than independents.

However, chains also tend to have the same merchandise in all stores. Thus independents can
compete effectively against chains by offering merchandise that is tailored to the needs of the local
community.

In addition, chains are often very bureaucratic. They have a lot of rules, which constrain the nature
of the service that can be provided to customers. In addition, store managers in chains often move
from store to store or they are promoted to higher-level management positions. Therefore, they
have less opportunity to develop long-term relationships with customers.
 Independents can compete by offering better service—by developing personal relationships with
local customers.

3. 3. What do off-price retailers need to do to compete against other formats in the

future?

The main competitive weapon for the off-price retailers is their low price. While they may not
directly compete with higher service formats, such as department and specialty stores, they do face
increasing competition from discount stores. Here, the off-price stores may be at a relative
disadvantage since their merchandise is based upon opportunistic buying, while discount stores
offer a relatively stable mix of merchandise at stable prices (everyday low pricing).

Since the option of improving service may increase costs and weaken their only source of
competitive advantage, low price, off-price retailers should focus on strategies to keep their costs
and prices low and explore low cost methods of attracting and retaining customers. In terms of
keeping operational costs low, they can locate in lower cost urban and rural areas (note that outlet
stores are more clustered within outlet malls located farther from the city but near major highways).
They can also implement more efficient inventory and merchandise management systems (note that
for a discount store, such as Wal-Mart, operational efficiency and costs reductions are crucial to
offering lower prices to customers). Also, they can expand their sourcing to include imports from
low cost international markets.

Another threat for off-price retailers may be from Internet stores. Often several stores publicize
their low prices and also attempt to match consumer price preferences through reverse bidding and
auctions (sites such as Priceline and eBay). Off-price retailers can explore the possibility of using the
Internet for relatively low cost advertising about current merchandises (since their merchandise
stocks fluctuate more rapidly due to opportunistic buying). Factory outlet stores, on the other hand,
can compete more directly over the Internet.

4. 4. Compare and contrast the retail mixes of convenience stores, traditional

supermarkets, superstores, and warehouse stores. Can all of these food retail
institutions survive over the long run? How? Why?

5.
 Element of Traditional
Retail Mix Convenience Store Supermarket Superstore Warehouse Store

Location Typically Typically in strip Typically in strip Typically in strip

freestanding, easily shopping centers shopping centers shopping centers
accessible sites
Merchandise Limited variety and Average variety and Greater variety with Greater variety with
Assortment assortment assortment deeper assortment about the same
than supermarket assortment as
supermarket. Primary
difference is that
merchandise
assortment varies
because of
opportunistic buying.
Pricing Higher pricing than Average pricing. Lower pricing than Lower pricing than
supermarkets Some chains have supermarkets. supermarkets. Pricing
constant (every day) Typical every day depends on cost of
pricing and others pricing. merchandise bought
have special sale on special buys.
(high-low) pricing.

Advertising and Limited advertising, High-low pricing Limited advertising Minimal promotion
Promotion frequent shopper chains advertise since most have since all merchandise is
programs tied to weekly specials. everyday pricing. basically on sale.
gasoline sales.

Minimal
Minimal Minimal Minimal
Personal selling

Store design Designed for quick Typically use a grid- Same as Same as supermarket.
and display and easy iron with cross- supermarket. A bit more
merchandise hatch aisles, disorganized to give
selection and extensive signs. the customers the feel
checkout of searching for a
bargain.

Service Minimal Some services for Some services for Minimal

produce, bakery, produce, bakery,
meat and fish meat and fish
categories. areas.

All four types will persist because they appeal to different customer needs. The warehouse stores
typically have larger pack sizes that are very attractive to customers with large families and to small
business owners like local restaurants. In addition, due to the varying assortments, customers who
are brand loyal might not want to shop in these stores.
Convenience stores are located and designed to offer customers a snack, quick meal or minimal
grocery/general merchandise purchase along with their gasoline. These retailers offer easy in and
out access and speedy transactions. In response to competitive pressures from other food retailers,
as well as dependency on gasoline sales, many convenience stores are now offering consumers fresh
food and healthy fast food choices to reduce dependency on fuel sales while maintaining on-the-go
ease and convenience.
 The superstores are low in price but more inconvenient to shop in because of the large size. Thus
they appeal to customers who are very price conscious and are willing to drive a longer distance and
spend more time shopping in a larger store.

Conventional supermarkets are the most convenient. In major metro areas, there is a conventional
supermarket two to three miles from everyone’s home. They also provide more services for
customers such as cutting meat to order. Conventional supermarkets appeal to customers who
value service and convenience and are not as price conscious.

Note that the same consumer may shop at all four types of food retailers depending on the nature
of the shopping trip. For example, a consumer might stock up on basic such as toilet paper, soft
drinks, and can goods at a warehouse or superstore and then go to a supermarket to buy meat,
produce, and gourmet food.

6. 5. Could a large discounter, such as Target or Walmart, enter another retail format
such as convenience stores or department stores in the future? Would they be successful
with either strategy? Explain why or why not.

Both Target and Walmart have had success entering other store formats. Target is offering more
supermarket items and Walmart has food stores and warehouse stores. Based on these experiences
it could be possible for theses discounters to enter other formats. Department stores may be more
problematic because there has been considerable industry consolidation in this category. There are
already three tiers in the department store category, therefore there is already high competition.

7. 6. Why are retailers in the limited assortment supermarket and extreme value
discount store sectors growing so rapidly?

Both limited assortment supermarkets and extreme value discount stores focus on relatively limited
merchandise offerings at highly appealing (low!) prices. The retail formats are able to offer their
extremely low prices through maximizing efficiency. By reducing extras and service offerings, as well
as managing a relatively low merchandise assortment, these retailers are able to provide consumers
with the “thrill of the hunt” for amazing deals.

8. 7. The same brand and model of a personal computer is sold by specialty computer
stores, discount stores, category specialists, online retailers and warehouse stores. Why
would a customer choose one retail format over the others?

Each type of retail store provides a unique combination of price and services tailored to the needs of
different types of customers. The specialty store typically will have higher prices, but will offer more
services. It will have salespeople with technical expertise available to provide information to
customers and answer questions. This service is particularly valuable to customers who do not know
much about computers.
 On the other hand, discount stores, category specialists, and warehouse stores have lower prices
and do not offer much personalized service. These stores are more attractive to customers who
have more expertise and do not need personalized service.
Due to the greater assortment in category specialists, customers are able to compare the prices and
features of different brands in one store visit. Warehouse and discount stores have limited
assortments and thus customers can only see a limited set of brands and models. But they can also
buy merchandise in different product categories at the same time they are buying a computer.
Some customers will prefer the convenience and selection offered online. The Internet may also be
used to collect information and compare features and prices prior to shopping in a store location.

9. 8. Choose a product category that both you and your parents purchase (e.g., business
clothing, casual clothing, music, electronic equipment, shampoo). In which type of store
do you typically purchase this merchandise? What about your parents? Explain why
there is (and is not) a difference in your store choices.

Students may emphasize specialty stores such as The Gap, Old Navy, Circuit City, Best Buy etc. for
their purchases for clothing, CDs, or electronic equipment, while mentioning that their parents favor
traditional department stores such as Macy's or Sears for the purchase of such product categories.
If price is a major factor, there may be some similarities between the students and their parents;
both may shop at discount stores.

The merchandise, service and prices for the various retail formats stocking different product
categories are different. In general, stores deliberately targeting a younger population will be
favored by students since these stores would better match their expectations of merchandise (such
as fashion clothing), prices and services (students may consider themselves savvy customers for
certain products, such as music and electronic equipment, and may not need the type of service
demanded by their parents for instance in purchasing business clothing).

10. 9. At many optical stores you can get your eyes checked and purchase glasses or
contact lenses. How is the shopping experience different for the service as compared to
the product? Design a strategy designed to get customers to purchase both the service
and the product. In so doing, delineate specific actions that should be taken to acquire
and retain optical customers.

Optical stores present an interesting mix of service and related merchandise. On one hand, the eye
examination is usually done by a trained and licensed eye doctor and here the service experience is
often very professional and similar to a visit to any physician or hospital. On the other hand, the
glasses or contact lenses are displayed in a retail store setting with the service being mostly oriented
towards helping the customer try out various options. The contrasts between the service and retail
environments may be unnerving for some customers.
 One strategy to reduce the gap is to ensure that the retail setting is very professional and courteous.
Since the problem has been detected and identified by the eye doctor, the sales staff in the retail
setting could engage and interact more directly with the customer with more of a problem-solving
approach. This would involve educating consumers on various issues, including the merits/demerits
of using glasses or contact lenses, the types of lenses and coatings, proper care of glasses and
contact lenses, etc.

It must also be recognized that most customers who are prescribed glasses for the first time are
likely to continue wearing glasses or contact lenses for the rest of their lives. Thus, it is important to
start building consumer trust and confidence through professional service and expertise. One
strategy would be to encourage customers to return for an eye examination every year and also
have their current prescription for the glasses or lenses checked. Another is to provide free repair
service for the frames.

11. 10. Many experts believe that customer service is one of retailers' most important issues
in the new millennium. How can retailers that emphasize low price (such as discount
stores, category specialists, and off-price retailers) improve customer service without
increasing costs and thus, prices?

It is very difficult to offer high-quality, personalized customer service at a low cost, because
personalized service is provided by people who have to be paid more. Price-oriented retailers
provide service by using signage to make it easy for customers to locate products, having many
checkout counters so customers can pay for merchandise quickly, and using displays to demonstrate
the use of merchandise and information about the merchandise. These store layout and display
activities do not require people, but they make it easier for customers to buy merchandise.

Personalized service from employees can be provided economically by having a centralized place in
the store where experts are available to answer questions. Rather than have a lot of employees
circulating throughout the store, a smaller number of employees can be in one central location.
However, customers will have to come to the service providers rather than the service providers
going to the customers.
ANCILLARY LECTURES

LECTURE # 2-1: FRANCHISING

--------------------------------------------------
Instructor’s Note: Franchising is one of the most popular and successful ways for individuals to start their
own business. The growth in franchising as a retail format will probably continue in the near future.
Many students who take a retailing course have intentions of someday starting their own business and this
lecture may provide them with an interesting possibility to consider. Instructors might want to use this
lecture as a stimulus to a class discussion on the topic. PowerPoint slides 2-59 to 2-67 can be used with
this lecture.

--------------------------------------------------
Introduction
Franchising is the licensing of an ENTIRE business format by a parent company
(FRANCHISOR) to a number of outlets (FRANCHISEES) to market a product or service
and engage in a business developed by the FRANCHISOR using the FRANCHISOR’S trade
names, trademarks, know-how, and methods of doing business.
In 1985, sales of goods and services by all franchising companies exceeded $529 billion,
approximately 33 percent of all U.S. retail sales flow.
There are roughly half a million establishments in franchise-related businesses.
The growth of franchising
Franchising has had a steady stream of growth. Some of the reasons include

1. Technological advances,
2. Profitable utilization of capital resources,
3. Attainment of the American dream,
4. Demographic expansion, and
5. Product/service consistency.
Technological advances
Equipment and systems--reduce product variability and more efficient marketing and
distribution systems.
For example: Electronic Data interchange.
Profitable utilization of capital resources
Can tap savings and credit capacity of individuals to realize national product/service
saturation
Attainment of the American dream
Owning your own business.
Demographic expansion
Urban “sprawl” creates need for more small retail establishments.

No-longer just downtown locations.

Product/service consistency
Due to geographic mobility, franchises have provided a level of homogeneous (boring)
quality in its product or service.
For example: A Big Mac tastes the same everywhere.
Types of franchise systems
There are various types of franchise systems including

1. Territorial,
2. Operating,
3. Mobile,
4. Distributorship,
5. Co-ownership,
6. Co-management,
7. Leasing/Licensing,
8. Manufacturing, and
9. Service.
Territorial franchise
The franchise granted encompasses several counties or states.
The holder of the franchise assumes the responsibility for setting up and training individual
franchisees within his territory and obtains an ‘override” on all sales in his territory.
For example: McDonalds and Burger King Regional franchises.
Operating franchise
The individual independent franchisee that runs his own franchise.
He deals either directly with the parent organization or with the territorial franchise holder.
For example: McDonalds and Burger King individual locations.
Mobile franchise
A franchise that dispenses its product from a moving vehicle, which is either owned by the
franchisee or leased from the franchisor.
For example: Country Store on Wheels and Snap-On Tools.
Distributorship
The franchisee takes title to various goods and further distributes them to sub-franchisees.
 The distributor has exclusive coverage of a wide geographical area and acts as a supply
house for the franchisee that carries the product.
For example: Texaco gasoline supply centers.
Co-ownership
The franchisor and franchisee share the investment and profits.
For Example: Denny’s Restaurant.
Co-management
The franchisor controls the major part of the investment.
The partner-manager shares profits proportionately.
For example: Travelodge and Holiday Inn.
Leasing/Licensing
The franchisor leases/licenses the franchisee to use his trademarks and business techniques.
The franchisor either supplies the product or provides franchisees with a list of approved
suppliers.
For example: Sheraton Hotels.
Manufacturing
The franchisor grants a franchise to manufacture its product through the use of specified
materials and techniques.
The franchisee distributes the product, utilizing the franchisor’s techniques.
This method enables a national manufacturer to distribute regionally when distribution costs
from central manufacturing facilities are prohibitive.
For example: Sealy.
Service
The franchisor describes patterns by which a franchisee supplies a professional service, as
exemplified by employment agencies.
For example: Personnel One.
Why franchises fail
Individuals who are interested in franchising need to recognize that there is risk despite the
high potential for success.
Franchises can fail for several reasons including
1. Inept management,
2. Fraudulent activities, and
3. Market saturation.
Inept management
Poor finances, product/service mix rejected, grew too quickly.
Fraudulent activities
The selling of unsound or unproven franchises to ignorant buyers, unfair contracts, etc.
Market saturation
Too many franchises of same type, e.g., chicken fast-food.
Franchisors and the marketing channel
A franchisor may occupy any position in the marketing channel.
Manufacturer-retailer franchise
Automobile dealers and service stations.
Manufacturer-wholesaler franchise
Coca-Cola, Pepsi, Seven-Up, etc. sell syrup they manufacture to franchised wholesalers who
bottle and distribute to retailers.
Wholesalers-retailer franchise
Rexall Drugs and Sentry Drugs.
Service Sponsor--Retailer franchise
Avis, Hertz, and National, McDonald’s, Chicken Delight, KFC, Howard Johnson’s and
Holiday Inn, Midas and AMCO, Kelly Girl and Manpower
Franchisor benefits
Franchisees (the store) provide benefits for the franchisor (the parent company).
Continuous market
Insured through consistent quantity and quality and strong promotion.
Market information
Information such as sales, local advertising, employee turnover, profits, etc. is usually
provided.
Money
Principal sources of franchise company revenue.
Royalty fees
Royalties provide continuous income although often the rate may decrease as sales volume
increase.
Sometimes a flat rate is established regardless of level of sales.
Sales of products
Often the franchisor supplies raw materials and finished products to the franchisee at a profit.
For example, Coke supplies syrup, Holiday Inn supplies furniture and carpeting.
Rental and lease fees
The franchisor may lease buildings, equipment, and fixtures.
License fees
There may be special fees that allow the franchisee to use and display the franchisor’s
trademark.
Management fees
Franchisor can charge for consultant fees, management reports, training, etc.
Franchisee benefits
Franchisors provide benefits for the franchisee through initial and continuous services. .
Initial services
There are a number of initial services that franchisors provide for franchisees including
1. Market survey and site selection,
2. Facility design and layout,
3. Lease negotiation advice,
4. Financing advice,
5. Operating manuals,
6. Management training programs, and
7. Employee training.
Continuous Services
There are also a number of continuous services that franchisors offer to franchisees including
1. Field supervision,
2. Merchandising and promotional materials,
3. Management and employee retraining,
4. Quality inspection,
5. National advertising,
6. Centralized purchasing,
7. Market data and guidance,
8. Auditing and record keeping,
9. Management reports, and
 10. Group insurance plans.
Franchisor advantages/disadvantages
Depending upon which viewpoint one takes (the franchisor or franchisee) there are many
advantages and disadvantages of franchising.
From the perspective of the franchisor, the advantages include
1. Rapid expansion,
2. Highly motivated franchisees do a good job, and
3. Additional profits by selling franchisees products and services.
The disadvantages include
1. Company-owned units may be more profitable,
2. Less control than independent retailers over advertising, pricing, personnel practices, etc. (e.g.,
can’t fire franchisee).
Franchisee advantages/disadvantages
From the viewpoint of the franchisee the advantages include
1. Established/proven product/service,
2. Business and technical assistance, and
3. Reduction in risk.
The disadvantages include
1. Loss of control -- are really only semi-independent business people,
2. Many franchisors own a number of their outlets which may compete with those owned by
franchisees, and
3. High royalties, fees, costs of equipment, supplies, merchandise, rental or lease rates and
mandatory participation in promo and support services.
Franchising trends for the New Millennium
Most of the growth of franchising occurred in the 1980s in the retailing of goods and
services. However, there two basic types of franchising that merit consideration.
The first, product and trade franchising, a common form of retailing in the automobile and
petroleum industry, focuses on what is sold.
Examples include brands like Ford, Honda, and Texaco.
The second, business format franchising, sells the right to operate the same business in
different geographic locations.
The emphasis here is on how the business is run.
Examples include Kentucky Fried Chicken, McDonald’s and Burger King.
The major franchising trends perceived for New Millennium are
 1. Sustained growth,
2. Enduring plus unimagined applications,
3. International expansion,
4. Increased tensions, and
5. Greater emphasis on financial returns.
Sustained Growth
It is perceived that franchising will continue to grow steadily, a trend begun in the 1980s.
One of the possible explanations for this growth is that franchising offers franchisors rapid
expansion as well as highly motivated owner-managers.
Also, annual growth in franchised sales volume will exceed the inflation rate by several
percentage points.
Enduring plus unimagined applications
Today, such things like video yearbooks, house-sitting services, and house calls by doctors
may be owned by franchises.
With the applications such as these, the possibilities are certainly diverse.
For example, in the future, franchisees will come from three main sources, which include
middle managers, women, and independent small-business owners.
International expansion
Franchisors are currently exploring foreign markets.
In fact, in 1988 one-sixth of all business-format franchisors had businesses outside the United
States.
In addition, this trend has also been reciprocated by foreign franchisors as well.
However, non-U.S. franchisors have had a more difficult time in the U. S. due to stiff
competition.
Increasing tensions
Despite the overwhelming of franchisors on the whole, there is still a major source of
contention.
That is, franchisor-franchisee relations have witnessed a rise in class-action suits and
arbitration hearings.
In 1989, over 400 franchisee-related hearings were held.
Dissatisfaction among franchisees could originate from various sources.
First, perceived inequity among this group regarding mandated or proposed changes may be
a major source of conflict.
Also unsatisfactory financial performance may be another cause of discord.
Greater emphasis on financial returns
The main sources of financial returns include: dual operations in which a franchisee may be
permitted to run two or more franchises from a common or adjacent area; reduced costs due
to downsizing; and incentives for ownership.
[Source: This lecture was adapted from Gerald Pintel and Jay Diamond, Retailing, 4th ed. (Englewood
Cliffs, NJ.: Prentice-Hall, 1987), pp. 73-76. in El-Ansary and Stern’s book, Marketing Channels, Prentice-
Hall, 3rd. ed. , 1988, p. 333); Bruce J. Walker, “Retail Franchising in the 1990s,” Retailing Issues Letter,
Published by Arthur Andersen & co, in conjunction with the Center for Retailing Studies, Texas A&M
University, Vol.; 3, No.1, January 1991, pp. 1-.]
3
MULTICHANNEL RETAILING – A VIEW INTO THE FUTURE

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Retail Channels for Interacting with

Customers See PPT 3-4, 3-5, 3-6, 3-7
Retailers are categorized by their offering
(food, general merchandise or services) Ask students to provide examples of retailers
and then by the channel(s) they use to who use multiple channels. What are the
reach their customers whether store- or various channels used by each? Do the
nonstore-based (electronic, catalog/direct students giving these examples use all the
mail, direct selling, TV home shopping, channels used by the retailer? If so, how and
vending machine, etc.). when?
Today, most retail firms are using more than
one channel to reach their customers.
A multi-channel retailer is a retailer that
sells merchandise and/or services through
more than one channel. By using a
combination of channels, retailers can
exploit the unique benefits provided by
each channel to attract and satisfy more
customers.
A. Store Channel PPT 3-8 provides a summary of the unique
benefits of stores, catalogs, and the Internet.
Stores offer a number of benefits that
customers cannot get when shopping
through catalogs and the Internet. These
benefits include: PPT 3-8 provides a summer of the unique benefits
provided by the store channel.
Browsing. While many consumers surf the
Internet and look through catalogs for Ask students if they consider any store to be
ideas, most consumers still prefer
their favorite for shopping. In other words, do
browsing in stores.
they look forward to shopping at that store? If
Touching and Feeling Products. Perhaps so, why?
the greatest benefit offered by stores is to
allow customers to use all of their senses
when examining products- touching,
smelling, tasting, seeing, and hearing.
Personal Service. Store sales associates still
have the capability of providing
meaningful, personalized information.
Customers for durable goods, such as
appliances, report that salespeople are the
most useful information source.
Cash and Credit Payment. Stores are the
only channel that accept cash payments.
Many customers prefer to pay cash
because it is easy, resolves the transaction
immediately, and does not result in
potential interest payments. Some
customers also prefer to use their credit
card or debit card in person rather than Ask students to describe their favorite
electronically sending payment entertainment elements of the store shopping
information via the Internet. experience. Which retailers do they believe
Entertainment and Social Experience. In- incorporate these entertainment elements very
store shopping can be a stimulating well?
experience for some people, providing a
break in their daily routine and enabling
consumers to interact with friends. All
nonstore retail formats are limited in the
degree to which they can satisfy these
entertainment and social needs. Which types of merchandise do students feel
require the immediate gratification factor? For
Immediate Gratification. Stores have the which merchandise categories is immediate
advantage of allowing customers to get gratification not such a big deal?
the merchandise immediately after they
buy it.
Risk Reduction. When customers purchase
merchandise in stores, the physical
presence of the store assures them that
 any problems with the merchandise will
be corrected.

B. Catalog Channel
Convenience. Catalogs, like all nonstore See PPT 3-9
formats, offer the convenience of looking
at merchandise and placing an order any
day at any time from almost anywhere.
Information. Catalogs are no longer just a
description of available products. They
offer more information on how the
products can enhance consumers’
lifestyles and be used effectively.
Safety. Nonstore retail formats have an
advantage over store-based retailers by
enabling customers to review
merchandise and place orders from a safe
environment – their homes.

C. Internet Channel
In addition to the convenience and security of See PPT 3-11
shopping from home or work at any time,
the electronic channel has the potential for
offering a greater selection of products
and more personalized information about Discuss the advantages shopping on the Internet
products and services. These benefits has over shopping in a store. Shopping through a
include: catalog.
Broader Selection. A potential benefit of the
electronic channel, compared to the other
two channels, is the vast number of Ask students about the products and purchase
alternatives available to consumers. situations where the broader selection offered by
More Information to Evaluate the Internet may be particularly useful.
Merchandise. An important service
offered by retailers is the provision of
information to help customers make better
buying decisions. The retail channels
differ in terms of how much information
they provide and whether customers can
format the information to compare
Ask students about a new purchase context; say
different brands easily.
buying a good home theater system. If they do not
Internet retailers have the capability of know anything about the product, or how to
providing as much information as each evaluate it, where would they look for information
customer wants, more information than first, the Internet or the local electronics store?
they can get through store and catalog What are the reasons behind this choice of
channels. The electronic channel can channel?
respond to customers’ inquiries just like a
sales associate would. The depth of
 information available at a retailer’s Web
site can provide solutions to customer
problems.
Also, information on the electronic channel How many students have participated in a
database can be frequently updated and product-related virtual community? Ask several
will always be available. The cost of students to describe the experience and the types
adding information to an electronic of information they were able to find.
channel is likely to be far less than the
cost of continually training thousands of
sales associates.
Consider two lists of DVDs available for rental.
Virtual communities, networks of people List 1 is organized alphabetically. List 2 provides
who seek information, products, and 10 items at a time ordered in any manner that the
services and communicate with one customer wants – according to how big a hit the
another about specific issues, are movie was when it was first released in a theater,
examples of these problem-solving sites. the leading stars, the director, etc. Which list will
These communities also help customers solve the students prefer? Why?
problems by providing information not
readily available through other channels.
Personalization. The most significant
potential benefit of the Internet channel is
its ability to personalize the information
for each customer economically. The
Internet offers the opportunity to provide
“personal” service at a low cost.
To improve customer service from an
electronic channel, many retailers are
offering live, online chats. An online chat
provides customers with the opportunity
to click a button anytime and have an
instant messaging email or voice
conversation with a customer service
representative.
The interactive nature of the Internet provides
an opportunity for retailers to personalize
their offerings for each of their customers,
such as allowing customers to create a
personal homepage that is tailored to that
customer’s individual needs.
Using a cookie (a small computer program
that provides identifying information
installed on your hard drive), the retailer
can provide personalized product
information, recommendations or
reviews.

D. Using the Internet to Improve Multichannel See PPT 3-13

Shopping Experience
 One common phenomenon in Internet retailing is
 An electronic channel can provide
known as "abandoned shopping carts." This
valuable insights into how and why
occurs when customers select items from the
customers shop and which shopping
retailers site, place it in a shopping basket, but
experiences they find satisfactory.
either before checkout or during checkout, decide
 Collecting this information as customers not to buy. Consider the reasons why such
navigate through a store or catalog would customers did not complete their orders.
be quite difficult; however, collecting data
as customers navigate through a Web site
is easy.
See PPT 3-16
II. Evolution Toward Multi-Channel Retailing
 Traditional store-based and catalog Ask students to consider examples of specialty
retailers are placing more emphasis on stores that also have an Internet presence. Or,
their electronic channels and evolving alternatively, a visit to the website of such stores
into multi-channel retailers for several and evaluation of the services offered online and
reasons: in-store can be a take-home assignment.

A. Overcoming Limitations of Existing Format PPT 3-19

 One of the greatest constraints facing
store-based retailers is the size of their
stores. The amount of merchandise that
can be displayed and offered for sales in
stores is limited. By blending stores with
Internet-enabled kiosks, retailers can
dramatically expand the assortment
offered to its customers.
 The availability and knowledge of sales
associates can vary considerably across
stores or even within a store at different
times during the day. This inconsistency
is most problematic for retailers selling
new, complex merchandise. Kiosks can
be designed and used by sales associates
and customers for product information.

III. Capabilities Needed for Multichannel

Retailing Talk with students about the various capabilities
To effectively operate and realize the benefits needed for success in multichannel retailing. Ask
of multichannel retailing, firms need to students which types of retailers seem best
have skills in: positioned to attain this success. Why?
(1) developing assortments and managing
inventory;
(2) managing store operations, including
managing employees in distant locations;
(3) distributing merchandise efficiently
from distribution centers to stores;
 (4) presenting merchandise effectively in
catalogs and Web sites;
(5) processing orders electronically;
(6) efficiently distributing individual
orders to homes and accepting
merchandise returns;
(7) operating communications and
information systems that provide a
seamless customer experience across all
the channels.

A. Who Has These Critical Resources?

Catalog retailers are best positioned to Which catalog retailer is doing the best job of
exploit an electronic retail channel. They retailing over the Internet? What are the reasons
have very efficient systems for taking for this success?
orders from individual customers,
packaging the merchandise ordered for
shipping, delivering it to homes, and
handling return merchandise. They also
have extensive information about their
customers and database management
skills needed to effectively personalize
service.
Store-based and catalog retailers both are
Which traditional bricks-and-mortar retailer has
ideally suited to offer assortment and
made a successful transition onto the Internet?
efficiently manage merchandise
Why?
inventories. Typically, they have more
experience and greater skills in putting
together merchandise assortments, a skill
that most manufacturers and pure
electronic retailers lack. In addition,
store-based and catalog retailers typically
have more credibility than manufacturers
when suggesting merchandise since they
offer an assortment of brands from
multiple suppliers. These traditional
retailers also have relationships with
vendors, purchasing power, and
information/distribution systems in place
to manage the supply chain from its
vendors to the retailers' warehouses.
Finally, some catalog and store-based
retailers presently sell unique
merchandise – they develop private label
merchandise.
Most store-based retailers and manufacturers
lack the appropriate systems for
individual orders to households.
 However, store-based retailers with broad
market coverage can use their stores as
convenient places for electronic shoppers
to pick up their merchandise and return
unsatisfactory purchases.

B. Will Manufacturers Bypass Retailers and Which manufacturers have students

Sell Directly to Consumers? purchased directly from? Ask them to
Disintermediation occurs when a
describe and evaluate their shopping/buying
manufacturer sells directly to consumers, experience.
bypassing retailers.
Retailers are concerned about
disintermediation because manufacturers
can get direct access to consumers by
See PPT 3-18
establishing a retail site on the Internet.
However, manufacturers lack some of the Which manufacturers are best positioned to
critical resources to sell merchandise bypass retailers in the channel? Why do students
electronically. believe so?
Retailers are typically more efficient in
dealing with customers than
manufacturers. They have considerably
more experience than manufacturers in:
(1) distributing merchandise directly to
customers, (2) providing complementary
assortments, and (3) collecting and using
information about customers.
If manufacturers start selling direct, they risk
losing support of retailers they bypass.

C. Which Channel is the Most Profitable? Ask students to address the question: which
channel should be most profitable?
Although the electronic channel may appear
to hold the greatest profit potential due to
eliminating costs of building and
operating stores and compensating store
employees, these Internet retailers face
significant costs to design and maintain
Web sites, attract customers to the site,
maintain distribution and warehouse
systems and deal with a high level of
returns.
The costs associated with operating an
electronic channel may even be greater
than the costs of operating physical stores.

IV. Issues in Multichannel Retailing See PPT 3-19 through 3-21 for illustrations of
the issues facing multichannel retailers.
In order to provide the same face to a
customer across multiple channels,
 retailers need to integrate their customer
databases and systems used to support
each channel.
In addition to information technology issues,
other critical issues facing retailers that
desire a customer centric offering involve:
(1) an integrated shopping experience, (2)
brand image, (3) merchandise assortment,
and (4) pricing.

V. Shopping in the Future

The seamless interface across channels that See PPT 3-22
customers in the future may experience is
illustrated through a scenario.

A. Shopping Experience
 The scenario described illustrates the
advantages of having a customer database
shared by all channels and integrated
systems.

VI. SUMMARY
 Traditional store-based and catalog
retailers are adding electronic channels
and evolving into integrated, customer-
centric, multi-channel retailers – an
evolution driven by the increasing desire of
customers to communicate with retailers
any time, any place, and anywhere.
 Meeting the expectations of today’s
shoppers will require the development and
use of common customer databases and
integrated computer systems; decisions
about how to use the different channels to
support the retailer’s brand image; and
present consistent merchandise and
pricing across all channels.

ANSWERS TO SELECTED “GET OUT AND DO ITS”

2. INTERNET EXERCISE Go to the Web sites of J. Crew (www.jcrew.com), JCPenney

(<www.jcpenney.com), and Target (www.target.com) and shop for a pair of khaki pants.
Evaluate your shopping experience at each site. Compare and contrast the sites and your
experiences on the basis of characteristics you think are important to consumers. Does the
online experience match the in-store experience for these retailers? Explain why or why not?
Students should consider the six reasons consumers like to purchase online:
Convenience – no traffic, parking or crowds, available, 24/7, no geographical constraints.
Cost – same price or cheaper online, many offer free shipping with a set dollar purchase, also
save on time, hurried shopper (temporal cost). People are looking for bargains.
Choice – numerous web sites to choose from, this format allows for easy comparison-
shopping for price and features. Information on product availability.

Customization – can find one-of-a-kind items and it offers one-to-one customized marketing.
This format makes it economically feasible to personalize the information for each customer.
Communication – 2-way interactive communication, consumers can send and receive
information according to expressed preferences, the electronic channel offers the opportunity
to help customers solve problems.
 Control – over the purchase decision process, a more informed customer because this format
allows retailers to provide as much information as consumers want.
Students should compare price, merchandise, design, brand image, etc. between the
bricks and mortar location and the web site.

3. INTERNET EXERCISE Consider an engaged couple planning their wedding. Evaluate the
benefits of www.theknot.com and www.weddingchannel.com for planning their wedding.
What features of the sites do you think consumers would like and dislike? Indicate the
specific services offered by these sites that engaged couples would use.
Engaged couples can plan for their ceremony, reception and honeymoon online with these sites.
They can learn what other couples did for their weddings. Couples can register for gifts, set a
budget, pick a venue and select vendors (caterers, florists, photographers, etc.) all in one
convenient place. They can also easily share their plans with relatives and friends.

INTERNET EXERCISE The Center for Democracy and Technology is a non-profit public interest
organization working to keep the Internet open, innovative, and free. (http://www.cdt.org/). Go to their
home page and read their recommended list of online consumer privacy: tips available at:
http://www.cdt.org/privacy/guide/basic/tips.php.
Why is privacy a concern for Internet shoppers? What are the top fourteen recommended ways for
consumers to protect their privacy online? How many of these recommendations have you employed
when using the Internet?

The Privacy Guide on the Center for Democracy and Technology website provides detailed
recommendations for consumers interested in protecting their privacy when using the Internet.
According to the Privacy Guide, the top ten recommended ways to protect privacy online are:
(1) Look for privacy policies on the Web

(2) Get a separate email account for personal email

(3) Teach your kids that giving out personal information online means giving it to strangers

(4) Clear your memory cache after browsing

(5) Make sure that online forms are secure

(6) Reject unnecessary cookies

(7) Use anonymous remailers

(8) Encrypt your email

(9) Use anonymizers while browsing

(10) Opt-out of third party information sharing

SOURCE: (http://www.cdt.org/privacy/guide/basic/tips.php)
4. INTERNET AND SHOPPING EXERCISE Pick a merchandise category like microwave
ovens, power drills, digital cameras, shoes, or a USB memory device. Compare a retailer’s
offering in its local store and its Internet site. What are the differences in the assortments
offered through its store and Internet channel? Are the prices the same or different? What has
the retailer done to exploit the relationship between the channels?
Students will find that some retailers have a consistent pricing strategy and merchandise
selection in both channels and other do not. Reasons for the differences could include space for
inventory, sales promotions, shipping charges, etc.

5. INTERNET EXERCISE: Go to the Monthly & Annual Retail Trade Reports posted by the
U.S. Census Bureau at: http://www.census.gov/retail/ and scroll down to ‘Latest Quarterly E-
Commerce Report’ and select Table 3. Estimated Quarterly U.S. Retail Sales (Adjusted):
Total and E-commerce. Using Excel, create a column graph of the E-Commerce Retail Sales
in Millions of Dollars for the most recent five years. How would you describe the growth
trend? Project the E-Commerce Retail Sales for the next quarter. How did you make this
forecast? Create a second column graph of the E-Commerce Retail Sales as a Percentage of
Total Retail Sales for the same five years. How would you describe the growth trend? Project
the E-Commerce Retail Sales as a Percentage of Total Retail Sales for the next quarter. How
did you make this forecast?
 E-Commerce Retail Sales in Millions of Dollars
$45,000

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000
0 5 2Q 3Q 4Q 06 2Q 3Q 4Q 07 2Q 3Q 4Q 08 2Q 3Q 4Q 09 2Q 3Q 4Q 10 ast
20 20 20 20 20 20 rec
Fo
2Q

E-Commerce Retail Sales as a Percentage of Total Retail Sales

 5.0%

4.5%

4.0% f(x) = 0.000864783088082578 x + 0.0235629913355012

R² = 0.971354949299576
3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
t
05 2Q 3Q 4Q 006 2Q 3Q 4Q 007 2Q 3Q 4Q 008 2Q 3Q 4Q 009 2Q 3Q 4Q 010 cas
20 2 2 2 2 2 re
Fo
2Q

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

12. 1. Why are store-based retailers aggressively pursuing sales through an electronic
channel?

Stores have realized several distinct benefits of an electronic channel that overcome their traditional
limitations. First, an electronic channel enables stores to expand nationally and globally at a
relatively low cost. Consider, for example a regional store with locations in 4 states in the Western
U.S. This store can service customers in other parts of the country through an electronic channel.
Even if the cost of setting up a fully functional state-of-the-art website may be high, the costs of
locating several stores in each of the other 46 states would likely be prohibitively higher. Second, an
electronic channel enables stores to gather more information about their customers, their
preferences and shopping habits. In a physical store format, stores gain some limited information
on the purchases made by customers only when the customers use a credit card for shopping. But
the information systems used in electronic channels can track customer visits, monitor their
movements through the website, and help create customer data that can be used for providing
personalized attention as well as better service and merchandise. Third, by offering an additional
electronic format, stores can now provide more options to customers who, depending on the
product category or purchase occasion, may prefer such electronic channels as well from time-to-
time. Thus, by giving alternatives to store formats to customers, stores have a better chance of
retaining their customers and increasing their share of wallet. Finally, using their superior retailing
 expertise and well-known images, stores using an electronic format find themselves in a
competitively advantageous position as compared to Internet-only retailers. The costs of acquiring
customers are lower for established store than for the relatively unknown Internet retailers and may
contribute to enhanced profitability.

13. 2. What capabilities are needed to be an effective multichannel retailer?

To effectively operate and realize the benefits of multichannel retailing, firms need to have skills in:
(1) developing assortments and managing inventory; (2) managing employees in distant locations;
(3) distributing merchandise efficiently from distribution centers to stores; (4) presenting
merchandise effectively in catalogs and web sites; (5) processing orders electronically; (6) efficiently
distributing individual orders to homes; and (7) operating communications and information systems
that provide a seamless interface with customers throughout all the channels.

14. 3. From a customer's perspective, what are the benefits and limitations of stores?
Catalogs? Retail web sites?

Stores allow customers the benefits of a high sensory experience when browsing and shopping.
Customers can touch and feel products and seek information from qualified sales associates before
purchase. Moreover, they can pay in cash and thus avoid both the need to give out personal
information and the high interest rates charged by credit card companies. Customers can obtain
immediate gratification in that they can take home the product immediately after purchase.
Customers feel comfortable with the quality and service (including the possibility of post-sales
returns) when they are buying from known and reputed stores. Returning a product is easier to a
store compared to other formats.

However, customers are constrained by the limited choices among the merchandise assortment
available at the store. Customers also have to spend considerable time and effort in comparative
shopping to ensure that they have obtained the best quality, price and/or value. Also, customers
often go through the added inconvenience of picking the merchandise themselves and waiting at
long checkout lines.

Catalogs allow customers the convenience of anytime, any place shopping. Consumer and credit
information is better protected when shopping through a catalog. Also, many catalogs provide
items that are not available in stores. Catalogs are particularly convenient when the product
category selection is limited in local stores. For example, customers living in more rural areas may
find catalog shopping to be a very convenient alternative. Since the customer does not have to
travel to unknown and unsafe areas to make a purchase, catalogs provide a safer alternative as
compared to physical stores.
 However, catalogs provide very little pre-sales information that the customer may desire about the
product. While some of this information may be obtained over the phone, in most cases, the
customer may only encounter an order taker with limited knowledge at the other end of the phone
line. Customers can see better pictures than over the computer screen, but sometimes critical
information may not be available. Returns are cumbersome, since the customer would have to
repackage the product and may have to drop it off at the post or UPS delivery location. Moreover,
catalogs provide limited assortment.

The Internet offers the convenience of always open retailing. Customers can order anytime and can
more efficiently comparison shop for products, brands, and prices. Customers are exposed to a very
wide assortment of products and brands and can make choices not only across products and brands
but also across the retailers who stock them. There is greater personalization which benefits
customers in selecting products and making purchase decisions. Detailed information, even on new
product categories, can be obtained more easily.

However, the consumer may be wary of unknown retailers over the Internet, fearing that the order
may not be fulfilled or that the delivery promises may not be kept or the product quality may not be
as advertised. Also, customers find their risks to be high, especially when they have to provide
personal and credit card information over the Internet. Consumers may find that less pre-sales
information is available for products that require touching-and-feeling before purchase. Also, the
costs of making a bad decision are high, especially since Internet retailers vary in terms of their
return policies (some charging a hefty restocking fee).

15. 4. Would you buy clothes based upon the way they looked on a customized virtual
model? Why or why not?

Customized virtual models are constructed on the basis of the customer’s answers to a series of
questions about their height, weight, and other dimensions. These customized models then provide
the opportunity for the customer to see how selected merchandise looks on an image with similar
proportions to their own, rotating the model to evaluate the “fit” of the clothing from various
angles. Students’ answers will likely vary as to whether they would buy clothes based on the virtual
model. Students who have experience with virtual shopping aids, and those who appreciate the
convenience of the online shopping experience will likely be very comfortable in making clothing
purchase decisions this way. Other students may point to concerns about removing the physical
ability to try the merchandise on in-person prior to making a decision.

16. 5. Why are electronic retailers and catalogers frequently patronized for gift giving?
Buying gifts from electronic retailers and catalogers offers the benefit of saving customers the time
and effort of packaging and sending the gift. Also, if the receiver doesn’t like the gift, they can more
easily return it than if they had to return it to a bricks and mortar retailer in another area.
17. 6. Should a multi-channel retailer offer the same assortment of merchandise for sale
on its Web site at the same price as it sells in its stores? Why or why not?

Customers are likely to expect pricing consistency across all of the retailer’s channels. In general, a
multi-channel retailer should attempt to offer the same assortment of merchandise, at the same
prices, across all channels. By ensuring parity between the store, catalog, and/or web site, the
retailer sends a uniform message about its quality, prices and reputation to the consumer.

However, significant operating, competitive and regulatory considerations may contribute to

differences in merchandise and prices in a retailer's store as compared to its website. First, in terms
of operating considerations, some retailers, manufacturers and service providers may find lower
costs of operating and making a sale through the web site. These lower costs can be passed on to
customers in terms of lower prices. For example, most airline firms now prefer customers to browse
and buy tickets from their web site due to cost and efficiency considerations and therefore alert
customers to the possibility of lower prices on their web site through a recording as soon as the
customer calls the airline's reservation phone number. In terms of merchandise, retailers may find
that bulky items requiring tremendous handling and packaging and incurring high shipping costs are
not appropriate for selling over the Internet. For example, it may be difficult to buy bulky furniture
and home improvement items over the Internet, especially when the retailer can not make home
delivery or drop ship the product. Second, retailers may charge different prices in specific physical
locations to match or better the prices charged by local competitors. Third, sales tax regulations
may force retailers to collect sales tax as well shipping and handling charges from customers who
are from the states in which the retailer has a physical presence. Thus, customers from these states
would be charged higher delivered prices through the Internet since they pay both the sales tax and
shipping charges, while customers visiting the physical store would pay only the sales tax.

18. 7. Which of the following categories of merchandise do you think could be sold
effectively by nonstore retailers: jewelry, TV sets, computer software, high fashion
apparel, pharmaceuticals, and health care products such as toothpaste, shampoo, and
cold remedies? Why?

Lower end costume jewelry can and is sold effectively by nonstore retailers. It is because this
merchandise can be presented well and accurately in a catalog and on television, or even over the
Internet.
 Television sets could probably not be sold effectively simply because seeing is believing. Without
actually seeing the picture quality on any given television it would be prohibitively difficult for most
people to consider purchasing one without first seeing it in the store. Perhaps a nonstore retailer
could be successful selling televisions if they could acquire first quality popular models in sizable
quantities. Then, if enough people find out about the retailer, customers might consider purchasing
televisions from them after first seeing the televisions in the store.

High fashion apparel would probably not sell well through nonstore retailers. The fit, feel, and detail
of high fashion merchandise would not come across without the customer actually seeing, feeling,
and trying it on in a store. Commodity apparel merchandise, however, can and does sell well
through nonstore retailers.

Pharmaceuticals have experienced higher than average sales growth through nonstore retailers
recently. It is however, difficult to determine what the ultimate nonstore retailer sales potential will
be for pharmaceuticals. The population is getting older, thereby increasing the demand for many
pharmaceutical products. But many pharmaceutical products require a prescription. At the
moment, the practices of some Internet retailers of prescription pharmaceuticals are being called
into question because in some cases it is too easy for patients to get prescriptions from a physician
to be filled on line.

Health care products such as toothpaste, shampoo, vitamins and other staples might sell well
through nonstore retailers. Some Internet retailers are currently using these products as loss
leaders and to encourage customer loyalty. Unfortunately, these retailers cannot base their
fortunes on the sale of these products due to low margins and relatively high shipping costs. Other
health care products, such as cold remedies would probably not sell well through nonstore retailers
in the long term because they are generally purchased as needed and consumed almost
immediately after purchase. For example, if someone catches a cold, they need to remedy the cold
as soon as they catch it. They will not have the time to wait for the medicine to be delivered.

19. 8. Assume you are interested in investing in a virtual community targeting people
interested in active outdoor recreation such as hiking, rock climbing, and kayaking.
What merchandise and information would you offer on the site? What type of an entity
do you think would be most effective in running the site: a well known outdoors person,
a magazine targeting outdoor activity, or a retailer selling outdoor merchandise such as
Patagonia or REI. Why?

The focus of the site, particularly if run by a retailer, is to sell outdoor equipment. The equipment
therefore would be the focal point of the site and would be organized around particular activities.
Each category would have detailed information on the products and how they are used. In addition,
information should be available about locations for using the equipment. So, if someone were going
kayaking in Colorado, there would be maps and directions for rivers for kayaking. Links to other
websites, such as tourist bureaus, would also be helpful.
 A retailer selling outdoor merchandise would be most effective in running the site because they
have the strongest incentive to provide customers with a reason to visit their site. There could be
some bias in merchandise selection with the retailer. But magazines or a well known expert might
introduce bias as well.

20. 9. Outline a strategy for an electronic-only retail business that is involved in selling
merchandise or services in your town. Outline your strategy in terms of your target
market and the offering available on your Internet site. Who are your competitors in
terms of providing the merchandise or service? What advantages and disadvantages do
you have over your competitors?

One type of electronic business that students may consider would be a quick delivery service
for their campus area. Such a service could specialize in products/services that college
students frequently buy/rent such as video tape rentals, CDs, fast food, laundry/cleaning, etc.
There are currently services like this available in certain areas. Being a first mover,
developing a loyal customer base, and making a profit are all considerations when going into
a business like this.

21. 10. When you shop online for merchandise, how much time do you spend browsing
versus buying? When you shop in a store for merchandise, how much time do you
spend browsing versus buying? Explain your responses.

Both store and Internet channels provide ample opportunities for browsing behaviors. Students’
answers will likely vary significantly as some will indicate browsing on one of the channels, others
may indicate browsing in both channels, and still others may avoid browsing behaviors altogether.
Students may point out the seemingly endless opportunities for browsing the Internet in particular
merchandise categories as a source of considerable browsing time spent. Students may also
consider this amount of information overwhelming, making browsing online cumbersome and less
pleasant than in-store browsing. Others may point out the social/entertainment advantages of
browsing the local mall or shops with friends. In addition, some store shoppers may be looking for
merchandise without a specific type or item in mind, preferring to stroll through a variety of types of
retail stores prior to making a purchase.
4
CUSTOMER BUYING BEHAVIOR

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. The Buying Process

 An effective retail strategy satisfies PPTs 4-4 through 4-8 provide a detailed
customer needs better than do example of each stage of the buying decision
competitors’ strategies. Thus, process.
understanding customer needs and buying
behavior is critical for effective retail
decision making.
PPT 4-9 illustrates the stages in the buying
 The buying process (the steps decision process both for selecting a retailer and
consumers go through when buying a for selecting merchandise.
product or service) begins when
customers recognize an unsatisfied need. Ask students to describe the steps they went
The process ends when customers make a through to purchase high price merchandise
purchase, use the product, and then decide such as a suit for job interviews, or a laptop.
whether the product satisfies their needs List the steps and relate each step to the steps
during the postpurchase evaluation stage. in the store selection and merchandise
 Retailers attempt to influence consumers selection process. Ask students to describe the
as they go through the buying process to steps they went through to purchase low price
encourage them to buy the retailer’s merchandise such as cereal, shampoo, etc.
merchandise and services. Each stage of List the steps and compare them with the
the buying process is addressed in the buying process for high price merchandise.
following sections.
Customers may not go through the stages in
the same order as presented. The amount
of time spent at each stage may differ
depending on the type of decision being
made.

A. Need Recognition
The buying process is triggered when people Ask students how and when they recognized the
recognize they have an unsatisfied need. need for a product they had never purchased
before. Ask them how they analyzed how
Unsatisfied needs arise when a customer's important that need was to them at that time.
desired level of satisfaction differs from
his or her present level of satisfaction.
Visiting stores, surfing the Internet, and
purchasing products are approaches to
satisfying different types of needs.

1. Types of Needs See PPT 4-10

The needs motivating customers to go Ask students to provide examples of
shopping and purchase merchandise can utilitarian and hedonic needs. Are utilitarian
 be classified as utilitarian or hedonic. needs more important than hedonic needs?
Why or why not?
Utilitarian needs are focused on
accomplishing a specific task.
Hedonic needs are needs for an entertaining,
emotional and recreational experience.
 Successful retailers attempt to satisfy both
the utilitarian and hedonic needs of their
customers. For utilitarian shoppers,
retailers make the shopping experience
easy and effortless. For hedonic shoppers,
retailers attempt to provide a more
stimulating and social experience.
 Some hedonic needs that retailers can See PPT 4-11
satisfy include:
 Stimulation. Retailers use background
music, visual displays, scents, and
demonstrations in stores and malls to
create a carnival-like, stimulating
experience for their customers.
Ask students to indicate what benefits they got
 Social Experience. Regional shopping
from their last shopping trip. Do their parents
malls in many communities are now
seek different benefits than they seek? Relate
social meeting places, especially for
these benefits to stimulation, social experience,
teenagers.
learning new trends, self-reward, and status and
 Today, mall developers are focusing on power.
mixed-use developments to satisfy
consumers’ need for social experiences.
Lifestyle centers are allocating significant
space to restaurants, movie theaters and
outdoor entertainment while online
retailers provide similar social
experiences by enabling customers to
email products to their friends.
 Learning New Trends. By visiting
retailers’ stores and Websites, people
learn about new trends and ideas.
 Status and Power. Some customers have
a need for status and power that is
satisfied through shopping.
 Self-reward. Customers frequently
purchase merchandise to reward
themselves when they have accomplished
something or want to dispel depression.
 Adventure. Some consumers go
shopping because they enjoy finding
 bargains, looking for sales, and finding
discounts or low prices. They treat
shopping as a “game” to be won.

2. Conflicting Needs See PPT 4-12 for examples of conflicting

needs.
Most customers have multiple needs.
Moreover, these needs often conflict.
Typically customers make tradeoffs
between their conflicting needs. Ask students to describe a situation in which
Because needs cannot be satisfied in one store they had conflicting needs.
or by one product, consumers may appear
inconsistent in their shopping behavior.
Ask students if they ever engage in cross-
The pattern of buying both premium and low- shopping. Some examples of cross-shopping for
priced merchandise or patronizing products could be: (1) buying a stereo system or a
expensive, status-oriented retailers and printer from a specialty store but buying the
price-oriented retailers is called cross- cables from a lower status retailer either at a
shopping. store or through the Internet; (2) buying an
expensive pair of shoes at a department store, but
buying socks at a discount store; or (3) buying a
mattress at a value priced retailer but buying bed
sheets from a department store.

B. Information Search
Once customers identify a need, they may
seek information about retailers and/or
products to help them satisfy the need.

1. Amount of Information Searched See PPT 4-13

In general, the amount of information sought Give examples of purchase decisions for
depends on the value customers feel which consumers need a lot of information
they'll gain from searching versus the cost (durables, medical treatment, etc.) and
of searching. purchase decisions made with limited
The value of the search is how it improves the information (nondurables).
customer's purchase decision. The costs
of the search include both time and
money.
Today, technology can dramatically reduce
the cost of information search.
Ask students if they have searched the Internet for
Factors influencing the amount of information
information about a product, brand or price. Did
searched for include (1) the nature and
they feel that obtaining information from the
use of the product being purchased, (2)
Internet was better than if they had engaged in
characteristics of the individual customer,
physical visits? Why or Why not?
and (3) aspects of the market and buying
situation in which the purchase is made.
Marketplace and situational factors affecting
information search include (1) the number
 of competing brands and retail outlets,
and (2) the time pressure under which the
purchase must be made.
When competition is greater and there are
more alternatives to consider, the amount
of information searched for may increase.
The amount decreases as time pressure
increases.

2. Sources of Information See PPT 4-14

Customers have two sources of information: Ask students to indicate various sources of
internal and external. information they use to locate an apartment to
Internal sources are information in a rent. What sources can apartment owners
customer’s memory such as the names, influence?
images, and past experiences with
different stores.
External sources are information provided by
ads and other people. When customers
feel that their internal information is
inadequate, they turn to external
information sources.
The Internet has had a profound impact on
consumers’ ability to gather external
information. Consumers can gather this
technology-aided information through
specialized search engines, mobile
devices like cell phones and PDAs, and
online customer reviews.

Reducing the Information Search See PPT 4-15, 4-17

The retailer's objective at this stage of the Ask students how retailers provide enough
buying process is to limit the customer's information so customers will not need to visit
information search to its store or website. other outlets before making a purchase
Each element of the retailing mix can be decision.
used to achieve this objective.
First, retailers must provide a good selection
of merchandise so customers can find
something to satisfy their needs within the
store.
Services provided by retailers can also limit
the search.
Everyday low pricing is another way retailers
increase the chance that customers will
buy in their store and not search for a
better price elsewhere.
C. Evaluation of Alternatives: The
Multiattribute Model See Ancillary Lecture # 4-1 and Ancillary
The multiattribute attitude model provides a Exercises 4-1 and 4-2.
useful way for summarizing how
customers use the information they have
about alternative products, evaluate the Have students use a multi-attribute model to
alternatives, and select the one that best make a choice between buying fashionable
satisfies their needs. clothing from a catalog and from a specialty
The multiattribute attitude model is based store. Then make the comparison for basic
on the notion that customers see a retailer jeans.
or a product as a collection of attributes or
characteristics.
The model is designed to predict a customer's See PPT 4-17
evaluation of a product or retailer based
on (1) its performance on relevant
attributes and (2) the importance of those
attributes to the customer.
Retail buyers can also use the multiattribute
model to evaluate merchandise and
vendors.

1. Beliefs about Performance

The customer mentally processes the Ask students what factors they consider in
“objective” information about each making a retailer choice to purchase
retailer and forms an impression of the
groceries, get a haircut, buy jeans, eat a
benefits each store provides.
meal, etc.
Some benefits combine several objective
characteristics.
The degree to which each retailer provides
benefits is represented on a 10-point
scale, where 10 means the retailer
performs well in providing the benefit and
1 means poor performance.

2. Importance Weights
The customer forms an overall evaluation of After listing the factors considered for a
each retailer based on the importance specific retailer choice, demonstrate how the
he/she places on each benefit the retailer importance weights differ across people by
provides. having students vote on what is most
The importance a customer places on a benefit important in their decision. Show how
can also be represented using a 10-point weights can vary depending on the purchase
rating scale, with 10 indicating that the situation. For example, ask students what are
benefit is very important and 1 indicating the most important characteristics of a
that the benefit is very unimportant. restaurant when they want a quick bite
The importance of a retailer’s benefits differs between classes, when they want to take their
for each customer and may also differ for parents to dinner during a campus visit, and
 each shopping trip. In general, customers when they want to impress a date?
can differ on their beliefs about the
retailer’s performance as well as their
importance weights.

3. Evaluating Stores See PPT 4-19

Research has shown that the customer’s
overall evaluation of an alternative
(retailer) is closely related to the sum of
the performance beliefs multiplied by the
importance weights.
The multiattribute attitude model doesn't
reflect customers' actual decision
processes, but it does predict their
evaluation of alternatives and their choice.
In addition, the model provides useful
information for designing a retail offering.
The same model can also be used to describe
how a customer evaluates and selects
merchandise in a store.
In general, customers don’t thoroughly
evaluate each alternative as suggested in
the multiattribute model. They simply Ask students for several examples of how they
buy merchandise that’s good enough or determine the “good enough” level in a retailer
very good on one particular attribute. or product choice situation.
They often don’t spend the time necessary
to find the very best product.

a. Getting into the Consideration Set See PPT 4-21

The retailer must make sure that it is included Ask students for their consideration sets for
in the customer's consideration set. The grocery purchases. What could a grocery
consideration set is the set of alternatives retailer do to get into the students'
the customer evaluates when making a consideration sets?
selection.
The choice rule described in the text is a
To be included in the consideration set, the linear compensatory rule--good performance
retailer must develop programs to
on one characteristic can overcome poor
increase the likelihood that customers will
remember it when they’re about to go performance on other characteristics. Other
shopping. choice rules involve using a cutoff--minimum
acceptable performance. Ask students if they
After ensuring that it is in the consideration can think of a situation in which they use
set, the retailer can use four methods to
cutoffs to represent minimum acceptable
increase the chances that it will be
selected for a visit. The retailer can (1)
performance.
increase the belief about its performance,
(2) decrease the performance belief for
competing retailers in the consideration
set, (3) increase customers' importance
 weights, or (4) add a new benefit.

b. Changing Performance Beliefs See PPT 4-22

The first approach involves altering
customers’ beliefs about the retailer’s
Ask students to indicate when their beliefs
performance -- increasing the retailer's
performance rating on a characteristic. about a retailer's performance changed. Why
did the belief change? What can retailers do
It is costly for a retailer to improve its to change beliefs? Why is it harder to change
performance on all benefits. Thus, a beliefs about a competing retailer than about
retailer should focus efforts on improving
yourself? Use automobiles to illustrate how
performance on benefits that are
important to customers in its target importance weights change over time.
market. Horsepower and size were very important 20
years ago. Now reliability, environmental
A change in performance belief on an impact, and gas mileage are important. Ask
important benefit results in a large change
students if it is easier to change performance
in customers’ overall evaluations.
beliefs or importance weights? Why?
Another approach is to try to decrease
customers’ performance ratings of a
competing retailer. This approach may be
illegal and usually isn't very effective
because customers typically don’t believe
a firm’s negative comments about its
competitors.

c. Changing Importance Weights Ask students to give an example of a retailer

that has tried to change an importance weight
Altering customers' importance weights is
another approach to influencing retailer
on an attribute– either to make it more
choice. important because they are doing really well
on that dimension or less important to
A retailer would want to increase the customers because they are doing a poor job.
importance customers place on benefits
for which the retailer has superior
performance and decrease the importance
of benefits for which it has inferior
performance.
Typically, changing importance weights is
harder than changing performance beliefs
because importance weights reflect the
customers' values.

d. Adding a New Benefit Ask students to think of a retailer that has

offered a new benefit--a benefit that
Retailers might try to add a new benefit to the
set of benefits that customers consider
customers previously did not consider when
when selecting a retailer. selecting a retailer.
The approach of adding a new benefit is often
effective because it’s easier to change
customer evaluations of new benefits than
 old benefits.

D. Purchasing the Merchandise See PPT 4-23

Customers don't always purchase a brand or
item of merchandise with the highest
overall evaluation. The item offering the
greatest benefits may not be available
from the retailer or the customer may feel Ask students to describe a situation in which they
that the risks outweigh the potential have abandoned a shopping cart online or in a
benefits. store. What led to this choice? What could the
One measure of retailer’s success at retailer have done to prevent the abandoned cart
converting positive evaluations to in each instance?
purchase is the number of real or virtual
abandoned shopping carts in the retailer’s
store or on its Web site.
Retailers can reduce the number of abandoned
carts in several ways including: making it
easier to purchase merchandise, reducing
actual or perceived waiting time to
purchase, and reducing perceived risks of
the purchase through liberal return and
refund policies.

E. Post-purchase Evaluation See PPT 4-24

The buying process does not end when a
customer purchases a product. After
Ask students to describe a situation in which
making a purchase, the customer
consumes or uses the product and then they were dissatisfied after visiting a retailer.
evaluates the experience to determine What could the retailer have done to satisfy
whether it was satisfactory or them? Ask students to describe a satisfying
unsatisfactory. experience. What did the retailer do to create
this satisfying experience?
Satisfaction is a post-consumption evaluation
of how well a retailer or product meets or
exceeds customer expectations.
The post-purchase evaluation becomes part of
the customer’s internal information that
affects future retailer and product
decisions.
Consistently high levels of satisfaction build
store and brand loyalty – important
sources of competitive advantage for
retailers.

II. Types Of Buying Decisions

Three types of customer decision-making Ask students how they went about collecting
processes are extended problem solving, information, deciding on purchase and making the
limited problem solving and habitual purchase once they realized that they needed any
 decision making. of the following: (1) new music for their MP3
player (2) jeans (3) sneakers (4) laptop (5)
apartment to rent.

If various product categories are used to

generate discussion, the instructor may wish
to use one side of the blackboard to list the
comments generated about each product
purchase decision. Later, as the lecture
proceeds, different types of problem solving,
different types of information search and
evaluation, different influences on purchase,
and different purchase contexts and post-
purchase satisfactions could be elaborated for
each of the products on which a discussion
was generated at the outset.
See PPT 4-29 for a review of the types of
customer decision-making processes.

A. Extended Problem Solving

Extended problem solving is a purchase See PPT 4-26
decision process in which customers
devote considerable time and effort to Ask students to provide an example of when
analyzing alternatives. Customers they engaged in extended problem solving.
typically engage in extended problem
When did they evaluate several retailers?
solving when the purchase decision
involves a lot of risk and uncertainty.
Why did they evaluate several? Ask students
for examples of financial, physical, and social
There are many types of risks, which include risks.
financial risk, physical risks, or social
risks.
Consumers engage in extended problem
solving when they are making buying
decisions to satisfy an important need or
when they have little knowledge about the
product or service.

B. Limited Problem Solving

Limited problem solving is a purchase See PPT 4-28
decision process involving a moderate
amount of effort and time. Customers Ask students to provide an example of when
engage in this type of buying process they engaged in limited problem solving.
when they have had some prior
experience with the product or service and
their risk is moderate.
REFACT: Seventy percent of all supermarket
In these situations, customers tend to rely purchases are unplanned, impulse purchases.
more on personal knowledge than on
external information. They usually By a show of hands, ask the class who shops
 choose a retailer they have shopped with with a "list" and who does not. Then ask each
before and select merchandise they have group about their purchases, impulse or
bought in the past. planned.
The majority of customer decision making
involves limited problem solving.
One common type of limited problem solving
is impulse buying, which is a buying
decision made by customers on the spot
after seeing the merchandise.
Retailers encourage impulse buying behavior
by using prominent displays to attract
customer attention and stimulate a
purchase decision based on little analysis.

C. Habitual Decision Making See PPT 4-31

Habitual decision making is a purchase
decision process involving little or no
Ask students to provide an example of when
conscious effort. This decision process is
used when decisions aren’t very important they engaged in habitual decision-making
to customers and involve familiar (you might focus on the store choice decision,
merchandise they have bought in the past. not the merchandise selection decision).
Have students describe a situation when they
Brand loyalty and store loyalty are examples
switched from habitual decision making to
of habitual decision making. Brand
loyalty occurs when customers like and limited or extended problem solving. Why did
consistently buy a specific brand in a they switch? What can retailers do to get
product category. students who are not presently patronizing to
do so?
Store loyalty means that customers like and
habitually visit the same store to purchase
a type of merchandise.
Ask students to give examples of 1 or 2 items
for which they are brand loyal. Compare the
selections the students identified. What are
the similarities and differences? What
features of the product make the individual so
brand loyal?

Ask students their favorite store to buy jeans.

Group the students together who answered
with the name of the same store. Ask what
makes them so brand loyal to that specific
store. Compare their answers to the
alternative answers offered. Compare and
contrast the similarities and differences.
III. Social Factors Influencing Buying See PPT 4-34 for an overview of the factors
influencing customers’ buying decisions.
 Decisions
Buying decisions are affected by the
customer’s social environment – the
customer’s family, reference groups, and
culture.

A. Family See PPT 4-35

Many purchase decisions are made for Ask students to give an example of a purchase
products that the entire family will decision they made that was influenced by
consume or use. Retailers must members of their family. One decision might
understand how families make purchase be the choice of college to attend. How did
decisions and how various family the family influence the decision?
members influence these decisions.
When families make purchase decisions, they
often consider the needs of all family
members. In some situations, all family
members may participate in the decision-
making process. In others, one member
of the family may assume the role of
making the purchase decision.
Children play an important role in family
buying decisions.
Retailers can attract consumers who shop with
other family members by satisfying the
needs of all family members.

B. Reference Groups
A reference group is one or more people that See PPT 4-36
a person uses as a basis of comparison for
their beliefs, feelings, and behaviors. A
consumer might have a number of
Ask students to give examples of their
different reference groups, although the
most important reference group is the
purchase decisions that are influenced by
family. their reference groups. What are the different
reference groups that influence their
These reference groups affect the buying decisions?
decision process by: (1) offering
information, (2) providing rewards for
specific purchasing behaviors, and (3)
enhancing a consumer’s self-image.
Reference groups provide information to
consumers directly through conversation
or indirectly through observation.
Some reference groups influence purchase
behaviors by rewarding behavior that
meets with their approval.
By identifying and affiliating with reference
 groups, customers create, enhance, and
maintain their self-image.
Retailers are particularly interested in
identifying and reaching out to those in a
reference group who act as store
advocates and actively influence others in
the group. Store advocates are consumers
who like a store so much they actively Does any student consider him- or herself to be an
share their experiences with friends and advocate for a particular retailer? Why? Which
family. retailer?

C. Culture
Culture is the meaning, beliefs, morals, and See PPT 4-38
values shared by most members of a
society.
As retailers expand beyond their domestic
markets, they need to be sensitive to how
cultural values affect customer needs and
shopping behavior.
Subcultures are distinctive groups of people
within a culture. Members of a subculture
share some customs and norms with the
overall society but also have some unique
perspectives. Subcultures can be based
on geography, age, ethnicity, or lifestyle.

IV. Market Segmentation

To increase their efficiency, retailers identify
groups of customers (market segments)
Ask students why retailers segment markets.
and target their offerings to meet the
needs of typical customers in that segment What are examples of retailers who clearly
rather than the needs of a specific appeal to a specific segment of customers?
customer. Describe the segment or segments of
customers that buy Red Bull, shop at Toys R’
A retail market segment is a group of
Us, buy hybrid cars, and eat at McDonald’s.
customers whose needs are satisfied by
the same retail mix because they have
similar needs.
The Internet enables retailers to efficiently
target individual customers and market
products to them on a one-to-one basis.

A. Criteria for Segmenting Markets

Four criteria for evaluating whether a retail See PPT 4-39
segment is a viable target market are (1)
Having described the segments above,
actionable, (2) identifiable, (3)
substantial, and (4) reachable. evaluate each of the segments on the criteria
listed.
1. Actionable Ask students if this segment is actionable.
Can a product or retail offering be developed
The fundamental criteria for evaluating a
retail market segment are (1) customers in
that will appeal to this segment and not to
the segment must have similar needs, seek other types of customers? Would you use
similar benefits, and be satisfied by a unique advertising and media to influence this
similar retail offering, and (2) those segment?
customers’ needs are different from the
needs of customers in other segments.
Actionable means that the definition of a
segment must clearly indicate what the
retailer should do to satisfy its needs.

2. Identifiable Ask students how they would identify people

in this segment? Sometimes retailers do not
Retailers must be able to identify the
customers in a target segment.
need to specifically identify customers in their
target segment. They promote their stores to
Identifiability is important because this way everyone and interested customers select to
the retailer can determine (1) the visit the store. What are the advantages and
segment’s size and (2) the consumers to disadvantages of using self-selection versus
whom the retailer should target its
targeted promotions?
promotions.

3. Substantial
A target segment must have enough buying
power to support a unique retailing mix.

4. Reachable Ask students how they would reach people in

this segment to tell them about a product or
Reachable means that the retailer can target
promotions and other elements of the
retail store. Which media could they use to
retail mix to consumers in the segment. reach them?

B. Geographic Segmentation.
Geographic segmentation groups customers
based on where they live. A retail market
Ask students for examples of retailers who use
can be segmented by countries or by areas
within a country such as states, cities, and geographic segmentation.
neighborhoods.
Segments based on geography are
Discuss differences in merchandise students may
identifiable, reachable, and substantial.
expect to see at a sporting goods store in Florida
However, when customers in different versus a sporting goods store in Vermont.
geographic segments have similar needs,
it is inappropriate to develop unique retail
offerings by geographic markets.

C. Demographic Segmentation. Examples of retailers focusing on

demographic segments are Home Depot
Demographic segmentation groups consumers
(homeowners), Limited Express (young
 based on easily measured, objective women), McDonald's (families with young
characteristics such as age, gender, children).
income, and education. Ask students for other examples.
Demographic variables are the most common
means to define segments because
consumers in these segments can be easily
identified and reached.
Demographics may not be useful for defining
segments for some retailers.

D. Geodemographic Segmentation
Geodemographic segmentation uses both
geographic and demographic
characteristics to classify consumers. Ask students if they can identify the different
This segmentation is based on the groups of people in their neighborhood based
principle that “birds of a feather flock on demographics and behaviors.
together.”
The most widely used tool for
geodemographic segmentation is PRIZM
(Potential Rating Index by Zip Market)
developed by Claritas.
Geodemographic segmentation is particularly
appealing to store-based retailers because
customers typically patronize stores close
to their neighborhood.
Retailers can use geodemographic
segmentation to select locations for their
stores and tailor the assortment in the
stores to the preferences of the local
community.

E. Lifestyle Segmentation
Lifestyle, or psychographics, refers to how Ask students to classify themselves, their
people live, how they spend their time and parents, and their grandparents in terms of
money, what activities they pursue, and lifestyle segmentation.
their attitudes and opinions about the
world they live in.
Retailers today place more emphasis on life-
styles than on demographics to define a Ask students to describe the lifestyle of a
target segment. couch potato? What retailers focus on this
The most widely used lifestyle tool is the segment? What can retailers do to appeal to
Value and Lifestyle Survey (VALS2) this segment?
conducted by SRI Consulting Business
Intelligence. The segments are described
by two dimensions: (1) the consumers’
resources including their income,
 education, health, and energy level, and
(2) personal orientation or what motivates
them – principles, status, or actions.
Lifestyle is useful because it identifies what
motivates buying behavior. On the other
hand, it is difficult to identify and access
consumers in specific lifestyle segments.

F. Buying Situation Segmentation Contrast the differences in the buying

situation target segments for convenience
Buying behavior of customers with the same
demographics or lifestyle can differ
stores and supermarkets.
depending on their buying situation.

G. Benefit Segmentation
Relate benefit segments back to the
Another approach for defining a target
segment is to group customers seeking
multiattribute model. A benefit segment is
similar benefits. In the multiattribute composed of customers who attach a high
attitude model, customers in the same importance weight to a specific characteristic
benefit segment would have a similar set or benefit.
of importance weights on the attributes of
a store or a product.
Benefit segments are very actionable. But
customers in benefit segments aren’t
easily identified or reached.

H. Composite Segmentation Approaches

No one approach meets all the criteria for Ask students to describe different groups of
useful customer segmentation. women (or men) shopping for moderate to good
Composite segmentation plans use multiple quality leisure clothing, based on their lifestyles,
variables to identify customers in the demographics, and benefit sought. What retailers
target segment. They define target target each segment more so than others?
customers by benefits sought, lifestyles,
and demographics.

V. Summary
 To satisfy customer needs, retailers must
thoroughly understand how customers
make retailer store, Web site and purchase
decisions, and the factors they consider
when deciding.
 This buying process of consumers is
influenced by their personal beliefs,
attitudes, and values and by their social
environments.
 To develop cost-effective retail programs,
retailers group customers into segments
with similar needs, characteristics and
 lifestyles.

ANSWERS TO “GET OUT AND DO ITS”

2 GO SHOPPING Go to a supermarket and watch people selecting products to put in their shopping
carts. How much time do they spend selecting products? Do some people spend more time than others?
Why is this the case? Does consumer behavior vary in the store perimeter versus in the aisles? Explain
your observations.
Students may find a variety of shopping styles from this observational research trip. Some shoppers
will have a list, some will go up and down each aisle, and others will go through the store in a more
random pattern. Some consumers will shop alone and others swill shop with family members
including young children.
A great deal of time goes into planning the store layout. The store perimeter usually has heavy
traffic with departments such as bakery, deli, meats and dairy. The dry goods aisles have the lowest
margins in the store and contain canned and packaged food and nonfood items.

4 INTERNET EXERCISE To better understand the segmentation classification of consumers, Strategic

Business Insights has developed the VALS tool, which uses psychology to segment people according to
their distinct personality traits. Go to the firm’s homepage at
http://www.strategicbusinessinsights.com/vals/presurvey.shtml and take the survey to identify your
VALS profile according to your values, attitudes, and lifestyle. According to the results,
what is your VALS profile type? Do you agree with your consumer profile? Why or why not? How can
retailers effectively use the results of this survey when planning and implementing their business
strategies?
“The purpose of the VALS™ survey is to identify the VALS type of the person taking the survey. That's it.
To find out about a person's product ownership, media preferences, hobbies, additional demographics,
or attitudes (for example, about global warming), the questions in the VALS survey integrate into larger
questionnaires that ask about these topics. For example, the VALS questions integrate into MRI's
nationally syndicated Survey of the American Consumer, which enables us to see the media preferences
of each of the eight VALS types. The VALS questions also integrate into our own Consumer Financial
Decisions' MacroMonitor survey, giving us in-depth information about how each VALS type uses, invests,
and saves money.”
Source : http://www.strategicbusinessinsights.com/vals/presurvey.shtml.
Some students will strongly agree with their VALS profile, others will not. This is a good opportunity
to discuss how retailers will use this tool to understand customers and plan business strategies in
small groups.

6 INTERNET EXERCISE Go to the following Internet sites offering information about the latest fashions:
www.style.com (Vogue, W), www.fashioninformation.com (U.K.), and
www.telegraph.co.uk/fashion/index.jhtml (U.K.). Write a brief report describing the latest apparel
fashions that are being shown by designers. Which of these fashion trends do you think will be popular
with college students? Why?
Students interested in fashion and apparel merchandising will really like this exercise. This is a
chance to see the latest fashions and discuss where they are in the product life cycle. Responses to
what will be popular with college students will vary by the trends and seasons. A great time to assign
this question is during or immediately following New York City Fashion Week.
http://www.mbfashionweek.com/.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

22. 1. Does the customer buying process end when a customer buys some merchandise?
Explain your answer.

No, the customer buying process does not end when a customer buys some merchandise. One of
the most important stages of the buying process is the Post Purchase Evaluation. This stage
happens after the purchase takes place. Customers consume or use the merchandise and then
evaluate their experiences to determine whether it was satisfactory or unsatisfactory. The post
purchase evaluation becomes part of the customer’s internal information that affects future store
and product decisions. A satisfied customer may make repeat purchases, where an unsatisfactory
experience can motivate customers to complain to the retailer and decide to patronize other stores.
23. 2. Describe how service retailers, such as hotels, provide information to potential
customers to answer questions about services offered, rates and other amenities. How is
this similar and different from the information provided by product manufacturers?

Consumers may seek information to help satisfy the need (where to stay, room rates, hotel amenities,
etc.). This step could be long or short depending on the consumer’s prior knowledge and the risk
involved.
Consumers may consult one or more of five general sources:
1. Internal - information in a person’s memory, past experience
2. Personal – consulting other people, friends and family
3. Marketing – packaging information, sales people, advertising
4. Public – independent sources, media and consumer reports
5. Experiential – consumer trial of the product, test drive, listen to a music CD
Retailers (hotels) try to have the consumers limit their information search to just their location or
web site. By anticipating questions, retailers can increase the likelihood of satisfying the consumer’s
needs. Hotels use their trained staff, signs, printed literature, hotel services booklet, web site etc.

24. 3. Considering the steps in the consumer buying process (Exhibit 4-1), describe how
you (and your family) used this process to select your college/university. How many
schools did you consider? How much time did you invest in this purchase decision?
When you were deciding on which college to attend, what objective and subjective
criteria did you use in the alternative evaluation portion of the consumer buying
process?

To answer this question, students need to consider the following steps in the decision
making process:
Need recognition—What stimulates the student to first think about going to college? What
types of needs was the student attempting to satisfy by going to college?
Information search—What information did the student collect about college and the different
colleges? Who provided the information—the colleges through the mail, school counselors,
friends, family, visits to the colleges?
Evaluation of alternatives—What were the characteristics on which the students compared
the various colleges? Did the student use something like a multi-attribute model to compare
the strengths and weaknesses of various alternatives?
Choosing a college—What were the key factors influencing the final choice and what was
the final choice?
Post-choice evaluation—How satisfied is the student with the choice? Would the student
recommend the college to a friend?
 A habitual decision would be choosing the same college that a sibling or parent went to
without much thought. Extensive problem solving would be searching for a lot of
information and making a detailed comparison of alternatives.

25. 4 Refer back to Exhibit 4-7, Location of Gray-Collar Neighborhoods (jobs with a
combination of white and blue collar skills). How could various retailers, such as banks,
restaurants, pharmacies and car dealers, use this map in their market segmentation
planning?

This map can be used for geographic and demographic segmentation to classify customers.
This can help retailers understand buying behavior of more than one characteristic including
age, lifestyle, media used, incomes, region, population, etc. This helps retailers select
locations and plan merchandise assortments to match the local community.

26. 5. Any retailer's goal is to get customers in its store so that they can find the
merchandise that they are looking for and make a purchase at this location. How could
a sporting goods retailer ensure that the customer buys athletic equipment at its outlet?

A sporting goods retailer can ensure that a customer buys athletic equipment in their store by
helping customers decrease their information search. In general, retailers want to reduce the
information search of customers when they are in the store. The sporting goods retailer needs to
limit the necessary information needed to make a decision to the information in the store so that
the customer will make a purchase decision in the store. To do this, the retailer should first provide
a good selection of merchandise so customers can find something to satisfy their needs within the
store. Second, retailers should hire an educated staff to provide the needed information to
customers when deciding on their equipment. Third, retailers should provide special services to
reduce the decision process. This could include the availability of credit and delivery. Lastly,
retailers could provide everyday low pricing to increase the chance that customers will buy in their
store and not search for a better price elsewhere.

27. 6. A family-owned used book store across the street from a major university campus
wants to identify the various segments in its market. What approaches might the store
owner use to segment its market? List two potential target market segments based on
this segmentation approach. Then contrast the retail mix that would be most
appropriate for the two potential target segments.

Target segment defined on demographics might be:

* Students (younger segment)
* Faculty, Staff and Administrators (older segment)
* Local residents with different demographic profiles such as gender, age, and education.
 Target segments based on lifestyle might be:
* Interest in outdoor recreation (travel, camping, fishing)
* Interest in indoor hobbies and activities (leisure, entertainment, cooking, sewing,
home repairs)
* Adventuresome
Target segment based on benefits sought and usage situation might be:
* Eclectic tastes in reading material
* Interest in non-fiction or local authors
* Textbooks vs. pleasure reading
Note that the target segment determines the nature of the merchandise offered. For example,
a target segment of students for used books means that the store has to get information about
tastes of the current batch of students at the university, what types of books they would be
looking for used versus new, and their price preferences. Also the store needs to offer
services like buying back books from students. This will serve at least two purposes: (1)
replenishing stock of used books, and (2) getting people back into the store. The store will
be designed so that the books are well categorized according to type (textbooks, non-fiction,
mysteries, etc.) and author(s). Not much personalized service needs to be provided, but the
store could have facilities where the students and other customers can relax to browse the
selection.
On the other hand, selling research-oriented books to the general public (local residents)
means that the store will have a wider variety of music but not too many copies of each
album. The store will have to provide services like special ordering, especially since the
local residents may be willing to wait for their choice of used music album.

28. 7. How does the buying decision process differ when shopping on the Internet
compared with shopping in a store in terms of locations/sites visited, time spent, brands
considered, purchases made and level of satisfaction with the purchase decision?

Students should consider the five steps in the buying decision. Looking at the differences in
time spent, retailers and/or sites visited, merchandise evaluated, and if a purchase was made
or not.
Problem/need recognition – Recognition of an unfulfilled need will lead to the inner motivation to
fulfill the need. Some needs are obvious, such as; there is no milk in the refrigerator. Other needs
are more ambiguous. Some products fulfill customer needs on a
 rational, or functional level. Other products meet customer needs on an emotional or psychological
level. Most consumers have multiple needs and frequently these needs overlap.
Information search – Once a need has been recognized, consumers may seek information
about retailers or products to help satisfy the need. This step could be long or short
depending on the consumer’s prior knowledge and the risk involved. May consumers search
for product information on the Internet prior to making a purchase. Information usually
results in a set of alternative brands consumers consider for purchase.

Alternative Evaluation - In this stage of the buying process, consumers consider a number of
attributes about the alternatives being considered that may satisfy their needs. The
multiattribute model is based on a notion that consumers see the retailer and the brands and
products offered as a collection of attributes or characteristics. The model aids in the
prediction of a customer’s evaluation of a product, brand or retailer based on their
performance beliefs and the importance of the attributes to the customer.
Some of the attributes will be objective and others will be subjective. Objective criteria may include
price, travel time, merchandise selection and other store characteristics. Subjective criteria may
include store atmosphere and other less tangible store benefits.
Purchase Decision - Once alternative evaluation is complete, the consumer will arrive at a
purchase decision and will either:
Purchase now – needs are met.
Purchase later – to save or wait for a sale.
No purchase – no options met needs.
Post-purchase Evaluation - After buying a product, consumers evaluate the outcome of the
purchase. How was the original need met? Favorable experiences lead to store and brand
loyalty, positive word of mouth, and repeat purchases. “A satisfied customer is our best
advertisement.” Low value leads to looking at alternative choices next time and negative
word of mouth.

29. 8. Using the multiattribute attitude model, identify the probable choice of an
automobile repair outlet for a young, single woman and for a retired couple with
limited income (See the table that follows). What can the national retail chain do to
increase the chances of the retired couple patronizing its dealership? You can use the
multiattribute model template found in the Online Learning Center to analyze this
information.

30.
 Importance Weight Performance Beliefs

Characteristics Young Retired Local Gas National Local Car

Single couple Station Service Chain Dealer

Price 2 10 9 10 3

Time to 8 5 5 9 7
Complete Repair

Reliability 2 9 2 7 10

Convenience 8 3 3 6 5

Using the multiattribute model (importance weights multiplied by price and summated
over all the characteristics), we get the following overall evaluation scores for each outlet
by each segment:

Segment Local Gas Station National Service Local Car Dealer

Chain

Single Woman 86 154 122

Retired Couple 142 226 170

The probable choice of an automobile repair outlet for a single woman would be the local
car dealer. The probable choice for a retired couple with limited income would be a
national service chain.

31. 9. Think of a recent purchase that you made and describe how social environmental
factors including reference group, family and culture, influenced your buying decision.
How could/are retailers use/using social media to impact your buying decisions?

Culture – values and behaviors in a society. Different cultures put importance on different values.
Subculture – distinctive groups within a culture such as, nationality, racial, ethnic, religious
Reference groups – membership groups, professional associations, and religious group. By
identifying with a reference group, consumers create or maintain their self-image. Example:
Outdoorsy lifestyle, L.L. Bean.
Family – parents, spouse and children. Many purchases are made for products that the entire family
will use. Example : vacation with or without children.
 All can result in different retailers and brands being selected. Students may have experience with
Facebook or other social media web sites. These sites can influence consumer buying behavior
depending on how much people value the information posted. Some consumers value the
information as a trusted friend or expert in the field and therefore trust their opinions, reviews and
recommendations when making a purchase decision.

32. 10. Think about the merchandise sold at Office Depot, Staples and Office Max and list
three to four types of merchandise that fall into extended problem solving, limited
problem solving and habitual decision making for college students. Explain how the
categories of merchandise would change for each type of buying decision if the
customer was a medium-sized business owner?

As marketers we examine the level of involvement and amount of time a consumer spends in
the buying process. Depending on the significance of the purchase, consumers will be more
or less involved in the purchase process with varying amounts of time and research.
Extended Problem Solving – considerable time, complex, unfamiliar, and significant, less frequently
purchased, considerable risk and uncertainty. Customers will spend more time and effort to collect
information and thoroughly evaluate alternatives. Consumers may visit several retailers before
making a purchase decision. Examples: computers, printers & office furniture.
Limited Problem Solving – involves a moderate amount of effort and time. The customer may have
some prior experience in buying this type of product. They may consider a new brand. If the product
is unfamiliar they will gather more information. Retailers can aid customers by offering the
information required. Examples: software,. electronics and storage items.
Habitual/Routine Decision Making – low involvement, simple, inexpensive, familiar, buy frequently.
Can lead to Brand loyalty. If the consumer need was satisfied in the past, the buyer will likely by the
same brand again. Store loyalty can also be created when the consumer routinely visits the same
store to purchase merchandise. Many retailers implement programs such as bonus cards and private
label brands to increase store loyalty. Examples: paper, ink, file folders.
A small business would likely use a more rational approach to buying with specific criteria.
Individuals would consider rational and emotional criteria, The small business would also likely buy
in bulk and reorder when supplies drop to a designated level.
ANCILLARY LECTURES AND EXERCISES

Lecture # 4-1 THE MULTIATTRIBUTE MODEL

Instructors’ Note: This lecture can be used to demonstrate a model designed to predict a customer’s
evaluation of a product or retailer based on their performance on several attributes and the importance
of those attributes to the customer. PowerPoint slides are available to accompany this lecture.
Introduction
 The multiattribute model is based on the notion that customers see a retailer or a product as a
collection of attributes or characteristics.
 Customers collect and review information about alternative products or retailers, evaluate the
alternatives, and select one that best satisfied their needs.
 A multiattribute attitude model provides a useful way to look at the customer's evaluation process.
 The model is designed to predict a customer's evaluation of a product or a retailer based on their
performance on several attributes and the importance of those attributes to the customer. Buyers
can also use the multiattribute model to evaluate merchandise and vendors.
Beliefs about performances
 A customer considering shopping at three retailers mentally processes the "objective' information
about each of the retailers and forms an impression of the benefits the retailer provides.
 His beliefs about these benefits may be a combination of several objective characteristics. For
example, the convenience benefit is a combination of travel time, checkout time and check-cashing
privileges. Price of the groceries and double coupons affect the perception of the economy of
shopping at the stores.
 The degree to which the retailer provides the benefits is represented on a 10-point scale. 10 means
that the retailer performs well in providing the benefits; 1 means that the retailer performs poorly.
Importance weights
 A customer may develop an overall evaluation of each retailer based on the importance he/she
places on each of the benefits provided by the retailers. For example, the importance a customer
places on a benefit can also be represented using a 10 point rating scale, with 20 indicating that the
benefit is very important and 2 indicating that the benefit is very unimportant.
 Using this rating scale, the importance of the retailer benefits for a young woman and a parent
with four children are shown in the accompanying exhibit, along with the performance beliefs
previously discussed.
Choice of Alternatives
 For the young woman, the Internet grocer has the highest score, and thus the most favorable
evaluation. However, the Supercenter has the highest score for the parent, who would probably
buy the family's weekly groceries there.
 Note that even though the multiattribute model does not reflect the customer’s actual decision
process, it does predict their evaluation of alternatives and their choice
 The model provides useful information for designing a retail offering.
 The same model can also be used to describe how a customer evaluates and selects merchandise.
This demonstrates that, generally, once customers find a product that will satisfy their needs, they
will stop searching.
Implications for retailers
 First, the model indicates what information customers use to make their decision about which
retailer to patronize. Thus, to develop a program for attracting customers, the retailer needs to do
market research to collect the information listed below.
1. Getting into the consideration set
The retailer must make sure that it is included in the customer's consideration set. The
consideration set is the set of alternatives the customer evaluates when making a selection. To
be included in the consideration set, the retailer must develop programs to increase the
likelihood it will be remembered and thought about when customers are about to shop. After
ensuring that it is in the consideration set, the retailer can use 4 methods to increase the
chances that it will be selected for a visit. 1) Increase the belief about its retailer's performance.
2) Decrease the performance belief for competing retailers in the consideration set 3) Increase
customers' importance weights or 4) Add a new benefit.
2. Changing performance beliefs
The first approach involves altering customer's beliefs about the performance of the retailer--
increasing the retailer's performance rating on a characteristic. For example, the supermarket
would want to increase its overall rating evaluation by improving its ratings on all four benefits.
The supermarket could improve its rating on economy by lowering prices and improve its rating
on store environment by modernizing the store, making sure the store is clean and neat. It is
very costly for a retailer to improve its performance on all benefits. Thus, a retailer typically
needs to focus efforts on improving performance on benefits that are important to customers in
its target market. A change in performance belief on an important benefit results in a large
change in customers’ overall evaluation. Another approach is to try to decrease customers'
performance ratings of a competing retailer. This approach may be illegal and usually isn't very
effective because customers typically don't believe a firm’s negative comments about its
competitors.
3. Changing importance weights
Altering customers’ importance weights is another approach to influencing retailer choice. A

retailer would want to increase the importance customers place on benefits on which the retailer

has superior performance or decrease the importance on benefits on which it has inferior

performance. Typically, changing importance weights is more difficult than changing performance

beliefs because the importance weights reflect the customers' values.

4. Adding a new benefit

The retailer might try to add a new benefit to the set of benefits that customers consider when
selecting a retailer. For example, since JCPenney is a national department store, customers can
purchase a gift at their local store and send it to a person in another part of
 the country knowing that the recipient can exchange it at their local store if desired. This
approach of adding a new benefit is often effective because it's easier to change customer
evaluation of new benefits than old benefits.

ANCILLARY EXERCISE # 4-1: USING THE MULTIATTRIBUTE MODEL FOR

CHOOSING A STORE

-------------------------------------------------
Instructor’s Note: This exercise is intended to give students the opportunity to use the multiattribute
Model found in the text. Instructors might want to use this lecture as a stimulus to a class discussion on
the topic.
-------------------------------------------------
Instructions
• Pick a student who has recently made a store choice decision -- such as choosing a retailer to buy
jeans, get a haircut, buy groceries, or eat a meal.
• Then go through the following steps:
• Have the student indicate the two or three retailers he/she considered and write these names on
the top of the two columns.
• Have the student indicate factors he/she considered in choosing the retailers.
• Typical factors are convenience (location), price of merchandise, availability of specific items,
offering credit or taking a check, service, etc.
• List these benefits offered on the row in the left-hand column.
• Ask the student which characteristics or benefit is the most important to him/her and give benefit a
10 in the importance weight column.
• Then have the student indicate the importance of the other characteristics using a 10 point scale
where 10 means very importance and 1 means not very important.
• Now have the student rate each retailer on each characteristic using a ten-point scale where 10
means excellent performance and 1 means poor performance.
• Now multiple the importance weights times the performance beliefs for each characteristic and
calculate a total score for each retailer.
• Ask the student which store he/she went to.
• The student typically will have gone to the retailer with the highest score.
ANCILLARY EXERCISE # 4-2
Using the multiattribute attitude model and the following information, identify the probable choice of a
retail store for a young single businesswoman and for a retired couple with limited income buying a TV
set.

IMPORTANCE WEIGHTS PERFORMANCE BELIEFS

CHARACTERISTIC YOUNG RETIRED DISCOUNT DEPART- CATEGORY

SINGLE COUPLE STORE SPECIALIST
MENT
STORE

Price 2 10 9 3 10

Services 5 8 5 17 9

Assortment 9 2 2 10 7

Shopping environment 6 2 3 8 6

young single 79 177 164

retired couple 140 122 208

The young single person would get more benefits from the department store and thus choose it over
the discount store and the category specialist. The retired couple would choose the category specialist.
5
RETAIL MARKET STRATEGY

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. What Is A Retail Strategy?

The term strategy is frequently used in
retailing. For example, retailers talk Ask students to list all the decisions a retailer
about their merchandise strategy, makes. Now determine which are strategic
promotion strategy, location strategy, and which are tactical. Why?
and private-brand strategy.
Retail strategy isn’t just another Ask students what strategic decisions (type of
expression for retail management. job) they plan to make when looking for a job
after graduation. What tactical decisions
(making up and sending out resumes) will
they need to make?

A. Definition of Retail Market Strategy

See PPT 5-6
A retail strategy is a statement
identifying 1) the retailer's target
market 2) the format the retailer plans
to use to satisfy the target market's
needs, and 3) the bases upon which
the retailer plans to build a sustainable
competitive advantage.
The target market is the market
segments(s) toward which the retailer
plans to focus its resources and retail
mix.
A retail format is the retailer's type of
retail mix (nature of merchandise and
services offered, pricing policy,
advertising and promotion programs,
approach to store design and visual
merchandising, and typical location
and customer services).
A sustainable competitive advantage is
an advantage over competition that is
not easily copied and thus can be
maintained over a long time.
II. Target Market and Retail Format See PPT 5-7
The retailing concept is a management Ask students for local retailers that compete
orientation that focuses a retailer on directly against each other. What is the
determining the needs of its target target market of the retailers? What is the
market and satisfying those needs retail format used?
more effectively and efficiently than
its competitors.
The selection of a target market focuses
the retailer on a group of consumers
whose needs it will attempt to satisfy.
The selection of a retail format outlines
the retail mix to be used to satisfy
needs of customers in the target
market. Review different ways that markets can be
segmented -- target market segments can be
The retail strategy determines the defined (see 4) as: geographic, demographic,
markets in which a retailer will psychographic, buying situation, etc.
compete.
We define a retail market, not as a
specific place where buyers and sellers
meet, but as a group of consumers
with similar needs (a market segment)
and a group of retailers using a similar
retail format to satisfy those consumer
needs.
III. Building a Sustainable Competitive See PPT 5-8
Advantage
What is the effect of cutting prices in the long-
The final element in a retail strategy is the term? What will competitors do? What
retailer's approach to building happens if they also cut prices?
sustainable competitive advantage.
Some advantages are sustainable over a
long period of time while others can The inventor of a new key-sized garage door
be duplicated by competitors almost opener feels that her invention would be
immediately. Establishing a copied very soon by new competitors. What is
competitive advantage means that a the best retail format for the invention?
retailer builds a wall around its [Note that similar inventions are often
position in the retail market. promoted heavily through infomercials to
Over time, all advantages will be eroded capture sales very early]
due to these competitive forces.
Ask students to list the number of ways a
Seven important opportunities for retailers retailer can get customers to buy from them
to develop sustainable competitive rather than their competitors. Now, indicate
advantages are (1) customer loyalty, which methods are sustainable -- difficult for
(2) location, (3) human resource
 competitors to match easily. Why?
management, (4) distribution and
information systems, (5) unique
merchandise, (6) vendor relations, and
(7) customer service.
A. Customer Loyalty
Customer Loyalty means that customers See PPT 5-10
are committed to shopping at retailer's
locations. Loyalty is more than simply Ask students if they are loyal to any retail
liking one retailer over another. outlet. Why are they loyal to that outlet?
Loyalty means that customers will be What can a retailer do to build loyalty?
reluctant to patronize competitive
retailers.
Some ways that retailers build customer
loyalty are by (1) developing branding
strategies along with clear and precise
positioning strategies, and (2) creating
an emotional attachment with
customers through loyalty programs.
1. Retail Brands and Positioning See PPT 5-11
A retail brand, whether it is the name of
the retailer or a private label, can
create an emotional tie with customers Which retail brands are students familiar
that builds their trust and loyalty. with? Which do they prefer over
manufacturers’ brands? Why?
Retail brands also facilitate store loyalty
because they stand for a predictable
level of quality that customers feel
comfortable with and often seek.

2. Positioning. PPT 5-13 shows a hypothetical perceptual

map of the women's apparel market.
A retailer builds customer loyalty by
developing a clear and distinctive Describe the positions of the retailers and
image of its retail offering and segment ideal points. Ask students what
consistently reinforcing that image retailer customers in segment 5 prefer most.
through its merchandise and service. What store is seen as most similar to Neiman
Positioning is the design and Marcus? Most similar to Kmart?
implementation of a retail mix to
create an image of the retailer in the
customer's mind relative to its
competitors.
A perceptual map is frequently used to
represent the customer's image and
 preference for retailers.

B. Vendor Relations
By developing strong relations with See PPT 5-14
vendors, retailers may gain exclusive Discuss the example of Kmart's strategy of
rights (1) to sell merchandise in a having electronic links with its vendors and
specific region, (2) to buy providing many of its vendors with point-of-
merchandise with better terms than sale data. By developing computer links with
competitors who lack such relations, its vendors, Kmart increases its opportunity to
or (3) to receive merchandise in short have the right merchandise at the right store
supply. when the customer wants it. Discuss how this
Relationships with vendors, like can be an important competitive advantage.
relationships with customers, are
developed over a long time and may
not be easily offset by a competitor.
C. Human Resource Management See PPT 5-15
Retailing is a labor-intensive business. Discuss how employee commitment to the
Knowledgeable and skilled employees retailer appears to be varied at different
committed to the retailer's objectives stores frequented by students, as evident by
are critical assets that support the employee turnover, interactions with
success of several companies. employees, etc.

In tight labor markets, and since retailing

offers relatively low-paying jobs, at least at
the lower levels, what can management do to
maintain effective, committed employees.

D. Distribution and Information Systems See PPT 5-16

All retailers strive to reduce operating
costs. They want to get their
customers the merchandise they want, Ask students to describe their experience at a
when they want it, in the quantities store where they could not find the
that are required, at a lower delivered product/brand they wanted. If they contacted
cost than their competitors. Retailers a store employee, how did this employee
can achieve these efficiencies by respond? Evaluate and discuss.
developing sophisticated distribution
and information systems.
E. Location See PPT 5-17
Location is the critical factor in consumer
selection of a store. It is also a Ask the class to identify the locations of the
competitive advantage that is not nearest McDonald’s, Wendy’s, and Burger
easily duplicated. King. Who was in the location first? Describe
 that specific locale in terms of traffic patterns,
etc.
Why can location provide a sustainable
advantage? Which local retailers have a
good location? A poor location? Why?
IV. Growth Strategies
Four types of growth opportunities that See PPT 5-18
retailers may pursue are: market
penetration, market expansion, retail
format development, and McDonald's original market was families with
diversification. young children and its format was selling
hamburgers and french fries in stand alone
stores at lunch and dinner time. How would
you classify these opportunities McDonald's
pursued: breakfasts; locations in office
building; locations in schools; adding salads
to the menu; adding pizza to the menu;
opening up seafood restaurants to compete
against Red Lobster.
A. Market Penetration
A market penetration opportunity Consider The Gap, Land’s End, and Kmart.
involves directing investments toward What would be examples of market
existing customers using the present penetration opportunities they could pursue?
retailing format. Approaches for
increasing market penetration include
attracting new customers by opening
more stores in the target market or
opening the stores for longer hours.
Cross-selling means that sales associates See PPT 5-20
in one department attempt to sell
complementary merchandise from
other departments to their customers.
More cross-selling increases sales
from existing customers.
B. Market Expansion See PPT 5-21
A market expansion opportunity
employs the existing retailing format Consider The Gap, Land’s End, and Kmart.
in new market segments. What would be examples of market expansion
opportunities they could pursue?
Examples of market expansion are Wal-Mart
opening stores in large cities and the Gap
 starting Gap Kids.
C. Retail Format Development See PPT 5-22
A retail format development opportunity
involves offering customers a new Have the class discuss examples of a retailer
retail format--a format involving a adding additional merchandise categories or
different retail mix--to the same target altering the breadth and depth of the
market. assortment in its stores. Then discuss the
Adjusting the type of merchandise or pros and cons of this strategy. What type of
services offered typically involves a financial investment would it take. What
small investment, while providing an retailers would benefit from this. Describe
entirely different format, such as a their target markets. Consider The Gap,
store-based retailer going into Land’s End, and Kmart. What would be
electronic retailing, require a much examples of format development opportunities
larger and riskier investment. they could pursue? Examples of format
development are Kmart starting a discount
home improvement center -- Builders Square
and Land’s End opening retail stores.
D. Diversification See PPT 5-23
A diversification opportunity involves a
new retail format directed toward a Consider The Gap, Land’s End, and Kmart.
market segment that is not presently What would be examples of diversification
being served. opportunities they could pursue?
1. Related versus unrelated
diversification Discuss the example of JCPenney's two
Diversification opportunities are either investments in electronic shopping
related or unrelated. (TeleAction and JCPenney Television
Shopping Channel). TeleAction was an
In a related diversification opportunity, interactive electronic home shopping system
the present target market and/or retail selling a variety of merchandise, from food to
format shares something in common ticket reservations. Since little of the
with the new opportunity. This merchandise was sold through the Penney
commonality might entail purchasing stores or catalog, the system was an unrelated
from the same vendors, using the same diversification because it didn't involve
distribution and/or management Penney's catalog ordering and distribution
information system, or advertising in system. On the other hand, the Television
the same newspapers to similar target Shopping Channel was a related
markets. diversification because it offers
In contrast, an unrelated diversification predominantly Penney merchandise shipped
lacks any commonalty between the through its mail-order catalog distribution
present business and the new business. system. It's like an electronic catalog TV
show.
For The Gap, Land’s End, and Kmart, what
 would be examples of related versus
unrelated diversification opportunities? What
about Sears buying a manufacturer of home
appliances?
2. Vertical integration
Vertical integration is diversification by
retailers into wholesaling or
manufacturing.
When retailers integrate by manufacturing
products, they are making risky
investments because the skills
required to make products are
different from those associated with
retailing them.
Note that designing private label
merchandise is a related
diversification because it builds on the
retailer’s knowledge of its customers,
but actually making the merchandise
is considered an unrelated
diversification.
V. Global Growth Opportunities
International expansion is one form of a See PPT 5-24
market expansion strategy. The most Ask students to generate international growth
commonly targeted regions are opportunities for The Gap, The Wet Seal,
Mexico, Latin America, Europe, Wal-Mart, and a regional grocery store
China, and Japan. chain. Discuss why different opportunities
International expansion is risky because might be attractive to each of these retail
retailers using this growth strategy chains.
must deal with differences in
government regulations, cultural
traditions, different supply chain
considerations, and language.
A. Who is Successful and Who Isn't
Retailers with an offering that has Which U.S. based retailers have been
universal appeal, such as distinctive successful going global?
merchandise or low cost, are the most
successful at exploiting global Which non-U.S. based retailers have been
markets. Some of the most successful successful in the U.S.?
global retailers are specialty store
Discuss the reasons why category killers and
retailers with strong brand images
hypermarkets may be more successful
and/or unique merchandise.
 internationally. These reasons include: (1)
Category specialists and supercenter
experienced use of technology to manage
retailers may be particularly suited to
inventories, control global logistical systems
succeed internationally because of
and tailor merchandise assortments; (2)
their operating efficiencies.
buying economies of scale and efficient
These retailers are leaders in their use of distribution systems; (3) development of
technology to manage their inventory unique systems and standardized formats
and distribution systems, and enjoy facilitating better control; (4) focused
economies of scale that translate into communications due to narrow assortment
good values for consumers around the and focused strategy; and (5) willingness of
globe. global consumers to forgo service for lower
prices.
B. Keys to Success See PPTs 5-25
Four characteristics of retailers that have
successfully exploited international
growth opportunities are: (1) globally
sustainable competitive advantage, (2)
adaptability, (3) global culture, and (4)
financial resources.
C. Evaluating Global Growth
Opportunities
 From the retailer’s perspective, some
countries represent better growth
opportunities than others.

 Operational restrictions on retailers

were lifted in China in 2004, leading
to a number of retailers moving into
the country. Doing business in China
remains a challenge, though, due to
increasing operating costs, challenges
in finding and retaining talented
management personnel, and inefficient
supply chains.

 India has become an attractive market

for retailers because it has a
population of over 1billion, solid
economic growth, and a growing
middle-class. The challenge to
retailers here is that a majority of
consumers prefer small, family-owned
shops.

 Three opportunity dimensions –

 growth, risk, and market size – are
used to portray the top 30 countries.
The U.S., U.K., Taiwan, and Malaysia
fall in the “Best Opportunity”
quadrant of the diagram, with
Australia and Canada just on the
fringe of the quadrant.

 Moving into global markets requires

all the same success factors as opening
up any store – a good strategy that is
sustainable, a strong financial
position, and a little luck.

 However, global expansion requires

much more. To succeed in global
expansion, retailers must: (1) act like
they are local and understand their
customers’ needs, (2) understand and
act appropriately in response to subtle
nuances between markets and
countries, (3) ensure their timing is
right, and (4) be selective.

D. Entry Strategies See PPT 5-26

Four approaches that retailers take when Have the students choose a retailer who has
entering non-domestic markets are or could go global. Ask them to choose and
direct investment, joint venture, justify an entry strategy.
strategic alliance, and franchising.
1. Direct Investment
Direct investment involves a retail firm Identify the products/services/conditions for
investing in and owning a division or which the retailer would prefer direct control
subsidiary that builds and operates over global operations offered by a direct
stores in a foreign country. investment strategy.
This entry strategy requires the highest
level of investment and exposes the
retailer to significant risks, but has the
highest potential returns.
2. Joint Venture
A joint venture is formed when the
entering retailer pools its resources
with a local retailer to form a new Would a retailer be more likely to use a joint
company in which ownership, control, venture when entering Canada or when
 entering China? Discuss.
and profits are shared.
A joint venture reduces the entrant’s risks.
The local partner understands the
market and access to resources –
vendors and real estate.
Problems with this entry approach can
arise if the partners disagree or the
government places restrictions on the
repatriation of profits.
3. Strategic Alliance
A strategic alliance is a collaborative Strategic alliances are often used for learning
relationship between independent about a country's unique environment and
firms. For example, a foreign retailer other business conditions.
might enter an international market
through direct investment but develop
an alliance with a local firm to
perform logistical and warehousing
activities.
4. Franchising
Franchising offers the lowest risk and
requires the least investment.
However, the entrant has limited
control over the retail operations in the
foreign country, profit potential is
reduced, and the risk of assisting in
the creation of a local domestic
competitor is increased.
VI. The Strategic Retail Planning Process PPT 5-27 charts the steps in the strategic
planning process.
The strategic retail planning process is
the set of steps that a retailer goes Go through the various stages of the planning
through to develop a strategic retail process for a local retailer or pick an idea for
plan. a new retail business and develop a strategic
plan for the business.
It describes how retailers select target
market segments, determine the Go through the various stages of the planning
appropriate retail format, and build process for the example of Gifts To Go given
sustainable competitive advantages. in text.
The planning process can be used to
formulate strategic plans at different
levels within a retail corporation.
A. Step 1: Define the Business Mission
 Why does a retailer need to have a formal
The mission statement is a broad
mission statement? Define a mission for
description of a retailer's objectives
Sears, which includes its financial services,
and the scope of activities it plans to
insurance company, and real estate
undertake. It should define the
brokerage. Define a mission for Wal-mart.
general nature of the target segments
and retail formats that the firm will Define a mission for your college or
consider. university.
In developing the mission statement,
managers must answer five questions:
(1) What business are we in? (2)
What should be our business in the
future? (3) Who are our customers?
(4) What are our capabilities? (5)
What do we want to accomplish?
B. Step 2: Conduct a Situation Audit .
A situation audit is an analysis of the See PPT 5-28
opportunities and threats in the retail
environment and the strengths and Conduct a situation audit for any department
weaknesses of the retail business store most familiar to students.
relative to its competitors.
A situation audit is composed of four
elements: market factors, competitive
factors, environmental factors, and
strengths and weaknesses analysis.
1. Market Factors
Some critical factors related to consumers What makes a market attractive? Ask for
and their buying patterns are market examples of attractive and unattractive
size and growth, sales cyclicality, and markets. How attractive over the long-term is
seasonality. Market size, typically the elderly market? The Tween market?
measured in retail sales dollars, is
important because it indicates a firm's
opportunity for generating revenues to See PPT 5-29
cover its investment.
Large markets are attractive to large retail
firms, but they are also attractive to
small entrepreneurs because they offer
more opportunities to focus on a
market segment. Growing markets are
typically more attractive than mature
or declining markets.
In general, markets with highly seasonal
sales are unattractive because a lot of
 resources are needed to accommodate
the peak season, but are underutilized
the rest of the year.
2. Competitive Factors
The nature of the competition in retail See PPT 5-30
markets is affected by barriers to
entry, the bargaining power of What are examples of retail markets that have
vendors, and competitive rivalry. high entry barriers? Low entry barriers? Are
Retail markets are more attractive there entry barriers for a new fast food
when competitive entry is costly. franchise in the local community? A new
department store? A new discount store
Barriers to entry are conditions in a specializing in toys?
retail market that make it difficult for
firms to enter the market. These
conditions include scale economies, Take a set of local competitors and evaluate
customer loyalty, and availability of how intense the rivalry is.
locations.
Compare competitive issues for a bricks and
Scale economies are cost advantages due mortar retailer versus a multichannel and an
to a retailer's size. Markets dominated Internet-only retailer.
by large competitors with scale
economies are typically unattractive.
Retail markets dominated by a well-
established retailer that has developed
a loyal group of customers offer
limited profit potential.
The availability of locations may impede
competitive entry.
A retail market with high entry barriers is
very attractive for retailers presently
competing in that market, but
unattractive for retailers not already in
that market.
Another competitive factor is the
bargaining power of vendors.
Markets are unattractive when a few
vendors control the merchandise sold
in it. In these situations, the vendors
have an opportunity to dictate prices
and other terms, such as delivery
dates, and thus reduce the retailer's
profits.
The final industry factor is the level of
competitive rivalry in the retail
 market, which is the frequency and
intensity of reactions to actions
undertaken by competitors.
Conditions that may lead to intense
rivalry include: (1) a large number of
competitors that are all about the same
size, (2) slow growth, (3) high fixed
costs, and (4) the lack of perceived
differences between competing
retailers.
3. Environmental Factors
Environmental factors that affect market See PPT 5-32
attractiveness are technological, Analyze some potential changes in the
economic, regulatory, and social environment such as people becoming more
changes. health conscious about the food they eat,
When a retail market is going through more concerned about the environment, more
significant changes in technology, interested in having experiences rather than
present competitors are vulnerable to buying products. Review some of the changes
new entrants that are skilled at using discussed in 4. Ask students how these
the new technology. changes will affect specific retailers?
Some retailers are more affected by
economic conditions than others.
Government regulations can reduce the
attractiveness of a retail market. Government regulations reduce the
attractiveness of a retail market by making it
Finally, trends in demographics, lifestyles, costly to build stores (zoning laws) and hire
attitudes, and personal values affect employees (wage regulations).
retail markets' attractiveness.
4. Strengths and Weakness Analysis
The most critical aspect of the situation See PPT 5-32
audit is for a retailer to determine its
unique capabilities in terms of its
strengths and weaknesses relative to
the competition. A strengths and
weaknesses analysis indicates how
well the business can seize
opportunities and avoid harm from
threats in the environment.
C. Step 3: Identify Strategic
Opportunities
After completing the situation audit, the
next step is to identify opportunities
 for increasing retail sales. The
strategic alternatives are defined in
terms of the squares in the retail
market matrix.
D. Step 4: Evaluate Strategic
Opportunities Go through the example in the text evaluating
The evaluation of strategic opportunities the merchandise categories in a department
identified in the situation audit store.
determines the retailer's potential to
establish a sustainable competitive
advantage and reap long-term profits Have students evaluate the market
from the opportunities under attractiveness and competitive position of
evaluation. some opportunities the local college
bookstore is presently pursuing and is
Thus, a retailer must focus on considering:
opportunities that utilize its strengths
and its area of competitive advantage. a. college textbooks,

Both the market attractiveness and the b. clothing with the college name on it,
strengths and weaknesses of the c. fashionable brand name clothing,
retailer need to be considered in
d. fast food,
evaluating strategic opportunities.
e. renting DVDs.
The greatest investments should be made
in market opportunities where the
retailer has a strong competitive Have students list the factors and go through
position. the ratings.
E. Step 5: Establish Specific Objectives
and Allocate Resources Ask students which opportunities the
The retailer's overall objective is included bookstore should pursue. Relate these
in the mission statement. The specific opportunities to the competitive advantages
objectives are goals against which the bookstore has.
progress toward the overall objective
can be measured.
Specific objectives have three
components: (1) the performance
sought, including a numerical index
against which progress may be
measured, (2) a time frame within
which the goal is to be achieved, and
(3) the level of investment needed to
achieve the objective.
Typically, the performance levels are
financial criteria such as return on
 investment, sales, or profits.
F. Step 6: Develop a Retail Mix to
Implement Strategy
The next step is to develop a retail mix for
each opportunity in which investment
will be made and to control and
evaluate performance.
G. Step 7: Evaluate Performance and
Make Adjustments
The final step in the planning process is
evaluating the results of the strategy
and implementation program.
If the retailer fails to meet its objectives,
reanalysis is needed. This reanalysis
starts with reviewing the
implementation programs; but it may
indicate that the strategy (or even the
mission statement) needs to be
reconsidered. This conclusion would
result in starting a new planning
process, including a new situation
audit.
H. Strategic Planning in the Real World
As described here, the strategic decisions Ask students to relate the strategic decision
in the planning process seem to be making process to the strategy they will use
made in a sequential manner. After for seeking a job after graduation. Will they
the business mission is defined, the go through all the steps? Why or why not?
situation audit is performed, strategic Will their strategy change as they look? Why
opportunities are identified, or why not?
alternatives are evaluated, objectives
are set, resources are allocated, the
implementation plan is developed, and
finally, performance is evaluated and
adjustments are made.
But, actual planning processes have
interactions among the steps. For
example, the situation audit may
uncover some logical alternative for
the firm to consider, even though this
alternative is not included in the
mission statement.
 VII. Summary
 A retailer’s long-term performance is
largely determined by its strategy. A
strategy coordinates employees’
activities and communicates the
direction the retailer plans to take.

 Retail market strategy describes both

the strategic direction and the process
by which the strategy is to be
developed.

 The retail strategy statement indicates

an identification of a target market and
the retail format (its offering) to be
directed toward that target market.
The statement also needs to indicate
the retailer’s methods to build a
sustainable competitive advantage.

ANSWERS TO “GET OUT AND DO ITS”

2 INTERNET EXERCISE Go to the Web sites for Walmart (www.walmartstores.com), Carrefour

(http://www.carrefour.com) Royal Ahold (www.ahold.com) and Metro AG (www.metro.de) Which entry
strategy has each company used to penetrate nondomestic markets? Justify your answer.
International growth can be accomplished by means of new start-ups, expansion of existing
affiliates, partial or complete acquisitions, mergers with other companies, or joint ventures.
Different strategies are selected based on resources, competition, legal requirements, and past
experience and results.

4 List the restaurants in a five mile radius of your campus and then construct a Perceptual Positioning
Map (see exhibit 5-3). What did you select as the x- and y-axis? Which firms are similar and which are
different? If a new restaurant were to consider locating in this area, what benefits should they offer to
be successful in the current competitive environment?
Students should complete a Product Positioning Map and describe their choices for the x- and y-
axis.
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

33. 1. For each of the four retailers discussed at the beginning of the (Steve & Barry’s,
Chico’s, Curves, and Magazine Luiza), describe its strategy and the basis of its
competitive advantage.

Chico's specializes in comfortable, easy-to-wear apparel designed for women in the age group of 35-
55 years old. The company sells only its own brand and has complete control over its supply chain.
The emphasis on private labels, a strong customer loyalty program, and high-quality customer
service with emphasis on a person-to-person relationship with each customer, differentiate the
retailer from other competitors, and ensure not only repeat sales, but also a higher transaction size
among its loyal patrons.

Curves targets those consumers who have not considered gym membership before, focusing on the
women of the Baby Boomer market who live in small towns. Curves franchises offer a very different
service from the traditional gym, at a much lower price. The Curves service is built around a 30-
minute circuit of 8 to 12 hydraulic resistance machines.

Magazine Luiza, a Brazilian consumer electronics and appliance store, targets low income consumers
with installment payment plans and affordable credit rates. The retailer also provides services like
personal loans and insurance policies that would be out of range for many of its target consumers.

Through its nearly 200 store, Steve & Barry’s offers a merchandise mix including university logoed
sportswear, humorous t-shirts, and basic clothing for men, women and children. Key success
strategies for Steve & Barry’s include: gaining aggressive incentives from mall owners, applying
creative strategies to working with vendors, and paying for virtually no advertising. These strategies
allow the retailer to offer surprisingly high quality merchandise at prices below $15. Save-A-Lot, a
wholly owned subsidiary of SuperValu, operates at highest levels of efficiency. By offering only the
most popular items in its stores, Save-A-Lot has been able to reduce its costs dramatically and
reduce its prices to as much as 40 percent below typical conventional supermarket prices. Much of
the success of this strategy is due to the buying power Save-A-Lot has been able to achieve allowing
the chain to offer high-quality private label merchandise at low prices.

34. 2. Choose a retailer and describe how it has developed a competitive strategic
advantage. Include customer loyalty, branding, positioning, location, human resource
management, distribution, information technology, unique merchandise, customer
service and vendor relationships.
Customer Loyalty: In order to keep customers committed to shopping at their store(s) and/or Web
sites, retailers can build customer loyalty by (1) emphasizing a unique positioning, and (2)
developing loyalty programs. For example, retailers can try to design a retail mix that creates an
image in the customer’s mind, which will keep them committed to the retailer. Or, by implementing
customer loyalty programs, as part of a broader customer relationship
 management (CRM) program, and maintaining and analyzing customer purchasing data, retailers
can develop strategies to create and maintain a loyal customer base.
Location: Location is one of the most important factors in retailing. For example, if a retailer is the
only one of its kind in a certain area, or is set in a high traffic area with a visible store front, the
retailer has a competitive advantage.
Human Resource Management: Since retailing is a labor-intensive business and also has high levels
of contact between employees and customers, retailers need to develop programs to motivate and
coordinate employee efforts. These are usually done by providing appropriate incentives for
employees, fostering a strong and positive organizational culture, and managing diversity.
Distribution and Information Systems: Retailers can achieve significant operational efficiencies
through developing sophisticated distribution and information systems. Efficient operations reduce
retailer costs, and thus, enable retailers to provide the same or similar merchandise at lower prices
than their competitors.
Unique Merchandise: Retailers can develop sustainable competitive advantage by offering private-
label brands.
Vendor Relations: Retailers may gain exclusive rights to sell merchandise in a region, to buy
merchandise at lower prices, or to receive popular merchandise in short supply through strong
vendor relationships.
Customer Service: Retailers can build competitive advantage by offering excellent customer service.
This involves instilling the importance of good customer service in employee training and
performance and consciously developing a reputation for good service.
Retailers should not rely on a single approach to gain a sustainable competitive advantage, but
instead, should use multiple approaches.

35. 3. Give an example of a market penetration, a retail format development, a market

expansion, and a diversification growth strategy that Best Buy might use.

Market Penetration: Best Buy could offer coupons, frequent purchase promotions, etc. to increase
sales among existing customers using its present format.

Retail Format Development: Best Buy already offers a new format to the same target market in their
online retailing at www.bestbuy.com. However, they could offer additional merchandise categories
such as more types of accessories including computer desks, chairs, television stands etc.

Market Expansion: Best Buy with its existing retail format could geographically expand
(international) and or target promotions to specific market segments that it may not currently be
targeting (senior citizen and/or student discounts).
 Diversification: Backward integration into electronics manufacturing would represent a related
diversification strategy for Best Buy, while opening retail stores for automobile service and repair
would represent an unrelated diversification strategy.

36. 4. Choose your favorite retailer. Draw and explain a positioning map, like that shown
in Exhibit 5-3, that includes your retailer, retailers that sell the same types of
merchandise, and the customer segments (ideal points).

Students’ answers will depend on the market in which they live and their preference of retailer. For
a bicycle retailer, the dimensions could be: High price/service and low price/service for one
dimension and broad assortment (mountain bikes, road bikes, tandems, kids, lots of accessories)
and narrow assortment (road bikes only) on the other dimension.

37. 5. Do a situation analysis for IKEA or The Container Store. What is its mission? What
are its strengths and weaknesses? What environmental threats might it face over the
next 10 years? How could it prepare for these threats?

Students should perform a SWOT Analysis for one or both retailers.

38. 6. What are Neiman Marcus’s and PetSmart’s bases for sustainable competitive
advantage? Are they really sustainable, or are they easily copied?
 Neiman Marcus offers extensive service and stocks fashion merchandise that could be called
"fashion forward," since these may be offered first and/or exclusively at these stores. Their prices
are higher than those charged by other retailers for similar product categories, but they cater to a
wealthier than average target market of customers for whom fashion and service may be more
important than low price. The multiple bases for competitive advantage used by Neiman Marcus are
unique positioning, location in upscale malls or neighborhoods so as to be closer to target market
segments, unique merchandise, and a heavy emphasis on customer service. The combination of
these sources of competitive advantage makes their strategy quite sustainable.
Alternatively, PetSmart offers a deep selection of pet related merchandise at everyday low prices.
Though very different in approach than Neiman Marcus, PetSmart uses multiple bases for
competitive advantage including unique merchandise and services for pet owners. The combination
of these sources of competitive advantage makes their strategy sustainable.

39. 7. Assume you are interested in opening a restaurant in your town. Use the Perceptual
Map created in Get Out and Do It! number 4 and then go through the steps in the
strategic planning process shown in Exhibit 5–7. Focus on conducting a situation audit
of the local restaurant market, identifying and evaluating alternatives, and selecting a
target market and a retail mix for the restaurant.

(1) Define the Business’s Mission: Looking to be in the Italian restaurant business, my target market
would be those customers in my local town and surrounding towns interested in paying money for
an authentic Italian meal in a romantic setting. The mission of this restaurant would be to have high
quality food, in a romantic setting, while avoiding being too expensive for those interested in a
special meal.
(2) Conduct a Situation Audit: Market Factors include the size of the market interested in Italian
food and the growth potential of this particular market. Competitive factors include how hard it is to
enter the Italian Restaurant Market including the startup costs, and the number of other Italian
Restaurants in the area along with alternatives. The environmental factors would include the social
and economic. The restaurant business focuses on the social aspect of dining out. Is there a growing
trend in those people eating out? With the shifting roles of women in society, there is often less
time for cooking, which may in turn increase dining out. What impact does the economy have on
consumers’ decisions to spend their dollars on dining out? The analysis of strengths and weaknesses
allows a retailer to judge their potential success. The strengths and weaknesses in this situation
could include my financial resources, the availability of a good location, my restaurant management
experience, my need to build customer loyalty, and my prospects of good operations.
(3) Identify Strategic Opportunities:
 Market Penetration: Can I increase the variation on my menu, open another restaurant in
another neighborhood?
 Market Expansion: Open a to-go style restaurant, open a restaurant in another geographic
area
  Retail Format Development: Sell candles with the restaurant name on them, or develop an
online ordering format for to-go style meals.
 Diversification: Manufacture Spaghetti Sauce under the restaurant name, or open an Italian
food grocery store.
(4) Evaluate Strategic Opportunities: In evaluating the alternatives, we must look at both the market
attractiveness and the competitive position. Retailers can maximize their growth opportunities by
investing in areas that have high market attractiveness and a low competitive position. In the
restaurant business, this might include opening additional restaurants, opening a to-go restaurant,
and manufacturing their own food products, like spaghetti sauce.
(5) Establish Specific Objectives and Allocate Resources: After finding growth opportunities,
resources must be allocated to each opportunity. This is done by looking at the performance sought,
the time frame needed, and the level of investment needed to accomplish the objective.
(6) Develop a Retail Mix to Implement Strategy: (Merchandise and services offered, merchandise
pricing, advertising and promotional programs, store design, and convenience of the store’s
location): The restaurant will offer a large variety of Italian dishes with a large experienced wait
staff, the pricing will be medium to high to attract the upscale customer and show the value of the
food, the advertising will start with publicity on the opening of the business and then focus on word
of mouth, promotional programs may be implemented to frequent eaters, store design will be small,
elegant, and romantic with many tables for two and private tables, and the location would be in a
downtown area. After this strategy is implemented, a retail mix can be developed for the growth
opportunities.
(7) Evaluate Performance and Make Adjustments: The final step of the planning process is
evaluating the results of the strategy and implementation program.

40. 8. The Gap Inc. owns five apparel brands — Gap, Piperlime, Athleta, Old Navy and
Banana Republic and. has Gap, Old Navy and Banana Republic stores located in the
United States, Canada, United Kingdom, France, Ireland and Japan. What type of
growth opportunity was Gap Inc. pursuing when it opened each of these retail concepts
in these various locations? Which is most synergistic with the original Gap chain?

Developing retail concepts to target specific markets offers Gap a number of market expansion
strategies. Each of the concepts described here is very similar to the others. Merchandise categories
are the same, basic store layouts are the same (yet with image and fixture differences appropriate
to the target markets) and even the brand’s Web site follow a very similar format, though
emphasizing models and fashion styling appropriate to their respective target markets.
Students could also consider the market penetration strategy as appropriate here. The multiple Gap
brands/formats are closely related enough that one could argue expected overlap in consumers.
41. 9. Identify a store or service provider that you believe has an effective loyalty
program. Explain how the program works and why it is effective.

An example that would readily come to mind to most students would be frequent flyer programs of
various airlines. Many airlines not only award frequent flyer miles on airline travel but also carry out
these programs in partnership with credit card companies and retailers. The effectiveness of such
programs depends on the extent to which there are various levels of rewards and bonuses and the
availability of multiple opportunities to earn points toward a reward.

42. 10. Choose a retailer that you believe could be, but is not yet, successful in other
countries. Explain why you think it could be successful.

A nonstore retailer such as Amazon.com is poised to be successful globally with the increasing
spread and prevalence of the Internet and World Wide Web. Since the costs associated with entry
and set up are less than in conventional retailing and most products carried by Amazon.com are
quite standardized, Amazon.com could pursue a cost-efficient and effective global expansion
strategy. However, such an expansion strategy would have to await infrastructure development in
various countries. The success of Amazon.com's global strategy would come from utilizing
technological and global efficiencies of scale, lower costs of operations, enhanced customer service
at lower costs due to better customer information and relationship management, and better
adaptability to local tastes and preferences due to superior information collection and analysis.

43. 11. Amazon.com started as an Internet retailer selling books. Then it expanded to
groceries, DVDs, apparel, software, travel services, and basically everything under the
sun. Evaluate these growth opportunities in terms of the probability that they will be
profitable businesses for Amazon.com. What competitive advantages does
Amazon.com bring to each of these businesses?

[In discussion with students, it is important to note that for several of the product categories listed
here, Amazon.com serves as the Internet channel for individual retailers such as Target, Toys R Us,
etc. ]

Groceries and Apparel: These categories represent somewhat risky growth propositions for
Amazon.com. The web grocery business has a few well positioned competitors (www.tesco.com and
www.peapod.com) that are more focused on the online grocery segment. These competitors have
developed business models specifically around providing the grocery merchandise and services that
customers in the channel expect. While Amazon.com may compete well on price on non-perishable
food items in small size that can be shipped easily, as books can, they are less well prepared to
compete on other types of grocery purchases. In terms of apparel retailing online, there are many
players in this market and the prices may not be much lower on Amazon's site as compared to those
offered by other players in these markets. Apparel shopping on Amazon.com is most likely to
succeed with those consumers who want a one stop shop for clothing, books, entertainment, small
appliances, etc.
DVDs: These growth opportunities will most likely be profitable because, like books, they do not
need to be touched and felt prior to purchase. Most customers will feel very comfortable ordering
DVDs over the Internet without previous viewing or experience. The primary threat to profitability
here is competitive from movie downloads and increasingly popular pay per view and DVD rental
services. Yet for those consumers interested in purchasing and owning DVDs, Amazon.com will bring
a competitive advantage to selling DVDs mainly through their name recognition over many other
dot.com companies. Also, Amazon has an amazing database system that will be able to better target
their customers and keep track of their purchases. Amazon’s distribution system will be able to
deliver the goods in minimal time at a minimal cost.

Software: Since software is an information product, even the distribution of the product could
be over the Internet. Thus, instead of costly packaging and stocking at retail stores, Amazon
could simply offer the product for immediate download, thereby also providing the
immediate gratification that is typically lacking for most products purchased over the
Internet. The lower costs of distribution coupled with the already lower costs of operations,
could render this category quite profitable for Amazon. However, larger software
manufacturers, such as Microsoft, Adobe, Real Networks, Broderbund, etc. already have
their own retail and distribution site and may use Amazon only for expansion to market
segments that they are not currently serving.

Internet Travel Site: This market expansion to a new service has its strengths and weaknesses.
Amazon may attract a larger customer base by offering this new service. However, most travel,
including airline travel is now viewed as a commodity, with consumers often deciding more on price
than on brand name. There is more intense competition and the prices may not be much lower on
Amazon's site as compared to those offered directly by the service providers.
6
FINANCIAL STRATEGY

ANNOTATED OUTLINE INSTRUCTOR NOTES

 Financial objectives and goals are an

integral component in every aspect of a
retailer's strategy. Retailers can use
financial tools to measure and evaluate
their performance.
 Financial analysis can be used to
monitor the retailer’s performance,
assess the reasons its performance is
above or below expectations, and
provide insights into appropriate
actions that can be taken if
performance falls short of those
expectations.
I. Objectives and Goals
 The first step in the strategic planning See PPT 6-4
process involves articulating the
retailer’s objectives and the scope of
activities it plans to undertake.
 Three types of objectives that a retailer
might have are: (1) financial, (2) social,
and (3) personal.
A. Financial Objectives
 The appropriate financial performance
measure is not profits but rather return
on investment (ROI).
 A commonly used measure of the
return on investment is return on
assets (ROA), or the profit return on
all assets possessed by the firm.
B. Societal Objectives
 Societal issues are related to broader Ask students to provide specific examples of
issues about providing benefits to retailers meetings societal objectives
society – making the world a better (merchandise, services, events, etc.) they
place to live, such as providing
 employment opportunities for people in have seen in the current marketplace.
a particular area, offering people
unique merchandise, providing an
innovative service or sponsoring
events.
 Regardless of the form the objective
takes, performance with respect to
societal objectives is more difficult to
measure than financial objectives.
C. Personal Objectives
 Many retailers, particularly owners of
small, independent businesses, have
important personal objectives such as
self-gratification, status and respect.
 Whereas societal and personal
objectives are important to some
retailers, financial objectives should be
the primary focus of managers of
publicly held retailers (retailers whose
stocks are listed on and bought through
a stock market).
II. The Strategic Profit Model
 The strategic profit model, illustrated See PPT 6-5
in Exhibit 6-1, is a method for
summarizing the factors that affect a
firm’s financial performance as
measured by ROA.
 The model decomposes ROA into two
components: (1) net profit margin and
(2) asset turnover.
 The net profit margin is simply how
much profit (after taxes, interest
income, and extraordinary gains and
losses) a firm makes divided by its net
sales. It reflects the profits generated
from each dollar of sales.
 Asset turnover is the retailer’s net
sales divided by its assets. This
measure assesses the productivity of a
firm’s investment in its assets and
indicates how many sales dollars are
 generated by each dollar of assets.
 These two components of the strategic
profit model illustrate that ROA is
determined by two sets of activities,
profit margin management and asset
turnover management, and that a high
ROA can be achieved by various
combinations of net profit margin and
asset turnover levels.
 In fact, two different retailers with
wide discrepancies in net profit margin
and asset turnover could have exactly
the same return on assets.
A. Profit Margin Management Path
 The information used to analyze a
firm’s profit margin management path
comes from the income statement.
 The income statement summarizes a
firm’s financial performance over a
period of time.
1. Net Sales
 The term net sales refers to the total
revenue received by a retailer after
refunds have been paid to customers
for returned merchandise and payments
have been collected from vendors for
promotions:
Net Sales = Gross amount of sales +
Promotional allowances - Customer
returns
 Customer returns represent the value of
merchandise customers return because
it's damaged, doesn't fit, and so forth.
 Promotional allowances are payments
made by vendors to retailers in
exchange for the retailer promoting the
vendor’s merchandise.
 Sales are an important measure of
performance because they indicate the
activity level of the merchandising
 function.
2. Gross Margin
Gross margin = Net sales - Cost of
Discuss the difference in gross margin
goods sold.
percentage between Costco and Macy’s.
Why is the difference to be expected?
 Gross margin, also called gross
profit, gives a retailer a measure of
how much profit it’s making on
merchandise sales without considering
the expenses associated with operating
the store and corporate overhead
expenses.
 Gross margin, like other performance
measures, is also expressed as a
percentage of net sales so retailers can
compare (1) performances of various
types of merchandise and (2) their own
performance with other retailers.
Gross margin / Net sales = Gross margin %

3. Operating Expenses
 Operating expenses are the selling,
general and administrative expenses Discuss the difference in expense to sales
(SG &A), plus the depreciation and ratio between Costco and Macy’s. Why is
amortization of assets. The SG&A the difference to be expected?
includes costs, other than the cost of
merchandise, incurred in the normal
course of doing business such as
salaries, advertising and rent.
 The operating expense category
includes salaries for sales associates
and managers, advertising, utilities,
office supplies and rent.
 Like the gross margin, operating
expenses are expressed as a percentage
of net sales to facilitate comparisons
across items, stores, and merchandise
categories within and between firms.
Operating expenses / Net sales =
Operating expense %
4. Interest and Taxes
 Two other major expenses are interest
(which includes the cost of borrowing
money to finance everything from
inventory to the purchase of a new
store location) and taxes.

 Offsetting the interest expense is the

interest income a retailer can generate
through a variety of investments.

 Most retailers incur these expenses.

However, these costs of doing business
may not reflect the retailer’s
performance in its primary business
activity which is selling goods and
services.

5. Net Operating Income

 Due to the lack of control over taxes,
interest and extraordinary expenses, a
commonly used overall profit measure
is the net profit percentage before
interest expenses/income, taxes, and
extraordinary expenses.

 This measure allows for a comparison

of financial performance across
companies or divisions within
companies.

6. Net Profit
 Net profit (after taxes) is the gross Discuss the difference in net profit margin
margin minus operating expenses and percentage between Costco and Macy’s.
taxes: Why is the difference to be expected?
Net profit = Gross margin – Operating
expenses – Net interest -- Taxes

 Net profit is a measure of overall

performance with respect to the profit
margin management path and can also
be expressed before taxes.
 Like gross margin, net profit margin
is often expressed as a percentage of
 sales:
 Net profit / Net sales = Net profit %
after taxes
 A commonly used overall profit
measure is the profit percentage before
interest and taxes. This measure is used
because operating managers have little
control over interest and tax expenses,
so these expenses do not reflect the
performance of operating managers or
the retailer’s operating effectiveness.
III. Asset Management Path
 The information used to analyze a See PPT 6-15
firm’s asset management path primarily
comes from the balance sheet.
 The income statement summarizes the
financial performance over a period of
time, while the balance sheet
summarizes a retailer’s financial
position at a given point in time, such
as the last day of the year.
 The balance sheet shows the following
relationship:
Assets = Liabilities + Owner’s equity
 Assets are economic resources (such as
inventory or store fixtures) owned or
controlled by an enterprise as a result
of past transactions or events.
A. Current Assets
 By accounting definition, current
assets are those that can normally be
converted to cash within one year. In
retailing:
Current assets = Cash + Accounts
receivable + Merchandise inventory +
Other current assets
 Accounts receivable are monies due to Ask students why retailers take third party
the retailer from selling merchandise to credit cards like Visa. ( Because they don't
customers on credit. This current asset want to tie up their assets in accounts
is substantial for some retailers.
 receivable. They would rather get most of
 From a marketing perspective, the
their money quickly to invest in more
accounts receivable generated from
inventory. Also, they must offer credit since
credit sales may be the result of an
customers expect it.)
important service provided to
customers.
 The retailer’s ability to provide credit,
particularly at low interest rates, could
make the difference between making
and losing a sale.
 The money invested in accounts
receivable costs the retailer interest
expense and keeps the retailer from
investing proceeds of the sale
elsewhere.
 Merchandise inventory is a retailer’s
lifeblood. Exceptions to this
generalization are service retailers, who
carry little or no inventory. Average Inventory is always considered at
 Inventory turnover is used to evaluate retail because sales are in terms of retail as
how effectively managers utilize their well.
investment in inventory: Ask students what a turnover of 1.61 means.
Inventory turnover = (Answer: For every dollar in inventory the
firm generates $1.61 in sales.)
COGS / Average inventory at cost

 Think of inventory as a measure of the

productivity of inventory--how many Ask students which firm has the highest
sales dollars can be generated from $1 inventory turnover and why they would
invested in inventory. expect this to be the case. Whose inventory
turnover would be higher: a discount store
 We can think of inventory turnover as or a specialty retailer? Why?
how many times, on average, the
inventory cycles through the store
during a specific period of time
(usually a year).
B. Fixed Assets
 Fixed assets are assets that require
more than a year to convert to cash. In
retailing,
Fixed assets = Buildings (if store property
is owned rather than leased)

+ Fixtures (such as display racks)

 + Equipment (such as computers or delivery trucks)

+ Long-term investments such as real estate or stock in

other firms

Although fixed assets don't turnover as

quickly as inventory, asset turnover can
be used to evaluate and compare how
effectively managers use their assets.
When a retailer decides to invest in a fixed
asset, it should determine how many
sales dollars can be generated from that
asset.
C. Asset Turnover
Asset turnover is an overall performance See PPT 6-16
measure from the asset side of the Ask students which firm has the highest asset
balance sheet. turnover and why they would expect this to
Asset turnover = Net sales / Total assets be the case.

D. Return On Assets
Overall performance, as measured by
ROA, is determined by considering the
effects of both paths by multiplying the
net profit margin by asset turnover:
Net profit margin x Asset turnover =
Return on assets
Return on assets is a very important
performance measure, because it shows
how much money the retailer is making
on its investments in assets and how
good that return is relative to other
investments.
The strategic profit model assumes two
important issues:
First, retailers and investors need to
consider both net profit margin and
asset turnover when evaluating the
retailer’s financial performance.
Second, retailers need to consider the
implications of strategic decisions on
both components of the strategic profit
 model.
IV. Setting Performance Objectives
Performance objectives should include: (1) Performance objectives are illustrated in
the performance sought, including a PPT 6-23
numerical index against which progress
may be measured, (2) a time frame
within which the goal is to be achieved,
and (3) the resources needed to achieve
the objective.
A. Top-Down versus Bottom-Up Process
Top-down planning means that goals are Describe a situation where management has
set at the top of the organization and set a higher sales goal for a particular
filter down through the operating period but has also cut employee hours and
levels. eliminated over-time for that same period.
Ask students to explain how they would
In a retailing organization, top-down resolve this difference.
planning involves corporate officers
developing an overall retail strategy
and assessing broad economic,
competitive, and consumer trends. For a comparison of top-down and bottom-
up planning, refer to PPTs 6-27 and 6-28.
The overall strategy determines the
merchandise variety, assortment, and
product availability plus store size,
location, and level of customer service.
This top-down planning is complemented
by a bottom-up planning approach.
Buyers and store managers are also
estimating what they can achieve. Their
estimates are transmitted up the
organization to the corporate planners.
Differences between bottom-up and top-
down plans must be resolved through a
negotiation process involving corporate
planners and operating managers.
B. Performance Objectives and Measures
The measures used to evaluate retail
operations vary depending on: (1) the
level of the organization where the
decision is made and, (2) the resources
the manager controls.
For example, the principle resources
 controlled by store managers are space
and money for operating expenses
(such as wages for sales associates and
utility payments to light and heat the
store). Store managers focus on
performance measures like sales per
square foot and employee costs.
C. Types of Measures
Retailers' performance measures are See PPT 6-29
broken into three types: input
measures, output measures, and Productivity measures are a ratio of outputs
productivity measures. to inputs. Ask students to demonstrate how
productivity measures can be used to
Input measures assess the amount of compare different business units.
resources or money allocated by the
retailer to achieve outputs, or results.
Output measures assess the results of
retailers' investment decisions. For
example, sales revenue results from
decisions on how many stores to build,
how much inventory to have in the
stores, and how much to spend on
advertising.
A productivity measure (the ratio of an
output to an input) determines how
effectively a retailer uses a resource.
In general, since productivity measures are
a ratio of outputs to inputs, they can be
used to compare different business
units.
E. Assessing Performance: The Role of See PPT 6-30
Benchmarks
The financial measures used to assess
performance reflect the retailer’s
market strategy.
In other words, the performance of a
retailer cannot be accurately assessed
by simply looking at isolated measures
because they are affected by the
retailer’s strategy.
To get a better assessment of a retailer’s
performance, you need to compare it to
 a benchmark.
One useful approach for assessing a
retailer’s performance is to compare its
recent performance with its
performance in preceding months,
quarters or years.
A second approach for assessing a
retailer’s performance is to compare it
with its competitors.

V. Summary
 Basic elements of the retailing financial
strategy and how retailing strategy
affects the financial performance of a
firm are explained in the chapter.

 The strategic profit model is used as a

vehicle for understanding the complex
interrelationships between financial
ratios and retailing strategy.

 The also presents some financial

performance measures used to evaluate
different aspects of a retailing
organization.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

44. 1. Why does a retailer need to use multiple performance measures to evaluate its
performance?

Many factors contribute to the overall performance of a retailer. Thus it is difficult to find one
measure that adequately evaluates performance. For instance, sales is a global measure of how
much activity is going on in the store. However, a store manager could easily increase sales and
inventory turnover by lowering prices, but gross margin would suffer as a result. Clearly, an attempt
to maximize one measure may lower another. Managers must therefore understand how their
actions affect multiple performance measures. It is usually unwise to use one measure since it
rarely tells the whole story.
 The measures used to evaluate retail operations are different depending on the level of the
organization where the decision is being made and the resources that the manager controls. For
example, the principle resources controlled by store managers are space and operating expenses
such as the wages paid to sales associates and the electricity used to light and heat the store. Thus,
store managers focus on performance measures like sales per square foot and employee costs.

45. 2. Describe how a multiple-store retailer would set its annual performance objectives.

Setting objectives in large retail organizations entails a combination of the top-down and
bottom-up approaches to planning. Top-down planning means that goals are set at the top of
the organization and filter down through the operating levels.
In a retailing organization, top-down planning involves corporate officers developing an
overall retail strategy and assessing broad economic, competitive, and consumer trends.
Armed with this information, they develop performance objectives for the corporation.
 These overall objectives are then broken down into specific objectives for each merchandise
category and each geographic region.
The overall strategy determines the merchandise variety, assortment, and service level and
the size, location, and level of customer service provided in the stores. Then the merchandise
vice-presidents decide on which types of merchandise sales are expected to grow, stay the
same, or shrink. Then performance goals are established for each buyer.
The director of stores works on the performance objectives with each of the regional store
managers. Then, these regional managers develop objectives with their store managers. The
process then trickles-down to department managers in the stores.
This top-down planning is complemented by a bottom-up planning approach. Buyers and
store managers are also estimating what they can achieve. Their estimates are transmitted up
the organization to the corporate planners. Frequently there are disagreements between the
goals that have trickled down from the top and those set by employees at lower levels of the
organization. For example, a store manager may not be able to achieve the 10% sales growth
set for the region because a major employer in the area has announced plans to layoff 2,000
employees.
When these differences in bottom-up versus top-down plans arise, they must be resolved
through a negotiation process involving the corporate planners and operating managers. If
the operating managers are not involved in the objective setting process, they will not accept
the objective and thus will be less motivated to achieve it.

46. 3. Buyers' performance is often measured by their gross margin percentage. Why is
this figure more appropriate than net profit percentage?

A buyer can impact the gross margin percentage because he/she can, to some extent, control
the sales and cost of goods sold. Expenses, which do not play a part in determining the gross
margin percentage, are often out of the control of the buyer and therefore should not be
counted when assessing a buyer’s performance.

47. 4. How does the strategic profit model assist retailers in planning and evaluating their
marketing and financial strategies?

The strategic profit model can assist management in 1) evaluating current strategies, and 2)
planning future proposed strategies. The SPM combines important information from both
the income statement and the balance sheet to establish return on owners’ equity (ROE) as a
primary financial performance measure for the retailer. In addition, it suggests ways to
improve the ROE and allows the retailer to compare itself against previous years as well as
industry-wide performance.

48. 5. Neiman Marcus (a chain of high-service department stores) and Wal-Mart target
different customer segments. Which retailer would you expect to have a higher gross
margin? Higher expense to sales ratio? Higher inventory turnover? Higher asset
turnover? Net profit margin percentage? Why?
 Gross margin gives a retailer a measure of how much profit it is making on merchandise sales
without considering the expenses associated with operating the store and covering corporate
overhead. Neiman Marcus should have a significantly higher gross margin than Wal-Mart. Because
Neiman Marcus is a high-end department store, providing a high-end image through upscale
merchandise and services to customers, operating expenses are significantly higher than Wal-Mart
which is renowned for its low cost, highly efficient operation. Neiman Marcus relies on its higher
gross margin to cover its significantly higher expenses.

Like the gross margin, operating expenses can be expressed as a percentage of net sales to facilitate
comparisons. Again, Neiman Marcus may be expected to show a significantly higher percentage
here than Wal-Mart due to its higher selling and operating expenses. Wal-Mart has built its global
reputation on keeping expenses throughout its organization under tight control.

Due to the fact that Wal-Mart deals with low margins, it is imperative to have high inventory
turnover and high asset turnover to yield a profit. These figures should be much higher than those
of Neiman Marcus.

On the other hand, Neiman Marcus will have a much higher net profit margin percentage because
they sell high ticket, high markup items such as brand name clothing and furnishings. Since
department stores don’t typically have high turnover, they rely on margin to succeed. Conversely,
Wal-Mart focuses on high turnover to succeed.

49. 6. What elements in the strategic model are affected if a retailer decides to build and
open 10 new stores?

Students will likely pose a variety of responses here. It will be very difficult to determine the exact
impacts on the strategic model without more information about the new stores, their sizes,
locations, etc. Assuming the 10 new stores will sell basically the same merchandise for the same
prices, the retailer’s gross margin may still be affected if net sales vary dramatically from one
location to the next or if volume discounts for the large increase in merchandise necessary reduce
cost of goods sold. Operating expenses, accounts receivable and fixed assets will drastically increase
with the increase in number of stores necessitating more salespeople, more expenses to maintain
the 10 new locations, and providing many more opportunities for consumer purchases.

50. 7. What differences would you expect to see when comparing Gifts To Go’s specialty
store strategic profit model with that of two dry cleaning service businesses?

Students should identify several differences resulting from the merchandise versus services nature
of the retailers described here. They may identify significant differences in terms of fixed assets, the
dry cleaning services will have more sophisticated machinery and equipment necessary to provide
their services to consumers. On the other hand, Gifts to Go will have all the associated merchandise
costs with maintaining inventory that service retailers do not face.
51. 8. Using the following information about Lowe’s 2010 income statement and balance
sheet from Hoovers, determine its asset turnover, net profit margin percentage, and
ROA. (Figures are in $ millions.)

Net sales $47,220.0

Total assets $33,005.0
Net profit $1,783.0

Asset turnover Net Sales = 1.43

Total Assets

Asset Turnover - The Asset Turnover measures how efficiently a company uses its
assets to generate sales.

Net profit margin % = Net Profit = 3.78%

Net Sales

Net Profit Margin - The percentage represents the amount of each dollar of Revenue
that results in Total Net Income.

Return on assets % Net Profit = 5.40%

Total Assets

Return on Assets (ROA) - A measure of profitability, ROA measures the amount earned
on each dollar invested in assets.
52. 9. Using the following information taken from the 2010 balance sheet and income
statement for Urban Outfitters, develop a strategic profit model. (Figures are in $
millions.) You can access an Excel spreadsheet for SPM calculations on the student side
of the book’s Web site.

Net sales $1,937.80

Cost of goods sold $1,151.70
Operating expenses $447.20
Inventory $186.10
Accounts receivable $78.00
Other current assets $422.70
Fixed assets $540.00
Net profit margin % = 11.91%
Asset turnover = 1.58
Return on assets % = 18.81%
To get these ratios students will first need to calculate:
Gross Margin = $786.10
Operating Income = $338.90
Net Income = $230.80
Total Asset = $1,226.80
53. 10. Examine Walgreens, CVS Caremark and Rite Aid’s 2009 financial performance in
the table below. (Source: http://premium.hoovers.com > Walgreen Co. > Competitive
Landscape). Evaluate Walgreens’ performance against direct external competition
using the financial data and ratios. Is Walgreens’ performance the same, better or
worse that CVS and Rite Aid? Why is this the case? If your university library has
access to hoovers.com (or other similar database) look up these financial ratios for the
current year. Has the financial performance improved or worsened for these three
retailers?

Key Numbers Walgreen CVS Caremark Rite Aid

Annual sales ($ millions) 63,335.0 98,729.0 25,669.1
Employees 238,000 295,000 97,500
Gross profit margin 27.95% 20.64% 26.58%
Pretax profit margin 5.12% 5.99% (1.87%)
Net profit margin 3.24% 3.74% (2.01%)
Return on assets 8.3% 6.0% (6.3%)
Inventory turnover 6.4 8.0 5.6
Asset turnover 2.6 1.6 3.1

Financial ratios and tools to measure and evaluate performance against stated objectives, past
performance and external competition. Bold values in the table are the highest for each ratio. These
vary because of the following:
- Size of the system
- Merchandise offered
- Global vs. US
- Markup
- Inventory turns
- Focus on quality
- Managed health care and insurance plans
- Ability to manage costs, etc.
-
ANCILLARY LECTURES AND EXERCISES

-------------------------------------------------
LECTURE # 6-1: THE STRATEGIC PROFIT MODEL (SPM)
Instructor’s Note: Instructors may wish to use this ancillary lecture in lieu of the annotated
outline. This is fairly complex material for students to grasp. This lecture is presented with a
simple example. Instructors might want to use this exercise as a stimulus to a class discussion on
the topic. The 6 Power Point slides can be used with this lecture.

-------------------------------------------------
Background
 Also known as the DuPont model, it was developed by the DuPont family around 1920.
 The DuPonts developed the model because they needed to find a basis for evaluating the
financial performance of complex organizations.
Purpose of the SPM
 The SPM serves two managerial purposes:
 Specifies that a firm’s financial objective is to earn adequate or target return on owner’s
equity—also known as return on net worth.
 This does not mean that a retailer wants to necessarily maximize return on Owner’s
Equity (O.E.).
This method is only one of many financial objectives. For example, maximizing shareholder
wealth is another very important objective.
  Identifies three profit paths a firm can take to increase O.E. by increasing:
1. profit margin
2. rate of asset turnover
3. financial leverage
 The preceding performance ratios are related to the following three areas of decision-
making:
4. margin management
5. asset management
6. financial management
 Let us take each of the three categories and break them down.
Margin management
 See PPT 6-15. This information is taken from the income statement:
 Net sales means after adjusting for returns and allowances
 Gross sales - Returns = Net sales
 Cost of goods sold
 Invoice cost + freight in + work room costs - vendor’s cash discounts
 Cost of goods sold:
 Invoice costs
 Freight in (transportation cost of bringing in merchandise)
 Workroom costs (alterations, set up)
 Vendors—cash discounts. For example, 2/10 n 30 provides incentives to get retailers to
pay quickly for the vendors’ accounts receivable reasons.
 Why are these adjustments made to cost of goods sold?
 Directly affect landed cost of merchandise
 Gross margin:
 Gross margin = Net sales - Cost of goods sold
  Can be expressed as a percentage of sales:
 Gross margin = Gross margin percent
 Sales
 Gross margin, gross margin percent, and inventory turnover are extremely important in
the world of retailing. They represent aspects of the business with which buyer has direct
control.
 Total expenses (two types—variable and fixed):
1. Variable—(varies with sales) -- the cost of doing business; e.g., sales commission
and is thus variable with sales).
2. Fixed—cost of being in business. We have fixed expenses whether or not we sell
anything. For example, rent, electricity, administrative salaries, etc.
 Net profit (after tax):
 Treat tax as a variable expense—a retailer always needs after tax profit for decision-
making. Net profit margin is net profit as a percentage of sales, just like gross margin is a
percentage of sales. So, if a retailer has $10,000 net profit before tax, and the tax = 40%,
the net profit after tax will = $6,000.
 The key in understanding net profit lies in the kind of retail establishment in which one
operates. For example, a grocery store having a 1 % net profit after tax would be
considered normal. The key is knowing what is good or bad for a retailer compared to
competition.
 How to evaluate profit margin
3. Firm’s past history
4. Compare with similar stores or departments. Should be really much better than
average for industry considering there are many bad stores.
Asset Management
 See PPT 6-23. To obtain a better idea of what asset management is about, examine the
Asset Management Model.
 All of these elements come from the balance sheet except for sales.
 The balance sheet is a snapshot of a retailer’s financial position on a particular day,
usually the end of the year.
 The income statement represents the performance over a period of time, generally a year.
 Objective: The objective in asset management is to turn inventory into accounts
receivable or cash by making sales rapidly.
 Current assets—“cycle”
1. cash to inventory
2. inventory to cash or
3. inventory to accounts receivable
4. want to minimize assets relative to sales
 Inventory—strive for best selection which
5. minimize inventory investment
6. maximize sales through
selection (depth + breadth)
minimize stock-outs (service level)
 Accounts receivable = Merchandise sold on credit. Want to minimize accounts
receivable because may be an unproductive asset. Most retailers offer credit because:
1. tradition
2. part of services mix
3. may be important in making people buy
4. can make some money if charge interest but usually sold to a factor (will define
below) -- most retailers aren’t in business to be a financial institution, so they
would rather sell their accounts receivable to a factor.
 Bankcard—Visa, MasterCard, or American Express (T&E—travel and entertainment
card); can be converted to cash immediately, but card company charges retailer a
percentage of sales.
 Factor—accounts receivables are sold to private-label credit card companies known as
“factors.” When a retailer’s accounts receivable is sold to another firm, it allows the
retailer to get money up-front and retain its own store identity. Also, information from
the credit cards can be used to target customers. Factoring is very popular now because
an intermediary company takes care of accounts receivable hassles for the retailer.
 Proprietary—when a retailer keeps its own accounts receivable (private credit card, like
“Sears” card). The most common reason for doing this is to collect interest from
customers.
 The first two types of credit cards are the most popular with retailers because they
generally prefer to stay away from accounts receivable. Naturally, their main interest is
 converting inventory into sales and profits.
 Cash: keep to a minimum
Fixed assets:
1. fixture
2. store (if owned, not rented)
3. delivery trucks
4. much slower to change than current assets
Asset turnover:
 Net sales/ total assets = Asset turnover.
 Similar to inventory turnover in that it is like a cycle of assets to cash to assets to cash ...
 Asset turnover rate always has to be less than inventory turnover if there are any fixed
assets.
 Inventory turnover = Net Sales / Average Inventory
Return on assets
 See PPT 6-34. ROA uses both asset management and margin management.
 Used for evaluating and programming performance of profit centers (like stores), used to
evaluate managers, not owners because owners also have control over financial leverage
—to be discussed below.
 Firms can get their return on assets in many ways. For example:
1. discount stores have low margin and high turnover
2. boutiques have high margin and low turnover
 Return on assets (ROA) = Net profit
 Total assets
 The question here is, how much profit are you able to generate from retailer’s assets?
 Return on assets is an extremely important measure of how a retailer is performing.
 The instructor may want to slow down here and give examples all the way through the
model like those in the text of high margin/low turnover operations versus low margin
high turnover operations.
Financial leverage management
 Leverage ratio = Total assets/O.E. or (Total liabilities +O.E.)/O.E.
 How to manage leverage:
1. Too leveraged (too much debt) means financial instability, i.e., too much risk.
2. If not leveraged, then return on owner’s equity suffers
 To illustrate financial leverage, take the case of leveraged buyouts.
 Leveraged buyouts (LBOs) occur when a firm takes on extra debt to finance a buyout.
 More debt means higher leverage.
Conclusion
 Depending where one is in the firm, different managers will use different performance
ratios.
 Top management will use leverage to get return on O.E.
 Lower executives will use margin and assets management to get return on assets.
 During the rest of the course we will be concentrating on these ratios, and others that will
help the retailers control the financial side of their business.
7
RETAIL LOCATIONS

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Types of Locations
 Store location is often the most important See PPT 7-7
decision made by a retailer.
Discuss the importance of store location based
 Location is typically the prime on students' shopping preferences. For the
consideration in a customer's store choice.
following types of products, how far would they
 Location decisions have strategic travel to reach a store:
importance because they can be used to
develop a sustainable competitive 1. Eggs and Milk
advantage.
2. Socks
 Location decisions are generally risky.
They are hard to change because retailers 3. Running Shoes
frequently have to either make substantial
4. Home Theater system
investments to buy and develop real estate
or commit to long-term leases with
developers.
 Many types of locations are available for
retail stores – each with its own strengths
and weaknesses. Choosing a particular Ask students to evaluate the best location in the
location type involves evaluating a series area around the university. What are the
of trade-offs. characteristics of the location that make it so
 These trade-offs generally concern the cost attractive?
of the location versus its value to
customers.
 Trade area is the geographic area
encompassing most of the customers who
would patronize a specific site.

II. Unplanned Retail Locations

 Some retailers put their stores in unplanned
locations for which there is no centralized
management to determine where specific
stores are and how they are operated.

A. Freestanding Sites
A freestanding site is a retail location that's
not connected to other retailers, although
See PPT 7-10
many are located adjacent to malls.
 Retailers with large space requirements, such
as warehouse clubs and hypermarkets, are
often freestanding. Have the students visited a retailer in a
freestanding site? What made them travel to
Outparcels, which are stores that are not such a retailer?
connected to other stores in a shopping
center but are located on the premises,
typically in a parking area, are freestanding
locations that are popular for fast food
restaurants or banks.
These locations enable retailers to have a drive-
through window, dedicated parking, and
clear visibility from the street.
Advantages of freestanding locations are
greater visibility, lower rents, ample
parking, no direct competition, greater
convenience for customers, fewer
restrictions on signs, hours, or
merchandise, and ease of expansion.
The most serious disadvantage is the lack of
synergy with other stores. A retailer in a
freestanding location must be a primary
destination point for customers. It must
offer customers something special in
merchandise, price, promotion, or services
to get them into the store.

B. City or Town Locations See PPT 7-12

 Some retailers are finding urban locations
attractive, particularly in cities that are
redeveloping their downtowns and
surrounding urban areas.

 In general, urban areas have low

occupancy costs, and locations in the
central business districts often have high
pedestrian traffic.

 Many urban areas are going through a

process of gentrification – the renewal and
rebuilding of offices, housing, and retailers
in deteriorating areas – coupled with an
influx of more affluent people that
displaces the former poorer residents.

 Redevelopment opportunities for retailers

are also emerging in so-called brownfields
– former industrial locations with a history
 of chemical pollutants, as developers and
investors give these areas serious
consideration for clean-up.

1. Central Business Districts

The central business district (CBD) is the See PPT 7-13
traditional downtown business area in a
city or town. Ask students whether they shop in the CBD
of the town/city in which they live. Ask them
Although CBD locations in the United States
declined in popularity among retailers and in which city(s) they love to shop in the CBD.
their customers for years, many are Why?
experiencing revival as they become We would expect cities like San Francisco,
gentrified, drawing in new residents and New York, London, Paris to be mentioned as
retailers. great “shopping cities.”
Because shoplifting can be common and
parking is often limited, CBDs generally
require the retailers to hire security.
Shopping flow in the CBD may be slow on
evenings and weekends when area
businesses are closed as parking problems
and driving time discourage customers
from driving in from the suburbs.

2. Main Street Locations

 Main Street is the traditional shopping Ask students if national retailers have started
area in smaller towns, or a secondary to invade the “Main Street” in their
business district in a suburb or within a neighborhoods.
larger city. Their occupancy costs are
lower than those of the primary CBD.
They do not draw as many people and offer
See PPT 7-14 for a comparison of CBDs and
smaller overall selection through fewer
Main Street locations.
stores. Main Streets typically don't off the
entertainment and recreational activities
available in the more successful primary
CBDs.

3. Inner-City Locations
 The inner city in the United States refers What are the various ethical issues in retailers
to high density urban areas that have higher charging higher margins in inner cities? What
unemployment and lower median incomes are the reasons retailers remain successful even
than the surrounding metropolitan area. though their prices may be higher in inner
Some retailers have avoided opening stores cities?
in the inner city because they believe it is
riskier and achieves lower returns than See PPT 7-15
other areas. As a result, inner city
consumers often have to travel to the
suburbs to shop, even for food items.
  That said, retailing can play an important
role in inner city redevelopment activities
by bringing needed services and jobs to
inner city residents, as well as property
taxes to support redevelopment efforts.

III. Shopping Centers

 A shopping center is a group of retail and
other commercial establishments that is
planned, developed, owned, and managed See PPT 7-17
as a single property.
 By combining many stores at one location,
the developer attracts more consumers to
the shopping center than if the stores were
at separate locations.
 Shopping center management maintains
common facilities (common area
maintenance, or CAM) such as the parking
area and restrooms, and is responsible for
security, outdoor signage and advertising
for the center.
 Most shopping centers have at least one or
two major retailers, referred to as anchors.
 In strip shopping centers, supermarkets are
typically the anchors, whereas department
stores traditionally anchor enclosed
shopping malls. Lifestyle centers may not
have anchors, while power centers are
often made of “anchors” exclusively.

A. Neighborhood and Community Shopping

Centers (Strip Centers) See PPT 7-18
 Strip centers are attached rows of stores
managed as units, with onsite parking Ask students for examples of Neighborhood and
usually located at the front of the stores. Community Shopping Centers in the campus
area and discuss. What are the pros and cons of
 The primary advantages of these centers these locations?
are that they offer customers convenient
locations and easy parking and they entail
relatively low rents for retailers.
 The primary disadvantages are that there is
no protection from the weather, and they
offer less assortment and entertainment
options for customers than malls.

B. Power centers
  A power center is a shopping center that is
dominated by several large anchors,
including discount stores, off-price stores, See PPT 7-19
warehouse clubs, or category specialists.
Why would a smaller retailer locate in a power
 Unlike traditional strip centers, power center anchored by discount stores and off-price
centers often include several freestanding stores? What types of merchandise would likely
(unconnected) anchors and only a be carried by the smaller retailer?
minimum number of specialty tenants.
 Now many power centers are larger than
regional malls and have trade areas as large
as regional malls.
 Power centers offer low occupancy costs
and modest levels of consumer
convenience and vehicular and pedestrian
traffic.

C. Shopping Malls
 Shopping malls are enclosed, climate See PPT 7-20
controlled, lighted shopping centers with Ask students if they spend more/less time in
retail stores on one or both sides of an
shopping malls than they did 5 years ago.
enclosed walkway.
[ It will probably be less. Ask them why.]
 Shopping malls are classified as either
regional malls (less than 1 million square
feet) or super regional malls (more than 1 Do students notice some significant differences
million square feet). between one shopping mall and another? If so,
 Shopping malls have several advantages what are these? [Prompt students on differences
over alternative locations. in types of stores, overall ambience and
environment of the shopping mall, general levels
 First, because of the many different types of service through the various stores in the
of stores, the merchandise assortments shopping mall, etc.]
available within those stores, and the
opportunity to combine shopping with
entertainment, shopping malls attract many
shoppers and have a large trade area.
 Second, retailers and their customers don’t
have to worry about the weather.
 Third, malls offer retailers a strong level of
homogeneous operations with the other
stores, such as uniform hours of operation.
 Although shopping centers are an excellent
site option for many retailers, they have
some disadvantages.
 First, mall rents are higher than those of
strip centers, freestanding sites, and most
 central business districts.
 Second, some tenants may not like mall
management’s control of their operations.
Managers can, for instance, dictate store
hours and window displays.
 Third, competition within shopping centers
can be intense.
 Shopping malls are facing several
challenges, leading to declining mall
traffic and sales.
 First, many people simply do not have time
to stroll through a mall. Strip centers,
freestanding locations, and power centers
are more convenient as they offer
convenient parking and easy access.
 Second, most retailers in shopping malls
sell fashionable apparel, a merchandise
category that has seen limited growth due
to more casual lifestyles.
 Third, many malls are getting old and have
not been subject to any significant
remodeling, making them somewhat
rundown and less appealing to customers
than they once were.
 Fourth, the consolidation in retailing,
particularly in the department store
segment, has decreased the number of
potential anchor tenants, leaving some
malls with diminished drawing power.

D. Lifestyle Centers See PPTs 7-24 for a detailed overview of

lifestyle centers.
 Lifestyle centers, the fastest growing type
of retail development, are shopping centers
with an open-air configuration of specialty
stores, entertainment and restaurants with
design ambience and amenities such as
fountains and street furniture.
 Lifestyle centers resemble the main streets
in small towns, where people stroll from
store to store, have lunch, sit for a while on
a park bench talking to friends. Thus, they
cater to the “lifestyles” of consumers in
their trade areas.
  Due to the ease of parking, lifestyle centers
are very convenient for shoppers. But they
typically have less retail space than
enclosed malls and thus smaller trade
areas, and they attract fewer customers
than enclosed malls. Many are located near
higher income areas so the higher
purchases per visit compensate for the
fewer number of shoppers.

E. Mixed-Use Developments
* Mixed-use developments (MXDs) combine See PPT 7- 25
several different uses in one complex,
including shopping centers, office towers,
hotels, residential complexes, civic centers, and
convention centers.

F. Outlet Centers See PPT 7-26

* Outlet centers are shopping centers that
consist mostly of manufacturers’ outlets.
Ask students if they have been to an outlet center.
* Outlet centers have progressed from no- What types of products have they purchased from
frills warehouses to well-designed such centers? Was the visit an everyday
buildings with landscaping, gardens, and shopping trip or part of a vacation?
food courts that make them hard to
distinguish from more traditional shopping
centers and lifestyle centers.
* Outlet centers are larger in size today than
they were a decade ago, with some outlets
having more the one million square feet.
* In the U.S. only two or three new outlet
centers open each year, yet outlet centers
are becoming very popular outside the U.S.
* Tourism is an important factor in
generating traffic for many outlet centers.
Thus, many are located in with convenient
interstate access and close to popular
tourist attractions.

G. Theme / Festival Centers See PPT 7-27

* Theme/festival centers are shopping
centers that typically employ a unifying
theme that is carried out by the individual
shops in their architectural design, and to
an extent, in their merchandise. The
biggest appeal of these centers is to
tourists.
 * These centers typically contain tenants
similar to specialty centers, except there
usually are no large specialty stores or
department stores.

H. Larger, Multiformat Developments - See PPT 7-28

Omnicenters
* New shopping center developments are
combining enclosed malls, lifestyle
centers, and power centers. Although
centers of this type do not have an official
name, they may be referred to as
omnicenters.
* Omnicenters represent a response to
several trends in retailing, including the
desire of tenants to lower common area
maintenance charges by spreading the costs
among more tenants and function inside
larger developments that generate more
pedestrian traffic and longer shopping
trips.
* In addition these centers reflect the
growing tendency of consumers to cross-
shop, as well as the desire for time-scarce
consumers to participate in one-stop
shopping.

IV. Other Location Opportunities See PPT 7-29

Airports, resorts, stores within a store, and
temporary stores are interesting location
alternatives for many retailers.

A. Temporary Stores
Retailers and manufacturers sometimes open
temporary or pop-up stores to a focus on a
new product or a limited group of products.
These temporary stores introduce and
remind consumers of a brand or store, but
they are not designed primarily to sell the
product.

B. Store within a Store See PPT 7-30

Another nontraditional location for retailers is
within other, larger stores. Retailers,
particularly department stores, have
traditionally leased space to other retailers
such as sellers of fine jewelry or furs.
 Grocery stores have been experimenting with
the store-within-a-store concept for years
with service providers like banks, film
processors, and video outlets.

C. Merchandise Kiosks See PPT 7-32

Merchandise kiosks are small, temporary
selling spaces typically located in the
walkways of enclosed malls, airports, train Ask students which categories of merchandise
stations, or office building lobbies. are best suited for sale in merchandise kiosks.

They usually have short-term leases and are

often operated seasonally.
Some are staffed and represent a miniature
store or cart that could be easily moved.
Others are twenty-first century versions of
a vending machine.
For mall operators, kiosks are an opportunity to
generate rental income in otherwise vacant
space and to offer a broad assortment of
merchandise for visitors. They also can
generate excitement leading to additional
sales for the entire mall.

D. Airports See PPT 7-33

One important high-pedestrian area that has Are airports good places to buy products? Why
become popular with national retail chains or why not? Which products have students
is airports. purchased from an airport retailer?

Sales per square foot at airport malls are often

three to four times as high as at regular
mall stores. However, rents are higher too.
Also, costs can be higher – hours are
longer, and since the location is often
inconvenient for workers, businesses have
to pay higher wages.
The best airport locations tend to be ones
where there are many layovers and
international flights.

V. Location and Retail Strategy

PPT 7-33 illustrates the need to match the
Location type decisions need to be consistent retailer’s strategy with its location type.
with the shopping behavior and size of the
retailer’s target market and its positioning.

A. Shopping Behavior of Consumers in Retailer’s See PPT 7-35

Target Market
 A critical factor affecting the location
consumers select to visit is the shopping
situation in which they are involved. Ask students how the nature of the consumer’s
shopping behavior will affect their preferred
Three shopping situations are: (1) convenience store location.
shopping, (2) comparison shopping, and
(3) specialty shopping.

1. Convenience Shopping See PPT 7-37

When consumers are engaged in convenience

shopping situations, they are primarily Ask students where they are most likely to
concerned with minimizing their effort to purchase convenience items such as soda, gum
get the product or service they want. and milk. Why do they select those particular
Stores selling primarily convenience goods locations?
usually locate their stores close to where
their customers are and make it easy for
them to park, find what they want, and go
about their other business.

2. Comparison Shopping Ask students to discuss product categories

they often comparison shop for. Where do
Consumers involved in comparison shopping
situations have a general idea about the
they go to compare? Describe the types of
type of product or service they want, but retailers they patronize for comparison
they do not have a strong preference for a shopping situations.
brand, model or specific retailer to
patronize.
Enclosed malls or shopping districts devoted to
one type of merchandise attract consumers
See PPT 7-38
by facilitating their comparison shopping
activities.
Category specialists offer the same benefit of
comparison shopping as a collection of co-
located specialty stores because consumers
can see almost all of the brands and models
in a particular product category.
This comparison shopping makes category
killers destination stores, places where
consumers will go even if it is
inconvenient.
3. Specialty Shopping
When consumers go specialty shopping, they Discuss specialty stores students have been to.
know what they want and will not accept a Would those stores improve their business by
substitute. being more conveniently located? Why or why
not?
The retailer becomes a destination store. Thus,
consumers are willing to travel to an
 inconvenient location. See PPT 7-39

VI. Legal Considerations

 The legal issues that affect site decision
include environmental issues, zoning,
building codes, signs, and licensing
requirements.

A. Environmental Issues See PPT 7-40 for a review of these issues.

Two environmental issues have received
particular attention in recent years. First is
“above-ground risks” such as asbestos-
containing materials or lead pipes used in
construction. The second issue is
hazardous materials that have been stored
in the ground. This issue may be of
particular importance to a dry cleaner or an
auto repair shop.
Retailers may protect themselves against
environmental hazards with protective lease
clauses in their leases, and/or by purchasing
environmental protection insurance policies.

B. Zoning and Building Codes See PPT 7-41 for a review of other legal
issues retailers must consider.
 Zoning determines how a particular site
can be used. Building codes are similar
legal restrictions that can determine the
type of building, signs, size and type of
parking lot, etc. that can be used at a
particular location.

C. Signs
 Restrictions on the use of signs can impact
a particular site's desirability. Size and
style may be restricted by building codes,
zoning ordinances, or even the shopping
center management.

D. Licensing Requirements
Licensing requirements may vary in different
parts of a region. For instance, some
Dallas neighborhoods are "dry," meaning
no alcoholic beverages can be sold; and in
other areas, only wine and beer can be
sold.

VI Summary
Location decisions are particularly important
because of their high-cost, long-term
commitment and impact on customer
patronage.
Choosing a particular location type involves
evaluating a series of trade-offs including
the occupancy costs of the location, the
pedestrian and vehicle traffic associated
with the location, the restrictions placed on
store operations by the property
management, and the convenience of the
location for customers.
ANSWERS TO “GET OUT AND DO ITS”

2 INTERNET EXERCISE Go to the web page for Faneuil Hall Marketplace at:
www.faneuilhallmarketplace.com and the online site for CocoWalk at: http://www.cocowalk.net. What
kinds of centers are these? List their similarities and differences. Who is the target market for each of
these retail locations?
Faneuil Hall Marketplace – “It's the seat of American history and the site of one of America's most
famous shopping and dining experiences, Faneuil Hall Marketplace. For over 250 years, the
marketplace has played an integral role in the life of Boston's residents.”
Restaurants, shopping, history (close to the Freedom Trail) events and entertainment. This urban
market place is located in Boston, Massachusetts and it attracts both locals and tourist of all ages.
CocoWalk – “Miami’s ultimate destination for shopping, dining & entertainment. As the first lifestyle
center in Florida, CocoWalks’ unique grounds and buildings were carefully designed to blend
seamlessly into the surroundings of Coconut Grove, a bayside boating village known for being
eclectic, sometimes eccentric and always exciting”.
Shops, boutiques, a movie theater, restaurants, cafes, bars and live entertainment. This center
caters to Miami residents and international visitors with upscale shops and sophisticated
restaurants.

6 INTERNET EXERCISE Go to the homepage of your favorite enclosed mall and describe it in terms of the
following characteristics: number of anchor stores, number and categories of specialty stores, number
of sit-down and quick service restaurants, and types of entertainment offered. What are the strengths
and weaknesses of this assortment of retailers? What are the unique features of this particular mall?
Student answers will vary depending on the mall selected.

7 GO SHOPPING Visit a power center that contains a Target, Staples, Sports Authority, Home Depot, or
other category specialists. What other retailers are in the same location? How is this mix of stores
beneficial to both shoppers and retailers?
Other retailers in this type of shopping center may include a food store, clothing stores such as Old
Navy, a book store, craft store, and possibly some quick service and family restaurants. Students
should consider how the retailers prefer low occupancy costs, high traffic levels and are trying to
reach the same target customers. Shoppers enjoy the convenience of easy parking and many
retailers located together.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

54. 1. Why is store location such an important decision for retailers?

 Location decisions are particularly important because of their high-cost, long-term
commitment and impact on customer patronage. Location is typically one of the most
influential considerations in a consumer’s store choice decision. Further, location decisions
have strategic importance because they can be used to develop a sustainable competitive
advantage.

55. 2. Pick your favorite store. Describe the advantages and disadvantages of its current
location, given its target market.

Students store choices will likely vary considerably. The store’s target market must be clearly
defined. And then the location should give the store a competitive advantage with the target
market they have defined.
Store: Urban Outfitters
The target market for this store can be defined as young men and women from ages 16 to 25
that live in the city or want the urban look. The best location for this store would be in a
central business district. This is a traditional downtown business area in a city or a town.
The store will draw from the business activity of the downtown area. There is an inflow of
people from public transportation and a high level of pedestrian traffic.
Store: The GAP
The primary target market segments for this store are men and women ranging from as young
as 15 to 40 years old looking for value in basic clothing. The best location for this store
would be in a shopping center, particularly a mall. A shopping center consists of a group of
retail and other commercial establishments that is planned, developed, owned, and managed
as a single property. A mall focuses on pedestrians and gains its advantage because it can
have a set of stores that carry similar merchandise assortments. The target market looking
for basics, can shop at the GAP and also shop at complementary stores nearby. This allows
the target market to have a one stop shopping experience.
Store: Verizon
The target market segments of Verizon are men and women ages 18 and up looking for a
cellular phone for convenience and safety. A great location for Verizon would be a kiosk. A
kiosk is located in mall common areas, is stationary, and has many conveniences of a store
such as telephones, electricity, and moveable shelves. Advantages of these selling spaces are
the prime mall locations, the relative inexpensiveness, and the short-term leases available,
which reduce owner’s risk. This is a perfect location for a Verizon store because the items
are very small and require little shelf space. A customer looking to get a phone, does not
need a lot of frills, but instead wants the information and the phone at a convenience. Also
this location will appeal to their target market. As they walk down the mall they may be
induced to purchase without previous planning.

56. 3. Home Depot typically locates in either a power center or a freestanding site. What
are the strengths of each location for this home improvement retailer?
 The tenant mix of a power center lends itself to attracting customers who would want to shop at
Home Depot. Home Depot will also benefit from this location due to increased traffic flow of
customers who will shop at a power center.
Home Depot will benefit from a free-standing location due to probable lower rent, abundant
parking, lack of direct competition, and the ability to design and operate the store with few or no
restrictions.

57. 4. As a consultant to 7-Eleven convenience stores, American Eagle Outfitters, and

Porsche of America, what would you say is the single most important factor in choosing
a site for these three very different types of stores?

The most important criterion that is common to all types of stores is a location that attracts
the right segment of consumers. However, since the segments targeted are different and the
merchandise/services offered are also different, these differences would also affect the
location decision for each of the retailers. For 7-Eleven, consumers who are shopping for
convenience products – food as well as non food items – are the primary target. Since these
consumers do not wish to travel far and are willing to pay a slightly higher price as compared
to grocery stores, the best locations for 7-Eleven stores are smaller, neighborhood strip
centers. For American Eagle Outfitters, the CBDs, Main Street or regional and super
regional shopping centers may attract their target consumers, while for Porsche of America,
upscale commercial neighborhoods – typically a commercial avenue further away from
downtown – will likely appeal to their target customers.

58. 5. Retailers are developing shopping centers and freestanding locations in central
business districts that have suffered decay. Some people have questioned the ethical
and social ramifications of this process, which is known as gentrification. What are the
benefits and problems associated with gentrification?

The benefits of gentrification include the redevelopment of urban areas that are in a state of
decay. Usually, these areas would continue to decay if it weren’t for the interested retailers.
Some retail developers argue that gentrification projects have positive effects on fighting
crime and drugs. Gentrification also allows retailers to develop buildings that would be
financially impossible to duplicate in today’s market. These structures often have significant
historical value. Finally, retail gentrification promotes the development of projects such as
housing and offices. This allows whole neighborhoods to make a comeback.
Gentrification may negatively impact the historical and/or cultural makeup of an area. In
addition, gentrification may be so successful that neighboring properties may increase in
value to the point that existing tenants may not be able to afford the higher rents and/or taxes.
This is especially controversial in terms of displacement of lower income individuals and
families. Gentrification projects are often highly speculative due to the expensive financing
and high risks usually associated with projects of this kind. When financing is a problem, a
project may have to be temporarily stopped or abandoned before completion, which results in
further accelerating decay of empty buildings and an uncertain future for existing businesses
and people.
59. 6. Staples, OfficeMax and Office Depot all have strong multichannel strategies. How
does competition and the Internet affect their strategies for locating stores?

Since all three stores sell mostly standardized and easily specified office supplies, the products
stocked by them can be conveniently and easily sold through the Internet. The primary target
markets for this type of retail outlets are small office/home office businesses. The Internet enables
these firms to target medium and large firms as well. At the same time, the Internet is also an
opportunity to target customers far removed from their primary concentration areas (Southeast for
Office Depot and Northeast for Staples) without incurring the additional costs of each store location
in markets where consumers may be sparse. While it does cost a tremendous amount of capital to
set up and successfully operate an Internet site, the costs of the site are spread to a wider target
market and trading area as compared to the costs of setting up individual stores in multiple
locations. So the Internet enables these firms to optimize on marketing efforts to various target
markets as well as the costs of setting up new stores in locations that may not generate sufficient
traffic. Since these three competitors offer similar merchandise it is import to offer some type of
rewards program to build store loyalty. Another way to differentiate in this industry is to offer
unique customer services such as delivery, printing and computer support.

60. 7. In many malls, quick service food retailers are located together in an area known as
a food court. What are the advantages and disadvantages of this location for the food
retailers? What is the new trend for food retailers in the shopping environment?

Mall food courts allow customers to find the fast-food retailers in the center to be easily found.
Since food courts usually have public seating in one area within the food court, each fast-food
retailer does not have to provide separate seating room for customers. The common area charges
associated with these kinds of arrangements are significantly less than if each fast-food retailer
provided a separate seating area. This arrangement enables the fast-food retailers to lease a smaller
amount of expensive space. Finally, food courts provide a variety of alternatives therefore creating a
synergy that attracts a larger group of potential customers. Groups of potential customers, such as
families, can patronize a variety of fast-food retailers at one time.
In terms of disadvantages, food courts require the fast-food retailers to be located next to each
other, thus making the immediate environment extremely competitive. In addition, since malls with
food courts usually insist that the fast-food retailers locate within the food court, there is no
opportunity to try to locate to a better position within the mall. Also, food courts tend to have
limited space, therefore creating less flexibility in store design and expansion.
The new trend for food retail in malls is providing a more upscale, sit-down dining experience in sit
down restaurants. Mall developers have learned that good food options can be a powerful attractor
of customer traffic.

61.
62. 8. Why would a Payless ShoeSource store locate in a neighborhood shopping center
instead of a regional shopping mall?

A Payless Shoe Source might locate in a strip shopping center because these centers offer
customers convenient locations, and easy parking, and offer retailers relatively lower rents
than regional shopping centers. This may enable Payless to offer lower prices than a store
offering comparable merchandise at the mall, and may also serve to offset the opportunity
cost of being located in a lower traffic location.

63. 9. How does the mall near you home or university combine the shopping and
entertainment experience?

Answers here will vary widely. Students may describe efforts at traditional shopping centers, such as
special promotions, food courts, holiday events or music/video offerings. Others may respond with
entertainment features typically found at lifestyle centers, including concerts and events, more
restaurants and clubs, and recreation centers.

64. 10. Consider a big city that has invested in an urban renaissance. What components of
the gentrification project attract both local residents and visiting tourists to spend time
shopping, eating and sightseeing in this location?

Local residents will likely be attracted to the convenience of retailers located in or nearby
their neighborhoods, along with the needed services, jobs, enhanced safety, visibility and
choices among retailers that would accompany the gentrification project. Visiting tourists
may be more attracted to the historical significance and unique entertainment elements built
into the project.

7
RETAIL LOCATIONS

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Types of Locations
 Store location is often the most important See PPT 7-7
decision made by a retailer.
Discuss the importance of store location based
 Location is typically the prime on students' shopping preferences. For the
consideration in a customer's store choice.
following types of products, how far would they
 Location decisions have strategic travel to reach a store:
importance because they can be used to
develop a sustainable competitive 1. Eggs and Milk
advantage.
  Location decisions are generally risky. 2. Socks
They are hard to change because retailers
frequently have to either make substantial 3. Running Shoes
investments to buy and develop real estate 4. Home Theater system
or commit to long-term leases with
developers.
 Many types of locations are available for
retail stores – each with its own strengths
and weaknesses. Choosing a particular Ask students to evaluate the best location in the
location type involves evaluating a series area around the university. What are the
of trade-offs.
characteristics of the location that make it so
 These trade-offs generally concern the cost attractive?
of the location versus its value to
customers.
 Trade area is the geographic area
encompassing most of the customers who
would patronize a specific site.

II. Unplanned Retail Locations

 Some retailers put their stores in unplanned
locations for which there is no centralized
management to determine where specific
stores are and how they are operated.

A. Freestanding Sites
A freestanding site is a retail location that's
not connected to other retailers, although
See PPT 7-10
many are located adjacent to malls.
Retailers with large space requirements, such
as warehouse clubs and hypermarkets, are Have the students visited a retailer in a
often freestanding. freestanding site? What made them travel to
Outparcels, which are stores that are not such a retailer?
connected to other stores in a shopping
center but are located on the premises,
typically in a parking area, are freestanding
locations that are popular for fast food
restaurants or banks.
These locations enable retailers to have a drive-
through window, dedicated parking, and
clear visibility from the street.
Advantages of freestanding locations are
greater visibility, lower rents, ample
parking, no direct competition, greater
convenience for customers, fewer
 restrictions on signs, hours, or
merchandise, and ease of expansion.
The most serious disadvantage is the lack of
synergy with other stores. A retailer in a
freestanding location must be a primary
destination point for customers. It must
offer customers something special in
merchandise, price, promotion, or services
to get them into the store.

B. City or Town Locations See PPT 7-12

 Some retailers are finding urban locations
attractive, particularly in cities that are
redeveloping their downtowns and
surrounding urban areas.

 In general, urban areas have low

occupancy costs, and locations in the
central business districts often have high
pedestrian traffic.

 Many urban areas are going through a

process of gentrification – the renewal and
rebuilding of offices, housing, and retailers
in deteriorating areas – coupled with an
influx of more affluent people that
displaces the former poorer residents.

 Redevelopment opportunities for retailers

are also emerging in so-called brownfields
– former industrial locations with a history
of chemical pollutants, as developers and
investors give these areas serious
consideration for clean-up.

1. Central Business Districts

The central business district (CBD) is the See PPT 7-13
traditional downtown business area in a
city or town. Ask students whether they shop in the CBD
of the town/city in which they live. Ask them
Although CBD locations in the United States
declined in popularity among retailers and in which city(s) they love to shop in the CBD.
their customers for years, many are Why?
experiencing revival as they become We would expect cities like San Francisco,
gentrified, drawing in new residents and New York, London, Paris to be mentioned as
retailers. great “shopping cities.”
Because shoplifting can be common and
parking is often limited, CBDs generally
 require the retailers to hire security.
Shopping flow in the CBD may be slow on
evenings and weekends when area
businesses are closed as parking problems
and driving time discourage customers
from driving in from the suburbs.

2. Main Street Locations

 Main Street is the traditional shopping Ask students if national retailers have started
area in smaller towns, or a secondary to invade the “Main Street” in their
business district in a suburb or within a neighborhoods.
larger city. Their occupancy costs are
lower than those of the primary CBD.
They do not draw as many people and offer
See PPT 7-14 for a comparison of CBDs and
smaller overall selection through fewer
Main Street locations.
stores. Main Streets typically don't off the
entertainment and recreational activities
available in the more successful primary
CBDs.

3. Inner-City Locations
 The inner city in the United States refers What are the various ethical issues in retailers
to high density urban areas that have higher charging higher margins in inner cities? What
unemployment and lower median incomes are the reasons retailers remain successful even
than the surrounding metropolitan area. though their prices may be higher in inner
Some retailers have avoided opening stores cities?
in the inner city because they believe it is
riskier and achieves lower returns than See PPT 7-15
other areas. As a result, inner city
consumers often have to travel to the
suburbs to shop, even for food items.
 That said, retailing can play an important
role in inner city redevelopment activities
by bringing needed services and jobs to
inner city residents, as well as property
taxes to support redevelopment efforts.

III. Shopping Centers

 A shopping center is a group of retail and
other commercial establishments that is
planned, developed, owned, and managed See PPT 7-17
as a single property.
 By combining many stores at one location,
the developer attracts more consumers to
the shopping center than if the stores were
at separate locations.
 Shopping center management maintains
 common facilities (common area
maintenance, or CAM) such as the parking
area and restrooms, and is responsible for
security, outdoor signage and advertising
for the center.
 Most shopping centers have at least one or
two major retailers, referred to as anchors.
 In strip shopping centers, supermarkets are
typically the anchors, whereas department
stores traditionally anchor enclosed
shopping malls. Lifestyle centers may not
have anchors, while power centers are
often made of “anchors” exclusively.

A. Neighborhood and Community Shopping

Centers (Strip Centers) See PPT 7-18
 Strip centers are attached rows of stores
managed as units, with onsite parking Ask students for examples of Neighborhood and
usually located at the front of the stores. Community Shopping Centers in the campus
area and discuss. What are the pros and cons of
 The primary advantages of these centers these locations?
are that they offer customers convenient
locations and easy parking and they entail
relatively low rents for retailers.
 The primary disadvantages are that there is
no protection from the weather, and they
offer less assortment and entertainment
options for customers than malls.

B. Power centers
 A power center is a shopping center that is
dominated by several large anchors,
including discount stores, off-price stores, See PPT 7-19
warehouse clubs, or category specialists.
Why would a smaller retailer locate in a power
 Unlike traditional strip centers, power center anchored by discount stores and off-price
centers often include several freestanding stores? What types of merchandise would likely
(unconnected) anchors and only a be carried by the smaller retailer?
minimum number of specialty tenants.
 Now many power centers are larger than
regional malls and have trade areas as large
as regional malls.
 Power centers offer low occupancy costs
and modest levels of consumer
convenience and vehicular and pedestrian
traffic.
C. Shopping Malls
 Shopping malls are enclosed, climate See PPT 7-20
controlled, lighted shopping centers with Ask students if they spend more/less time in
retail stores on one or both sides of an
shopping malls than they did 5 years ago.
enclosed walkway.
[ It will probably be less. Ask them why.]
 Shopping malls are classified as either
regional malls (less than 1 million square
feet) or super regional malls (more than 1 Do students notice some significant differences
million square feet). between one shopping mall and another? If so,
 Shopping malls have several advantages what are these? [Prompt students on differences
over alternative locations. in types of stores, overall ambience and
environment of the shopping mall, general levels
 First, because of the many different types of service through the various stores in the
of stores, the merchandise assortments shopping mall, etc.]
available within those stores, and the
opportunity to combine shopping with
entertainment, shopping malls attract many
shoppers and have a large trade area.
 Second, retailers and their customers don’t
have to worry about the weather.
 Third, malls offer retailers a strong level of
homogeneous operations with the other
stores, such as uniform hours of operation.
 Although shopping centers are an excellent
site option for many retailers, they have
some disadvantages.
 First, mall rents are higher than those of
strip centers, freestanding sites, and most
central business districts.
 Second, some tenants may not like mall
management’s control of their operations.
Managers can, for instance, dictate store
hours and window displays.
 Third, competition within shopping centers
can be intense.
 Shopping malls are facing several
challenges, leading to declining mall
traffic and sales.
 First, many people simply do not have time
to stroll through a mall. Strip centers,
freestanding locations, and power centers
are more convenient as they offer
convenient parking and easy access.
  Second, most retailers in shopping malls
sell fashionable apparel, a merchandise
category that has seen limited growth due
to more casual lifestyles.
 Third, many malls are getting old and have
not been subject to any significant
remodeling, making them somewhat
rundown and less appealing to customers
than they once were.
 Fourth, the consolidation in retailing,
particularly in the department store
segment, has decreased the number of
potential anchor tenants, leaving some
malls with diminished drawing power.

D. Lifestyle Centers See PPTs 7-24 for a detailed overview of

lifestyle centers.
 Lifestyle centers, the fastest growing type
of retail development, are shopping centers
with an open-air configuration of specialty
stores, entertainment and restaurants with
design ambience and amenities such as
fountains and street furniture.
 Lifestyle centers resemble the main streets
in small towns, where people stroll from
store to store, have lunch, sit for a while on
a park bench talking to friends. Thus, they
cater to the “lifestyles” of consumers in
their trade areas.
 Due to the ease of parking, lifestyle centers
are very convenient for shoppers. But they
typically have less retail space than
enclosed malls and thus smaller trade
areas, and they attract fewer customers
than enclosed malls. Many are located near
higher income areas so the higher
purchases per visit compensate for the
fewer number of shoppers.

E. Mixed-Use Developments
* Mixed-use developments (MXDs) combine See PPT 7- 25
several different uses in one complex,
including shopping centers, office towers,
hotels, residential complexes, civic centers, and
convention centers.

F. Outlet Centers See PPT 7-26

 * Outlet centers are shopping centers that
consist mostly of manufacturers’ outlets.
Ask students if they have been to an outlet center.
* Outlet centers have progressed from no- What types of products have they purchased from
frills warehouses to well-designed such centers? Was the visit an everyday
buildings with landscaping, gardens, and shopping trip or part of a vacation?
food courts that make them hard to
distinguish from more traditional shopping
centers and lifestyle centers.
* Outlet centers are larger in size today than
they were a decade ago, with some outlets
having more the one million square feet.
* In the U.S. only two or three new outlet
centers open each year, yet outlet centers
are becoming very popular outside the U.S.
* Tourism is an important factor in
generating traffic for many outlet centers.
Thus, many are located in with convenient
interstate access and close to popular
tourist attractions.

G. Theme / Festival Centers See PPT 7-27

* Theme/festival centers are shopping
centers that typically employ a unifying
theme that is carried out by the individual
shops in their architectural design, and to
an extent, in their merchandise. The
biggest appeal of these centers is to
tourists.
* These centers typically contain tenants
similar to specialty centers, except there
usually are no large specialty stores or
department stores.

H. Larger, Multiformat Developments - See PPT 7-28

Omnicenters
* New shopping center developments are
combining enclosed malls, lifestyle
centers, and power centers. Although
centers of this type do not have an official
name, they may be referred to as
omnicenters.
* Omnicenters represent a response to
several trends in retailing, including the
desire of tenants to lower common area
maintenance charges by spreading the costs
among more tenants and function inside
 larger developments that generate more
pedestrian traffic and longer shopping
trips.
* In addition these centers reflect the
growing tendency of consumers to cross-
shop, as well as the desire for time-scarce
consumers to participate in one-stop
shopping.

IV. Other Location Opportunities See PPT 7-29

Airports, resorts, stores within a store, and
temporary stores are interesting location
alternatives for many retailers.

A. Temporary Stores
Retailers and manufacturers sometimes open
temporary or pop-up stores to a focus on a
new product or a limited group of products.
These temporary stores introduce and
remind consumers of a brand or store, but
they are not designed primarily to sell the
product.

B. Store within a Store See PPT 7-30

Another nontraditional location for retailers is
within other, larger stores. Retailers,
particularly department stores, have
traditionally leased space to other retailers
such as sellers of fine jewelry or furs.
Grocery stores have been experimenting with
the store-within-a-store concept for years
with service providers like banks, film
processors, and video outlets.

C. Merchandise Kiosks See PPT 7-32

Merchandise kiosks are small, temporary
selling spaces typically located in the
walkways of enclosed malls, airports, train Ask students which categories of merchandise
stations, or office building lobbies. are best suited for sale in merchandise kiosks.

They usually have short-term leases and are

often operated seasonally.
Some are staffed and represent a miniature
store or cart that could be easily moved.
Others are twenty-first century versions of
a vending machine.
 For mall operators, kiosks are an opportunity to
generate rental income in otherwise vacant
space and to offer a broad assortment of
merchandise for visitors. They also can
generate excitement leading to additional
sales for the entire mall.

D. Airports See PPT 7-33

One important high-pedestrian area that has Are airports good places to buy products? Why
become popular with national retail chains or why not? Which products have students
is airports. purchased from an airport retailer?

Sales per square foot at airport malls are often

three to four times as high as at regular
mall stores. However, rents are higher too.
Also, costs can be higher – hours are
longer, and since the location is often
inconvenient for workers, businesses have
to pay higher wages.
The best airport locations tend to be ones
where there are many layovers and
international flights.

V. Location and Retail Strategy

PPT 7-33 illustrates the need to match the
Location type decisions need to be consistent retailer’s strategy with its location type.
with the shopping behavior and size of the
retailer’s target market and its positioning.

A. Shopping Behavior of Consumers in Retailer’s See PPT 7-35

Target Market
A critical factor affecting the location Ask students how the nature of the consumer’s
consumers select to visit is the shopping shopping behavior will affect their preferred
situation in which they are involved. store location.
Three shopping situations are: (1) convenience
shopping, (2) comparison shopping, and
(3) specialty shopping.

1. Convenience Shopping See PPT 7-37

When consumers are engaged in convenience

shopping situations, they are primarily Ask students where they are most likely to
concerned with minimizing their effort to purchase convenience items such as soda, gum
get the product or service they want. and milk. Why do they select those particular
Stores selling primarily convenience goods locations?
usually locate their stores close to where
their customers are and make it easy for
them to park, find what they want, and go
 about their other business.

2. Comparison Shopping Ask students to discuss product categories

they often comparison shop for. Where do
Consumers involved in comparison shopping
situations have a general idea about the
they go to compare? Describe the types of
type of product or service they want, but retailers they patronize for comparison
they do not have a strong preference for a shopping situations.
brand, model or specific retailer to
patronize.
Enclosed malls or shopping districts devoted to
one type of merchandise attract consumers
See PPT 7-38
by facilitating their comparison shopping
activities.
Category specialists offer the same benefit of
comparison shopping as a collection of co-
located specialty stores because consumers
can see almost all of the brands and models
in a particular product category.
This comparison shopping makes category
killers destination stores, places where
consumers will go even if it is
inconvenient.
3. Specialty Shopping
When consumers go specialty shopping, they Discuss specialty stores students have been to.
know what they want and will not accept a Would those stores improve their business by
substitute. being more conveniently located? Why or why
not?
The retailer becomes a destination store. Thus,
consumers are willing to travel to an See PPT 7-39
inconvenient location.

VI. Legal Considerations

 The legal issues that affect site decision
include environmental issues, zoning,
building codes, signs, and licensing
requirements.

A. Environmental Issues See PPT 7-40 for a review of these issues.

Two environmental issues have received
particular attention in recent years. First is
“above-ground risks” such as asbestos-
containing materials or lead pipes used in
construction. The second issue is
hazardous materials that have been stored
in the ground. This issue may be of
particular importance to a dry cleaner or an
 auto repair shop.
Retailers may protect themselves against
environmental hazards with protective lease
clauses in their leases, and/or by purchasing
environmental protection insurance policies.

B. Zoning and Building Codes See PPT 7-41 for a review of other legal
issues retailers must consider.
 Zoning determines how a particular site
can be used. Building codes are similar
legal restrictions that can determine the
type of building, signs, size and type of
parking lot, etc. that can be used at a
particular location.

C. Signs
 Restrictions on the use of signs can impact
a particular site's desirability. Size and
style may be restricted by building codes,
zoning ordinances, or even the shopping
center management.

D. Licensing Requirements
Licensing requirements may vary in different
parts of a region. For instance, some
Dallas neighborhoods are "dry," meaning
no alcoholic beverages can be sold; and in
other areas, only wine and beer can be
sold.

VI Summary
Location decisions are particularly important
because of their high-cost, long-term
commitment and impact on customer
patronage.
Choosing a particular location type involves
evaluating a series of trade-offs including
the occupancy costs of the location, the
pedestrian and vehicle traffic associated
with the location, the restrictions placed on
store operations by the property
management, and the convenience of the
location for customers.
ANSWERS TO “GET OUT AND DO ITS”

2 INTERNET EXERCISE Go to the web page for Faneuil Hall Marketplace at:
www.faneuilhallmarketplace.com and the online site for CocoWalk at: http://www.cocowalk.net. What
kinds of centers are these? List their similarities and differences. Who is the target market for each of
these retail locations?
Faneuil Hall Marketplace – “It's the seat of American history and the site of one of America's most
famous shopping and dining experiences, Faneuil Hall Marketplace. For over 250 years, the
marketplace has played an integral role in the life of Boston's residents.”
Restaurants, shopping, history (close to the Freedom Trail) events and entertainment. This urban
market place is located in Boston, Massachusetts and it attracts both locals and tourist of all ages.
CocoWalk – “Miami’s ultimate destination for shopping, dining & entertainment. As the first lifestyle
center in Florida, CocoWalks’ unique grounds and buildings were carefully designed to blend
seamlessly into the surroundings of Coconut Grove, a bayside boating village known for being
eclectic, sometimes eccentric and always exciting”.
Shops, boutiques, a movie theater, restaurants, cafes, bars and live entertainment. This center
caters to Miami residents and international visitors with upscale shops and sophisticated
restaurants.

6 INTERNET EXERCISE Go to the homepage of your favorite enclosed mall and describe it in terms of the
following characteristics: number of anchor stores, number and categories of specialty stores, number
of sit-down and quick service restaurants, and types of entertainment offered. What are the strengths
and weaknesses of this assortment of retailers? What are the unique features of this particular mall?
Student answers will vary depending on the mall selected.

7 GO SHOPPING Visit a power center that contains a Target, Staples, Sports Authority, Home Depot, or
other category specialists. What other retailers are in the same location? How is this mix of stores
beneficial to both shoppers and retailers?
Other retailers in this type of shopping center may include a food store, clothing stores such as Old
Navy, a book store, craft store, and possibly some quick service and family restaurants. Students
should consider how the retailers prefer low occupancy costs, high traffic levels and are trying to
reach the same target customers. Shoppers enjoy the convenience of easy parking and many
retailers located together.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

65. 1. Why is store location such an important decision for retailers?

 Location decisions are particularly important because of their high-cost, long-term
commitment and impact on customer patronage. Location is typically one of the most
influential considerations in a consumer’s store choice decision. Further, location decisions
have strategic importance because they can be used to develop a sustainable competitive
advantage.

66. 2. Pick your favorite store. Describe the advantages and disadvantages of its current
location, given its target market.

Students store choices will likely vary considerably. The store’s target market must be clearly
defined. And then the location should give the store a competitive advantage with the target
market they have defined.
Store: Urban Outfitters
The target market for this store can be defined as young men and women from ages 16 to 25
that live in the city or want the urban look. The best location for this store would be in a
central business district. This is a traditional downtown business area in a city or a town.
The store will draw from the business activity of the downtown area. There is an inflow of
people from public transportation and a high level of pedestrian traffic.
Store: The GAP
The primary target market segments for this store are men and women ranging from as young
as 15 to 40 years old looking for value in basic clothing. The best location for this store
would be in a shopping center, particularly a mall. A shopping center consists of a group of
retail and other commercial establishments that is planned, developed, owned, and managed
as a single property. A mall focuses on pedestrians and gains its advantage because it can
have a set of stores that carry similar merchandise assortments. The target market looking
for basics, can shop at the GAP and also shop at complementary stores nearby. This allows
the target market to have a one stop shopping experience.
Store: Verizon
The target market segments of Verizon are men and women ages 18 and up looking for a
cellular phone for convenience and safety. A great location for Verizon would be a kiosk. A
kiosk is located in mall common areas, is stationary, and has many conveniences of a store
such as telephones, electricity, and moveable shelves. Advantages of these selling spaces are
the prime mall locations, the relative inexpensiveness, and the short-term leases available,
which reduce owner’s risk. This is a perfect location for a Verizon store because the items
are very small and require little shelf space. A customer looking to get a phone, does not
need a lot of frills, but instead wants the information and the phone at a convenience. Also
this location will appeal to their target market. As they walk down the mall they may be
induced to purchase without previous planning.

67. 3. Home Depot typically locates in either a power center or a freestanding site. What
are the strengths of each location for this home improvement retailer?
 The tenant mix of a power center lends itself to attracting customers who would want to shop at
Home Depot. Home Depot will also benefit from this location due to increased traffic flow of
customers who will shop at a power center.
Home Depot will benefit from a free-standing location due to probable lower rent, abundant
parking, lack of direct competition, and the ability to design and operate the store with few or no
restrictions.

68. 4. As a consultant to 7-Eleven convenience stores, American Eagle Outfitters, and

Porsche of America, what would you say is the single most important factor in choosing
a site for these three very different types of stores?

The most important criterion that is common to all types of stores is a location that attracts
the right segment of consumers. However, since the segments targeted are different and the
merchandise/services offered are also different, these differences would also affect the
location decision for each of the retailers. For 7-Eleven, consumers who are shopping for
convenience products – food as well as non food items – are the primary target. Since these
consumers do not wish to travel far and are willing to pay a slightly higher price as compared
to grocery stores, the best locations for 7-Eleven stores are smaller, neighborhood strip
centers. For American Eagle Outfitters, the CBDs, Main Street or regional and super
regional shopping centers may attract their target consumers, while for Porsche of America,
upscale commercial neighborhoods – typically a commercial avenue further away from
downtown – will likely appeal to their target customers.

69. 5. Retailers are developing shopping centers and freestanding locations in central
business districts that have suffered decay. Some people have questioned the ethical
and social ramifications of this process, which is known as gentrification. What are the
benefits and problems associated with gentrification?

The benefits of gentrification include the redevelopment of urban areas that are in a state of
decay. Usually, these areas would continue to decay if it weren’t for the interested retailers.
Some retail developers argue that gentrification projects have positive effects on fighting
crime and drugs. Gentrification also allows retailers to develop buildings that would be
financially impossible to duplicate in today’s market. These structures often have significant
historical value. Finally, retail gentrification promotes the development of projects such as
housing and offices. This allows whole neighborhoods to make a comeback.
Gentrification may negatively impact the historical and/or cultural makeup of an area. In
addition, gentrification may be so successful that neighboring properties may increase in
value to the point that existing tenants may not be able to afford the higher rents and/or taxes.
This is especially controversial in terms of displacement of lower income individuals and
families. Gentrification projects are often highly speculative due to the expensive financing
and high risks usually associated with projects of this kind. When financing is a problem, a
project may have to be temporarily stopped or abandoned before completion, which results in
further accelerating decay of empty buildings and an uncertain future for existing businesses
and people.
70. 6. Staples, OfficeMax and Office Depot all have strong multichannel strategies. How
does competition and the Internet affect their strategies for locating stores?

Since all three stores sell mostly standardized and easily specified office supplies, the products
stocked by them can be conveniently and easily sold through the Internet. The primary target
markets for this type of retail outlets are small office/home office businesses. The Internet enables
these firms to target medium and large firms as well. At the same time, the Internet is also an
opportunity to target customers far removed from their primary concentration areas (Southeast for
Office Depot and Northeast for Staples) without incurring the additional costs of each store location
in markets where consumers may be sparse. While it does cost a tremendous amount of capital to
set up and successfully operate an Internet site, the costs of the site are spread to a wider target
market and trading area as compared to the costs of setting up individual stores in multiple
locations. So the Internet enables these firms to optimize on marketing efforts to various target
markets as well as the costs of setting up new stores in locations that may not generate sufficient
traffic. Since these three competitors offer similar merchandise it is import to offer some type of
rewards program to build store loyalty. Another way to differentiate in this industry is to offer
unique customer services such as delivery, printing and computer support.

71. 7. In many malls, quick service food retailers are located together in an area known as
a food court. What are the advantages and disadvantages of this location for the food
retailers? What is the new trend for food retailers in the shopping environment?

Mall food courts allow customers to find the fast-food retailers in the center to be easily found.
Since food courts usually have public seating in one area within the food court, each fast-food
retailer does not have to provide separate seating room for customers. The common area charges
associated with these kinds of arrangements are significantly less than if each fast-food retailer
provided a separate seating area. This arrangement enables the fast-food retailers to lease a smaller
amount of expensive space. Finally, food courts provide a variety of alternatives therefore creating a
synergy that attracts a larger group of potential customers. Groups of potential customers, such as
families, can patronize a variety of fast-food retailers at one time.
In terms of disadvantages, food courts require the fast-food retailers to be located next to each
other, thus making the immediate environment extremely competitive. In addition, since malls with
food courts usually insist that the fast-food retailers locate within the food court, there is no
opportunity to try to locate to a better position within the mall. Also, food courts tend to have
limited space, therefore creating less flexibility in store design and expansion.
The new trend for food retail in malls is providing a more upscale, sit-down dining experience in sit
down restaurants. Mall developers have learned that good food options can be a powerful attractor
of customer traffic.

72.
73. 8. Why would a Payless ShoeSource store locate in a neighborhood shopping center
instead of a regional shopping mall?

A Payless Shoe Source might locate in a strip shopping center because these centers offer
customers convenient locations, and easy parking, and offer retailers relatively lower rents
than regional shopping centers. This may enable Payless to offer lower prices than a store
offering comparable merchandise at the mall, and may also serve to offset the opportunity
cost of being located in a lower traffic location.

74. 9. How does the mall near you home or university combine the shopping and
entertainment experience?

Answers here will vary widely. Students may describe efforts at traditional shopping centers, such as
special promotions, food courts, holiday events or music/video offerings. Others may respond with
entertainment features typically found at lifestyle centers, including concerts and events, more
restaurants and clubs, and recreation centers.

75. 10. Consider a big city that has invested in an urban renaissance. What components of
the gentrification project attract both local residents and visiting tourists to spend time
shopping, eating and sightseeing in this location?

Local residents will likely be attracted to the convenience of retailers located in or nearby
their neighborhoods, along with the needed services, jobs, enhanced safety, visibility and
choices among retailers that would accompany the gentrification project. Visiting tourists
may be more attracted to the historical significance and unique entertainment elements built
into the project.

9
HUMAN RESOURCE MANAGEMENT

ANNOTATED OUTLINE INSTRUCTOR NOTES

 Retailers achieve their financial objectives

by effectively managing their five critical
assets: locations, merchandise inventory,
stores, employees, and customers.
 Human resource management is
particularly important in retailing because
employees play a major role in
performing critical business functions.
 Retailers rely on people to perform the
basic retailing activities such as buying,
 displaying merchandise, and providing
service to customers.

I. Gaining Competitive Advantage through See PPT 9-4

Human Resource Management
 Human resource management can be the
basis of a sustainable competitive Ask students why managing people is so
advantage for three reasons. important to retailers? Will the number of
 First, labor costs account for a significant
retail employees decline? Will these be
percentage of a retailer's total expenses. replaced by automation?
Thus, the effective management of Discuss these issues in relation to the
employees can produce a cost advantage. REFACT: Labor cost typically are over 25%
of sales and 50% of operating costs in
 Second, the experience that most
fashion-oriented department and specialty
customers have with a retailer is
determined by the activities of employees
stores.
who select merchandise, provide
information and assistance, and stock
displays and shelves. Thus, employees The people employed in retailing are often low in
can play a major role in differentiating a skills and motivation and thus difficult to
retailer's offering from its competitor's management and motivate. Ask students who have
offering. worked retail to relate their experiences. How
were they motivated? What skills and
 Finally, these potential advantages are
characteristics did their co-workers have?
difficult for competitors to duplicate.

A. Objectives of Human Resource

Management See PPT 9-5
 The strategic objective of human resource
management is to align capabilities and
behaviors of employees with the short- Ask students which types of retailers have low
term and long-term goals of the retail and high labor productivity.
firm.
 One human resource management
performance measure is employee [Department stores have low productivity
productivity--the retailer's sales or profit because they have high labor costs to provide
divided by the number of employees. customer service. Category specialists and
other self-service discount stores have low
 Employee productivity can be increased
labor costs and thus high productivity.]
by increasing the sales generated by each
employee or reducing the number of
employees, or both.
Discuss the downward performance spiral as
 Employee productivity is directly related shown in PPT 9-7
to the retailer's short-term profits, while
employee attitudes have important effects
on customer satisfaction and subsequent
long-term performance of the retailer.
 Another behavioral measure of employee
 attitudes is employee turnover.
 Employee turnover = number of
employees leaving their job during the
year / number of positions
 A failure to consider both long- and short-
term objectives can result in
mismanagement of human resources and
a downward performance spiral. Short
term cost reductions often have an
adverse effect on long-term performance.

B. The Human Resource Triad

The full potential of a retailer's human See PPT 9-8
resource is realized when three elements
of the human resource triad work together
– HR professionals, store managers, and
employees.

C. Special HR Conditions Facing Retailers

Human resource management in retailing is See PPT 9-9
very challenging due to (1) the need to
use part-time employees, (2) the emphasis
on expense control, and (3) the changing
demographics of the workforce.

1. Part-Time Employees
To deal with peak periods such as lunch
hours, night and during sales, as well as
the long hours they are open, retailers
have to complement their full-time
employees with part-time workers. Part-
time employees are difficult to manage
since they are less committed to the
company and their jobs, and they're more
likely to quit than full-time employees.

2. Expense Control
Retailers often operate on thin margins and
must control expenses. Thus, they are
cautious about paying high wages to
hourly employees and often hire people
with little or no sales experience in order
to control their costs. High turnover,
absenteeism, and poor performance often
result from the use of inexperienced, low-
wage employees. Also, poor appearance,
manners, and attitudes can have a
negative effect on sales and customer
 loyalty.

3. Employee Demographics
The changing demographic pattern will result
in a chronic shortage of qualified sales
associates. Thus, retailers need to explore
approaches for operating effectively in a
tight labor market.
These approaches include: (1) increasing
retention; (2) better recruitment, training
and management of minorities,
handicapped, and mature workers; and (3)
use of incentives and technology to
increase productivity.

4. International Human Resource Issues

The management of employees working for
an international retailer is especially
challenging because differences in work
values, economic systems, and labor laws
mean that human resource practices
effective in one country might not be
effective in another.
The legal-political system in countries often
dictates the human resource management
practices that retailers can use.
The staffing of management positions in
foreign countries raises a wide set of
issues, including those involving use of
local or expatriates and the selection,
training and compensation of local
managers and/or expatriates.

II. Designing The Organization Structure For See PPT 9-14

A Retail Firm
 The organization structure identifies
activities to be performed by specific
employees and determines the lines of
authority and responsibility in the firm.
 The first step in developing an
organization structure is to determine the
tasks that must be performed.
 These tasks are divided into four major
categories: strategic management,
administrative management (operations),
merchandise management, and store
 management.

A. Matching Organization Structure to Retail

Strategy
 The design of the organization structure
needs to match the firm's retail strategy.
For example, category specialists and
warehouse clubs target price-sensitive
customers and thus are very concerned
about building a competitive advantage
based on low cost.
 They minimize the number of employees
by having decisions made by a few people
at corporate headquarters.
 Retailers targeting less price sensitive customers tend to
have more managers and decision making at the local
store level.

B. Organization of a Single-Store Retailer See PPT 9-19

 Owner-managers of a single store may be Small stores typically violate the principles of
the entire organization. Coordinating and organization --unity of command and
controlling employee activities is easier in
specialization. Ask students why?
one store than in a large chain of stores.
 Since the number of employees is limited,
small retailers have little specialization.
 When sales increase, specialization in
management may occur when the
owner-manager hires management
employees.

C. Organization of a National Retail Chain See PPT 9-20

 In contrast to the management of small The Mazur plan emphasized the separation of
retailers, retail chain management is buying and store management functions.
complex.
What are the advantages of different
 Managers must supervise units that are employees doing each of these activities?
geographically distant from each other. What are the disadvantages?
 Traditionally, department stores were
family owned and managed.
Organization of these firms was governed
by family circumstances -- executive
positions were designed to accommodate
the number of family members involved
in the business.
 In 1927, Paul Mazur proposed a
functional organization plan that has been
adopted by most retailers. The
 organization structures of retail chains
continue to reflect principles of the Mazur
plan such as separating the merchandising
and store management tasks into separate
divisions.
 In most retail firms, the two senior
executives, typically called the CEO and
COO work closely together in managing
the firm. They are frequently referred to
as principals or partners.
 One member of the partnership is
primarily responsible for the
merchandising activities of the firm--the
merchandise, stores, and marketing
divisions.
 The other partner is primarily responsible
for the human resource, distribution,
information systems, and finance
divisions.

1. Merchandise Division

 The merchandise division is responsible

for procuring the merchandise sold in
stores and ensuring that the quality,
fashionability, assortment, and pricing of
merchandise are consistent with the
firm’s strategy.
2. Buyers
 Buyers are responsible for procuring In discussing each division, mention the skills
merchandise, setting prices and needed to be successful in each type of job.
markdowns, and managing inventories for
Ask students in which division they would like
specific merchandise categories.
to work. Why?
 They attend trade and fashion shows and
negotiate with vendors on prices,
quantities, assortments, delivery dates,
and payment terms.
 They might specify private-label
merchandise or request modifications to
tailor the merchandise to the retailer's
target market and differentiate it from
competitive offerings.
 Buyers are given considerable autonomy,
but they must adhere to an inventory
 budget that will vary from season to
season.
Ask students to help identify merchandise
 In recent years, the buyer’s role in categories from the local supermarket.
supermarket chains has evolved into
category management.
 Category managers are responsible for a
set of products that customers likely view
as substitutes.

3. Planners
The merchandising planner is responsible
for allocating merchandise and tailoring
the assortment of several categories for
specific stores in a geographic area.

4. Stores Division
 The stores division is responsible for the The merchandising division has traditionally
group of activities undertaken in stores. been most important. Why is store operations
 A store manager is responsible for becoming more important?
activities performed in each store.

5. Corporate Organization of Macy’s Inc.

 The decisions made at the corporate office
involve activities that set strategic
directions and increase productivity by
coordinating the regional divisions’
activities.

6. Organization Structures of Other Types

of Retailers
 Most retail chains have organization
structures very similar to the Macy’s
Florida structure.
 The primary difference between the
organization structure of a department
store and other retail formats is the
number of people and management levels
in the merchandising and store
management areas. Many national
retailers centralize merchandise
management at corporate headquarters.

III. Retail Organization Design Issues

A. Centralization versus Decentralization

 Centralization is when the authority for
 retailing decisions is delegated to See PPT 9-24
corporate managers rather than to
geographically dispersed regional, Ask students what types of merchandise would
district, and store managers. be better managed centrally? Decentralized?
Decentralization is when authority for What about toys and games? High fashion
retail decisions is assigned to lower levels clothing? Groceries?
in the organization.
 Centralization offers several advantages:
 Retailers can reduce costs when decision
making is centralized in corporate
management.
 Overhead falls because fewer managers
are required to make the merchandise,
human resource, marketing and financial
decisions.
 By coordinating its efforts across
geographically dispersed stores, the
company achieves lower prices from
suppliers.
 Centralization produces an opportunity to
have the best people make decisions for
the entire corporation.
 Finally, centralization increases efficiency
since standard operating policies are used
for store and personnel management and
these policies limit the decisions made by
store managers.
 Centralization has disadvantages as well:
 While centralization has advantages in
reducing costs, it is more difficult for a
retailer to adapt to local market
conditions, to respond to local
competition, and to adapt to local labor
markets.
 In addition, the centralized retailer may
have difficulty responding to local
competition and labor markets.
 Finally, centralized personnel policies can
make it hard for local managers to pay
competitive wages in their area or to hire
appropriate types of salespeople.
 Centralized retailers are relying more on
their information systems to react to local
market conditions. Large retailers are
 using their information systems to make
more and more merchandise and
operations decisions at corporate
headquarters.

B. Coordinating Merchandise and Store See PPT 9-25

Management
Why is there a need to coordinate buying and
 Small, independent retailers have little store management activities?
difficulty coordinating their stores' buying
and selling activities. Owner-managers
typically buy the merchandise and work
with their salespeople to sell it. Being in
close contact with customers, they know
what their customers want.
 On the other hand, large retail firms
organize the buying and selling functions
into separate divisions. Buyers specialize
in buying merchandise and have little
contact with the store management
responsible for selling it.
 While this specialization increases buyers'
skills and expertise, it makes it harder for
them to understand customers' needs.
 Three approaches large retailers use to
coordinate buying and selling are: (1)
improving buyers' appreciation for store
environment, (2) making store visits, and
(3) assigning employees to coordinating
roles.

1. Improving Appreciation for Store

Environment
 Management trainees, who eventually
become buyers, are required by most
retailers to work in the stores before they
enter the buying office.

2. Making Store Visits What are the benefits and costs of having
 Another approach for increasing customer buyers visit the stores frequently?
contact and communication is to have
buyers visit the stores and work with the
departments they buy for.
 This face-to-face communication provides
buyers with a richer view of store and
customer needs than they can get from
impersonal sales reports from the
company's management information
 system.

3. Assigning Employees to Coordinating Would being a coordinator be an interesting

Roles job? Would it be stressful? Why or why not?
 Some retailers, like TJX, have people in
the merchandise division (the planners
who work with buyers) and the stores (the
managers of operations who work for the
store managers) who are responsible for
coordinating buying and selling activities.
 Most national retail chains have regional
and even district staff personnel to
coordinate buying and selling activities.

IV. Winning the Talent War See PPT 9-26

 The pool of potential retail employees is
decreasing due to changing
demographics. However, retailers have a
critical need for managers that can
effectively deal with the increased
complexities of retail jobs, such as the use
of new technologies, increased global
competition, and a diverse workforce.
 Thus retailers are engaged in a “war” with
their competitors for talent, that is for
effective employees and managers.
 Retailers generally use three methods to
motivate and coordinate their employees'
activities: (1) written policies and
supervision, (2) incentives, and (3)
organization culture.

A. Attracting Talent: Employment Marketing See PPT 9-27

 HR departments for large, national
retailers develop marketing programs to
attract excellent potential employees.
Employment marketing or employment
branding programs involve learning what
employees are looking for and creating a
brand image to reach potential employees.

B. Developing Talent: Selection and Training

1. Selective Hiring See PPT 9-28

 The first step in building a committed
workforce is recruiting the right people.
The job requirements and firm strategy
 dictate the type of people hired.

2. Training
 Training is particularly important in
retailing because more than 60% of retail
employees have direct contact with
customers.
 Investing in developing employee skills
tells employees that the firm considers
them important.
 An interesting challenge facing retailer is
how to train younger employees. They
have recognized that Generation Y, the
first generation to grow up with the
Internet and Internet-base games, learns
differently than previous generations.

C. Motivating Talent: Aligning Goals

 The task of aligning employees’ and the
firm’s goals is often difficult, because
employees’ goals usually differ from
those of the firm.

 Retailers generally use three methods to

motivate their employees’ activities:

1. Policies and Supervision See PPT 9-29

 Perhaps the most fundamental method of Ask students whether written policies provide
coordination is to prepare written policies enough control? Why or why not? Would
that indicate what employees should do
written policies be more useful for
and have supervisors enforce these
policies. salespeople in a department store or for
employees in a discount store? Why?

2. Incentives
 Incentives can be used to motivate
employees to perform activities consistent
with the retailer's objectives.

a. Types of Incentive Compensation

 Two types of incentives are commissions What is the difference between commissions
and bonuses. and bonuses? When should retailers use
 A commission is compensation based on bonuses rather than commissions for
a fixed formula such as 2 % of sales. salespeople?
Many retail salespeople's compensation is
 based on a fixed percentage of the
merchandise they sell.
 A bonus is additional compensation
awarded periodically based on an
evaluation of the employee's performance.
 Besides incentives based on individual
performance, retail managers often
receive additional income based on their
firm's performance.
 These profit-sharing arrangements can be
offered as a cash bonus based on the
firm's profits or as a grant of stock options
that link additional income to
performance of the firm's stock.

b. Drawbacks of Incentives Commissions motivate salespeople to make

 Incentives are very effective in motivating more sales. Ask students why some retailers
employees to perform the activities on use commission if it is not good for improving
which the incentives are based. But customer service and developing customer
incentives may cause employees to ignore loyalty?
other activities.
 Excessive use of incentives to motivate
employees also can reduce employee
commitment. Company loyalty falls
because employees feel that the firm
hasn’t made a commitment to them (since
it’s unwilling to guarantee their
compensation).

3. Organization Culture Ask a student to describe the organizational

 An organization culture is the set of culture at Disney World.
values, traditions, and customs in a firm
that guides employee behavior. These
guidelines aren't written in a set of Have the students give their own descriptions
policies and procedures, but experienced of the "culture" of organizations they belong
employees do pass along traditions to new to such as clubs, teams, fraternities or
employees. sororities. This will help the students to
 Many retail firms have strong identify the meaning of "corporate culture."
organization cultures that give employees
a sense of what they ought to do on their
jobs and how they should behave to be
consistent with the firm's strategy.
 An organization culture often has a much
stronger effect on employees' actions than
rewards offered in compensation plans,
directions provided by supervisors, or
 written company policies.

4. Developing and Maintaining a Culture

 Organization cultures are developed and See PPT 9-31
maintained through stories and symbols.
Values in an organization culture are Ask students about the culture of their living
often explained to new employees and group -- dormitory, fraternity, or sorority.
reinforced to present employees through Are there stories, customs, and symbols used
stories. to convey that culture to new people?
 Using symbols is another technique for
managing organization culture and
conveying its underlying values. Symbols
are an effective means of communicating
with employees because the values they
represent can be remembered easily.

D. Keeping Talent: Building Employee

Commitment
 An important challenge in retailing is to
reduce turnover. High turnover reduces See PPT 9-32
sales and increases costs.
 To reduce turnover, retailers need to build
an atmosphere of mutual commitment in
their firms.
 When a retailer demonstrates its
commitment, employees respond by
developing a loyalty to the company.
 Some approaches that retailers take to
build mutual commitment are: (1)
empowering employees, and (2) creating
a partnering relationship with employees.

1. Empowering Employees Ask students for examples of a service

 Empowerment is the process of encounter with a retailer in which the
managers sharing power and decision employee was/was not empowered to solve a
making authority with employees. problem.
 When employees have the authority to
make decisions, they are more confident
in their abilities, have greater opportunity
to provide service to customers, and are
more committed to the firm’s success.
 The first step in empowering employees is
to review employee activities that require
a manager’s approval. Empowerment of
retail employees transfers authority and
responsibility for making decisions to
 lower levels in the organization. These
employees are close to the retailer's
customers and in a good position to know
what it takes to satisfy customers.
 For empowerment to work, managers
must have an attitude of respect and trust,
not control and distrust.

2. Creating a Partnering Relationships

 Three human resource management Ask students if they believe that their employer
activities that build commitment through has reached out to develop a relationship with
developing partnering relationships with them. Then ask what their employers did to
employees are: (1) reducing status develop that relationship.
differences, (2) promoting from within,
and (3) enabling employees to balance
their careers and families.

a. Reducing Status Differences

 By reducing status differences, employees
feel they play an important role in the
firm's achieving its goals and that their
contributions are valued.
 Status differences can be reduced
symbolically through the use of language
and cut substantively by reducing wage
differences and increasing
communications between managers at
different levels in the company.

b. Promotion from Within

 Promotion from within is a staffing
policy that involves hiring new employees
only for positions at the lowest level in
the job hierarchy and then promoting
employees for openings at higher levels in
the hierarchy.
 Promotion-from-within policies establish
a sense of fairness. When employees do
an outstanding job and then outsiders are
brought in over them, employees feel that
the company doesn’t care about them.
 Promotion-from-within policies also
commit the retailer to develop its
employees.

c. Balancing Careers and Families

  The increasing number of two income and
single parent families makes it difficult
for employees to effectively do their jobs
and manage their households.
 Retailers build employee commitment by
offering services like job sharing,
childcare, and employee assistance
programs to help their employees manage
these problems.
 Flextime is a job scheduling system that
enables employees to choose the times
they work.
 With job sharing, two employees
voluntarily are responsible for a job that
was previously held by one person.
 Both programs let employees
accommodate their work schedules to
other demands in their life such as being
home when children return from school.
 Many retailers offer child care assistance.
 Some companies will even arrange for a
person to be at an employee’s home
waiting for the cable guy to come or to
pick up and drop off dry cleaning.

VI. Issues in Retail Human Resource

Management
 Three issues in human resource
management are: (1) the increasing
importance of having a diverse workforce,
(2) the growth in legal restrictions on HR
practices, and (3) the use of technology to
increase employee productivity.

A. Managing Diversity
 Managing diversity is a human resource See PPT 9-34
management activity designed to realize
the benefits of a diverse work force.
Why are retailers interested in managing
 Managing a diverse work force isn't a new
issue for retailers. The traditional
diversity programs? How do they benefit
approach for dealing with diverse groups from these programs? How do their
was to blend them into the "melting pot." customers benefit?
Minority employees were encouraged to
adopt the values of the majority, white,
 male-oriented culture. Ask the students if any one has had the
opportunity to be involved in a corporate
 But times have changed. Minority groups diversity training program. If so, have them
now embrace their differences and want describe their experiences.
employers to accept them for who they
are.
 To compete in this changing marketplace
of diversity, retailers need management
staffs that match the diversity of their
target markets.
 Besides gaining greater insight into
customer needs, retailers must deal with
the reality that their employees will
become more diverse in the future.
 Many retailers have found that these
emerging groups are more productive
than their traditional employees.
 The fundamental principle of managing
diversity is the recognition that employees
have different needs and require different
approaches for accommodating those
needs.
 Managing diversity means accepting and
valuing differences among employees.
 Some programs that retailers use to
manage diversity involve offering
diversity training, providing support
groups and mentoring, and managing
career development and promotions.

1. Diversity Training
 Diversity training typically consists of
two components: developing cultural
awareness and building competencies.
The cultural awareness component
teaches people about how their own
culture differs from the culture of other
employees and how stereotypes they hold
influence the way they treat people often
in subtle ways they might not realize.
Then role-playing is used to help
employees develop better interpersonal
skills, including showing respect and
treating people as equals.
 2. Support Groups and Mentoring
 Mentoring programs assign higher-level
managers to help lower-level managers
learn the firm's values and meet other
senior executives.
 Many retailers help form minority
networks to exchange information and
provide emotional and career support for
members who traditionally haven't been
included in the majority's networks.

3. Career Development and Promotions

 Although retailers provide entry-level
opportunities for women and minority
groups, these employees often encounter a
glass ceiling as they move through the
corporation.
 A glass ceiling is an invisible barrier that
makes it difficult for minorities and
women to be promoted beyond a certain
level.
 Many retailers monitor the promotion
process to eliminate these barriers.

B. Legal and Regulatory Issues in Human

Resource Management See PPT 9-37
 The major legal and regulatory issues
involving the management of retail
employees are (1) equal employment
opportunity, (2) compensation, (3) labor
relations, (4) employee safety and health,
(5) sexual harassment, and (5) employee
privacy.

1. Equal Employment Opportunity Discuss the impacts of the equal employment

opportunity law in changing the retail
 The basic goal of equal employment landscape. Do you think that these laws are
opportunity regulations is to protect effective? What are impacts of these laws on
employees from unfair discrimination in large retail chains versus small independent
the workplace.
retailers?
 Illegal discrimination is the actions of a
company or its managers that result in
members of a protected class being
treated unfairly and differently as
compared to others.
 A protected class is all of the individuals
 who share a common characteristic
defined by the law.
 Companies cannot treat employees
differently simply based on their race,
color, religion, sex, national origin, age,
or disability status.
 It is illegal to engage in a practice that
disproportionately excludes a protected
group even though it might seem to be
nondiscriminatory.

2. Compensation
 Laws relating to compensation define the
40-hour workweek, the pay rate for
working overtime, and the minimum
wage, and they protect employee
investments in pensions.
 In addition, they require that firms
provide the same pay for men and women
doing equal work.

3. Labor Relations
 Labor relations laws describe the process
by which unions can be formed and the
ways in which companies must deal with
unions.

4. Employee Safety and Health

 The basic premise of these laws is that the
employer is obligated to provide each
employee with an environment that is free
from hazards that are likely to cause death
or serious injury.

5. Sexual Harassment
 Sexual harassment includes unwelcome
sexual advances, requests for sexual
favors, and other verbal and physical
conduct.
 Simply creating a hostile work
environment can be considered sexual
harassment.

6. Employee Privacy
 Employees' privacy protection is very
 limited. For example, employers can
monitor e-mail and telephone
communications, search an employee's
workspace and handbag, and require drug
testing. However, there must be a strong
suspicion that employees are acting
inappropriately before employers can
undertake these activities.

7. Developing Policies
 The human resource department is
responsible for developing programs and
policies to make sure that managers and
employees are aware of these restrictions
and know how to deal with potential
violations. These legal and regulatory
requirements are basically designed to
treat people fairly.
 Perceptions of fairness are based on two
factors: the perceptions of (1) distributive
justice and (2) procedural justice.
 Distributive justice arises when
outcomes are viewed as fair with respect
to outcomes received by others.
 Procedural justice is based on the
fairness of the process used to determine
the outcome.

C. Use of Technology
 Retail chains are using intranets to
automate and streamline human resource
operations. The use of intranets and
connections to a centralized base
dramatically reduces the time human
resource administrators spend on
paperwork.

VII. Summary
 Human resource management plays a
vital role in supporting a retail strategy.
The organization structure defines
relationships and responsibilities.

 Retailers must make trade-offs between

the cost savings gained through
centralized decision-making and the
benefits of tailoring the merchandise
 offering to local markets – benefits that
arise when decisions are made in a
decentralized manner.

 Retailers are engaged in a war over talent.

To win the war, retailers develop
programs to attract, develop, motivate,
and keep talent.
ANSWERS TO “GET OUT AND DO ITS”

4 INTERNET EXERCISE Go to the homepage for Retail Human Resources plc at

http://www.retailhumanresources.com/. How does this recruitment consultancy assist UK retailers and
job seekers to find the best employment matches?
“We provide retail job seekers and employers with the most comprehensive recruitment and
selection services available, and have built up an enviable reputation in the retail industry,
making us the first port of call for both job seekers and recruiters alike.
Retail Human Resources was founded to address a gap in the retail recruitment market. In an
expanding and prosperous sector, retail managers and professionals who wanted quality, clear-
cut career advice simply had nowhere to go.
Today, we continue to uphold the principles that have assured our market-leading position. We
insist on meeting all our candidates face-to-face and are constantly measuring our own response
standards. We are dedicated to our candidates, clients and staff and are committed to providing
the best service, the highest standards of corporate responsibility and unparalleled employee
training.”

5 INTERNET EXERCISE Go to the National Retail Federation’s Foundation (NRFF) homepage at

http://www.nrffoundation.com/CareersCenter/default.asp and click on “Experience Retail” to read
about the different career paths in Marketing/Advertising, Store Operations, Loss Prevention, Store
Management, Finance, Human Resources, IT and E-Commerce, Sales and Sales-Related,
Distribution/Logistics/Supply Chain Management, Merchandise Buying/Planning, and Entrepreneurship.
Which area(s) appeals to you the most? Explain your preference for this career direction.
Responses here will vary for students. This is a good homework assignment to gain insight to
your students and their preferred career directions.
http://www.nrffoundation.com/CareersCenter/Experience_Retail.asp

6 LIBRARY EXERCISE Go to one of your college/university's library business databases and find a recent
newspaper or journal article that discusses human resources management in the retail industry. Briefly
tie the concepts in the article back to the or your Continuing Case Assignment (Question 1 above).
If time is short, here are a few articles that you could assign versus having students search for
their own articles:
- Coaching helps Tesco HR stretch managers. By: Churchard, Claire. People
Management, 8/12/2010, p10-10.
- To Train and Nurture. By: Lewis, Len. Stores Magazine, Aug 2010, Vol. 92 Issue
8, p64-66.
- Human resource management practices affecting unit managers in franchise
networks. By: Castrogiovanni, Gary J.; Kidwell, Roland E.. Human Resource
Management, Mar/Apr 2010, Vol. 49 Issue 2, p225-239.
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

76. 1. Why is human resource management more important in retailing than in

manufacturing firms?

Human resource management is particularly important in retailing because employees play

the major role in performing retail functions. In many manufacturing firms, capital
equipment (machinery, computer systems, and robotics) is now used to perform jobs
employees once did. But retailing and other service businesses remain labor-intensive.
Retailers still rely on people to perform the basic retailing activities such as buying,
displaying merchandise, and providing service to customers.

77. 2. How can retailers use hiring, selecting, training and motivating employees in their
human resource management practices to gain competitive advantage?

Human resource management can be the basis of a sustainable competitive advantage for
three reasons:
(1) First, labor costs account for a significant percentage of a retailer's total expense.
Thus, the effective management of employees can produce a cost advantage.
(2) Second, the experience that most customers have with a retailer is determined by the
activities of employees who select merchandise, provide information and assistance,
and stock displays and shelves. Thus, employees can play a major role in
differentiating a retailer's offering from its competitor's offering.
(3) Finally, these potential advantages are difficult for competitors to duplicate.

78. 3. Describe the similarities and differences between the organization of small and large
retail companies. Why do these similarities and differences exist?

Retail organization structures differ according to the type of retailer and the size of the firm.
For example, a retailer with a single store will have an organization structure quite different
from a national chain.
Owner-managers of small stores may be the entire organization. Coordinating and controlling
employee activities is easier in a small store than in a large firm. The owner-manager simply
assigns tasks to each employee and watches to see that these tasks are performed properly.
Since the number of employees is limited, small retailers have little specialization. Each
employee must perform a wide range of activities, and the owner-manager is responsible for
all management tasks. If sales increase, specialization in management may occur when the
owner-manager hires management employees.
In contrast to the management of small retailers, retail chain management is complex.
Managers must supervise units that are geographically distant from each other.
 Vice presidents responsible for specific merchandise, store, and administrative tasks report to
the chairperson and president. In most retail firms, the chairperson and president work
closely together in managing the firm. They are frequently referred to as principals or
partners. One member of the partnership is primarily responsible for the merchandising
activities of the firm--the merchandise, stores, and marketing divisions. The other partner is
primarily responsible for the human resource, distribution, information systems, and finance
divisions.
Most managers and employees in the stores division work in stores located throughout the
geographic region. The distribution center employees and managers work in one or two
distribution centers in the region. Senior executives and the merchandise, marketing and
human resource division employees work at corporate headquarters.

79. 4. Some retailers have specific employees (merchandise assistants) assigned to restock
the shelves and maintain the appearance of the store. Other retailers have sales
associates perform these tasks. What are the advantages and disadvantages of each
approach?

Some retailers have specific employees assigned to restocking the shelves and maintaining
the appearance of the store. When merchandise assistants perform these tasks, there is more
control by upper management because there are fewer people involved. Retailers can also
spend time specifically training these specific employees to perform these tasks. Retailers
can then have specific categories of merchandise handled by the merchandise division.
However, this may be costly to the retailers while also making sales associates feel less
empowered.
Retailers that use sales associates to restock the shelves and maintain the appearance of the
store are motivating their employees at a lower level. Sales associates will feel empowered
which may decrease employee turnover. Sales associates also would have a greater
knowledge of where all items are in the store, so they will have more information for
customers as well as management on the store level. Retailers might also save money, by
delegating the work to sales associates with their other job functions instead of hiring specific
employees, which would be costly. However, there are security and control issues over
inventory when using sales associates. The more people that handle the inventory, the more
items are stolen or misplaced.

80. 5. How can national retailers like Best Buy and Victoria's Secret, which both use a
centralized buying system, make sure that their buyers are aware of the local
differences in consumer needs?
 Retailers with a centralized buying system can implement an extensive management
information system that can track sales, and thus local customer preferences, by various
categories. While most large chains, like Best Buy and Victoria's Secret, are too big to allow
for consistent and individual contact between each store manager and the buyer, the buyer
can make a point to keep in contact with some managers. The managers who are contacted
should be diverse and reliable so that the information obtained is accurate and helpful.
Buyers involved in centralized buying systems should make a point to keep up with the
changing regional demographics as well as possible. Keeping informed through trend reports,
news services, and (to some degree) travel will help a buyer to keep up with differences.
Finally, satellite communications allow information to be collected through POS and
transmitted via EDI.

81. 6. Reread Retail View 9.3 on the Container Store. What are the positive and negative
aspects of employee turnover? How is this retailer reducing the turnover of its sales
associates? How can other retail firms learn from this example?

Turnover is the number of employees occupying a set of positions during a period (usually a year)
divided by the number of positions. There are many positive and negative aspects to having
employee turnover. The positive side to turnover is that it allows the company to replenish its work
force with new workers that may be more skilled for the position. Often these employees are pat-
time and fill a gap when demand is high. These employees earn lower wages, usually without
benefits. However, retailers never want too high a turnover rate. High turnover reduces sales and
increases costs. Sales are lost because inexperienced employees lack the skills and knowledge about
company policies and merchandise to effectively interact with customers. Costs increase due to the
need to continually recruit and train new employees.
Retailers should try to reduce the turnover in its sales associates. They can do this by building a
mutual commitment, which employees will respond to by developing loyalty to the company. This
mutual commitment can be achieved by (1) empowering employees, and (2) creating a partnering
relationship with employees.
The Container store hires past customers who believe in the brand and makes them part of the
team. The interview process is thorough and new positions are posted on the company homepage.
These strategies help to find and keep talented, productive employees.

82. 7. To motivate employees, several major department stores are experimenting with
incentive compensation plans, though frequently, compensation plans with a lot of
incentives don’t promote good customer service. How can retailers motivate employees
to sell merchandise energetically and at the same time not jeopardize customer service?

Retailers need to emphasize to their employees that there is a danger in focusing every effort on
simply selling as fast as one can. It is important that employees realize that customers must be
served properly, and that customer satisfaction (not one-time individual sales) should be the
primary goal. When helping a customer, sales personnel should focus on fulfilling a customer's
needs. If a salesperson is concerned solely with making the sale, the customer is
 likely to be disappointed and/or return the merchandise. Both scenarios will affect the employee's
ability to take advantage of the incentive. Retailers need clear-cut policies that sales at the expense
of good customer service will not be tolerated. This implies that the retailer will have to outline
customer service standards before implementing incentive compensation plans.

83. 8. Assume that you're starting a new restaurant that caters to college students and
plan to use college students as servers. What human resource management problems
would you expect to have? How would you build a strong organization culture in your
restaurant to provide outstanding customer service?

A fundamental task of human resource management is to motivate and coordinate employees

to work toward achieving the firm's goals and implementing its strategy. Most human
resource management problems in any organization stem from an employer's difficulty in so
doing. The task is often challenging because employees' goals may differ from the firm's.
For example, a waiter/waitress might find it more personally rewarding to socialize with
patrons than to provide efficient service to all of his/her customers. Other problems may
include conflicts with work due to school and personal life. Retailers generally use three
methods to motivate and coordinate their employees' activities: (1) written policies and
supervision, (2) incentives, and (3) organization culture.
A strong organizational culture in the restaurant can be created by having a strong
charismatic leader; a manager that the students respect. The restaurant should also do the
following:
Have contests and rewards for outstanding service.
Have meetings in which employees can interact and tell stories about how they handled
service issues.
Lead by example, even with little things. For instance, the managers should step in and
bus tables or pick up things on the floor.
In general, organizational cultures are developed and maintained through stories and
symbols. Values in an organization culture are often explained to new employees and
reinforced to present employees through stories. For example, Nordstrom's service culture is
emphasized by stories describing the "heroic" service undertaken by the firm's salespeople.
Using symbols is another technique for managing organization culture and conveying its
underlying values. Symbols are an effective means of communicating with employees
because the values they represent can be remembered easily.
84. 9. Three approaches for motivating and coordinating employee activities are policies
and supervision, incentives, and organization culture. What are the advantages and
disadvantages of each?

Retailers generally use three methods to motivate and coordinate their employees' activities:
(1) Written Policies and Supervision:
If employees and supervisors use written policies to make decisions, their actions will
be consistent with the retailer's strategy. But strict reliance on written policies can
reduce employee motivation. Employees might have little opportunity to use their
own initiative to improve performance of their areas of responsibility.
(2) Incentives: Incentives such as commissions and bonuses are generally designed to
reward individual performance. Such incentives are usually very effective in
motivating employees and managers to perform the tasks on which the incentives are
based. Profit sharing and stock based incentives reward individuals when the entire
firm does well. These stock incentives align the employees' interests with those of
the company.
However, if the growth in stock prices declines, employee morale declines, the
corporate culture is threatened, and demands for higher wages and more benefits
develop. Also, incentives may cause employees to ignore activities that are not
specifically rewarded. For example, salespeople whose compensation is based
entirely on their sales may be reluctant to spend time arranging merchandise.
Excessive use of incentives to motivate employees also can reduce employee
commitment. Company loyalty falls because employees feel that the firm hasn't
made a commitment to them (since it's unwilling to guarantee their compensation).
(3) Organization Culture:
An organization culture is the set of values, traditions, and customs in a firm that
guides employee behavior. These guidelines aren't written in a set of policies and
procedures, but are traditions that are passed along by experienced employees to new
employees. An organization culture often has a much stronger effect on employees'
actions than rewards offered in compensation plans, directions provided by
supervisors, or written company policies. This may be viewed as positive in that,
employees may feel a greater sense of belonging and commitment to an organization
that has a strong culture. But it could also be negative if the culture creates
“groupthink” and contradicts the firm's overall strategy.
85. 10. Why should retailers be concerned about the needs of their employees? What can
retailers do to satisfy these needs?

Retailers need to be concerned with the needs of their employees, because their employees
act as direct connections between the retailer and the customers. If the employees are not
satisfied with their work environment, this in turn, will bring a lack of commitment to their
work. High turnover is often a result of retailers not meeting the needs of their employees. If
employees are constantly leaving, retailers have increased costs resulting from continual
recruitment and training. Sales are also lost because of inexperienced employees.
Employers can satisfy the needs of employees by motivating their employees. This can be
done by empowerment and through creating a partnering relationship. Reducing status
differences, promoting from within, and helping balance careers and families by allowing
“flextime” are all ways employers can help satisfy the needs of their employees. This in turn
may reduce employee turnover, and create a more loyal employee and thus more loyal
customers.

86. 11. What HR trends are helping meet employees’ needs, increase job satisfaction, and
lower turnover?

Several HR trends are taking place in the retail industry to address employees’ needs, job
satisfaction, and turnover. Two of these activities that retailers undertake to develop
knowledge, skills and abilities in their human resources are selective hiring, finding
employees who truly fit with the strategic position of the firm, and training. Other trends
include empowering employees, reducing status differences among employees, promoting
from within, flextime and job sharing.
ANCILLARY LECTURES

LECTURE # 9-1: LEGAL ISSUES IN HUMAN RESOURCES

Instructor's Note: This lecture consists of a potpourri of legal issues dealing with human resource
management. It can be used in its entirety, or the instructor can pick and choose items of
interest. The lecture can be used in either 9 or 17.

Introduction
 Within the realm of human resource management in retailing there are a number of
legal issues that are of significant importance.
1. Equal opportunity & anti-discrimination laws,
2. What can (or can't) be asked,
3. Drug testing, and
4. Sexual harassment.

Equal opportunity & anti-discrimination laws

 The following laws in some way pertain to the legal rights as a present or future
employees under the general guidelines of an equal opportunity:
1. Equal Pay Act of 1963
2. Title VII of Civil Rights Act of 1964 -- Amended in 1972 & 1978
3. Age Discrimination in Employment Act of 1967
4. Rehabilitation Act of 1972
5. Immigration Reform & Control Act of 1986
6. Polygraph Protection Act of 1988
 Now let's talk briefly about each one of these laws:

Equal Pay Act of 1963

 Deals only with wages—no other aspect of employment process
 Men & women are to receive same pay for jobs requiring same skills, effort,
responsibility, and working conditions
 Criteria used to evaluate "equal jobs" are: Duties, responsibilities, and work environment.
 The job description alone is not sufficient to show "equal jobs."
 Differences in jobs can legally exist on only four grounds:
1. Seniority
2. Merit
3. Quality/Quantity of Work
4. "Any factor Other Than Gender"
Title VII of Civil Rights Act of 1964 (As Amended)
 Forbids discrimination based on:
1. Race
2. Color
3. Religion
4. National Origin
5. Sex
 "Disparate Treatment"—to what extent can you treat people differently under the law?
1. Cannot treat people different due to these aforementioned characteristics.
2. Cannot exclude people from employment solely on basis of these characteristics.
3. Example: One cannot ask women their marital status.
 "Disparate Impact"—to what extent does discriminatory actions impact different groups
of people?
1. Otherwise harmless criteria may exclude protected groups.
2. Cannot exclude people solely on basis of these characteristics.
3. Example: Requirement for a particular degree, GPA, or major may exclude a large
portion of a given race or ethnic group. Another example: a maximum weight
restriction will discriminate against people suffering from obesity.
 Protects Against Sexual Harassment

Age Discrimination in Employment Act of 1967

 No Discrimination Against Persons Over the Age of 40

Rehabilitation Act of 1972

 Applies specifically to federal contractors and federal aid recipients
 Prohibits discrimination based on physical handicap

Immigration Reform & Control Act of 1986

 Companies are required to:
1. Ensure that new employees are citizens or legally authorized to work in the United
States
2. Immediately report to INS (Immigration and Naturalization Service) within 3 days
of hiring
Polygraph Protection Act of 1988
 Prohibits use of lie detector tests by most employers
 Exemptions from law:
1. National security
2. Drug manufacturers
3. Armored car firms
4. Security guard firms
5. So, most retailers cannot use lie detector tests.

Discriminatory questions and what can or can't be asked?

 See PPT 9-36 to 9-51.
 Federal laws don't specifically prohibit types of question
 EEOC looks with "Extreme Disfavor" on questions re: Race, color, religion, national
origin, age, marital status, sexual preference, and politics.
 State laws are more specific.
 Most states have question lists.

Drug testing - before and after an employee is hired

 Depends upon nature of company or industry
1. 1986 - 25% of Fortune 500 companies did drug testing
2. 1990's - 47-54% of companies now doing testing
 Most do testing after hire - part of employment physical.
 Hire is contingent upon passing physical.
 In most cases - refusal to test = no hire.
 Failure = no hire.

Sexual Harassment
 What is it?
 Language - Verbal abuse, vulgar or sex-related jokes.
 Touching - Unwanted patting, kissing, hugging, or even cornering.
 Unwelcome advances - Offensive and repeated requests for dates.
 Advancement favors - Requests for sexual favors accompanied by threats concerning
one's job, advancement, grades, etc.
  Remarks & Innuendo - Subtle remarks concerning one's clothing, body, or sexual
activity.
 Statutory Protection Against Sexual Harassment.
 June 1986 - U.S. Supreme Court ruling on Title VII of Civil Rights Act of 1964 - Protects
against sexual harassment.
 46 states now have separate sexual harassment laws.
 What should be done if one believes they have been sexually harassed?
 Take at least the following steps:
1. Inform violator that the incident constitutes "sexual harassment",
2. Report the incident to his/her supervisor,
3. Document claim - secure testimony from witnesses,
4. Discuss with others in the office or company,
5. Report occurrence to the EEO Office, and
6. Speak to your attorney.

[Source: Barry Shiflit—granted full reproduction rights]

10
INFORMATION SYSTEMS AND SUPPLY CHAIN
MANAGEMENT

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Creating Strategic Advantage Through

Supply Chain Management and Information See PPT 10-4
Systems
 It is the retailer’s responsibility to gauge
customers’ wants and needs and work with
the other members of the supply chain –
distributors, vendors and transportation
companies – to make sure the merchandise
that customers want is available when they
want it.
 In a simplified supply chain, manufacturers
ship merchandise either to a distribution
 center operated by a retailer or they ship
directly to stores.
 Supply chain management refers to a set
of approaches and techniques firms employ
to efficiently and effectively integrate their
suppliers, manufacturers, warehouses, PPT 10-5 illustrates the components of a typical
stores, and transportation intermediaries. supply chain.
 Retailers have increasingly taken a
leadership position in their respective
supply chains. As a result of their position
in the supply chain, retailers are in the
unique position to collect customer PPT 10-6 illustrates why efficient supply chain
purchase information customer by management is important to retailers.
customer, transaction by transaction. This
information can be shared with suppliers to
plan production, promotions, deliveries,
assortments, and inventory levels.

A. Strategic Advantage Wal-Mart’s sustainable advantage through

supply chain management is summarized in
 Not all retailers can develop a competitive
PPT 10-9.
advantage from their information and
supply chain systems. Achieving this
advantage requires a substantial financial
investment as well as the coordinated effort
of employees and functional areas
throughout the company.

 When retailers do develop a competitive

advantage from these systems, as Wal-
Mart has, the advantage is sustainable – it
is very difficult for competitors to
duplicate.

B. Improved Product Availability See PPT 10-10 for summaries of the benefits
of supply chain management.
 An efficient supply chain has two benefits
for customers: (1) fewer stockouts and (2)
tailored assortments. These benefits
translate into greater sales, higher
inventory turnover, and lower markdowns
for retailers.

1. Reduced Stockouts
 A stockout occurs when an SKU that a
customer wants is not available.
 In general, stockouts have short-term and
long-term effects on sales and profits.
 2. Tailored Assortments
 Another benefit provided by information
systems that support supply chains is
making sure the right merchandise is
available at the right store.
 Retailers use sophisticated statistical
methods to analyze sales transaction data
and adjust store assortments on a wide
range of merchandise on the basis of
customer demand characteristic’s of the
store’s local market.

C. Higher Return on Investment

 One measure of retailing performance is
the ability to generate a target return on
investment (ROI). See PPT 10-11

 Net profit margin is improved by

increasing the gross margin and lowering
expenses.
 An information system coordinating the
buying staffs and vendors could allow the
retailer to take advantage of special buying
opportunities and obtain items at a lower
cost, thus improving the gross margin.
 Retailers can lower operating expenses by
coordinating deliveries, thus cutting
transportation expenses.
 With more efficient distribution centers,
merchandise can be received, prepared for
sale, and shipped to stores with minimum
handling, further reducing expenses.
 Sophisticated inventory management
systems can allow the retailer to carry
relatively little backup inventory to stay in
stock.
 With a lower inventory investment, total
assets are also lower, so the asset and
inventory turnovers are both higher.

II. Information Flows See PPT 10-12 for an overview of

Information and Merchandise Flows.
 The flow of information is complex in a
retail environment.
 As the transaction takes place, the See PPT 10-13. Walk through the diagram
merchandise Universal Product Code
step by step.
(UPC) is scanned and a sales receipt is
 generated for the customer. Purchase
information is recorded in the POS
See PPT 10-14, 10-15, and 10-16 for detailed
terminal and sent to the buyer/planner.
information on the Information Flow process.
The planner uses this information to plan
additional purchases and make markdown
decisions.
 The sales transaction data are also sent to
the distribution center. When the store
inventory drops to a specified level, more
merchandise is shipped to the store and the
shipment information is sent to the
retailer’s computer system so the planner
knows the inventory level left in the
distribution center.
 When the inventory drops to a specified
level, the planner communicates with the
vendor regarding the purchase order for the
merchandise. At this point they often
negotiate shipping dates and terms of
purchase.
 The planner communicates with the
distribution center to coordinate deliveries
from the vendor and to the stores, check
inventory status, and so on.
 When the manufacturer ships the product
to the distribution center, it sends an
advanced shipping notice (ASN) to the
distribution center. An ASN is a document
that tells the distribution center what
specifically is being shipped and when it
will be delivered.
 When the shipment is received at the
distribution center, the planner is notified
and then authorizes payment to the vendor.

A. Data Warehousing
 Purchase data collected at the point of sale See PPT 10-17
goes into a huge database known as a data Ask students what would they like to know
warehouse. The information stored in the
about their customers? How would they use
data warehouse is accessible on various
dimensions and levels. that information?

 Analysts from various levels of the retail

operation extract information from the data
Ask students why one major drug store retailer
warehouse for making marketing decisions
decided to put beer next to diapers. Because a
about development and replenishing
market-basket analysis showed that guys were
merchandise assortments.
“sent” to the store at night to buy diapers and
 ended up buying beer.
 Data warehouses also contain information
about customers, which is used to target
promotions and group products together in
stores.

B. Electronic Data Interchange

 Electronic Data Interchange (EDI) is the See PPT 10-19
computer-to-computer exchange of
business documents in a structured format , Ask students if they were buyers at the retail
which means that the data transmissions store, what information would they like to have
used s standard format to communicate the from the vendor.
data.

1. Standards
Two data transmission standards are used in
the retail industry. The Uniform
Communication Standard (UCS) which
was used initially in the grocery sector
(though now it has been adopted in several
other supply chains) and the Voluntary
Interindustry Commerce Standard (VCIS)
used in the general merchandise retailing
sector.
Using these standards, retailers and vendors
can exchange many points of necessary
data.
EDI relies on the development and use of
transmission standards because they enable
all retailers to use the same format when
transmitting data to their vendors.

2. Transmission Systems
In larger retail firms, communications among Consider a large retail chain with over 500
employees within a company are done stores spread in 10 countries. Discuss how
through an intranet. intranets could provide better coordination
Intranets are local area networks (LANs) that of activities across the entire organization.
employ Internet technology in an
organization to facilitate communication
and access to information internally.
EDI transmissions between retailers and
vendors occur over the Internet through
extranets.
An extranet is a collaborative network that
uses Internet technology to link businesses
with their suppliers, customers, or other
businesses. Extranets are typically private
and secure in that they can be accessed
 only by certain parties.
An extranet is generally an extension of a
company's intranet, modified to allow
access by specified external users.

3. Security See PPT 10-21

 Because the Internet is a publicly
accessible network, its use to communicate
internally and externally with vendors and Ask students what rules they would include if
customers raises security issues. they were in charge of setting up the security
policy.
 Some of the potential implications of
security failures are the loss of business
data essential to conducting business;
disputes with partners, suppliers,
distributors, customers; loss of public
confidence; and bad publicity.
 Internet security can be expensive but is
necessary for even the smallest retailer or
service provider.
 Security has become a bigger challenge in
recent years as a result of EDI using
extranets and the operation of Internet
retail channels. Now vendors and
customers all need some form of access to
the retailer’s information system.
 To help control the changing information
environment, retailers need to develop a
corporate security policy. A security
policy is a set of rules that apply to
activities involving the computer and
communications resources that belong to
an organization.
 The security policy should meet the
following objectives:
1. Authentication. The system should be able
to assure or verify that the person or
computer at the other end of the session
really is who/what it claims to be.
2. Authorization. The system should be able to
assure that the person or computer at the
other end of the session has permission to
carry out the request.
3. Integrity. The system should be able to
assure that the arriving information is the
same as that sent. This means that the data
 are protected from unauthorized changes or
tampering (data integrity).

4. Benefits of EDI See PPT 10-25

 The use of EDI provides three main
benefits to retailers and their vendors:
 First, EDI reduces cycle time (the time
between the decision to place an order
and the receipt of the merchandise).
 Second, EDI improves the overall quality of
communications through better record-
keeping and fewer human errors.
 Third, the data transmitted by EDI are in a
computer readable format that can be
easily analyzed and used for a variety of
tasks.
 Due to these benefits, many retailers are
asking their vendors to interface with
them using EDI. However, small- to
medium-sized vendors and retailers face
significant barriers, specifically cost and
lack of information technology (IT)
expertise to become EDI enabled.

III. The Physical Flow of Merchandise --

Logistics See PPT 10-22. Also see a diagram of
 Logistics is that part of the supply chain Merchandise Flow in PPT 10-22.
process that plans, implements, and
controls the efficient, effective flow and
storage of goods, services, and related
information from the point of origin to the
point of consumption in order to meet
customers' requirements.
 Merchandise flows from:
1. Vendor to distribution center
2. Distribution center to stores
3. Alternatively, from vendor directly to stores.
 Sometimes merchandise is temporarily
stored at the distribution center; other times
it is immediately prepared to be shipped to
individual stores. This preparation may
include breaking shipping cartons into
smaller quantities that can be more readily
utilized by the individual stores (breaking
 bulk), as well as tagging merchandise with
price tags or stickers, UPC codes, and the
store's label.

A. Distribution Centers versus Direct Store The advantages of using a Distribution

Delivery Center are summarized in PPT 10-25
 Retailers can use a distribution center or
direct store delivery, depending on
merchandise characteristics and the nature
of demand.
 To determine which distribution system –
distribution centers or direct store delivery
- is better, the retailer must consider the
total cost associated with each alternative
versus the customer service criterion of
having the right merchandise at the store
when the customer wants to buy it.
 Advantages of using a distribution center
are: (1) more accurate sales forecasts, (2) The advantages of using a Direct Store Delivery
the retailer’s ability to carry less are summarized in PPT 10-28
merchandise in the individual stores, which
results in less inventory investment system-
wide, (3) easier to avoid running out of
stock or having too much stock, and (4)
since distribution centers are better
equipped to prepare merchandise for sale,
it is more cost-effective to store
merchandise and get it ready for sale than
in individual stores.
 Distribution centers are not viable for all
retailers. If a retailer has only a few
outlets, then the expense of a distribution
center is probably unwarranted. Also, if
many outlets are concentrated in
metropolitan areas, then the merchandise
can be consolidated and delivered by the
vendor to all the stores in one area. In some
cases, it is quicker to get merchandise to
stores by avoiding the extra step of using a
distribution center. This is particularly
important for perishable goods (meat and Ask students if they have ever bought a
produce), high-fashion items, or fads since refrigerator from a big retailer like Sears.
shelf life is limited. Remind them that they were asked if they
 What type of retailer should use a wanted a left or right handed refrigerator,
distribution center? Retailers with wildly and that the refrigerator was delivered from
fluctuating demand at a store level, stores a distribution center. Why? The retailer
that require frequent replenishment, stores was practicing the "Principle of
 that carry a relatively large number of Postponement". That is, the retailer did not
items or order in less than full-case put the handle on the refrigerator until it
quantities, and retailers with a large was about to be delivered. Also, all
number of outlets that are not inventories were stored in a central location.
geographically concentrated within a In this way, the total amount of inventory
metropolitan area would all benefit from could be reduced because the retailer does
using a distribution center. not have to stock both left and right handed
refrigerators, and there need not be any
inventory stored at individual stores.

Ask students to name types of retailers that

should use distribution centers and those who
should not.

IV. The Distribution Center

 The distribution center performs several
functions, which might include:

A. Activities Managed by Distribution Centers See PPT 10-24 for the activities performed
by a distribution center.

1. Management of Inbound Transportation

 Buyers and their staffs get more involved
in coordinating the physical flow of
merchandise to the stores.
 The dispatcher is the person who
coordinates deliveries to the distribution
center.

2. Receiving and Checking

 Receiving refers to the process of
recording the receipt of merchandise as it
arrives at a distribution center.
 Checking is the process of going through
the goods upon receipt to make sure they
arrived undamaged and that the
merchandise ordered was the actual
merchandise received.
 Many distribution systems using electronic
data interchange are designed to minimize,
if not eliminate labor-intensive and time-
consuming processes.

3. Storing and Crossdocking

 After the merchandise is received and
Ask students what they think an ideal cross-
checked, it is either stored or crossdocked. docking distribution center would look like.
Draw it on the board. Draw a long skinny
 Merchandise cartons that are crossdocked rectangle with bays on both sides, one for
are prepackaged by the vendor for a incoming freight, the other for outgoing
specific store. Because the merchandise is
freight, and no storage space in between.
ready for sale, it is placed on a conveyor
system that routes it from the unloading
dock at which it was received to the
loading dock for the truck going to the
specific store – thus, the name
crossdocked.
 Crossdocked merchandise is only in the
distribution center for a few hours before it
is shipped to the stores.
 Merchandise size and the sales rate
typically determine whether cartons are
crossdocked or stored.

4. Getting Merchandise Floor Ready

 Floor-ready merchandise is merchandise Ask students if they think retailers are asking
that's ready to be placed on the selling too much of their vendors in making them
floor. Getting merchandise floor ready provide floor-ready merchandise.
entails ticketing, marking, and, in the case
of apparel, placing garments on hangers.
Ask students if they have ever been in a store
 Ticketing and marking refers to affixing
that was cluttered with merchandise being
price and identification labels on the
merchandise. ticketed while all the salespeople were too
busy to wait on customers because they were
 It is more efficient for a retailer to perform busy checking in and marking merchandise.
these activities at a DC than in the stores. Point out inefficiencies of such a system.
 An even better approach from the retailer's
perspective is to get vendors to ship the
merchandise floor-ready, thus totally
eliminating this expensive, time-
consuming process. Having floor-ready
merchandise benefits the retailer because
the cost of making the merchandise floor-
ready is passed on to vendors.

5. Preparing to Ship Merchandise to a Store

 After receiving the store order, the
computer at a distribution center creates a
pick ticket, a document that tells the order
filler how much of each item to get from
the storage area.
 The pick ticket is printed in warehouse
 location sequence so the order fillers don’t
waste time crisscrossing the distribution
center looking for merchandise. The
computer knows which items are out of
stock so it doesn’t even print them on the
pick ticket.
 Order fillers take the merchandise to a
staging area where an electronic sorter
routes the merchandise to the bay with the
truck going to the store.

6. Management of Outbound
Transportation
 The management of outbound
transportation from distribution center to
stores has become increasingly complex as
chain stores expand. Centers may use a
sophisticated routing and scheduling
computer system. This system considers
the rate of sales in the store, road
conditions, and transportation operating
constraints to develop the most efficient
routes possible. As a result, stores are
provided with an accurate estimated time
of arrival and vehicle utilization is
maximized.

B. Outsourcing Logistics See PPT 10-26

* To streamline their operations and make
more productive use of their assets and
personnel, retailers are constantly looking
to outsource logistical functions if those
functions can be performed better or less
expensively by third-party logistics
companies.
* Third party logistics companies are firms
that facilitate the movement of
merchandise from manufacturer to retailer,
but are independently owned.
* Specifically, they provide transportation,
warehousing, consolidation of orders, and
documentation.

1. Transportation
* Retailers must choose their shippers
carefully and demand reliable, customized
services. A retailer’s lead time and the
variation in lead time are determined by the
 chosen transportation company.
* Also, many retailers are finding that the
added cost of airfreight is worth the benefit
of getting merchandise into stores more
quickly.
* Some retailers mix modes of transportation
in order to reduce overall cost and time
delays.

2. Warehousing
* To meet increasingly stringent demands
retailers are placing on their vendors to
meet specific delivery times for floor-ready
merchandise, many vendors must store
merchandise closer to their retail
customers.
* Rather than owning these warehouses
themselves, the vendors typically use
public warehouses that are owned and
operated by a third party.

3. Freight Forwarder
* Freight forwarders are companies that
purchase transport services. They then
consolidate small shipments from a number
of shippers into large shipments that move
at a lower freight rate.

4. Integrated Third-Party Logistics

Services
* Traditional definitions distinguishing
between transportation, warehousing, and
freight forwarding, have become blurred in
recent years.
* Some of the best transportation firms, for
example, now provide public warehousing
and freight forwarding. The same
diversification strategy is being used by the
other types of third-party logistics
providers.

C. Pull and Push Supply Chains See PPT 10-27 for a summary of
characteristics of push and pull supply
 In a pull supply chain, orders for
chains.
merchandise are generated at the store
level on the basis of sales data captured by
POS terminals. The demand for an item
 Ask students: “All other things held equal, which
pulls it through the supply chain.
retailer is more sophisticated, one using a pull or
 In a pull supply chain, there is less a push logistics system?”
likelihood of being overstocked or out of
stock because the store orders
merchandise as needed on the basis of
consumer demand.
 This approach increases inventory
turnover and is more responsive to
changes in customer demand.
 In a push supply chain, merchandise is
allocated to the store on the basis of
forecast demand. A forecast is developed
and specific quantities of merchandise are
shipped to distribution centers and stores
at predetermined time intervals.
 Although generally more desirable, a pull
approach is not the most effective in all
situations. It requires a more costly and
sophisticated information system to
support it, some merchandise does not
allow retailers flexibility to adjust
inventory levels on the basis of demand,
and push supply chains are more efficient
for merchandise that has steady,
predictable demand,

D. Reverse Logistics
 Reverse logistics is the flow back of Ask students what percentage of
merchandise through the channel, from the merchandise they return to either catalog or
customer to the store, distribution center, Internet retailers. Have them discuss both
and vendor, for customer returns. excellent and poor return experiences.
 Reverse logistics can be challenging. Items
may be damaged, and without the original
shipping carton, thus causing special PPT 10-29 illustrates the Reverse Logistics
handling needs. Transportation costs can process.
be high because items are shipped back in
small quantities.

C. Supply Chain for Fulfilling Catalog and See PPT 10-30

Internet Orders
 Fulfilling Internet orders from customers is Ask students, “If you were a bricks and
very different than distributing
mortar retailer going into the Internet space,
merchandise to stores.
would you integrate your logistics system, or
 Internet retailers have outbound shipments create a separate system for the Internet?”
with 1 or 2 items per order that are shipped
 to addresses all over the world.
 Some retailers have a fully integrated
information system, whereby distribution
to stores and to customers ordering through
a Web site or catalog are handled by the
same information system. Yet they use
different DCs to service store and Internet
and catalog customers.
 Other retailers use one distribution center
for catalog, stores, and Internet orders.
Catalog and web orders are treated
identically but separated from the store-
based distribution system.

V. Collaboration Between Retailers and

Vendors in Supply Chain Management
 Retailers’ and vendors’ objectives for
supply chain management are to make sure
that merchandise is available in the stores
when customers want it and to accomplish Ask students to discuss the risks associated with
this task with the minimum investment in the bullwhip effect. Who is harmed most by its
inventory and costs. occurrence? The retailer? The vendor? The
consumer?
 Supply chain efficiency dramatically
improves when vendors and retailers share
information and work together.
 By collaborating, vendors can plan their
purchases of raw materials and production
process to match the retailer’s merchandise
needs.
 Excess inventory buildup, referred to as the
bullwhip effect, often takes place in
uncoordinated channels. This effect is
caused by: (1) delays in transmitting orders PPT 10-32 illustrates the Bullwhip Effect.
and receiving merchandise, (2)
overreacting to shortages, and (3) ordering
in batches.
 Four approaches for coordinating supply
chain activities are: (1) using EDI, (2)
exchanging information, (3) using vendor-
managed inventory and (4) employing
collaborative planning.

A. Using EDI For an overview of the development of

retailer and vendor relationships, see PPT
 The use of EDI to transmit purchase order
10-34.
information reduces the time it takes for
retailers to place orders and for vendors to
 acknowledge the receipt of orders and
communicate delivery information about
those orders.
 EDI additionally facilitates the
implementation of the other collaborative
approaches discussed below.

B. Sharing Information
 Sharing sales data with vendors is an
important first step in improving
supply chain efficiency.
 Better information sharing will allow
vendors to respond more precisely to
sales increases and decreases.

C. Vendor-Managed Inventory For an overview of VMI, see PPT 10-36

 Vendor-managed inventory (VMI) is an
approach to improving supply chain
efficiency in which the vendor is
responsible for maintaining inventory
levels at the retailer’s individual stores
and/or distribution centers.
 In a VMI system, the vendor replenishes
inventories in quantities that meet the
retailer’s immediate demand, reducing
stockouts with minimal inventory.
 VMI can reduce both vendor’s and
retailer’s costs.
 VMI is not a new approach. Snack foods
and beverage vendors have managed the
stocks of their products on supermarket
shelves for a long time. However,
technological advances have increased the
sophistication of VMI.
 For instance, the sharing of POS data
allows vendors to sell merchandise on
consignment; the vendor owns the
merchandise until it is sold by the retailer,
at which time, the retailer pays for it.
Consignment selling provides incentive for
the vendor to pick SKUs and inventory
levels that will minimize inventory and
generate sales.
 Although a more advanced level of
collaboration than simply using EDI and
sharing information, VMI has limitations,
 such as limited awareness of actions the
retailer may be taking to increase sales of
specific products or categories.

D. Collaborative Planning, Forecasting and See PPT 10-37, 10-38

Replenishment
 Collaborative planning, forecasting and
replenishment (CPFR) is a more advanced
form of retailer-vendor collaboration that
involves sharing proprietary information
such as business strategies, promotion
plans, new product developments and
introductions, production schedules and
lead time information.
 The software used to exchange CPFR
information is Internet based and thus more
easily and inexpensively available to all
parties.

VI. Radio Frequency Identification (RFID) See PPT 10-39, 10-40

 Radio frequency identification (RFID) is
a technology that allows an object or
person to be identified at a distance using
radio waves.
 The RFID technology has advantages over
traditional bar codes, including the ability
to hold more data and update data stored
on the device.
 RFID enables accurate, real-time tracking
of every product item from manufacturer to
retail check-out.

A. Benefits of RFID
 RFID has several demonstrated benefits Discuss the advantages of RFID. Ask students if
including: (1) reduced labor costs for they foresee any disadvantages. What are the
warehouse and distribution, (2) reduced risks or downsides of these systems?
labor costs at point-of-sale, (3) inventory
savings, (4) reduced theft, and (5) reduced
out-of-stock conditions.

B. Impediments to the Adoption of RFID

 High costs are the major obstacle to the
adoption of RFID systems.
 In addition, RFID generates more
information than can be efficiently
processed, making it even more difficult to
 justify its costs.

VII. Summary
 Supply chain management and information
systems have become important tools for
achieving sustainable competitive
advantage. Developing more efficient
methods of distributing merchandise
creates an opportunity to reduce expenses
and improve customer service levels.
 The systems used to control the flow of
information to buyers and then on to
vendors have become quite sophisticated.
Through the use of technology, retailers
and vendors are collaborating to improve
supply chain efficiency
ANSWERS TO “GET OUT AND DO ITS”

2 INTERNET EXERCISE Go to Barcoding Incorporated’s Web page at http://www.barcoding.com and

search on retail, warehouse management and RFID. How is this company using technology to support
retailers with information systems and supply chain management?
Some of the information students will find on this homepage…
“If inefficiencies throughout the system could be eliminated, from the stockroom to the shelf to the point
of sale, it eases the pressures faced at the register, and unlocks even greater profit potential. Mobile
computing and data capture solutions, such as bar code and RFID (radio frequency identification),
provide retail companies with greater visibility and control over inventory and stock levels, more
productive employees, and a better customer experience.
Barcoding Inc. can deliver bottom line benefits to retail companies of all shapes and sizes with our
tailored solutions. By leveraging technologies like mobile checkout, and RFID and wireless networks to
maximize employees' time on the floor and improve the shopping experience through more face time
with customers, Barcoding can deliver key benefits like higher same store sales, decreased inventory
stock outs, and increased inventory turnover while delivering long-term efficiencies that help season after
season.”

3 INTERNET EXERCISE Go to the homepage for Stores Magazine at http://www.stores.org and search on
“Supply Chain” in the current issue. Summarize one of the recent articles and explain how the key
concept(s) described could make the shopping experience better for consumers and improve efficiency
in the supply chain.
Example of recent articles…
Unfettering the Supply Chain. Sharing real-time data critical to efficient merchandise movement. Feb
2010, By David P. Schulz.
Strong Supply Chain Vital to a Retailer’s Success. Feb 2010. By V.C. Hanson.
Delivering the World. Navigating obstacles in pursuit of global supply chain optimization. Feb 2010, By
Len Lewis.

4 INTERNET EXERCISE Go to the homepage for Vendor Managed Inventory at

http://www.vendormanagedinventory.com/index.php and answer the following questions: What is
vendor managed inventory? What are the benefits and limitations of a vendor managed inventory
approach?
Definition of Vendor Managed Inventory – “A means of optimizing Supply Chain performance in which
the manufacturer is responsible for maintaining the distributor’s inventory levels. The manufacturer has
access to the distributor’s inventory data and is responsible for generating purchase orders.”
The Benefits and Pitfalls. (Lists from the web site)
DUAL BENEFITS:
- Data entry errors are reduced due to computer to computer communications. Speed of
the processing is also improved.
- Both parties are interested in giving better service to the end customer. Having the
correct item in stock when the end customer needs it, benefits all parties involved.
- A true partnership is formed between the Manufacturer and the Distributor. They
work closer together and strengthen their ties.
- Stabilize the timing of Purchase Orders - PO's are now generated on a predefined
basis.
DISTRIBUTOR BENEFITS:
- The goal is to have an improvement in Fill Rates from the manufacturer and to the
end customer. Also, a decrease in stock-outs and a decrease in inventory levels.
- Planning and ordering cost will decrease due to the responsibility being shifted to the
Manufacturer.
- The overall service level is improved by having the right product at the right time.
- The manufacturer is more focused than ever on providing great service.
MANUFACTURERS BENEFITS:
- Visibility of the Distributor’s Point of Sale data makes forecasting easier.
- Promotions can be more easily incorporated into the inventory plan.
- A reduction in Distributor ordering errors (which in the past would probably lead to a
return)
- Visibility of Stock Levels helps to identify priorities (replenishing for stock or a
stock-out?). Before VMI, a manufacturer has no visibility of the quantity and the
products that are ordered. With VMI, the manufacturer can see the potential need for
an item before the item is ordered.
POTENTIAL PITFALLS - VENDOR MANAGED INVENTORY
EDI problems: Extensive EDI testing should be done to validate the data being sent. Is the distributor
sending all the data that should be sent? Is each field populated with the correct data?
Acceptance: Make sure that all employees involved in the process fully understand and accept this new
way of doing business. It's not enough to just sell the concept to senior management, all employees who
are involved must be willing participants.
Promotions/Events: Anything that adds or takes away from the normal ordering pattern must be
properly communicated to the manufacturer.
Customer Base: Any large customers, either gained or lost, must be communicated to the manufacturer.
The distributor must guide the manufacturer on how this will affect sales.
Over/Obsolete Stock: An agreement must exist between the manufacturer and the distributor on what
to do if an overstock does occur (or in the case of an ordering error). Also, both parties must agree on
how to handle obsolete stock.
Time: Both parties involved must understand that this is a learning process. Errors will occur. You will
probably not have a perfect process in place day 1.

CUSTOMER RELATIONSHIP MANAGEMENT

ANNOTATED OUTLINE INSTRUCTOR NOTES

 Customer relationship management See PPT 11-4

(CRM) is a business philosophy and a set
of strategies, programs, and systems that Ask students to give examples of retailers in
focuses on identifying and building the area who seem to have a loyal customer
loyalty with a retailer's most valued base. What are the reasons why customers
customers. (including themselves) frequent this retailer?
What is the retailer doing for its loyal
 CRM is based on the philosophy that
retailers can increase profitability by customers?
building relationships with their better
customers.
 Effectively managing merchandise
inventory and the stores provides value
and supports the primary objective of
building customer loyalty. The goal is to
develop a base of loyal customers who
patronize the retailer frequently.

I. The CRM Process See PPT 11-5

 Retailers are now beginning to Ask students if they buy more products from
concentrate on providing more value to one specific retailer now, i.e., spend more
their customers using targeted money with one specific retailer? If so, why?
promotions and services to increase their If not, why do they buy different products from
share of the wallet – the percentage of different retailers?
the customers' purchases made from the
retailer – from these customers.
 This change in perspective is supported Discuss the costs of attracting new customers
by research indicating that all customers versus the costs of retaining current
are not equally profitable, and that more customers.
and less profitable customers need to be
treated differently.

A. What is Loyalty?
 Customer loyalty, the objective of CRM, See PPT 11-6
is more than having customers make
repeat visits to a retailer and being Ask students how much they like a specific
satisfied with their experiences. retailer. Are they loyal to the retailers they like
Customer loyalty to a retailer means that most? If so, why? If not, why not? Note that for
customers are committed to purchasing emotional bonding, there may be less objective
 reasons as to why they like a retailer.
merchandise and services from the
retailer and will resist the activities of
competitors attempting to attract their
patronage.
 Loyal customers have an emotional
connection with the retailer. Their
reasons for continuing to patronize a
retailer go beyond the convenience of the
retailer's store or the low prices and
specific brands offered by the retailer.
They feel such goodwill toward the
retailer that they will encourage their
friends and family to buy from it.
 Programs that encourage repeat buying
by simply offering price discounts can be
easily copied by competitors. However,
when a retailer develops an emotional See PPT 11-7
connection with a customer, it is difficult
for a competitor to attract the customer.
 Emotional connections develop when the
customer receives personal attention.
 Unusual positive experiences also build
emotional connections.

B. Overview of the CRM Process See PPT 11-8 for an overview of CRM
 CRM is an iterative process that turns See PPT 11-9 for an illustration of the CRM
customer data into customer loyalty Process Cycle
through four activities: (1) collecting
customer data, (2) analyzing the customer
data and identifying target customers, (3)
developing CRM programs, and (4)
implementing CRM programs. Each of
the four activities in the CRM process is
discussed in the next sections.

II. Collecting Customer Data

 The first step in the CRM process is
constructing a customer database. This
database contains all of the data the firm
has collected about its customers and is
the foundation for subsequent CRM
activities.

A. Customer Database
 Ideally, the customer database should See PPT 11-10
contain the following information:
1. Transactions – a complete history of the
 To demonstrate how a customer database could
purchases made by the customer,
have very simple beginnings, ask students the
including purchase date, the SKUs
types of information contained in a typical invoice.
purchased, the price paid, the amount of
Note that each transaction invoice would contain
profit, and whether the merchandise was
details on the customer's name and address,
purchased in response to a special
products and quantities purchased, price paid, etc.
promotion or marketing activity.
If a whole year's invoices were collected, what
2. Customer Contacts – a record of the types of information could be obtained?
interactions that the customer has had
with the retailer, including visits to the
retailer's Web site, inquiries made
through in-store kiosks, and telephone
calls made to the retailer's call center,
plus information about contacts initiated
by the retailer, such as catalogs and direct
mail sent to the customer.
3. Customer Preferences – what the
customer likes, such as favorite colors,
brands, fabrics, and flavors as well as
apparel sizes.
4. Descriptive Information – Demographic
and psychographic data describing the
customer that can be used in developing
market segments.
5. Responses to marketing activities –
analysis of the transaction and contact
data provide information about the
customer's responsiveness to marketing
activities.
 To get a complete view of the customers,
the retailer needs to be able to combine
the individual customer data from each
member of a household.
 The analysis of the customer database
can provide important insights for
planning merchandise assortment.
 With today's technology, even small,
independent retailers can create and use a
customer database.

B. Identifying Information
 Constructing the database is relatively See PPT 11-11
easy for catalog and Internet shoppers
and customers who use the retailer's
credit card when buying merchandise in
stores. Customers buying from nonstore
channels must provide their contact
 information, their name and address, so
that the purchases can be sent to them.
 However, identifying most customers
who are making in-store transactions is
more difficult because they often pay for
the merchandise with a check, cash, or a
third-party credit card.
 Store-based retailers use three approaches
to identify their customers: (1) asking
customers for identifying information, (2)
offering frequent shopper programs, and
(3) connecting Internet purchasing data
with stores.

1. Asking for Identifying Information Ask students for their reactions when a cashier
asks them for their name, address and phone
 Some retailers ask customers for number before ringing up a sale.
identifying information such as their
phone number or name and address when How could the store minimize consumer
they ring up a sale. The information is concerns and still obtain customer identity
then used to create the transaction information?
database for the customer.
 Some customers may be reluctant to
provide the information and feel that the
sales associates are violating their
privacy.

2. Offering Frequent Shopper Programs

 Frequent shopper programs, also called Ask students if they use a frequent shopper
loyalty programs, are programs that card. What are the advantages and
identify and provide rewards for
disadvantages from a customer's perspective
customers who patronize a retailer.
in using such cards?
 Some retailers issue customers a frequent
shopper card, whereas others use a
private-label credit card – a credit card
that has the store’s name on in it. In both
cases, customer information is
automatically captured when the card is
scanned at the point of sale terminal.
 When customers enroll in one of these
programs, they provide some descriptive
information about themselves or their
household. Customers are then offered
an incentive to show the card when they
make purchases from the retailer.
 From the retailer's perspective, frequent
shopper programs offer two benefits: (1)
 customers provide demographic and
other information when they sign up for
the program and then are motivated to
identify themselves at each transaction,
(2) customers are motivated by the
rewards offered to increase the number of
visits to the retailer and the amount
purchased on each visit.

3. Connecting Internet Purchasing Data

with the Stores
 If a customer has used a credit card while
shopping on a multichannel retailer’s What are the various privacy issues when a
Internet site or from its catalog, and then retailer unobtrusively collects information
uses the same card to make a purchase in through checking account numbers, debit
the retailer’s store, the retailer can update cards and third-party credit cards?
the customer’s purchase record and
capture information about where the
customer lives or works from the
shipping information.

C. Privacy and CRM Programs

 While detailed information about
individual customers helps retailers
provide more benefits to their better
customers, consumers are concerned
about retailers violating their privacy
when they collect this information.
 Even if CRM databases benefit the
retailer’s relationship with the consumer,
if customers’ data are not secure and
susceptible to identity theft, multichannel
retailing could cease to exist.
 The FBI and Secret Service also are
signaling to retailers that consumer
privacy is a much more serious issue than
it ever has been before.

1. Privacy Concerns
 The degree to which consumers feel their See PPT 11-12, 11-13
privacy has been violated depends on: (1)
their control over their personal Ask student if they have bought or buy regularly
information when engaging in from Internet retailers. If they have bought from
marketplace transactions and (2) their Internet retailers, what do they feel about privacy
knowledge of the collection and use of issues? If they have never bought from Internet
personal information. retailers, is it due to privacy concerns?
 These concerns are particularly acute for
customers using an electronic channel
 because many of them do not realize the
extensive amount of information that can
be collected without their knowledge. In
addition to collecting transaction data,
electronic retailers can collect
information by placing cookies on
visitors' hard drives.
 Cookies are text files that identify
visitors when they return to a website.
Due to the data in the cookies, customers
do not have to identify themselves and
use passwords every time they visit a
store. However, the cookies also collect
information about other sites the person
has visited and what pages they have
downloaded.

2. Protecting Customer Privacy

 Some people define personal information See PPT 11-15
as all information that is not publicly
available; others include both public (i.e., Evaluate the differences between U.S. and
driver's license, mortgage data) and European laws regarding privacy. From the
private (hobbies, income) information in
point of view of the individual consumer,
the definition of personal information.
which one is more comprehensive and better
 Retailers need to take the necessary ensures privacy protection? From the point of
precautions to protect consumer privacy view of the retailer, which one offers more
by incorporating safety software such as opportunities for reaping the full benefits of a
firewalls and data encryption programs. CRM program?
 In the United States, legal protection for
privacy is limited. Existing legislation is
limited to the protection of information in
a few specific contexts, including
government functions and practices in
credit reporting, video rentals, and
banking.
 The European Union (EU) is more
aggressive in protecting consumer
privacy and its provisions include:
a. Businesses can collect consumer
information only if they have clearly Ask students which one is better from the point of
defined the purpose such as completing view of customers – opt-in or opt-out? Similarly,
the transaction. which one is less costly from the perspective of the
retailer?
b. The purpose must be disclosed to the
consumer from whom the information is
being collected.
c. The information can only be used for that
 specific purpose.
d. The business can only keep the
information for the stated purpose.
 The EU perspective is that consumers
own their personal information. Retailers
must get consumers to explicitly agree to
share this personal information. This is
referred to as opt in.
 In contrast, personal information in the
United States is generally viewed as
being in the public domain, and retailers
can use it in any way they desire. U.S.
consumers must explicitly tell retailers
not to use their personal information –
they must opt out.
 The Federal Trade Commission has
developed the following set of principles
for fair information practices:
a. Notice and Awareness – covers the
disclosure of information practices,
including a comprehensive statement of
information use such as information
storage, manipulation, and dissemination. See PPT 11-16
b. Choice/Consent – includes both opt out
and opt in options, and allows the
consumers the opportunity to trade
information for benefits.
c. Access/Participation – allows for the
confirmation of information accuracy by
consumers.
d. Integrity/Security – controls for the theft
of and tampering with personal
information.
e. Enforcement/Redress – provides a
mechanism to ensure compliance by
participating companies.
 There is growing consensus that personal
information must be fairly collected, the
collection must be purposeful, and the
data should be relevant, maintained as
accurate, essential to business, subject to
the rights of the owning individual, kept
reasonably secure, and transferred only
with the permission of the consumer.
  The Electronic Privacy Center
(www.epic.org) recommends that privacy
policies clearly state what information is
collected from each visitor and how it
will be used, give consumers a choice as
to whether they give information, and
allow them to view and correct any
personal information held by an online
retail site.

III. Analyzing Customer Data and Identifying

Target Customers
See PPT 11-17
 The next step in the CRM process is
analyzing the customer database and Ask students what questions they could answer
converting the data into information that if they had a computerized record of all of one
will help retailers develop programs for store's transactions for the last two year. (In
building customer loyalty. other words, what patterns in the data would
 Data mining is one approach and is a they look for?)
technique used to identify patterns in
data, typically patterns that the analyst is
unaware of prior to searching through the
data.
 Market basket analysis is a specific
type of data analysis that focuses on the
composition of the basket, or bundle, of
products purchased by a household
See PPT 11-18 and PPT 11-19 for illustrations of
during a single shopping occasion. This
the Market Basket Analysis approach
analysis is often used for suggesting
where to place merchandise in a store.

A. Identifying Best Customers See PPT 11-20

 Customer data analysis is focused on
identifying market segments – groups of
customers who have similar needs, See PPT 11-21 for an LTV comparison of two
purchase similar merchandise, and different shoppers
respond in a similar manner to marketing
activities. What can small retailers do to determine the
 Using information in the customer lifetime customer value of their customers?
database, retailers can develop a score or Does a simple mom-and-pop retailer know
number indicating how valuable who its best customers are?
customers are to the firm. This score can
then be used to determine which
customers to target.
 Lifetime customer value (LTV) is the
expected contribution from the customer
to the retailer's profits over his or her
entire relationship with the retailer.
 LTV is estimated by using past behaviors
to forecast the future purchases, gross
margin from these purchases, and costs
associated with servicing the customers.
Some of the costs associated with a
customer are the cost of advertising and
promotion used to acquire the customer
and the cost of processing merchandise
that the customer has returned.
 These assessments of LTV are based on
the assumption that the customer's future
purchase behaviors will be the same as
they have been in the past.

2. Customer Pyramid See PPT 11-22, PPT 11-23, PPT 11-24, PPT
 Most retailers realize that their customers 11-25
differ in terms of their profitability or A retailer is developing a program whereby it
LTV. They believe in the 80-20 rule- 80
would have a special one-day sales event
percent of the sales or profits come from
20 percent of the customers. every month. Which segment(s) of the
customer pyramid should it target? Why?
 A commonly used segmentation scheme
divides customers into four segments:
1. Platinum Segment – this segment is
composed of the retailer's customers with
the top 25 percent LTVs. The most loyal
customers who are not overly concerned
about merchandise price and place more
value on customer service.
2. Gold Segment – The next 25 percent of
customers in terms of LTV still shop a
significant amount at the retailer but are
more price-sensitive and are not as loyal
as the platinum customers.
3. Iron Segment – Customers in this third tier
probably do not deserve much special
attention from the retailer due to their
modest LTV.
4. Lead Segment – Customers in the lowest
segment cost the company money. They
often demand a lot of attention but do not
buy much from the retailer or they buy a
lot of sale merchandise and abuse return
privileges.

3. RFM Analysis See PPT 11-26, 11-27

 RFM (recency, frequency, monetary) A catalog marketer has decided on the following
 rule for mailing customers. Every new prospect
analysis, often used by catalog retailers
would receive 6 catalogs mailed once every month
and direct marketers, is a scheme for
before they are dropped from the mailing list. If
segmenting customers according to how
they bought at least once in the 6 months, they
recently they have made a purchase, how
would get an additional 8 catalogs before they are
frequently they make purchases, and how
dropped from the mailing list. If they bought 2 or
much they have bought.
more times in 6 months, they would receive
 Catalog retailers often use this type of catalogs for the next 15 months and would also
analysis to determine which customer receive special sales and other bargain
groups should be sent catalogs. supplements from time-to-time. Evaluate this
plan. Does this plan make a distinction between
 Customers who have made infrequent,
the customer in terms of profitability (high) and
small purchases recently are considered
costs (lower) to the retailer?
to be first-time customers. The objective
of CRM programs directed toward this
segment of customers is to convert them
into early repeat customers and
eventually high-value customers.
See PPT 11-28, and PPT 11-29 for an illustration
 CRM programs directed toward of an RFM application.
customers in the high-value segment
(high frequency, recency, and monetary
value) attempt to maintain loyalty,
increase retention, and gain a greater
share of wallet by selling more
merchandise to them.

IV. Developing CRM Programs

 The next step in the CRM process is to See PPT 11-30
develop programs for the different
customer segments. These include: (1)
retaining best customers, (2) converting
good customers into high-LTV
customers, and (3) getting rid of
unprofitable customers.

A. Customer Retention See PPT 11-31

 Four approaches that retailers use to Ask students why customer retention is
retain their best customers are: (1) important, especially since CRM programs
frequent shopper programs, (2) special
cost so much. How do the rewards of
customer service, (3) personalization, and
(4) community. retention outweigh the costs of the CRM
program?
1. Frequent Shopper Programs
 Frequent shopper programs are used See PPT 11-32 and PPT 11-33
both to build a customer database by
identifying customers with transactions Should a college bookstore use a frequent shopper
and to encourage repeat purchase card? Why or Why not?
behavior and retailer loyalty. Retailers
provide incentives to encourage
 customers to enroll in the program and
use the card.
 Several considerations should be made in
developing effective frequent shopper
programs, including: (1) tier rewards
according to the volume of purchases, (2)
offer choices in selecting rewards, (3)
reward all transactions, and (4) provide
transparency and simplicity1.
 Four factors limit the effectiveness of
frequent shopping programs: (1) they can
be expensive, (2) it is difficult to make
corrections in programs when problems
arise, (3) it is not clear that these
programs increase consumer spending
behavior and loyalty toward the retailer,
and (4) it is difficult to gain a competitive
advantage based on frequent shopper
programs.

2. Special Customer Services

 Some retailers provide unusually high
quality customer service to build and
maintain the loyalty of their best
customers.

3. Personalization See PPT 11-34

 With the availability of customer-level Most retail store associates wear a name tag.
data and analysis tools, retailers can now Should customers also wear a name tag or
economically offer unique benefits and
mention their name when shopping at a store?
target messages to individual customers.
They now have the ability to develop What types of retailing/services may benefit
programs for small groups of customers from this type of name recognition and
and even specific individuals. identification?
 Many small, local retailers have always
practiced 1-to-1 retailing, developing
retail programs for small groups or
individual customers. They know each of
their customers, greet them by name
when they walk in the store, and then
recommend merchandise they know the
customers will like.
 The Internet channel provides an
opportunity for retailers to automate the
practice of 1-to-1 retailing.

1
Frank Badillo, Customer Relationship Management (Columbus, OH: Retail Forward, 2001).
  Nearly every online retailer allows
shoppers to search selectively for items in
which they are most interested. Some
retailers attempt to match specialized
promotions to the customer’s search.

4. Community
 Retailers can also develop a sense of
community among customers. The
Internet channel offers an opportunity for
customers to exchange information using
bulletin boards and develop more
personal relationships with each other
and the retailer. By participating in such
a community, customers are more
reluctant to leave the "family" of other
people patronizing the retailer.

B. Converting Good Customers into Best See PPT 11-35

Customers
 Increasing the sales made to good
customers is referred to as customer
alchemy – converting iron and gold
customers in to platinum customers. Ask students for examples of cross-selling and
Customer alchemy involves offering add-on selling from their own experience.
and selling more products and services to
existing customers and increasing the
retailer's share of the wallet with these
customers.
 Add-on selling is selling additional new
products or services to existing
customers, such as a bank encouraging a
customer with a checking account to also
apply for a home improvement loan from
the bank.
C. Dealing with Unprofitable Customers See PPT 11-36
 In many cases, the bottom tier of When dealing with unprofitable customers, a
customers actually has negative LTV. retailer may be consciously providing lower
Retailers actually lose money on every
levels of benefits or service to such customers.
sale they make to these customers.
Evaluate the ethical issues involved.
 Two approaches for getting the lead out
are: (1) offering less costly approaches
for satisfying the needs of lead
customers, and (2) charging the
customers for the services they are
abusing.

V. Implementing CRM Programs

 Increasing sales and profits from CRM See PPT 11-37
programs is a challenge. The effective
implementation of CRM programs What can a small retailer do to implement a CRM
requires the close coordination of program without expending too much in costs?
activities by different functions in a What are the basic sources of costs for such a
retailer's organization. retailer?

 The MIS department needs to collect,

analyze, and make the relevant
information readily accessible for
employees implementing the programs –
the front-line service providers and sales
associates and the marketers responsible
for communicating with customers
through impersonal channels (mass
advertising, direct mail, and e-mail).
 Store operations and human resource
management needs to attract, hire, train,
and motivate the employees who will be
using the information to deliver
personalized services.
 VI. Summary
 This focuses on activities that retailers
are undertaking now and will undertake
in the future to increase the sales and
profits they get from their better
customers.

 Customer relationship management is

an iterative process that turns customer
data into customer loyalty.

13
BUYING MERCHANDISE

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Introduction
 After creating an assortment plan for the
category, forecasting sales, and developing
a plan outlining the flow of merchandise,
the next step in the merchandise
management process is to buy the
merchandise.
 The first strategic decision that needs to be
made is the type of merchandise to buy for
the category: well-known national brands
or private-label brands that are exclusively
available from the retailer.
 Although buyers meet and negotiate with
vendors and manufacturers each season
concerning new merchandise, there is a
trend toward developing long-term
strategic relationships with key suppliers
(as discussed in 10).

I. Brand Alternatives
Retailers and their buyers face a strategic See PPT 13-4, 13-5
decision about the mix of national and
private-label brands sold exclusively by the Ask students to name several of their favorite
retailer. brands. What appeals to them about these
brands? In contrast, what brands do they truly
 dislike? Ask for their reasoning.

A. National Brands

1. National Brands Ask students which brands on their “list of

favorite brands” are national brands?
National brands, also known as
manufacturer brands, are products
designed, produced, and marketed by a
vendor and sold to many different retailers.
The vendor is responsible for developing
the merchandise, producing it with
consistent quality, and undertaking an
advertising program to establish an
appealing image for the brand.
Some vendors use an umbrella or family brand
associated with their company and a
subbrand associated with the product.
In other cases, vendors use individual brand
names for different product categories and
don’t associate the brands with their
companies.
 Some retailers their buying activities
around national brands that cut across
merchandise categories. Despite some
inefficiencies, managing a merchandise by
vendor, rather than by category, gives the
retailer more clout in dealing with the
vendor.

B. Private-Label Brands
Private-label brands (also called store See PPT 13-6
brands, house brands or own brands) are
products developed by retailers.
Ask students which brands on their “list of
In many cases, retailers develop the design and
specifications for their private-label favorite brands” are private-label brands?
products and then contract with
manufacturers to produce those products.
Ask students why a manufacturer of national
In other cases, national brand vendors work brands would want to produce private-label
with a retailer to develop a special version products for grocery stores. (Excess
of its standard merchandise offering to be
production capacity)
sold exclusively by the retailer. In these
cases, the manufacturer is responsible for
the design and specification as well as the
production of the merchandise.
In recent years, as the size of retail firms has
increased through growth and
consolidation, more retailers have the
 economies of scale to develop private-label
merchandise and to use this merchandise to
Ask students about the brand reputation and
establish a distinctive identity. Also,
quality of various private labels vis-à-vis
manufacturers and national brand suppliers
manufacturer brands in some items, e.g., jeans
are more willing to accommodate the needs
(Gap versus Levi's), shoes (Nike versus Payless),
of retailers and develop exclusive private
and cheese (Kraft versus local supermarket
labels for them.
brand). What are the reasons behind these
Private branded products now account for an differences in perceived brand reputations and
average of 16 percent of the purchases in quality? When does it not matter if the brand
the United States and roughly 22 percent in was a manufacturer brand or a private label
Europe. brand?
Retailers can use their names to create a private
label for merchandise in many different
categories or develop category-specific
private brands.
There are four categories of private brands:
Premium branding offers the consumer a
private label that is comparable to, or even
superior to, a manufacturer’s brand quality,
sometimes with modest price savings, such
as Wal-Mart’s Sam’s Choice brand.
Generic brands target a price-sensitive
segment by offering a no-frills product at a
discount price.
Copycat brands imitate the manufacturer’s
brand in appearance and packaging,
generally are perceived as lower quality,
and are offered at lower prices.
Exclusive co-brands are brands developed by
a national brand vendor, often in
conjunction with a retailer, and sold
exclusively by the retailer such as the
American Beauty and Good Skin cosmetics
lines, developed by Estee Lauder for sale
exclusively at Kohl’s.

See PPT 13-7

C. National or Private-Label Brands? See PPT 13-8

Buying from vendors of national brands can
help retailers build their image and traffic
flow and reduce their selling/promotional
 expenses. Retailers need to spend relatively
less money selling and promoting national
brands.
However, since vendors of national brands
assume the expenses of designing,
manufacturing, distributing and promoting
the brand, retailers typically realize lower
gross margins for them compared with
those for their own private-label brands.
Also, since national brands are sold by
other retailers, competition can be intense.
Customers compare prices for these brands
across stores.
Stocking national brands may increase or
decrease store loyalty. If the brand is
available only at a limited number of
retailers, customers loyal to the brand will
also be loyal to that limited set of retailers.
Alternatively, if the brand is available from
many retailers in a market, customer
loyalty to a specific retailer may decrease.
Another problem with national brands is that
they limit the retailer’s flexibility. Vendors
of strong brands can dictate how their
products are displayed, advertised and
priced.
Offering private-label brands has several
advantages: (1) exclusivity boosts store
loyalty, (2) well known, highly desirable
private-labels enhance the retailer’s image
and draw in customers, (3) relatively lower
prices for consumers, (4) fewer restrictions
on merchandise display, promotion or
pricing, and (5) potentially greater gross
margin opportunities.
There are draw-backs to private-label brands as
well. Retailers must make significant
investments to design merchandise,
manage global manufacturers, create
customer awareness, and develop a
favorable image for the brand. In addition,
if the private-label merchandise doesn’t
sell well, the merchandise can’t be returned
to a vendor or sold at an off-price retailer.

II. Buying National Brand Merchandise See PPT 13-11

Buyers of fashion apparel and accessory
categories typically make major
 merchandise buying decisions five or six
times a year for their core merchandise.
These purchases are made many months
before delivery to allow vendors to
produce and deliver the merchandise.
Buyers of staple merchandise categories make
decisions about buying new merchandise
items less frequently, but they replenish the
merchandise on a continuous basis,
sometimes daily.

A. Meeting National Brand Vendors See PPT 13-12

A wholesale market for retail buyers is a
concentration of vendors within a specific
geographic location, perhaps even under Ask students if they think they would enjoy a
one roof or over the Internet. career as a retail buyer in the future? What do
they see as the pros and cons of retail buying as
These markets may be permanent wholesale a career?
market centers or annual trade shows or
trade fairs.

1. Wholesale Market Centers

For many types of merchandise, particularly
fashion apparel and accessories, buyers
regularly visit with vendors in established
market centers.
At specific times during the year, these
wholesale centers host market weeks
during which buyers make appointments to
visit the various vendor showrooms.
Vendors that do not have permanent
showrooms at the market center lease
temporary space to participate in market
weeks.

2. Trade Shows
Trade shows provide an opportunity for
buyers to see the latest products and styles
and to interact with vendors.
Trade shows are typically staged at convention
centers not associated with wholesale
market centers. Vendors display their
merchandise in designated areas and have
sales representatives, company executives,
and sometimes celebrities available to talk
with buyers as they walk around the exhibit
area.
 Vendors from outside the United States and
private brand manufacturers have started to
attend trade show to learn about the market
and pick up trend information. Despite
these trends, most participants at the shows
are national brand vendors.

B. National Brand Buying Process See PPT 13-13

 When attending market weeks or trade
shows, buyers and their superiors typically
make a series of appointments with key
vendors.

 The meetings during market weeks offer an

opportunity for in-depth discussions,
whereas trade shows provide the
opportunity for buyers to see a broader
array of merchandise in one location and to
gauge reactions to the merchandise by
observing the level of activity in the
vendor’s display areas.

III. Developing and Sourcing Private-Label

Merchandise
Retailers use a variety of different processes to
develop and buy private-label merchandise.

A. Developing Private-Label Merchandise See PPT 13-14

Larger retailers that offer a significant amount
of private-label merchandise, like Macy’s
and The GAP, have large divisions
dedicated to managing their private-label
merchandise all the way from design, to
manufacture.
Smaller retail chains can offer private-label
merchandise without making a significant
investment in the supporting infrastructure.
Many national brands will modify their
national brand merchandise and put the
store’s label on the products.
Retailers with private-label departments or
divisions use different processes to develop
merchandise.

B. Sourcing Merchandise See PPT 13-16

 Once the decision has been made about
which and how much private-label
merchandise will be acquired, the
 designers develop a complete specification
and work with the sourcing department to
find a manufacturer for the merchandise.

1. Reverse Auctions Ask students to consider the costs and benefits

of the reverse auction from both retailer’s and
Rather than negotiating with a specific vendor’s sides.
manufacturer to produce their private-label
merchandise, some retailers use reverse
auctions to get quality private-label
See PPT 13-17
merchandise at low prices.
The most common use of reverse auctions is to
buy the products and services used in retail
operations rather than merchandise for
resale.
Auctions conducted by retailer buyers of
private-label merchandise are called
reverse auctions because there is one
buyer, the retailer, and many potential
sellers, the manufacturing firms.
In reverse auctions, retail buyers provide
specifications for what they want a group
of potential vendors to bid on. The
competing vendors then bid on the price at
which they are willing to sell until the
auction is over.
Reverse auctions have not been very popular
with vendors who prefer not to be
anonymous contestants in bidding wars
where price alone, without consideration of
service or quality is the sole basis for
winning business.

B. Global Sourcing See PPT 13-18

An important issue facing large retailers that
design and contract for the production of
Have students give examples of products that
private-label merchandise is to select a
manufacturer. they believe has a higher/lower image than it
deserves just because of the country in which
Barriers to international trade are diminishing it is made.
which means that retailers can consider
sources of production from across the
globe.

1. Costs Associated with Global Sourcing

Decisions
Retailers use production facilities located in
developing economies for much of their
 private-label merchandise because of the
very low labor costs in these countries.
To counterbalance the lower acquisition costs,
however, there are other more subtle
expenses that increase the costs of sourcing
private-label merchandise from other
countries including foreign currency
fluctuations, tariffs, longer lead times, and
increased transportation costs.
Fluctuations in currency exchange rates can
increase costs.
A tariff , also known as a duty, is a tax placed
by a government upon imports.
Import tariffs have been used to shield
domestic manufacturers from foreign
competition and to raise money for the
government.
In general, since tariffs raise the cost of
imported merchandise, retailers have
always had a strong incentive to reduce
them.
It is also more difficult to predict exactly how
long lead time will be when sourcing
globally.
Transportation costs are significantly higher
when merchandise is produced in foreign
countries.

B. Managerial Issues Associated with Global

Sourcing Decisions
When sourcing globally, it is more difficult to
maintain and measure quality standards
than when sourcing domestically.
In addition, the collaborative supply chain
management approaches described in 10
are more difficult to implement when
sourcing globally. Collaborative systems
are based on short and consistent lead
times, and trust and the sharing of Ask students to discuss barrier to the
information. These systems are more development of global collaborative supply chain
difficult to develop globally than relationships.
domestically.
A final issue with global sourcing is the
policing of potential violations of human
rights and child labor laws.
V. Negotiating with Vendors See PPT 13-19
When buying national brands or sourcing
private-label merchandise, buyers and firm
employees responsible for sourcing
typically enter into negotiations with
suppliers.

A. Knowledge is Power
 The more the buyer knows about the
retailer’s and vendor’s situations, as well as
trends in the marketplace, the more
effective he or she will be in negotiations.

 One important issue to be aware of is the

vendor’s policy on markdown money –
funds vendors give retailers to cover lost
gross margin dollars due to the markdowns
needed to sell unpopular merchandise.

 Vendors and their representatives are

excellent sources of market information.
They know what is, and is not, selling.
Retail buyers also can provide market
information to the vendor.

B. Negotiation Issues
Buyers should be prepared to cover a variety of Ask students to consider the positions of both the
issues in their meeting with the vendor buyer and the vendor on each of these six issues.
including: (1) price and gross margin, (2) What position will each of them bring to the
special margin-enhancing opportunities, negotiation?
(3) terms of purchase, (4) exclusivity, (5)
advertising allowances, and (6)
transportation.

1. Price and Gross Margin See PPT 13-21

 The retail buyer wants to buy the
merchandise at a low price to have a higher
gross margin while the vendor wants to sell
the merchandise at a higher price to
achieve better profits.

 Although the wholesale price the buyer

negotiates might enable achievement of
gross margin goals, if the merchandise not
sell as expected, the merchandise may have
to be put on sale, falling short of the
 margin goal.

 Faced with this uncertainty, the buyer may

seek a margin guarantee, the vendors
promise to provide markdown money if
necessary.

 In addition to negotiating the wholesale

price, supermarket buyers often negotiate
slotting allowances. Slotting allowances, or
slotting fees, are charges imposed by a
retailer to stock a new item.

 When a vendor agrees to pay that fee, the

retailer will stock the product for a period
of time, assess its sales and margin, and, if
successful, continue to offer the product
after the trial period.

 Vendors may view slotting allowances as

extortion, and small vendors believe these
fees preclude their access to retail stores.
However, retailers, and most economists,
agree that slotting allowances are a useful
method to determine which new products
the retailer should carry.

2. Additional Markup Opportunities

 As part of the negotiation, the vendor may
offer the buyer discounted prices to take
excess merchandise.
 Although the buyer can realize higher than
normal gross margins on the merchandise
or put the merchandise on sale and pass the
savings on to customers, the buyer must
consider the retailer’s image.

3. Terms of Purchase
 The buyer hopes to negotiate for a long
time period in which to pay for the
merchandise to improve cash flow, lower
liabilities, and even reduce interest expense
if it is borrowing money to pay for its
inventory. In contrast, the vendor would
like to be paid soon after the merchandise
is delivered.

4. Exclusivity
  Retailers often negotiate with vendors for
an exclusive arrangement so that no other
retailer can sell the same item or brand.
This helps the retailer differentiate from
competitors and realize higher margins due
to reduced price competition.

 Vendors may also benefit by making

certain the image of the retailers selling
their merchandise is consistent with their
own brand image. In fashion merchandise
categories, being the first retailer in a
market to carry certain products helps the
retailer hold a fashion-leader image.

5. Advertising Allowances
 Retailers often share the cost of advertising
through a cooperative arrangement with
vendors known as co-op (cooperative)
advertising – a program undertaken by a
vendor in which the vendor agrees to pay
for all or part of a pricing promotion.

6. Transportation
 The question of who pays for shipping
merchandise from the vendor to the retailer
will be a significant negotiating point, as
transportation costs can be substantial.

C. Tips for Effective Negotiations2 See PPT 13-23

1. Have at Least as Many Negotiators as the

Vendor
Retailers have a psychological advantage at the
negotiating table if the vendor is
outnumbered. At the very least, the
negotiating teams should be of equal
number.

2. Choose a Good Place to Negotiate

From a psychological perspective, people Ask students to suggest some locations for the
generally feel more comfortable and negotiation that would be comfortable for the
confident in familiar surroundings. buyer and for the vendor.

3. Be Aware of Real Deadlines

2
These tips are based on Roger Fisher and William Ury, Getting to Yes (New York: Penguin, 1981).
 Recognizing important deadlines will help the
parties come to closure in a timely manner.

4. Separate the People from the Problem

Personal relationships, favors and threats have
no place in the negotiation meeting.

5. Insist on Objective Information

The best way to separate people from business
information is to rely on objective
information.

6. Invent Options for Mutual Gain

Inventing multiple options is part of the
planning process, but knowing when and
how much to give, or give up, requires
quick thinking at the bargaining table.

7. Let Them Do the Talking

There’s a natural tendency for one person to
continue to talk if the other person
involved in the conversation doesn’t
respond. If used properly, this can work to
the negotiator’s advantage.

8. Know How Far to Go

Recognize the fine line between negotiating too
hard and walking away from the table with
less than necessary.

9. Don’t Burn Bridges

The world of retailing is relatively small.
Neither buyer nor vendor can afford to be
known in the trade as unfair, rude, or
worse.

10. Don’t Assume

To be certain there are no misunderstandings,
participants should orally review the
outcomes as the end of the negotiating
session. Both parties should also
summarize the session in writing as soon as
possible after it ends.

VI. Strategic Relationships See PPT 13-24

Maintaining strong vendor relationships is an
important method of developing a
 sustainable competitive advantage.

A. Defining Strategic Relationships

Relationships between retailers and vendors are See PPT 13-25
often based on arguing over splitting up a
Ask students to identify the benefits of
profit pie. This is basically a win-lose
relationship because when one party gets a entering into strategic relationships. One
larger portion of the pie, the other party way to tease out the various issues is to
gets a smaller portion. Both parties are compare relationships that are not of the
interested exclusively in their own profits partnering type with partnering
and are unconcerned about the other relationships. The costs of transactions,
party’s welfare. negotiations, as well as some obvious costs
A strategic relationship, also called a of dealing with partners who have only their
partnering relationship, is when a retailer own interests at heart can be uncovered. By
and a vendor are committed to maintaining contrast, the partnering relationship admits
the relationship over the long term and mutual goals, a commitment to preserving
investing in opportunities that are mutually the relationship and may forsake short-term
beneficial to the parties. gains for a long-term mutually profitable
A strategic relationship is a win-win relationship.
relationship. Both parties benefit because
the size of the pie has increased – both the
retailer and vendor increase their sales and
profits. Strategic relationships are created
explicitly to uncover and exploit joint
opportunities.
Members in strategic partnerships depend on
and trust each other heavily; they share
goals and agree on how to accomplish
those goals; and they’re willing to take
risks, share confidential information, and
make significant investments for the sake
of the relationship.
A strategic relationship is like a marriage.
When businesses form strategic
relationships, they are wedded to their
partners for better or worse.

B. Maintaining Strategic Relationships

The four foundations of successful strategic
relationships are mutual trust, open
communication, common goals, and
credible commitments.

1. Mutual Trust
The glue in strategic relationships is trust. If the retailer doesn’t trust their vendors,
Trust is a belief that a partner is honest
they won’t be willing to share information
(reliable, stands by its word, sincere, necessary for strategic partnerships to
 fulfills obligations) and is benevolent succeed.
(concerned about the other party's welfare).
When vendors and buyers trust each other,
they’re more willing to share relevant
ideas, clarify goals and problems, and
communicate efficiently.
Information shared between the parties
becomes increasingly comprehensive,
accurate, and timely.

2. Open Communication
Buyers and vendors in a relationship need to
understand what’s driving each other’s
business, their roles in the relationship,
each firm’s strategies, and any problems
that arise over the course of the
relationship.

3. Common Goals
Shared goals give both members of the Retailer and Vendor must have same goals,
relationship incentive to pool their such as maintaining high product image,
strengths and abilities, and to exploit limiting distribution outlets, and maintaining
potential opportunities between them. suggested retail prices.
Common goals also help to sustain the
partnership when expected benefit flows
aren’t realized.

4. Credible Commitments
Credible commitments are tangible investments Some vendors help retailers by investing in
in the relationship. store displays, coop advertising, and/or
Credible commitments involve spending inventory management systems
money to improve the supplier’s products
or services provided to the customer.

C. Building Partnering Relationships

The development of strategic partnerships See PPT 13-28
tends to go through a series of phases
characterized by increasing levels of Ask students for examples of manufacturers who
commitment: (1) awareness, (2) sell direct over the Internet. (Hewlett-Packard)
exploration, (3) expansion, and (4) Ask them whether they think the increased sales
commitment. they get by selling over the Internet is worth
In the awareness stage, no transactions have alienating their traditional retail customers.
taken place. Reputation and image of the
vendor can play an important role in
determining if the buyer moves to the next
stage.
 During the exploration phase, the buyer and
vendor begin to explore the potential
benefits and costs.
Once the buyer has collected enough
information about the vendor to consider
developing a longer-term relationship, the
buyer and the vendor determine that there
may be potential for a win-win
relationship.
If both parties continue to find the relationship
mutually beneficial, it moves to the
commitment stage and becomes a strategic
relationship. The buyer and vendor make
significant investments in the relationship
and develop a long-term perspective
toward it.

VII. Legal and Ethical Issues Legal Issues are summarized in PPT 13-29
Given the large number of negotiations and
interactions between retail buyers and
vendors, ethical and legal issues are bound
to arise.

1. Terms and Conditions of Purchase See PPT 13-30

The Robinson-Patman Act, passed by the U.S.
Congress in 1936, potentially restricts the
Ask students to suggest situations where
prices and terms that vendors can offer to
retailers. The Act forbids vendors from offering a different price to different retailers
offering different terms and conditions to may be acceptable.
different retailers for the same merchandise
and quantity. The Act was passed to
protect independent retailers from chain
store competition.
Vendors can offer different terms to retailers
for the same merchandise and quantities if
the cost of manufacturing, selling or
delivery are different.
Different prices can also be offered if the
retailers are providing different functions.

2. Commercial Bribery See PPT 13-31

Commercial bribery occurs when a vendor or
its agent offers to privately give or pay a
retail buyer "something of value" to
influence purchasing decisions.
Gifts could be construed as bribes or
 kickbacks, which are illegal.
Many companies forbid employees to accept
gifts of any kind from vendors.
When the gift or favor is perceived to be large
enough to influence a buyer’s purchasing
behavior, it is considered to be commercial
bribery, and therefore illegal.

3. Chargebacks See PPT 13-32

A chargeback is a practice used by retailers in
which they deduct money from the amount
they owe a vendor.
The retailer may deduct money from an invoice
because merchandise isn’t selling.
The second reason is vendor mistakes such as
shoddy labeling, lost billings, wrong-size
boxes or hangers, missing items, and late
shipments.
Although often legitimate, chargebacks are
often viewed as being unjustified by
vendors.

4. Buybacks See PPT 13-33

The buyback (also known as stocklift or lift-
out) is a strategy vendors and retailers use
Ask students “how bad” an ethical situation
to get products into retail stores.
this practice seems to them.
A buyback can occur under two scenarios.
First, and most ethically troubling is when
a retailer allows a vendor to create space
for its goods by “buying back” a
competitor’s inventory and removing it
from a retailer’s system. Second, the
retailer forces a vendor to buy back slow-
moving merchandise.
Technically, a company with market power
may violate federal antitrust laws if it
stocklifts from a competitor so often as to
shut it out of a market. But such cases are
difficult to prove.

5. Counterfeit Merchandise
Counterfeit merchandise includes goods that See PPT 13-34
are made and sold without permission of
Ask students what products they have seen
the owner of a trademark, a copyright, or a
patented invention that is legally protected that they think are counterfeit.
in the country where it is marketed.
Trademarks, copyrights, and patents are all
under the general umbrella of intellectual
property.
Intellectual property is intangible and is
created by intellectual (mental) effort as
opposed to physical effort. A trademark
is any mark, word, picture, device, or
nonfunctional design associated with
certain merchandise. A copyright protects
original work of authors, painters,
sculptors, musicians, and others who
produce works of artistic or intellectual
merit.

7. Gray Markets and Diverted Merchandise

A gray-market good possesses a valid U.S. It is important to note that gray market
registered trademark and is made by a merchandise is not counterfeit! It is
foreign manufacturer, but is imported into imported and sold to the retailer without the
the United States without permission of the knowledge of (or profit to) the U.S.
U.S. trademark owner. trademark owner.
Diverted merchandise is similar to gray-
market merchandise except there need not
be distribution across international
boundaries.
This term applies to merchandise that is
diverted from its legitimate channel of
distribution. The diversion often involves
a wholesaler (the diverter) and a discount
store operator. See PPT 13-35

Some discount store operators argue that Ask students to discuss the difference between
customers benefit from the lack of gray market and diverted merchandise.
restriction on gray-market and diverted
goods because it lowers prices.
Traditional retailers claim gray-market and
diverted merchandise has a negative impact
on the public. After sale service will be
unavailable and trademark images may be
hurt.
Vendors wishing to avoid the gray-market
problem have several remedies.
First, they can require all of their retail and
wholesale customers to sign a contract
stipulating that they will not engage in gray
marketing.
Another strategy is to produce different
 versions of products for different markets.

8. Exclusive Dealing Agreements See PPT 13-38

Exclusive dealing agreements occur when a
manufacturer or wholesaler restricts a
retailer into carrying only its products and
nothing from competing vendors.
The effect on competition determines the
legality of these contracts.

9. Tying Contracts
A tying contract exists when a vendor and a See PPT 13-39
retailer enter into an agreement that
Ask students to give an example of a product
requires the retailer to take a product it
does not necessarily desire (the "tied that could be legitimately used in a tying
product") to ensure it can buy a product it contract (e.g. McDonald's ground beef) and
does desire (the "tying product"). one that would not (napkins at McDonald's).
Tying contracts are illegal if the effect may be
to substantially lessen competition or tend
to create a monopoly, but the complaining
party has the burden of proof.

10. Refusal to Deal

Generally, both a supplier and a retailer have See PPT 13-40
the right to deal or refuse to deal with
The issue again is whether the vendor is
anyone they choose. There are exceptions
to this general rule when there is evidence large enough to restrict trade or create a
of anti-competitive conduct by one or more monopoly. See exclusive territories.
firms wielding market power.
A manufacturer may refuse to sell to a
particular retailer, but it cannot do so for
the sole purpose of benefiting a competing
retailer.
 VI. Summary
 This examines issues surrounding
purchasing merchandise and vendor
relations. Retailers can purchase either
national brands or private-label brands.
Each type has its own relative advantages.
Choosing appropriate brands, and a
branding strategy, are integral parts of a
firm’s merchandise and assortment
planning process.

ANSWERS TO “GET OUT AND DO ITS”

2 Read the article, "NBA warns fans about counterfeit products", posted at
http://cbs11tv.com/local/NBA.Counterfeit.Merchandise.2.1481903.html. Follow the story's link to
homepage for The Coalition to Advance the Protection of Sports logos (CAPS) at www.capsinfo.com and
read, "About CAPS". What are college and professional sports teams doing to prevent the sale of
counterfeit merchandise? Will these measures be effective? Explain why or why not.
From the CAPS web site:
The Coalition to Advance the Protection of Sports logos (CAPS) is an alliance formed by The Collegiate
Licensing Company, Major League Baseball Properties, Inc., NBA Properties, Inc., NFL Properties LLC, and
NHL Enterprises, L.P. in 1992 to address common trademark protection and enforcement matters of its
members. Since then, CAPS members have worked diligently to enforce their respective trademark rights
by pursuing both civil and criminal legal remedies. For example, CAPS works closely with law
enforcement, providing valuable assistance during the investigation, arrest, prosecution, sentencing and
probation of those who violate the trademark rights of the CAPS members and their affiliated member
sports teams and universities.
CAPS appreciates your interest in the protection and enforcement of the CAPS members’ trademark
rights. CAPS designed this web site to assist you by providing information regarding the identification
and protection of the well-known names, logos and other trademarks of CAPS members. We hope the
instructional information provided throughout this site is useful.
Because sports-logoed products are so popular, trademark owners are compelled to establish
enforcement programs to protect their fans. Fans come to expect that products bearing the marks of
their favorite teams will be of a certain standard. The CAPS members have strict quality control and
approval processes in place to ensure that their licensed products meet or exceed these high quality
standards.
For more information go to: http://www.capsinfo.com/content.cfm?capsnav=about
4 Read the Recession, Recovery & Store Brands report based on an exclusive survey of shopping
attitudes by GfK Custom Research North America for the Private Label Manufacturers Association
(http://www.plma.com/share/press/FOR_IMMEDIATE_RELEASE/PLMA_Recession_Recovery_and_Store
_Brands.pdf). The findings in this report are based on a poll of nearly 800 main household grocery
shoppers. How does a recession impact the demand for private label merchandise? How would
shoppers perceive store brands in an economic upturn? What can retailers do to maintain store brand
loyalty regardless of the external economic environment?
The new GfK poll found that:
1. For most American shoppers, the recovery has yet to begin. Asked whether the economy has changed
over the past few months, 40% of those surveyed said conditions were worse, while 42% said things have
stayed the same. Fewer than one in five felt the economy had improved.
2. As a result, the surge in store brands sales will likely continue. When asked how important current
economic conditions were in deciding to buy a supermarket or grocery store's store brand, 39%
responded “very important.” A solid majority of consumers (62%) plan on buying more private label as
they continue to deal with tough economic times.
3. Shoppers who identify themselves as frequent buyers of store brands are at an all-time high.
More than 57% of shoppers now say they buy private label products “frequently,” a figure that has been
rising (it was under 55% a year ago). The new percentage is consistent across all age, regional and
income demographics included in the study.
4. Consumer awareness of store brands is also up. More than half of consumers (51%) told GfK they are
more aware now of store brand products than they were a year ago. Awareness was up significantly
more among consumers at both ends of the age spectrum: 72% of the youngest age group (age 18-24)
were more aware of store brands, as were 55% of those age 65 and older.
5. More shoppers are forsaking national brands for store brands. In another growing trend, consumers
continue to turn to store brands in supermarket categories where they had previously only purchased a
national brand product. More than four in ten (43%) report they have recently forsaken a familiar
national brand for a private label counterpart, a marked increase since the GfK study conducted in June
2009 when only 35% said they had done so.
6. What's more, virtually all of the shoppers who switched to a store brand are happy with their new
choice. Fully 97% compared store brands favorably to their previous national brand choices in the same
categories. About half (49%), said that their new store brand selections compare “very favorably.” This is
a dramatic increase from the June 2009 study when only 26% reported that.
7. Consumers endorsed a variety of strategies to cope with the economy. When asked how they think the
economy will impact their supermarket shopping habits, more than two thirds of them (69%) say they
will take advantage of discounts by buying larger sizes or quantities for items they regularly buy; while
67% say they will look for more coupons and promotions on national brands. About a third (36%) intend
to change the stores or types of stores where they do their primary grocery shopping. Overall, half the
shoppers in the study (51%) claim they intend to spend less money on buying groceries in the months
ahead.
For the full report go to:
http://www.plma.com/share/press/FOR_IMMEDIATE_RELEASE/PLMA_Recession_Recovery_and_Store_
Brands.pdf

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

Assume you have been hired to consult with The Gap on sourcing decisions for sportswear.
What issues would you consider when deciding whether you should buy from Mexico or
China, or finding a source within the United States?

Students should consider these issues when consulting The Gap on sourcing decisions: Country of
Origin Effect, Foreign Currency Fluctuations, Tariffs, Foreign Trade Zones, Cost of Carrying Inventory,
Transportation Costs, Quality Control, Collaborative supply chain management, and International
Human Rights and Child Labor Violations. Given the choice between sourcing in Mexico, China, and
the United States, various combinations of these issues will influence the advice I will give pertaining
to sourcing in any one of these various countries. For example: China might be a problematic choice
because of its history of human rights abuse, but is also a good choice because labor is
comparatively inexpensive. Similarly, Mexico might be problematic because of instability of its
currency, but a positive choice on the issue of tariffs due to the passage of NAFTA and less costly
expenses than might be incurred by being close to the United States. The United States might be the
best choice when accounting for every one of the aforementioned issues and other issues, but labor
is expensive and unions may be difficult to deal with. The corporate priorities of The Gap would also
have to be accounted for given the relative advantages and disadvantages that exist for sourcing in
any country.

What is the difference between counterfeit and gray-market merchandise? Is the selling of
either legal? Do you believe that the selling of counterfeit merchandise should be
allowed? What about gray-market merchandise? Provide a rationale for your positions.
Would you purchase a counterfeit wallet? What about a counterfeit car part or
prescription medication?

Counterfeit merchandise includes goods that are made and sold without permission of the owner of
a trademark, a copyright or a patented invention that is legally protected
 in the country where it is marketed. Gray-market merchandise, also known as parallel imports,
refers to merchandise that moves through distribution channels other than those authorized or
intended by the manufacturer or producer. Counterfeit merchandise is illegal, whereas gray-market
merchandise is legal (although potentially very unpopular with vendors).
Students will likely have various opinions as to whether selling counterfeit merchandise, gray-
market merchandise, or both, should be allowed. The purpose of this question is to make students
think about what their own moral/ethical positions are in relation to these types of merchandise. Do
they feel advantages to consumers outweigh other disadvantages to retailers and vendors? Do they
feel these types of competition are just part of the “doing business”?

What are the advantages and disadvantages of manufacturer’s brands versus private-label
brands? Consider both the retailer's and customer's perspectives.

National brands are products designed, produced, and marketed by a vendor/manufacturer and
sold to many different retailers. The vendor is responsible for developing the merchandise and
establishing an image for the brand. Retailers carrying national brands receive a number of
advantages. These brands help to build both the retailer’s image and its traffic flow. They also
reduce expenses as the vendor is responsible for promoting the merchandise.
Private-label brands are products developed and marketed by a retailer. These include labels like
Craftsman belonging to Sears, Arizona in JCPenney, and Kmart’s Martha Stewart or stores that sell
their own labels like The Gap. In recent years, private-labels have assumed a new level of
significance by establishing distinctive identities among retailers.
In discussing the strategies of their favorite clothing stores, students should identify several
advantages that would lead the retailers to carry private-label merchandise. Private-label products
now account for an average of 20% of the purchases in grocery stores and as much as 50% in some
product categories in drug stores. Offering private-labels provides a number of benefits to retailers.
First, the exclusivity of store brands boosts store loyalty. Second, they can enhance store image if
the brands are high quality and fashionable. Third they can draw customers to the store. Fourth,
there are no restrictions on display and finally, gross margin opportunities may be greater.

Does your favorite clothing store have a private-label brand strategy? If yes, how does it
build store loyalty? If no, how could a private label brand create loyalty?

Students will think of a store brand that they have purchased. Answers will vary.
 When the retailer designs and manages its own private-label brands, those brands provide the
retailer’s customers with a unique merchandise opportunity. The private-label brands are exclusive
to the retailer, only available through its store or Web site. This provides a distinctive image for the
retailer which cannot be duplicated, and thus is not available from competing retailers. With well-
known, desirable brands, available nowhere else, customers become loyal to the retailer’s store in
order to patronize its private-label brand(s).

Explain why a grocery store, such as Kroger, offers more than one tier of private-label
brands within a particular product category.

Different types of private-label brands offer consumers different advantages. Kroger may choose to
provide more than one private-label brand within a product category to reach different target
consumer segments based on what the brand provides. For instance, within the cold, breakfast
cereal category, Kroger may carry a Premium private-label brand to offer consumers a product of
the same quality as the national brand, at modest price savings. Kroger may also elect to offer a
cereal classified as a copycat brand, one offering consumers somewhat lower quality for a
significantly lower price.

Why have retailers found exclusive private labels to be an appealing branding option?
Choose a department store, a discount store, and a grocery store. What exclusive
private-label brands do they offer? How are they positioned in relation to their national
brand counterparts?

In recent years, exclusive private-label brands have become increasingly prominent in the
marketplace. Before this upswing in popularity, private-label brands were viewed as representing
lower quality merchandise from the consumer’s perspective. More recently, national brand
manufacturers have entered these exclusive relationships to provide private-label merchandise for
specific retailers at the same level of quality as the vendor’s own brands.
Department store exclusive private-label brands include Alfani, Macy’s Charter Club, and T. Tahari
and Nordstrom’s BP, Caslon and Rubbish brands. Discount store’s exclusive private-label brands
include Target’s Archer Farms, Merona, and Michael Graves Design and Costco’s Kirkland Signature
brands. Grocery store private-label brands include Shaw’s/Star Market’s Wild Harvest brand and
Whole Foods’ 365 brand.
This trend toward national brand vendors producing exclusive private-label merchandise for its
strategic partners allows a retailer to use its private-label to create or enhance a distinctive retail
image and to generate customer loyalty for its own store brand. The intense level of competition
within the retail industry, as well as economic pressures on consumer spending make the creation of
private-label merchandise targeted at enhancing the retailer’s image and fostering increased loyalty
from its customer base.
When you go shopping in which product categories do you prefer private labels or national
brands? Explain your preference.

Students will likely respond to current marketplace trends here. Clothing (The GAP and Banana
Republic) cosmetics (American Beauty and Good Skin), and home goods (Martha Stewart and
American Living) are among the many popular categories of private-label brand spending.
Drugstores, supermarkets, and mass merchandisers all report significant sales growth for their
private-label brands. This growth has fueled private-label expansion into food products, health and
beauty products, and household items.

What are retailers doing to be more socially responsible in buying merchandise? Why are
they becoming more socially responsible? Do you buy products that you believe were
produced in a socially responsible manner, even if they cost more?

In response to significant pressures from the marketplace, retailers have become very aware of their
social responsibilities as part of their global sourcing efforts. Faced with a number of very public
critiques of global practices, particularly regarding sweatshops and child labor. In order to avoid
these abuses many U.S. apparel retailers have engaged in self-policing of their entire organizations,
including compliance policies with all vendors regarding labor practices. Students may bring up
examples of fair trade sourcing, environmentally friendly practices and charitable giving.

You have decided that you don’t want to take the final in this class. Explain how you would
negotiation this request with the instructor. Consider place, deadlines, past
relationship, possible objections, options for mutual gain and how to maintain a
professional relationship.

The negotiation session should be planned in advance with a consideration of gathering all the
necessary facts (knowledge is power) before the meeting. Next, students should determine their
negotiation issues: exactly what it is they are looking for and exactly what are they willing to
concede to the instructor in return. Finally, students should consider the 10 Tips for Effective
Negotiations presented in the chapter.
ANCILLARY LECTURES AND EXERCISES

LECTURE # 13-1: NEGOTIATING WITH THE VENDOR

Introduction
What is negotiation?
Negotiation is a two-way communication designed to reach an agreement when parties have
both shared and conflicting interests.
Three key points:
1. Two-way communication - to have a negotiation there has to be communication being sent
and received.
2. Agreement - that our goal to get mutual agreement among the parties..
3. Shared or conflicting interests - both parties can have the same or very different interests.
For instance, a buyer and seller can start off with very different goals, but at the end they
must be in agreement for the negotiation to be successful.
If we agree that negotiating is simply getting what you want from others, then it stands to
reason that people are involved in the negotiating activity everyday.
Ask students: whom do you negotiate with and for what results?
Responses might include:
1. Spouse - Where to go for dinner.
2. Shopkeeper - Dickering price on antiques.
3. Children - What time they should go to bed.
4. Boss - Due date on project.
5. Stranger - Seat on subway/bus.
Everyone negotiates everyday.
Though we all have lots of practice, negotiating is still not easy to do well.
As buyers, the success, i.e., profitability of the business would be greatly affected by how
well they negotiate.
In talking about negotiating we want to direct our attention to results.
What is it we want to achieve?
What are the benefits and effects of a successful negotiation?
At the same time, what are the negotiating results we want to avoid?
Potential results
Today, planning and execution is the method through which obstacles are overcome.
When involved in negotiating, the results you achieve can be any of the following:
1. WIN - WIN (Buyer wins, vendor wins)
2. WIN - LOSE (Buyer wins, vendor loses)
3. LOSE - LOSE (Buyer loses, vendor loses)
WIN - WIN
This is the best situation.
Based on cooperation and collaboration.
Enhances vendor trust in buyer as a professional.
Produces long-term, best deals for buyer and the company.
Unless you are involved in used car sales, an important goal of negotiations is to develop
long-term relationships.
The only way this can be done is if both parties win.
Does not mean “giving-in or being soft.”

WIN - LOSE
There are some instances where win/lose can be positive -- if buyer doesn’t want to develop a
long term relationship.
It is generally negative because if the vendor feels like a loser, then there is little possibility
of going back to the vendor again.
Win/lose can turn into lose/lose.
For instance, if a buyer gets the lowest price in the market, the vendor might just
conveniently not ship.
Vendor in business to make money, cannot “lose” all the time.
For instance, an appliance distributor decided not to sell to a department store in Denver
because the distributor was unable to make money because the negotiations were always so
unfavorable to the distributor.

LOSE - LOSE
Wastes time and energy.
No relationship established.
Objectives not met.
 How can you determine what negotiating result you are going to achieve?
Your style will play an important role.
Let‘s take a look at a video and see if these buyers are getting the results they want.
Principled Negotiations
The concept of principled negotiating is based on four basic points:
1. People
2. Interests
3. Options
4. Criteria

Let’s talk about them individually.

Separate the people from the problem
Negotiators are people first -- all have human aspects.
Relationships between negotiators tend to become entangled with the problem.
There is a need to separate the relationship from the problem and see ourselves as working
side by side.
Attack the problem, not each other.
Focus on interests, not positions
Position is something you have decided on.
Interests are what caused you to decide (desires, concerns)
Put yourself in the other person’s shoes and examine each position taken; look for
understanding of their interests. Ask yourself why they have taken that position?
Communicate your interests firmly and openly.
Invent options for mutual gains
Think of a wide range of possible solutions that will benefit both parties.
Consider all options -- all sides.
Get over the obstacles that inhibit you from inventing an abundance of options.
Don't make premature judgment, i.e., jumping to conclusions.
There is no one best single answer. There are many possibilities.
Don't assume there is a “fixed pie”, “either I get it or you do”. There are possibilities to
make the pie bigger for both parties.
Thinking that a solution to their problem is their problem. A good negotiator always thinks
of many solutions to their problem.
 Get the options out in the open.
Look for mutual gain and shared interests.
Insist on using objective criteria
Use fair standards, i.e., market value, cost.
Once agreement is reached, what standards will be used to make sure the deal is carried out?
Be reasonable and be open to reason.
Reach solutions based on principle not pressure.
For greater clarification, let’s contrast the three style of negotiating and the characteristics of
the negotiator using each specific style.
Which style do you feel will get the desired result of Win/Win? Why?
We said earlier that success is based on negotiating style.
Planning
In addition to style and probably even more important is one simple word/action --
PLANNING.
To be effective in the market, to get the success you want, you must plan effectively.
Being prepared -- ready to anticipate and answer questions gives the buyer confidence.
Confidence breeds success!
What are the areas that we must look at in order to plan?
1. History - To go forward, you must understand what has happened in the past. Know the
merchandise and its sales history. What is the customer telling you? What is the future
potential?
2. Buyer Objectives -- optimum and realistic - Know what you want and what you will settle
for to achieve it. Set optimum goals and realistic goals. Determine what you could give up
in your optimum goal to reach your realistic goal.
3. Concessions. Concessions are those we can afford to give up. Only use your concessions
after you have explored every option available.
4. Vendor objectives - An important point in preplanning is anticipating what the vendor
wants and what he will settle for. Vendors, like buyers, will have concessions ready, but
will keep them hidden.
Setting objectives
Keep in mind that to set goals you must:
1. Know the market: What are the current trends? How is business generally? How are each
of your vendors performing against the overall market?
 2. Know the vendor: How is his/her business? What inventory position is he/she in? (Did
they make too much this season? Is he/she a manufacturer or an importer? This will
determine the delivery dates, and amount of control you and the vendor have over the
order. Has he/she been hit with major cancellations from another retailer? If so, you may
be able to get a very good price. Who can you replace his/her goods with? At what price?
3. Know the numbers: What is a realistic sales plan for this vendor? What is a realistic
margin projection for this vendor? Are you accurately anticipating markdowns? What is
the amount of inventory on hand? What should it be? What is the amount of inventory on
order? Do you need to cancel or buy goods? How much of the merchandise will be sold
on sale? Are you being realistic in the current business environment? If business is tough,
how deep do you need to cut prices to generate sales? Know what you need!
4. Know the competition: Who are they? Other department stores, chains, specialty stores?
What financial condition are they in? What is their inventory position? How much of the
same type of merchandise do they carry? Are they canceling orders or buying merchandise
at lower than normal prices? How will you protect your margin if you are forced to meet
competitive prices?
5. Know yourself: Know your personal strengths and limits. Are you a morning or afternoon
person? Set up your meetings for when you are at your best. Can you pull this off by
yourself or do you need help? If so, get it!
Negotiating tips
There are several tips that one can use while negotiating:
1. Beware of time pressures. Almost everything happens at or just before the deadline. Think of the
last major labor strike. Give and get appropriate deadlines.
2. Keep the numbers of negotiators even, or even try to have more people on your side. In some
countries in the Orient they will get people to come in from the factory who don't even speak
English just to keep the numbers at least equal.
3. Let the other guy talk. Be patient and listen. The more he/she talks, the more you learn from
him/her about his/her business. The person who breaks the silence first, usually loses.
4. Let the other guy mention a figure first. It might be better than you would ask for. In any case, it
tells you where you are starting.
5. Know when to use your boss as a partner and source of extra power. The bigger your deal, the
higher you go.
6. Don‘t be afraid to say no to an offer that doesn’t help you get what you need.
7. Don‘t be greedy -- don‘t over-negotiate. Know when you‘ve reached the limit and don’t go beyond
it, or you could sour your deal. If you ask for too much, even if they initially agree, you may never
get the merchandise.
8. Don‘t assume -- recap everything and, if appropriate send a letter to follow.
9. Go into the meeting knowing exactly where you will come out on profit margin, using several
different scenarios. Remember to invent options for mutual gain.
10. Before you go into the negotiation, use a technique that Olympic athletes use: envision how the
meeting will go, and picture yourself being very successful -- it will build your self-confidence.
11. Make sure that you plan to meet when you are at your best. Plan your schedule thoroughly -- the
amount of time the meeting will take (don’t arrange two tough meetings back-to-back); see your
most important vendors or biggest problems early in the week. You might have to go back.
12. Make every effort to reduce stress for yourself. Just being in New York City can be stressful, so do
things that make you feel better -- whether it‘s exercise, staying in touch with family at home,
seeing friends outside the business -- whatever is a harmless escape. Don‘t burn the candle at both
ends; get a decent amount of sleep and don‘t overindulge in bad habits like drinking and
overeating. Keep yourself in top condition.
13. Always leave the door open for the future. Finally, here are some key points to remember when
negotiating:
1. Planning is critical

2. Knowledge is power!

3. The secret in any negotiation is that the other person will only do what is right for him!

ANCIALLRY EXERCISE : ROLE PLAYING NEGOTIATIONS

-------------------------------------------------
Instructor’s Note: This exercise should be used in conjunction with 14, but only after the class has had
Lecture 13-1.

-------------------------------------------------
Directions
Get two groups of students to volunteer for this exercise.
One group will represent Drip-Dry; while the other will represent Burdines.
Each group should have three to four people.
Provide the entire class with the following handouts:
1. Dealer letter from Drip-Dry
2. Burdines Fact Sheet
3. Observers' Notes Sheet
Give the two groups 15 minutes to prepare or give them the assignment one class period in
advance.
The two groups will role play the negotiation for about 15 minutes.
The rest of the class should be encouraged to fill out the Observers' Notes.
Then, the relative successes of the two teams should be discussed in class.
 P.O. BOX 999
NEW YORK, N.Y. 10038
October 12, 1992
DEAR MR DEALER

DRIP-DRY is proud to announce a SUPER MARKET SPECIAL on all orders placed in our showroom
the week of June 10.
INTRODUCTORY SALE ON ALL NEW MODEL WASHERS @ 15% off regular prices!
$5.00/unit ADVERTISING ALLOWANCE included!
PREPAID FREIGHT!
 Regular CASH DISCOUNT of 2% (our normal teens) stD1 applies!

These SPECIAL MARKET WEEK SALE PRICES, along with all the EXTRAS, will apply to any orders
placed DURING MARKET WEEK, June 10 through June 17, under the conditions listed below:
Minimum quantity purchase of 25 units or more.
Delivery must be taken by July 1st
 Factory selected color mix with NO LESS THAN 40% WHITE.

Here’s how the promotion actually works. On any purchase of 25 units or more, we will invoice you as
follows:
Regular Wholesale Price $175.00 ea.
Less 15% Sale Discount 26.25
Promotia1On “sale. Price $148.75 ea.

In addition, you may bill us back $5.00/unit advertising allowance, all freight costs, as well as your
regular 2% Cash Discount:
Promotion “sale”. Price $148.75 ea.
– 5.00 (Adv. Allow)
– 7.19 (Freight Chg.)
– 2.73 (2% Cash Disc.)

JUST SEND YOUR CHECK FOR: $133.83 ea.

COME IN TODAY!!. REMEMBER THIS SPECIAL OFFER IS GOOD ONLY DURING MARKET
WEEK. HOPE TO SEE YOU IN SPACE 1075, SHOWROOM BUILDING.

SINCERELY,

ROBERT SNOGRASS
PRESIDENT
 BURDINES vs. DRIP-DRY APPLLANCE CORP.

BUYER’S FACTS AND GOALS

General information: The appliance business has been good this season. It is Market Week, and you.
received a brochure from Drip-Dry outlining their market Special in the new model washers.
You are shopping for a mayor promotion for Labor Day Weekend Sale. A PREVIOUS PURCHASE
YOU HAD MADE FOR THIS EVENT HAS FALLEN THROUGH, AND THAT VENDOR HAS
REFUSED TO SHIP TO YOU DUE TO PROBLEMS WITH THE ACCOUNTS PAYABLE. YOU
MUST COMPLETE A DEAL IN THE NEXT FIFTEEN MINUTES OR BE CLOSED OUT OF THE
LABOR DAY PROMOTION ALTOGETHER, KILLING YOUR MOMENTUM FOR SEPTEMBER.
Drip-Dry is the sixth largest appliance manufacturer in the United States, and you are his second largest
account nationally.
Specifics: You are looking for a LABOR DAY PROMOTION, and you need between 200 and 250
washers.
Your goal is to run a Preseason Introductory Sale on new model washers @ 25% off the regular prices.
Regular Retail Price $250 ea. Proposed Retail: $187.50 ea. Regular Cost Price: $175 ea.
Previous statistics show that at least 50% of the assortment should be WHITE with the balance made up
of Copper, Harvest Gold, Avocado, and Blue.
You have $1 000 budgeted for the Ad.
Your normal department Markup is 30%.
Your open-to-buy is $25,000 until August 1st. No problem for August deliveries.
Regular terms with Drip-Dry are _10 EOM.3
(Freight usually runs 5% of cost).
YOU MUST COMPLETE THIS DEAL IN THE NEXT FIFTEEN MINUTES OR BE
CLOSED OUT OF ALL LABOR DAY ADVERTISING. IF NEEDED, YOU WILL SETTLE
FOR 25% MARK-UP ON THIS PURCHASE
 OBSERVER’S NOTE

During the negotiation: What did the buyer attempt to get? What did the vendor agree to?
BUYER’S ATTEMPT VENDOR AGREEMENT

Indicate

What talked most often?

Who cited first number?
Was vendor self-esteem maintained?
Were concessions made? By whom?
How profitable was the deal for the other?
How did the participants feel after the negotiating
visit?
ANCILLARY LECTURE 142- INTERNATIONAL SOURCING
DECISIONS
Instructor’s Note: The purpose of this lecture is to supplement material in the text. A good portion of this
material is already in the book. Therefore, instructors should use either this version or the shorter version
in the book.

-----------------------------------------------------

Refact: Over the last 20 years, importing has gone from a small segment of the production strategy for
apparel to a dominant force, now accounting for about 67 percent of all goods sold at retail. 3

Take a look at what you are wearing to see if anything is made in the US. Chances are your shirt or blouse
is made in Hong Kong. Your jeans are made in Italy. Those beautiful new shoes are Brazilian, while
those old sweat socks are from China. Your undergarments are from Honduras. To top it off, your watch
is probably from either Japan or Switzerland.

A decision that is closely associated with branding decisions, which we discussed in the previous section,
is to determine where the merchandise is made. A product’s country of origin is often used as a signal of
quality. Certain items are strongly associated with specific countries, and products from those countries,
such as chocolate from Switzerland or cars from Japan, often benefit from those linkages. 4 But there is
more to global sourcing decisions that simply buying from those countries with reputations for high
quality merchandise.

In this section we will first examine the cost implications of international sourcing decisions. On the
surface, it often looks like retailers can get merchandise from foreign suppliers cheaper than from
domestic sources. Unfortunately, there are a lot of “hidden” costs, including managerial issues,
associated with sourcing globally that make this decision more complicated. The influence of
Collaborative supply chain management inventory systems on Global sourcing decisions is then
examined. Clearly it takes longer to source globally than it does to buy from a vendor close to home.
Since Collaborative supply chain management inventory systems have become such an important facet of
merchandise management, we will examine ways that retailers can derive benefits from Collaborative
supply chain management while still sourcing globally. This section concludes with an examination the
ethical issues associated with retailers who buy from vendors engaged in human rights and child labor
violations. We discuss what some retailers are doing to eliminate the problem.

3
Arthur Friedman, “Sourcing Now: The Proximity Factor, Imports: A Change of Venue,” Women’s Wear Daily,
Mary 26, 1996, p. 6, citing the Commerce Department.
4
See Gary M. Erickson, Johny K. Johansson, and Paul Chao, “Image Variables in Multi-Attribute Information on
Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research 16 (September
1989), pp. 175-87; Sung-Tai Hong and Robert S. Wyer, Jr., “Effects of Country-Of-Origin and Product-Attribute
Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research 16
(September 1989), pp. 175-87; Michael R. Solomon, Consumer Behavior, Boston: Allyn and Bacon, 1992, p. 262.
Costs Associated with Global Sourcing Decisions
A demonstrable reason for sourcing globally rather than domestically is to save money. Retailers must
examine several cost issues when making these decisions. The cost issues discussed in this are: Country
of origin effects, foreign currency fluctuations, tariffs, free trade zones, inventory carrying costs, and
transportation costs.

Country of Origin Effects

The next time you are buying a shirt that is made in Western Europe -- Italy, France, or Germany -- notice
that it is probably more expensive than a comparable shirt made in a developing country like Hungary,
Ecuador, or Taiwan. These European countries have a reputation for high fashion and quality.
Unfortunately for the US consumer, however, the amount of goods and services that can be purchased in
those countries with US dollars is significantly less than in the developing countries. When making
international sourcing decisions, therefore, retailers must weigh the savings associated with buying from
developing countries with the panache associated with buying merchandise from a country that has a
reputation for fashion and quality. Jeans from Italy, for example, can retail for over $100; whereas those
made in Ecuador or even in the United States are much less. Other countries, such as Japan for instance,
might have a technological advantage in the production of certain types of merchandise and can therefore
provide their products to the world market at a relatively lower price than other countries. For example,
Japan has always been a leader in the development of consumer electronics. Although these products
often enter the market at a high (penetration) price, the price soon drop as manufacturers learn to produce
the merchandise more efficiently.

Foreign Currency Fluctuations

An important consideration when making global sourcing decisions is fluctuations in the currency of the
exporting firm. Unless currencies are closely linked, for example, between the US and Canada, changes
in the exchange rate will increase or reduce the cost of the merchandise.

Suppose that Service Merchandise is purchasing watches from Swatch in Switzerland for $100,000,
which is equivalent to 120,000 Swiss Francs (SFr) since the exchange rate is 1.2 Sfr for each US dollar.
If Service Merchandise believes the value of the dollar will fall to, say 1.1 SFr, before they have to pay
for the watches, they should negotiate payment for the watches in US dollars. In this case, Service
Merchandise would pay $100,000 and the risk of devaluation of the dollar lies with Swatch. If, however,
Swatch demands payment is Swiss Francs, Service Merchandise assumes the currency fluctuation risk. In
this case, Service Merchandise would end up paying $109090 (120,000 SFr ÷ 1.1).

To lessen the risk of a falling currency exchange, i.e., the US dollar becoming less valuable compared to
the currency of the vendor, Service Merchandise could engage in the foreign exchange market. Suppose
that Service Merchandise believes that the value of the dollar will fall in relation to the Swiss Franc
before payment is due, as in our example. Service Merchandise can get a bank to agree to guarantee the
Swiss Francs at the $1.20 rate for an additional fee to be used to pay for the watches at the time that
payment is due. There is still a risk involved with this strategy, however. Service Merchandise could
miss an opportunity to get the watches at a lower price by locking in the $1.20 rate if the value of the US
dollar goes up instead of down.
Tariffs
A tariff, also known as a duty, is a list of taxes placed by a government upon imports or exports. Import
tariffs have been used to shield domestic manufacturers from foreign competition and to raise money for
the government. Although more common in less developed countries, export taxes are only used to
generate additional revenue. For instance, the Argentinean government may impose an export tariff on
wool that is exported. An export tariff actually lowers the competitive ability of domestic manufacturers,
rather than protecting them, as is the case with import tariffs. In general, since tariffs raise the cost of
imported merchandise, retailers have always had a strong incentive to reduce them. In this section we
will discuss several mechanisms used for reducing tariffs: the General Agreement on Tariffs and Trade
(GATT), the North American Free Trade Agreement (NAFTA), and Foreign Trade Zones.

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).
In 1946, the average US tariff rate was 26 percent, compared to approximately five percent in 1987. 5 The
General Agreement on Tariffs and Trade (GATT) is partially responsible for this reduction. Started in
1947, GATT has evolved into a group of 125 member countries that sponsors international trade
negotiations.

In 1993, a GATT accord was reached that has far-reaching effects on the reduction of tariffs and other
trade barriers. Importantly, in January 1995, the World Trade Organization (WTO) was formed to
supervise and arbitrate GATT agreements and encourage future negotiations.

North American Free Trade Agreement (NAFTA). The ratification of NAFTA on January 1, 1994
created a tariff free market with 364 million consumers and a total output of $6 trillion. 6 NAFTA
members are currently the US, Canada, and Mexico, but other Latin American countries are expected to
join in the next few years.

US retailers stand to gain from NAFTA on several fronts. First, Mexican labor is relatively low-cost and
abundant. Thus, retailers can either search for lower-cost suppliers in Mexico or begin manufacturing
merchandise there themselves. Maquiladoras -- plants in Mexico that make goods and parts or process
food for export to the United States -- are plentiful, have lower costs than their US counterparts, and are
located throughout Mexico, but particularly in border towns such as Nogales and Tijuana. Second, with
the growing importance of Collaborative supply chain management inventory systems, the time it takes to
get merchandise into stores has become even more critical than in the past. Transit times are shorter and
managerial control problems are reduced when sourcing from Mexico, compared to the Far East or
Europe. Finally, many US retailers view Mexico as an attractive market for expansion (See 5 (Strategy
chapter).)

5
Thomas R. Graham, “Global Trade: Ware and Peace,” Foreign Policy (Spring 1983), pp. 124-137, taken from
Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 85.
6
The Likely Impact on the United States of a Free Trade Agreement with Mexico (Washington, DC: United States
International Trade Commission, 1991).
NAFTA was not passed without opponents, however. There are segments of the US economy that will
suffer. Since US employers will be able to buy or manufacturer merchandise cheaper in Mexico, the
wages and employment of US unskilled workers may decrease. Further, some labor intensive industries
such as furniture, and clothing are likely to suffer. Finally, those involved in the production of sugar,
peanuts, citrus, vegetables and seafood may loose business to Mexican competition.

Foreign Trade Zones

Retailers involved in foreign sourcing of merchandise can avoid import tariffs completely by using
foreign trade zones. A foreign trade zone is a special area within a country that can be used for
warehousing, packaging, inspection, labeling, exhibition, assembly, fabrication or transshipment of
imports without being subject to that country’s tariffs.

To illustrate how a foreign trade zone can benefit retailers, consider how German cars are imported to a
foreign trade zone in Guatemala for distribution throughout Central America. The duty for passenger
vehicles is 100 percent of the landed cost of the vehicle. The duty for commercial vehicles, however, is
only 10 percent. The German manufacturer imported commercial vans with no seats or carpeting, and
with panels instead of windows. After paying the 10% import duty, they converted the vans to passenger
station wagons in the foreign trade zone in Guatamala and sold them throughout Latin America.

Cost of Carrying Inventory

The cost of carrying inventory is likely to be higher when purchasing from suppliers outside the US than
from domestic suppliers. Recall from 6 that:

Cost of carrying inventory = Average inventory value (at cost) X Opportunity cost of capital.

The opportunity cost of capital is the rate available on the next best use of the capital invested in the
project at hand.

There are several reasons for the higher inventory carrying costs. Consider The Spoke bicycle store in
Aspen, Colorado that is buying Moots bicycles manufactured in Steamboat Springs, Colorado. They
know that the lead time -- the amount of time between recognition that an order needs to be placed and
the point at which the merchandise arrives in the store and is ready for sale -- is usually two weeks plus or
minus three days. But if The Spoke is ordering their bikes from Italy, the lead time might be three
months, plus or minus three weeks.
Why is the lead time typically longer when sourcing globally? The lead time tends to be longer because
order transmission, order filling, packing and preparation for shipment, and transportation tends to be
longer and more complicated for global transactions. Order transmission time -- the time it takes for the
order to get from the retailer to the supplier -- depends on whether electronic data interchange (EDI),
telephone, fax, or mail is used in communicating. The order filling time may also increase because of a
lack of familiarity of customs and procedures between the retailer and their foreign supplier. Packing and
shipment preparation require more attention. Finally, and probably most important, transportation time
increases with the distances involved. 7

Since lead times are longer, retailers must maintain larger inventories to insure that merchandise is
available when the customer wants it. Larger inventories mean larger inventory carrying costs.

It is also more difficult to predict exactly how long the lead time will be when sourcing globally. When
the bicycle goes from Steamboat Springs to Colorado, the worst that could happen is that it gets caught in
a snow storm for a day or two. On the other hand, the bicycle from Italy might be significantly delayed
because of multiple handlings at sea or airports, customs, strikes of carriers, poor weather, or other
bureaucratic problems. Similar to longer lead times, inconsistent lead time require the retailer to maintain
higher levels of safety stock.

Transportation Costs:
In the previous section, we described how the cost of carrying inventory is higher when sourcing globally
than when sourcing domestically. Part of this cost is due to longer shipping distances -- the longer the
distance, the higher the transportation cost for any particular mode of transportation. For instance, the
cost of shipping a container of merchandise by ship from China to New York is significantly higher than
from Panama to New York.

The introduction of different modes into the transportation cost equation complicates the sourcing
decision. Suppose The Spoke in Aspen decides to have the bicycles from Italy shipped by airfreight
instead of by ship and then train. The shipping cost per bicycle skyrockets. In essence they are adapting
a Collaborative supply chain management inventory system with all the associated benefits. The
inventory carrying cost is significantly reduced because the lead time and fluctuations in lead time go
down for all of the reasons detailed above. Also, sales might also increase because The Spoke is better
able to provide their customers with exactly what they want. It is easier to stay in stock with the bicycles
that are most popular, and they can promote special orders.

Retailers can use the following rule of thumb to determine which transportation mode is best. First,
relatively high weight/high density/low cost staple merchandise such as furniture is more likely to be
shipped via lower cost modes such as water, truck, or train. Alternatively, relatively low weight/low
density/high value fashion merchandise such as jewelry is more likely to be shipped by air. What do
retailers that are in the middle of this weight/density/cost spectrum do? Some of the best have chosen
airfreight. The Limited, for example, leases Boeing 747s to airfreight merchandise from the Orient to its
distribution centers in the United States.

7
Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 488.
Managerial Issues Associated with Global Sourcing Decisions
In the previous section we examined the specific costs associated with global sourcing decisions. In most
cases, retailers can obtain hard cost information that will help them make their global sourcing decisions.
The managerial issues discussed in this section -- quality control and developing strategic alliances -- are
not as easily evaluated.

Quality Control
When sourcing globally, it is more difficult to maintain and measure quality standards than when
sourcing domestically. Typically these problems are more pronounced in countries that are further away
and that are less developed. For instance, it is easier to address a quality problem if it occurs on a
shipment of dresses from Costa Rica to the US than if the dresses were shipped from Singapore. In the
same way, since Germany is known for its high engineering standards and since Volkswagen’s corporate
offices are in Germany, one might expect fewer defects on Volkswagens made in Germany than those
made in Mexico.

There are both direct and indirect ramifications for retailers if merchandise is delayed because it has to be
remade due to poor quality. Suppose Banana Republic is having pants made in Haiti. Before leaving the
factory, Banana Republic representatives find that the workmanship is so poor that the pants need to be
remade. This delay reverberates throughout the system. Banana Republic could carry extra safety stock
to carry them through until the pants can be remade. More likely, however, they won’t have advance
warning of the problem, so the stores will be out-of-stock.

A more serious problem occurs if the pants are delivered to the stores without detecting the problem.
This could happen if the defect is subtle, such as inaccurate sizing. In this case, customers must try on
multiple pants, and special orders and transfers from other stores are useless since there is no size
integrity. In the end, customers can become irritated and question merchandise quality. Also,
markdowns ensue because inventories become unbalanced and shop-worn.

Building Strategic Alliances

The importance of building strategic alliances is examined later in this chapter. It is typically harder to
build these alliances when sourcing globally, particularly when the suppliers are further away and are
from less developed countries. Communications are more difficult. There is often a language barrier, and
there are almost always cultural differences. Business practices -- everything from terms of payment to
the mores of trade practices such as commercial bribery -- are different in a global setting. The most
important element in building a strategic alliance -- maintaining the supplier’s trust -- is more arduous in
an international environment.

The Influence of Collaborative supply chain management on Global Sourcing Decisions

Sourcing globally and collaborative supply chain management inventory systems are inherently
incompatible. Yet both are important and growing trends in retailing. Collaborative supply chain
management systems are based on short and consistent lead times (See X -- systems). Vendors provide
frequent deliveries with smaller quantities. There is no room for defective merchandise. For a
Collaborative supply chain management system to work properly, there needs
to be a strong alliance between vendor and retailer that is based on trust and a sharing of information
through electronic data interchange (EDI). In the preceding section we argued that each of these activities
are more difficult to perform globally than domestically. Further, each of these activities is more difficult
to perform globally than domestically. Further, the level of difficulty increases with distance and the
vendor’s sophistication.8

What can a retailer do to lessen the impact of these seemingly incompatible trends? Retailers can use
third party logistics companies and source closer to home. In the next section, we examine how third
party logistics companies can help retailers and why so many retailers are choosing suppliers that are
located closer to their stores.

Third Party Logistics Companies

Third party logistics companies are companies that facilitate the movement of merchandise from
manufacturer to retailer, but are independently owned. These companies provide transportation,
warehousing, consolidation of orders, and documentation, or a combination of several of these services.
Increasingly, third party logistics companies provide information services called Value Added Networks
(VANs) that facilitate the electronic data interchange that is such an integral part of collaborative supply
chain management systems.

Transportation. Retailers must choose their shippers carefully and demand reliable, customized services.
After all, to a large extent, the retailer’s lead time and the variation in lead time is determined by the
chosen transportation company. Also, many retailers are finding that airfreight is worth the added costs.
Some retailers mix modes of transportation in order to reduce overall cost and time delays. For example,
many Japanese shippers send Europe-bound cargo by ship to the U.S. West Coast. From there, the cargo
is flown to its final destination in Europe. By combining the two modes of transport, sea-air, the entire
trip takes about two weeks, as opposed to four or five weeks with an all-water route, and the cost is about
half of an all-air route.9

Warehousing. To lessen the chance of being out-of-stock as a result of long and inconsistent lead times
on overseas shipments, retailers are insisting that their vendors maintain inventories in warehouses in the
US. Rather than owning these warehouses themselves, the vendors typically use public warehouses
which are owned and operated by a third party. By using public warehouses, vendors can provide their
retailers with the same level of service as domestic suppliers can.

International freight forwarder. Although there are several types of organizations that help in the
management of global shipments, the most comprehensive is the international freight forwarder. 10
International freight forwarders are companies that purchase transport services. They then consolidate
small shipments from a number of shippers into large shipments that move at a lower

8
Stanley E. Fawcett and Laura M. Birou, “Exploring the Logistics Interface between Global and JIT Sourcing,”
International Journal of Physical Distribution & Logistics Management, 22, No. 1, 1992, pp. 3-14.
9
“Sea-Air: Cheap and Fast,” Global Trade, February 1992, pp. 16-18, taken from Michael R. Czinkota and Ilkka A.
Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 486.
10
Other third part providers are: Export distributor, customs-house broker, and trading company. For a discussion
see: Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 696-
699.
freight rate. These companies offer shippers lower rates than the shippers could obtain directly from
transportation companies because small shipments generally cost more per pound to transport than large
shipments.11 One of the most daunting tasks for a retailer involved in importing merchandise to the US is
government bureaucracy. The international freight forwarder helps retailers by preparing and expediting
all documentation such as government-required export declarations, consular and shipping documents. 12

Value Added Networks (VANs). Value Added Networks are a relatively new type of third party logistics
company that that was spawned by the use of Collaborative supply chain management systems. Value
Added Networks are companies that facilitate EDI by making computer systems between suppliers and
retailers compatible. Suppose Wal-Mart has contracted with a manufacturer in Mexico to supply them
with toys. Since Wal-Mart insists that their vendors utilize an EDI system, and their computer systems
are incompatible, they might contract with a VAN like General Electric Information Services to provide
the communications link. Computer files would be sent to the VAN via EDI, translated to Wal-Mart’s
format, and sent on to Wal-Mart’s computer.

Integrated third party logistics services. Traditional definitions between transportation, warehousing,
freight forwarding, and VANs have become blurred in recent years. Some of the best transportation
firms, for example, now provide public warehousing, freight forwarding and VANs. The same
diversification strategy is being used by the other types of third party logistics providers. Retailers are
finding this “one stop shopping” useful when implementing Global sourcing. Business Logistics
Services, a division of Federal Express, for example, performs multiple logistics functions well beyond
transportation for Laura Ashley.

Refact: In 1995, the volume of imports from Mexico, propelled by NAFTA, grew 61 percent, and the
country was the third-largest foreign apparel supplier to the US Right behind Mexico was the Dominican
Republic. Nevertheless, China remains the number one apparel supplier, followed by Hong Kong. 13

Source Closer to Home (or Stay Home).

Some US retailers are shifting suppliers from Asia to nearby Central American and Caribbean countries
to improve quality control and shipping times. Others are attempting to “Buy American.” (See following
section.) For example, although China is still an important source for apparel, the North American Free
Trade Agreement (NAFTA) and similar initiatives with other Latin American Countries such as the
Caribbean Basin Initiatives and the Enterprise for the Americas Initiative (EAI) make Mexico,
Guatemala, Costa Rica, Haiti, Honduras and the Dominican Republic likely sources for US retailers.
Also, the standard of living in traditional import powerhouses like Japan, South Korea, Hong Kong, and
Singapore have become so high that cheap labor is not as readily available as it one was. Thus, the less
developed countries in the Western Hemisphere have become more viable sources of suppliers. 14

11
Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 181.
12
Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 698.
13
“Asia’s Fertile Fields,” Women’s Wear Daily, May 1, 1996, p. 8, 9.
14
Arthur Friedman, “Sourcing Now: The Proximity Factor, Imports: A Change of Venue,” Women’s Wear Daily,
Mary 26, 1996, p. 6.
Made in America Controversy
Refact: In a national survey, 84% indicated a preference for buying American-made products; 64% said
they would spend 10% more for domestically-produced goods over foreign-made items. 15

During the 1980s and into the 1990s, America has seen much of its dominance in manufacturing move
offshore. More recently, however, the tide appears to be turning back to the US, at least in certain
industries. There are two reasons for this shift. First, a national survey of consumers indicates that
Americans purchase goods based first on quality, then features, followed by price, warranty, and country
of origin. Importantly, American-made products are perceived as being superior in quality to foreign-
made goods, especially for tools, clothing, candy or confections, and toys.16 Retailers are simply reacting
to the quality perceptions of their customers.

The second reason that retailers are attempting to buy more products that are “Made in America” it is
simply more profitable. They don’t have to worry about foreign currency fluctuations or tariffs. Also, it
is easier to implement Collaborative supply chain management inventory systems with suppliers that are
located close to their retailers. Since lead time and fluctuations in lead time are shorter when buying
domestically, retailers don’t have to carry as much inventory. Transportation costs and the problems
associated with global transportation issues are also less when “Buying American.” Finally, it is typically
easier to manager quality and develop and maintain strategic alliances when sourcing domestically.

The apparel industry in New York City has initiated a Made in New York program to promote domestic
production. Participants stress, however, that patriotism has little to do with their sourcing decisions. For
instance, after Federated Department Stores placed a $1 million order for sportswear with a New York
Chinatown contractor through the Made in New York Program, the vice president of better sportswear for
the retailer said that quality price and delivery, but not politics contributed to the decision. 17

Ethical Issues -- Violation of Human Rights and Child Labor in a Global Setting
Wal-Mart, The Gap, J.C. Penney, Dayton Hudson, Columbia Sportswear, Liz Claiborne, Eddie Bauer and
Phillips Van Heusen, among many others, have had to publicly deflect allegations about human rights,
child labor or other abuses involving factories and countries where their goods are made. 18

These days, companies faced with such accusations are likely to respond with promises of an inquiry.
They point to strict codes of conduct that their contractors must now sign, which threaten withdrawal of
business if labor abuses occur. Many companies are asking their quality control people to look out for
worker abuses while also watching that zippers are sewn on straight.

15
“‘Buy American’ Emotional Appeal No Match for Bargains,” Discount Store News, June 20, 1994, p. 23.
16
Ibid.
17
Dianne M. Pogoda, “Sourcing Now: The Proximity Factor, Patriot Games: Strictly Business,” Women’s Wear
Daily, Mary 26, 1996, p. 7.
18
This section adapted from: Joanna Ramey, “Apparel’s Ethics Dilemma.” Women’s Wear Daily, March
18, 1996, pp. 10-12; and Susan Chandler, “Look Who’s Sweating Now,” Business Week, October 16,
1995, pp. 96, 97.
Nevertheless, in the eyes of activists pressing the cause of factory workers abroad, manufacturers and
retailers alike largely fall short of their ethical obligation as importers. How companies view their role in
the business of socially responsible importing varies. Some have embraced the idea pushed by human
rights groups of establishing independent monitoring programs to keep tabs on contractors. Others say
periodic, announced inspections of contractors and reports by quality control employees are the most they
will require.

With thousands of products and commercial relationships to keep track of, stores say they would be
unable -- and ill-equipped -- to police workplace conditions around the globe. But one point on which
most importers and retailers involved in this debate do agree is that they can encourage Third World
contractors and governments to improve conditions. Sometimes this can be accomplished with the
assistance of industry supported nonprofit organizations.

One such group is Business for Social Responsibility (BSR), a San Francisco-based nonprofit
organization started three years ago and designed to help member companies address the question of
rights in factories abroad. Some prominent BSR members include Liz Claiborne Levi Strauss, Patagonia,
Reebok and Timberland.

Another effort at improving worker standards at foreign factories is a handbook on how to prevent child
labor, prepared by the Council on Economic Priorities (CEP), a New York-based think tank that analyzes
national issues. The CEP prepared the handbook for the International Labor Organization with a $25,000
grant and the help of several leading apparel importers, including Levi’s, Claiborne, L.L. Bean,
Nordstrom, Sears and The Limited. The handbook is directed at the four industries that employ children
under 14: apparel, footwear, toys and carpets.

David Zwiebel, vice president of the CEP, said he would ask importers to establish a set of internationally
accepted compliance standards, much like what is being done by the television industry to curb violent
programming. This would be particularly helpful for small to medium-size importers that don’t have the
wherewithal of a Levi’s to embark on a company-wide endeavor.

14
RETAIL PRICING

ANNOTATED OUTLINE INSTRUCTOR NOTES

  The importance of pricing decisions is
See PPT 14-4
growing because today's customers have Query students on what is a good value for them
more alternatives to choose from and are when buying a specific product, such as jeans or
better informed about the alternatives sneakers. Different conceptions of value would
available in the marketplace. emerge, including the lowest price, good quality
for the money paid, etc. Note that students willing
 Value is the ratio of what customers
to pay different prices would still consider their
receive (the perceived benefit of the
own choices as being good value.
products and services offered by the
retailer) to what they have to pay for it.
 Value = Perceived Benefits/Price
 Retailers can increase value and stimulate
more sales by either increasing the
perceived benefits offered or reducing the
price.
 If retailers set prices higher than the
benefits they offer, sales and profits will
decrease.
 If retailers set prices too low, their sales
might increase, but profits might decrease
due to the lower profit margin.
 In addition, retailers need to consider the
value proposition offered by their
competitors and legal restrictions related
to pricing.

IV. Pricing Strategies See PPT 14-5

 Retailers use two basic retail pricing
strategies: high-low pricing and everyday
low pricing (EDLP).

A. High/Low Pricing Ask students to name retailers using a

High/Low Pricing strategy from the
 With this strategy, retailers frequently –
following: women’s shoes, men’s suits, home
often weekly – discount the initial prices
for merchandise through sales electronics, and home furniture.
promotions.
 This strategy is in response to competitive
moves and to the positive response from
See PPT 14-5
value-conscious consumers.

B. Everyday Low Pricing

 This strategy stresses continuity of retail See PPT 14-6
prices at a level somewhere between the Name retailers using EDLP strategies from
regular nonsale price and the deep
the following: grocery store chain, and
discount sale price of the retailer’s
competitors. building supplies.
  EDLP does not necessarily mean the
lowest price in the market.
 A more accurate description of this
strategy is everyday same prices because
the prices don’t have significant
fluctuations.
 Some retailers have adopted a low price
guarantee policy in which they guarantee
that they will have the lowest possible
price for a product or group of products.
The guarantee usually promises to match
or better any lower price found the local
market, and includes a provision to refund
the difference between the seller’s offer
price and the lower price.

C. Advantages of the Pricing Strategies

 Advantages of High/Low Pricing: A chain of supermarkets that has strong
national buying power wants to open several
 Increases profits through price stores in a competitive area. Which strategy
discrimination is best for them and why? How would the
situation be different for a jewelry store
 Sales create excitement chain?
 Allows retailers to get rid of slow moving
merchandise

 Advantages of EDLP:

 Assures customers of low prices

 Reduces advertising and operating

expenses

 Reduced stockouts and improved

inventory management

I. Considerations in Setting Retail Prices See PPT 14-9

* Retailers consider four factors when
setting retail prices.

A. Customer Price Sensitivity and Cost See PPT 14-10

 As the price of a product increases, the
sales for the product will decrease
because fewer and fewer customers feel
the product is a good value.
  The price sensitivity of customers
determines how many units will be sold at
different price levels.

1. Price Elasticity Ask students to list products or services they

would estimate to be price elastic and others
 A commonly used measure of price
they would estimate to be price inelastic.
sensitivity is price elasticity. Price
elasticity is the percentage change in
quantity sold divided by the percentage
change in price. See PPT 14-11

 Elasticity =

% change in quantity sold/% change in price

 The target market for a product is

considered price insensitive (inelastic)
when its price elasticity is greater than -1.

 The target market for a product is

considered price sensitive (elastic) when
its price elasticity is less than -1.

 A number of factors affect the price

sensitivity for a product.

 The more substitutes a product or service

has, the more likely it is to be price
elastic.

 Products and services that are necessities

are price inelastic.

 Products that are expensive relative to a

consumer’s income are price elastic.

B. Competition Ask students for examples of retailers using

each of these pricing strategies relative to
 Retailers can price above, below, or at
competing retailers.
parity with the competition. The chosen
pricing policy must be consistent with the
retailer’s overall strategy and its relative
market position.

1. Collecting and Using Competitive Price

Data
 Most retailers routinely collect price data
about their competitors to see if they need
to adjust their prices to remain
 competitive.

2. Reducing Price Competition

 Retailers attempt to reduce price See PPT 14-15
competition by utilizing some of the
branding strategies described in 14 to
offer unique merchandise, such as
developing line of private-label
merchandise, negotiating with national
brand manufacturers for exclusive
distribution rights, or having vendors
make unique products for them.

II. Setting Retail Prices See PPT 14-18

* Many retailers have to set prices for over
50,000 SKUs and make thousands of
pricing decisions each month. From a
practical perspective, they cannot conduct
experiments nor do statistical analyses to
determine the price sensitivity for every
item.
* Retailers typically set prices by marking
up the item’s cost to yield a profitable
gross margin. Then these cost-based
prices are adjusted on the basis of insights
about customer price sensitivity and
competitive pricing.

A. Setting Prices Based on Costs

 Most retailers either use the MSRP
(manufacturer’s suggested retail price) or
set prices by marking up the item’s cost to
yield a profitable gross margin. Then,
these cost-based prices are adjusted on the
basis of insights about customer price
sensitivity and competitive pricing.

1. Retail Price and Markup

* When setting prices based on Setting prices is primarily dependent on the
merchandise cost, retailers start with the margin management component of the
following equation: strategic profit model. Although, if prices are
Retail price = Cost of merchandise + Markup lowered, the velocity of sales in terms of
inventory turnover should also increase.
* The markup is the difference between
the retail price and the cost of an item.
* The appropriate markup is determined to
cover all of the retailer’s operating
 expenses needed to sell the merchandise
and produce a profit for the retailer.
* The markup percentage is the markup as
a percentage of the retail price:
Markup percent = See PPT 14-19
Retail price – Cost of merchandise/Retail price
 The retail price based on the cost and
markup percentage is:
Retail price = Cost of merchandise/ 1 – Markup
percentage (as a fraction)
 Traditionally, apparel retailers used a 50
percent markup, referred to as keystoning
that set the retail price by simply doubling
the cost.

2. Initial Markup and Maintained Markup

* Retailers rarely sell all items at the initial See PPT 14-22
price. They frequently reduce the price of
items for special promotions or to get rid
of excess inventory at the end of a season.
Instructors may wish to stress the difference
* Initial markup is the difference between between maintain markup and gross margin.
the retail selling price originally placed on We find it more important, however, to stress
the merchandise and the cost of the that they are almost the same thing. Even those
merchandise, whereas maintained students going into retailing are more likely to
markup is the actual sales you get for the remember the similarity.
merchandise less its cost.
* The difference is due to various
reductions, such as markdowns, See PPT 14-23
discounts to employees and customers,
and inventory shrinkages (due to
shoplifting, breakage or loss).
* Initial markup must be high enough so
that after reductions are taken out, the
maintained markup is left.
* The relationship between initial markup
and maintained markup is:
Initial markup % =
(Maintained markup % + % Reductions)
___________________________
100% + % Reductions See PPT 14-23

B. Merchandising Optimization Software PPT 14-29

  A relatively new approach to setting retail
prices takes a more comprehensive
approach using merchandising
optimization software. These software
programs use a set of algorithms that
analyze past and current merchandise
sales and prices, estimate the relationship
between prices and sales generated , and
then determine the optimal (most
profitable) initial price for the
merchandise and the appropriate size and
timing of markdowns.

 Given its cost, however, (more than $1

million) the software is only used
currently by a small set of the largest
retail firms.

C. Profit Impact of Setting a Retail Price: The

Use of Break-Even See PPT 14-30, 14-31
Analysis
* Break-even analysis determines how
much merchandise is required to be sold
to achieve a break-even (zero) profit at
various sales levels.
* Break-even quantity =
Total fixed costs/(Actual unit sales price – Unit
variable cost)

1. Calculating Break-Even for a New

Product
* The break-even point (BEP) is the
quantity at which total revenues are equal
to total cost, and beyond which profit
occurs. Assume you have a lemonade stand that rents
for $5.00. Lemonade costs $.30 and sells for
* BEP quantity= Fixed costs/(Actual unit
sales price - Unit variable cost) $.50/cup. BEPquantity would be: $5.00 ÷ $.20
* The retailer can choose the profit they = 25 cups.
wish to make, and calculate quantity by
adding profit to the numerator, i.e.
BEP quantity = (Fixed costs +profit) ÷ Assume an ad costs $10,000, shirts cost $30
(Unit price - Unit variable costs) and sell for $50. How many shirts do you need
to sell to breakeven?
* To convert the break-even quantity to
break-even sales dollars, multiply the $10,000 ÷ $20 = 500 shirts
BEP quantity by the selling price.
What if the vendor splits the cost of the ad?
$5,000 ÷ $20 = 250 shirts
 2. Calculating Break-Even Sales
* The retailer can calculate how much sales
would have to increase to profit from a
price cut.

III. Price Adjustments See PPT 14-33

* Retailers adjust prices over time
(markdowns) and for different customer
segments (variable pricing).

A. Markdowns
* Markdowns are a reduction in the initial
retail price. Markdowns are a type of
second-degree price discrimination
because the lower price induces price-
sensitive customers to buy more
merchandise.

1. Reasons for Taking Markdowns

* Markdowns can be classified as either See PPT 14-34
clearance (to get rid of merchandise) or
promotional (to generate sales). Ask students why retailers take markdowns.
* When merchandise is slow-moving,
obsolete, at the end of its selling season,
or priced higher than competition, it
generally gets marked down.
* Markdowns are part of the cost of doing
business. Retailers set their initial
markup high enough so that after
markdowns and other reductions are
taken, the planned maintained markup is
achieved.
* Retailers employ markdowns to promote
merchandise to increase sales. Markdown
sales generate cash flow to pay for new
merchandise.
* Markdowns are also taken to increase
customers' traffic flow.
* Markdowns may also increase the sale of
complementary products.

2. Optimizing Markdown Decisions See PPT 14-35

* Instead of depending on arbitrary rules for
taking markdowns, retailers can benefit
significantly from merchandising
optimization software.
* Merchandising optimization software is
a set of algorithms that monitors
merchandise sales, promotions,
competitors’' actions, and other factors to Ask students how retailers can reduce the
determine the optimal (most profitable) amount of markdowns. Ask students under
price and timing for merchandising what circumstances markdown money would
activities, especially markdowns. be legal. Under the Robinson Patman Act, it
* The optimization software works by would only be legal if it were offered to all
constantly refining its pricing forecasts on retailers on a proportionately equal basis.
the basis of actual sales throughout the
season.
* Retailers must also work closely with
their vendor partners to coordinate
deliveries and help share the financial
burden of taking markdowns.

3. Reducing the Amount of Markdowns by

Working with Vendors
* Retailers can reduce the amount of
markdowns by working closely with their
vendors to time deliveries with demand.
* Retail buyers can often obtain markdown
money - funds a vendor gives the retailer
to cover lost gross margin dollars that
result from markdowns and other
merchandising issues.
* As discussed in 10, collaborative supply
chain management systems reduce the
lead time for receiving merchandise so
that retailers can monitor changes in
trends and customer demand more
closely, thus reducing markdowns.

4. Liquidating Markdown Merchandise

* Retailers can use one of five strategies to See PPT 14-37
liquidate merchandise:
a. Sell the remaining merchandise to another
retailer.
b. Consolidate the unsold merchandise.
c. Place the remaining merchandise on an
Internet auction site, like eBay or have a
special clearance location on its own
webpage.
d. Give the merchandise to charity.
e. Carry the merchandise over to the next
 season.
 Marked-down merchandise can be
consolidated in a number of ways.
 First, the consolidation can be made into
one or a few of the retailer's regular
locations.
 Second, marked-down merchandise can
be consolidated into another retail chain
or an outlet store under the same
ownership.
 Finally, marked-down merchandise can
be shipped to a distribution center or a
rented space such as a convention center
for final sale.
 The Internet is increasingly useful for
liquidating marked-down merchandise.
 Giving clearance merchandise to charities
is an increasingly popular practice.
Charitable giving is always a good
corporate practice.
 The final liquidation strategy – to carry
merchandise over to the next season – is
used with relatively high priced
nonfashion merchandise, such as
traditional men's clothing and furniture.

B. Variable Pricing and Price Discrimination See PPT 14-38, 14-39, 14-40

1. Individualized Variable Pricing Ask students to identify retail categories that

frequently implement first-degree price
 Ideally, retailers would maximize their discrimination.
profits if they charged each customer as
much as the customer was willing to pay.
 Charging each customer a different price
based on their willingness to pay is called
first-degree price discrimination.
 Pricing merchandise through auction
bidding is an example of first-degree
price discrimination.
 Although first-degree price discrimination
is legal and widely used in some retail
sectors, it is not practical in most retail
stores. It is difficult to assess each
customer’s willingness to pay, trying to
do may cause ill-will on the part of
 customers, and posted prices can’t be
changed as each customer walks in the
door.

2. Self-Selected Variable Pricing

 Markdowns and other widely used retail
adjustment practices are known as
second-degree price discrimination –
charging different prices to different
people on the basis of the nature of the
offering.

3. Clearance Markdowns for Fashion

Merchandise
 Clearance markdowns result in higher
prices being charged at the beginning of
the season than at the end of the season.
Some customers will have a high
willingness to pay because they want the
fashion items early in the season. More
price-sensitive customers will wait until
the items are marked down at the end of
the season.

4. Coupons
 Coupons offer a discount on the price of
specific items when they're purchased at a
store.
 Coupons are used because they induce
customers to try products for the first
time, convert those first-time users to
regular users, encourage large purchases,
increase usage, and protect market share
against competition.
 Coupons are also considered a form of
second-degree price discrimination
because price-sensitive consumers are Ask students if they, or anyone they know, use
more likely to expend the extra effort to coupons regularly. Why or why not? This is a way
collect and redeem coupons whereas of getting to the advantages and disadvantages.
price- insensitive consumers will not.
 Some risks to the retailer are associated
with the use of coupons. Like all
temporary promotions, coupon
promotions may be stealing sales from a
future period without any net increase in
sales. Also coupons may alienate, annoy
or confuse consumers and therefore do
little to increase store loyalty.
5. Rebates
 Rebates provide another form of
discounts for consumers off the final
selling price. In this case, the
manufacturer issues the refund as a
portion of the purchase price returned to
the buyer in the form of cash.
 Rebates can be even more frustrating for
consumers than coupons, as they are
required to carefully follow a set of steps
to apply.
 Manufacturers like rebates because as
many as 90% of consumers for an eligible
item don’t bother to redeem them.
Retailers like rebates because they
increase demand in the same way
coupons may, but the retailer has no
handling costs.

6. Price Bundling Ask students to identify retailers that use price

bundling, and what products they use. (It is used a
* Price bundling is the practice of offering lot with travel -- cruises, tours)
two or more different products or services
for sale at one price.
 Price bundling is used to increase both
unit and dollar sales by bringing traffic
into the store.

7. Multiple-unit Pricing
* Multiple-unit pricing is similar to price
bundling in that the lower total
merchandise price increases sales, but the
products or services are similar, rather
than different.
* This strategy is used to increase sales
volume.
* Depending on the type of product,
customers may stockpile for use at a later
time, resulting in no long-term effect on
sales.

8. Variable Pricing by Market Segment

 Retailers often charge different prices to
different demographic market segments, a
practice referred to as third-degree price
 discrimination.
 Another example of third-degree price
discrimination is zone pricing. Zone
pricing refers to the practice of charging
different prices in different stores,
markets, regions, or zones. This practice
is generally used by retailers to address
different competitive situations in their
various markets.

V. Pricing Services See PPT 14-47

A. Matching Supply and Demand Ask students for examples of services retailers
utilizing yield management.
 As services are intangible, they cannot be
inventoried. When a services retailer’s
capacity is unused, its revenue is lost
forever. On the other hand, due to
capacity limitations, services retailers
might encounter situations when they
cannot realize as many sales as consumers
are willing to make.

 Yield management is the practice of

adjusting prices up or down in response to
demand to control the sales generated.

 Other services retailers use less

sophisticated approaches for matching
supply and demand, such as “early bird
specials” and matinees at the movies.

B. Determining Service Quality

 Due to the intangibility of services, it is
often difficult for customers to assess the
quality of services. Customers are likely
to use price as an indicator of service
quality. Especially in high-risk purchase
situations (medical or dental services),
customers may look to price as a
surrogate for quality.

 Thus, in addition to being chosen to

manage capacity, service prices must be
set to convey the appropriate quality
signal.

VI. Pricing Techniques for Increasing Sales

 See PPT 14-42
* There are three strategies that could be
used to increase retail sales without
resorting to price discrimination.

A. Leader Pricing
* In leader pricing, certain items are priced See PPT 14-43
lower than normal to increase customers'
traffic flow or to boost sales of Ask students what retailers typically use a
complementary products. leader pricing strategy, and what products they
* Reasons for using leader pricing are use.
similar to those for coupons. The
difference is that with leader pricing, the
merchandise has a low price to begin
with, so customers, retailers, and vendors
don’t have to handle coupons.
* Some retailers call these products loss
leaders.
* The best items for leader pricing are
frequently purchased products. The
retailer hopes consumers will also
purchase other products while buying loss
leaders.

B. Price Lining
* In price lining, retailers offer a limited See PPT 14-44
number of predetermined price points
within a classification.
* Both customers and retailers can benefit Ask students to identify retailers that use price
from such a strategy in the following lining. Then ask if a price lining strategy helps
ways: them in making their shopping decisions.
* Confusion that often arises from multiple
price choices is essentially eliminated.
* Merchandising task is simplified for the
retailer.
* Price lining can also give buyers greater
flexibility.
* Customers may “trade up” to more
expensive offerings.

C. Odd Pricing
* Odd pricing refers to a price ending in an See PPT 14-45
odd number, typically a nine.
Ask students if they think an odd pricing
* While odd pricing originally had loss
strategy works. For example, if they bought a
prevention and accounting functions,
some retailers believe odd pricing can pair of jeans for $29.99, what price would they
 increase profits. tell a friend when asked later - $29 or $30?

VII. The Internet and Price Competition PPT 14-46

 Retailers are concerned that the growth of
electronic retailing will intensify price
competition. Using the Internet,
consumers can search for merchandise
across the globe to find the lowest prices.

 Although consumers shopping

electronically can collect price
information with little effort, they can
also get a lot of information about the
quality performance of products at a low
cost. This additional information about
product quality might lead customers to
pay more for high-quality products, thus
decreasing the importance of price.

 Retailers using an electronic channel can

reduce the emphasis on price by
providing better services and information.
Because of these services, customers
might be willing to pay higher prices for
the merchandise.

C. Legal and Ethical Pricing Issues These issues are summarized in PPT 14-47.
 In addition to customer price sensitivity,
cost and competition, retailers need to
consider legal and ethical issues when
setting prices.

1. Price Discrimination
* Price discrimination by retailers occurs
when a retailer charges different prices
for the identical products and/or services
sold to different customers. Price
discrimination between retailers and their
customers is generally legal.

2. Predatory Pricing
Predatory pricing is a particular form of price
discrimination where a market-
dominating firm charges below-cost
prices for some goods or in some areas in
order to drive out or discipline one or
more rival firms. Eventually, the predator
hopes to raise prices and earn back
 enough profits to compensate for the
losses during the period of predation.
The firm challenging prices as being
predatory bears the burden of proving
three things: (1) the predator has
significant market power; (2) the predator
prices some goods at least below its total
cost, including an allocation for overhead
costs for a significant period; and, (3)
there is reasonable likelihood that the
predator will be able to recoup its
predatory losses.
A retailer generally may sell the same
merchandise at any price so long as the
motive isn't to destroy competition.

3. Resale Price Maintenance

Vendors often encourage retailers to sell their
merchandise at a specific price, the
manufacturer’s suggested retail price
(MSRP) in order to reduce price
competition among retailers, eliminate
free riding, and stimulate retailers to
provide complementary services.
The U.S. Supreme Court recently ruled that
the ability of a vendor to require retailers
to sell merchandise at MSRP should be
decided on a case by case basis,
depending on the individual
circumstances.

4. Horizontal Price Fixing

* Horizontal price fixing involves Retailers can, however, offer different prices to
agreements between retailers that are in different customers as long as the pricing
direct competition with each other to policies aren’t discriminatory.
have the same prices.
* As a general rule of thumb, retailers
should refrain from discussing prices or
terms or conditions of sale with
competitors.
* The only exception to this rule is when a
geographically oriented merchants
association is planning a special
coordinated event.

5. Bait-and-Switch Tactics
 Bait-and-switch is an unlawful deceptive Ask students if they have ever experienced bait-
practice that lures customers into a store and-switch.
by advertising a product at a lower than
usual price (the bait) and then induces the
customers to switch to a higher-priced
model (the switch).
To avoid disappointed customers and
problems with the FTC, retailers should
have sufficient quantities of advertised
items, or if they run out of stock, should
offer customers a rain check.

6. Scanned Versus Posted Prices

Many states and localities have specific laws
regarding accurate pricing. FTC-led
studies of the accuracy of price scanning
versus posted or advertised prices have
generally found a high level of accuracy,
but mistakes are made in one out of 30
scans. Generally, retailers lose money
because the scanned price is below the
recommended price.
Experts recommend that retailers adopt
specific practices to ensure accurate
pricing. These include, on-going training
of employees, designating one person as
the pricing coordinator, and random price
audits done on a daily basis.

VIII. Summary
 Setting prices is a critical decision in
implementing a retail strategy, because
price is a critical component in
customers’ perceived value.

 Retailers consider the price sensitivity of

consumers in their target market, the cost
of the merchandise and services offered,
competitive prices, and legal restrictions.

15
RETAIL COMMUNICATION MIX

ANNOTATED OUTLINE INSTRUCTOR NOTES

Introduction
 The communication program informs
customers about the retailer as well as the
merchandise and services it offers and
plays a role in developing repeat visits and
customer loyalty.
 Communication programs can have both
long-term and short-term effects on a
retailer's business. From a long-term
perspective, communications programs can
be used to create and maintain a strong,
differentiated image of the retailer and its
store brands. This image develops
customer loyalty and creates a strategic
advantage.
 Retailers frequently use communication
programs to realize the short-term
objective of increasing sales during a
specified time period. Retailers often have
sales during which some or all
merchandise is priced at a discount for a
short time.

I. Using Communication Programs to Develop

Brand Images and Build Customer Loyalty See PPT 15-3
 A brand is a distinguishing name or
symbol, such as a logo, that identifies the
products or services offered by a seller and
differentiates those products and services
from the offerings of competitors.

A. Value of Brand Image

 Brands provide value to both customers See PPT 15-4
and retailers. Ask students how brands help them make
 Brands convey information to consumers decisions about products and retailers. One way
about the nature of the shopping to analyze the impact of brands on consumer
experience – the retailer's mix – they will decisions is to consider their decision to pull off
encounter when patronizing a retailer. an Interstate highway and stop to eat at a
McDonald's versus some unknown local brand
 They also affect the customers' confidence restaurant.
in decisions made to buy merchandise
from a retailer.
 Finally, brands can enhance the customers'
satisfaction with the merchandise and
services they buy.
  The value that brand image offers retailers
is referred to as brand equity. Strong
brand names can affect the customers'
decision-making process, motivate repeat
visits and purchases, and build brand
loyalty.
 In addition, strong brand names enable
retailers to charge higher prices and lower
their marketing costs.
 Customer loyalty to brands arises from
heightened awareness of the brand and the
emotional ties toward it.
 A strong brand image enables retailers to
increase their margins. When retailers
have high customer loyalty, they can
engage in premium pricing and reduce
their reliance on price promotions to attract
customers. Brands with weaker images are
forced to offer low prices and frequent
sales to maintain their market share.
 Finally, retailers with strong brand names
can leverage their brand to successfully
introduce new retail concepts with only a
limited amount of marketing effort.

B. Building Brand Equity

 The activities that a retailer needs to See PPT 15-5
undertake to build the brand equity for its
firm or its private-label merchandise are
(1) create a high level of brand awareness,
(2) develop favorable associations with the
brand name, and (3) consistently reinforce
the image of the brand.

1. Brand Awareness
 Brand awareness is the ability of a See PPT 15-6
potential customer to recognize or recall
that the brand name is a type of retailer or
product/service. Thus brand awareness is
the strength of the link between the brand
name and the type of merchandise or The awareness and associations evoked by
service in the minds of customers. the brand in consumers' minds can also be
discussed using positioning concepts
 Aided recall is when consumers indicate discussed in 5.
they know the brand when the name is
presented to them.
 Top-of-mind awareness, the highest level
 of awareness, arises when consumers
mention a brand name first when they are For a hypothetical positioning diagram for
asked about the type of retailer, a women's clothing retailers, draw two
merchandise category, or a type of separate axis -- fashion versus traditional
service. and high/low service. Ask students to
 Retailers can build top-of-mind awareness position the leading regional department
by having memorable names; repeatedly store, Lerner's, The Gap, The Limited, Sears,
exposing their name to customers through K mart, Brooks Brothers, and JCPenney for
advertising, locations, and sponsorships; women's clothing on the diagram.
and using memorable symbols.
 Symbols involve visual images that Discuss the various awareness and
typically are more easily recalled than associations evoked by each retailer.
words or phrases and thus are useful for
building brand awareness.

2. Associations
 Brand associations are anything linked to
or connected with the brand name in a
consumers' memory.
 Some common associations that retailers
develop with their brand name are (1)
merchandise category, (2) price/quality,
(3) specific attribute or benefit, and (4)
lifestyle or activity.
 The brand image is a set of associations
that are usually organized around some
meaningful themes, such as merchandise
category, price/quality, specific attribute
or benefit, specific lifestyle or activity.

3. Consistent Reinforcement See PPT 15-8

 The retailer's brand image is developed
and maintained through the retailer's
communication program as well as other
elements of the communication mix, such
as merchandise assortment and pricing,
the design of its stores and website, and
the customer service it offers.
 Providing a consistent image can be
challenging for multichannel retailers.
 To develop a strong set of associations
and a clearly defined brand image,
 retailers need to be consistent in
portraying the same message to
customers over time and across all
elements of its retail mix.
 Retailers need to develop an integrated
marketing communication program – a
program that integrates all of the
communication elements to deliver a
comprehensive, consistent message.
Without this coordination, communication
methods might work at cross-purposes.

C. Extending the Brand Name

 Retailers can leverage their brand names See PPT 15-10
to support their growth strategies.
 There are pluses and minuses to extending
a brand name to a new concept. An
important benefit of extending the brand
name is that minimal communication
expenses are needed to create awareness To illustrate the pluses and minuses of extending
and a brand image for the new concept. the brand name, give students examples of some
Customers will quickly transfer the original well-known retailers, such as Wal-Mart, Circuit
brand's awareness and associations to the City, JCPenney, Kroger's, Blockbuster, and
new concept. However, in some cases, query them as to credibility of extending these
the retailer might not want to have the brands to different hypothetical merchandise
original brand's associations connected categories and retail store concepts.
with the new concept.
 These issues also arise as a retailer
expands internationally. Associations with
the retailer's brands that are valued in one
country may not be valued in another.
 Retailers communicate with customers
using a mix of methods such as:
advertising, sales promotion, publicity,
store atmosphere and visual
merchandising, and personal selling.
 In large retail firms, the communication
mix elements are managed by the firm’s
marketing or advertising department and
the buying organization.

II. Methods for Communicating with

Customers See PPT 15-11
 The classification of communication Ask students why retailers want to
methods is based on whether the methods
 are impersonal or personal and paid or communicate with their customers? What do
unpaid. they want to tell them?

A. Paid Impersonal Communications

 Advertising, sales promotions, store Ask students to describe the different paid,
atmosphere, and websites are examples of personal communication they have received
paid impersonal communications. from retailers. Which form of paid, personal
communication is most effective for
communicating information about a sale?
Information about the quality of
merchandising carried in the store? Why?
1. Advertising
 Advertising is a form of paid
communication to customers using
impersonal mass media such as
newspapers, TV, radio, direct mail, and the
Internet.

2. Sales Promotion
 Sales promotions are paid impersonal
communication activities that offer extra
value and incentives to customers to visit a
store and/or purchase merchandise during a
specific period of time.
 The most common sales promotion is a
sale. Other sales promotions involve
special events, in-store demonstrations,
coupons, and contests.
 Special events are sales promotion
programs comprising a number of
techniques built around a common theme,
such as a holiday or sporting event.
 Some retailers use in-store demonstrations
and offer free samples of merchandise to
build excitement in the store and stimulate
purchases.
 Contests are promotional games of skill or
chance. They differ from price-off sales in
that (1) only a few customers receive
rewards and (2) winners are often
determined by luck.
 Coupons offer a discount on the price of
specific items when they're purchased at a
store.
  Although sales promotions are effective at
generating short-term interest among
customers, they are not very useful for
building long-term loyalty.

3. Store Atmosphere
 The store itself provides paid impersonal
communications to its customers. Store
atmosphere is the combination of the
store's physical characteristics, such as
architecture, layout, signs and displays,
color, lighting, temperature, sounds, and
smells, which together create an image in
the customer's mind.

4. Web Site
 Retailers use their websites to build their
brand image; inform customers of store
locations, special events, and the
availability of merchandise in local stores;
and sell merchandise and services.

5. Community Building
 Many retailers offer Web sites devoted to
community building. They offer an
opportunity for customers with similar
interests to learn about products and
services that support their hobbies and
share information with others. The
community helps to reinforce the
retailer’s image.

B. Paid Personal Communications

 Paid forms of personal communication are
growing as new technologies emerge. All
of the personal communication techniques
described below can be tailored to
individual customers through face-to-face
exchange or CRM systems.

1. Retail Salespeople Communicating through salespeople is much

more expensive than communicating through
 Retail salespeople are the primary vehicle
advertising. Ask students why department
for providing paid personal
communications to customers. stores place more emphasis on paid
personal versus impersonal
 Personal selling is a communication communications. Why do supermarkets do
process in which salespeople assist just the opposite?
customers in satisfying their needs through
 face-to-face exchanges of information.

2. Email
 E-mail is another paid personal
communication vehicle that sends
messages over the Internet. Retailers use
e-mail to inform customers of new
merchandise, confirm the receipt of an
order, and indicate when an order has
been shipped.

3. Direct Mail See PPT 15-12

 Direct mail refers to any brochure,
catalog, advertisement, or other printed
material delivered directly to the
consumer.
 These communications are frequently
targeted to customer groups on the basis
of data collected through CRM systems.
 Retailers may also purchase a wide variety
of lists to help them target customers with
specific demographics profiles, interests,
and lifestyles.
 Although relatively expensive on a per
customer basis because of printing and
mail costs, along with a relatively low
response rate, directly mail is extensively
used by many retailers because many
consumers respond favorably to these
personal messages.

4. M-Commerce See PPT 15-13

 As both technology and consumers
become more sophisticated, retailers are
beginning to add m-commerce (mobile
commerce) to their communications
programs.
 This involves communicating with
consumers through their wireless
handheld devices like cell phones and
PDAs.

C. Unpaid Impersonal Communications

 The primary method for getting unpaid Ask students to describe some instances of
retailers communicating through publicity.
 impersonal communication is publicity. Publicity is cheap. Why don't retailers rely
on publicity rather than advertising?
 Publicity is communications through
significant unpaid presentations about the
retailer (usually a news story) in
impersonal media.
 Publicity is often used to communicate
with employees and investors.

D. Unpaid Personal Communications

 Finally, retailers communicate with their
customers at no cost through word of Ask students if they have communicated with
mouth (communication between people
other students about retail stores. Why did
about a retailer).
they talk about the retailer? What did they
 Word of mouth communications are very say? Note word-of-mouth is usually about a
effective, but retailers encounter bad experience, not a good experience. How
difficulties in harnessing that power in a can retailers stimulate favorable
disciplined, strategic way. word-of-mouth?
 A relative new form of WOM
communications is called social shopping,
where consumers use the Internet to shop
by engaging with other product users,
family and friends on product reviews,
preferences and opinions.
 Many retailers encourage customers to post
reviews of products they have bought or
used. Research has shown this technique to
increase customer loyalty, providing a
competitive advantage for sites that use
them.

E. Strengths and Weaknesses of

Communication Methods
 Communications methods can be
compared in terms of control, flexibility,
credibility, and cost.

1. Control
 Retailers have more control when using Ask students about the type of
paid versus unpaid methods. communication over which retailers have the
most control. How can retailers control
 When using advertising, sales promotions,
websites, e-mail, and store atmosphere, unpaid communications? Mergers,
retailers determine the message's content, acquisitions, store openings and closing, and
and for advertising, e-mail, M-commerce, financial performance generate publicity.
and sales promotions, they control the time Discuss a recent event and ask students
of its delivery. whether or not retailer received benefited
 Retailers have less control over personal
from the publicity.
selling than other paid communication
methods.
 Retailers have very little control over the
content or timing of publicity and word-of-
mouth communications.

2. Flexibility
 Personal selling is the most flexible
communication method because Ask students which form is the most flexible
salespeople can talk with each customer,
in terms of tailoring the message to the
discover their specific needs, and develop
unique presentations for them. specific customer.

3. Credibility Ask students which form of communications

do customers find most credible -- the one in
 Because publicity and word of mouth are
which they believe the information
communicated by independent sources, the
information is usually more credible than presented. Have students heard
information in paid communication communications about a retailer they did not
sources. believe? Why?

4. Cost
 Publicity and word of mouth are classified Ask students if word-of-mouth and publicity
as unpaid communication methods, but are really free?
retailers do incur costs to stimulate them. .
 Paid impersonal communications often are
economical.
 While maintaining a website on a server is
relatively inexpensive, it is costly to
design, continuously update the site, and
promote the site to attract visitors,
however, emails and M-commerce can be
sent to customers at low cost.
 Typically, advertising in mass media
advertising is most effective at building
awareness. Websites, direct mail, and
newspaper advertising are effective for
conveying information about a retailer's
offerings and prices. Personal selling and
sales promotion are most effective at
persuading customers to purchase
merchandise. Mass media and magazine
advertising, publicity, websites, and store
atmosphere are most cost-effective at
building the retailer's brand image and
encouraging repeat purchases and store
 loyalty.

III. Planning The Retail Communication

Program See PPT 15-20
 The four steps in developing and Review steps in developing a communication
implementing the retail promotion program
program.
are setting objectives, determining a
budget, allocating the budget, and
implementing and evaluating the mix.

A. Establish Objectives
 Retailers establish objectives for See PPT 15-21
promoting a program to provide (1)
direction for people implementing the Discuss the goals for a communications
program and (2) a basis for evaluating its program.
effectiveness.
 Some promotion programs have a long-
term objective, such as creating or altering
a retailer's brand image. Other
communication programs focus on
improving short-term performance, such as
increasing store traffic on weekends.

1. Communication Objectives
 Retailers often use communications Review the communication objectives. Ask
objectives rather than sales objectives to students what communication problem is
plan and evaluate their communication suggested by this pattern. What would a
programs. pattern look like if customers had little
 Communication objectives are specific knowledge of the store? If customer only
goals related to the retail promotion mix's shopped during a sale? If customer found
effect on the customer's decision- making the location very inconvenient?
process.
 To effectively implement and evaluate a
Illustrate which methods are more effective
communication program, objectives must
be clearly stated in quantitative terms.
at different stages of the decision making
process. Why is advertising better than
 The target audience for the communication salespeople for creating awareness? Why
mix needs to be defined along with the are salespeople better than advertising for
degree of change expected and the time changing attitudes? How would an ad,
period over which the change will be
directed at building awareness, differ from
realized.
one directed at changing an attitude?
 Even though vendors and retailers have
different goals, they frequently work
together to develop mutually beneficial
Describe the differences between the objectives
outcomes.
and nature of the communications programs
developed by retailers and vendors.
B. Determine The Communication Budget See PPT 15-22
 The second step in developing a retail Reviews the methods for setting a budget
promotion program is determining a and illustrate the difference in the logic
budget. between marginal analysis and the rules of
 The economically correct method for thumb methods.
setting the promotion budget is marginal
analysis.

1. Marginal Analysis Method

 Marginal analysis is based on the See PPT 15-23
economic principle that firms should Ask students where the estimates come from.
increase promotion expenditures so long as
Indicate they are judgments that the
each additional dollar spent generates more
than a dollar of additional contribution. manager has now stated explicitly.

 In most cases, however, it is very hard to

do a marginal analysis because managers
do not know the relationship between
promotion expenses and sales.
 Sometimes, retailers do experiments to get
a better idea of this relationship.

2. Objective-and-Task Method
 The objective-and-task method See PPT 15-24
determines the budget required to As in the marginal analysis, the relationship
undertake specific tasks for accomplishing
between the expenditures and the objective
communication objectives.
realized is based on the manager's judgment.
 The retailer first establishes a set of The method simply quantifies the managers'
communication objectives. Then the judgment. By quantifying the judgments,
necessary tasks and their costs are people have a basis for discussing them.
determined. The sum total of all costs
incurred to undertake the tasks is the
communication budget.

3. Rule-of-thumb Methods See PPT 15-27

 In the previous two methods the Ask students why the marginal analysis and
communication budget is set by estimating objective-and-task methods are more
communication activities' effects on the appropriate than the rules of thumb for
firm's future sales or communication setting advertising budgets? If the rules of
objectives. thumb are not good methods, why do
 The rule-of-thumb methods use the retailers use them so frequently?
opposite logic by using past sales and
communication activity to determine the
present communication budget.

a. Affordable Method
  When using the affordable budgeting
method, retailers first forecast their sales
and expenses excluding communication
expenses during the budgeting period. The
difference between the forecast sales and
expenses plus desired profit is then
budgeted for the communication mix.
 The major problem with the affordable
method is that it assumes that promotion
expenses do not stimulate sales and profit.

b. Percentage-of-sales Method The typical advertising expenditures for food

stores are 1.4% of sales. Ask students
 The percentage-of-sales method sets the
whether they would expect the typical
communication budget as a fixed
percentage of forecast sales. Retailers use expenditures for an everyday low pricing
this method to determine the promotion supermarket to be above or below 1.4%.
budget by forecasting sales during the Why? What about a convenience store?
budget period and using a predetermined
percentage to set the budget.
 The problem with the percentage-of-sales
method is that it assumes the same
percentage used in the past, or by
competitors, is still appropriate for the
retailer.
 One advantage of both the percentage-of-
sales method and the affordable method for
determining a communication budget is
that the retailer will not spend beyond its
means.

c. Competitive Parity Method

 Under the competitive parity method, the
communication budget is set so that the
retailer's share of communication expenses
equals its share of market.
 Like other rule-of-thumb methods, the
competitive parity method does not allow
retailers to exploit the unique opportunities
or problems they confront in a market.

C. Allocation of the Promotional Budget See PPT 15-30

 After determining the size of the
communication budget, the retailer decides
how much of its budget to allocate to
specific communication elements,
merchandise categories, geographic
 regions, or long- and short-term objectives.
 Retailers often can realize the same
objectives by reducing the size of the
communication budget, but allocating the
budget more effectively.
 An easy way to make such allocation
decisions is just to spend about the same in
each geographic region or for each
merchandise category.
 Allocation decisions, like budget-setting
decisions, should use the principles of
marginal analysis. The retailer should
allocate the budget to areas that will yield
the greatest return. This principle for
allocating a budget is sometimes referred
to as the high-assay principle.

D. Planning, Implementing, and Evaluating

Communication Programs – Three
Illustrations
 The final two stages in developing a retail
communication program are
implementation and evaluation.

1. Advertising Campaign Review the communication program

developed by the furniture company in the
 A specialty import home furnishing store
text and how the retailer evaluated the
decided to concentrate its limited budget
on a specific segment and use highly effectiveness of the campaign.
distinctive copy and art in advertising.
 The advertising program emphasized the
store's distinctive image. The newspaper
was the major vehicle.
 An inexpensive tracking study was used to
measure the campaign's effectiveness.

2. Sales Promotion Opportunity See PPT 15-31

 Many sales promotion opportunities Discuss the factors a retailer needs to
undertaken by retailers are initiated by consider when evaluating a promotion.
vendors. Discuss how each factor has either a
 To evaluate a trade promotion, the retailer positive or negative effect on the retailer's
should consider (1) the realized margin profits.
from the promotion, (2) the cost of the
additional inventory carried due to buying
more than the normal amount, (3) the
potential increase in sales from the
promoted merchandise, (4) the potential
 loss suffered when customers switch to the
promoted merchandise from more
profitable unpromoted brands, and (5) the
additional sales made to customers
attracted to the store by the promotion.

3. Special Promotion Using a

CRM/Campaign Management Tool
 A national retailer used a CRM/Campaign
management system to plan, design,
evaluate, and implement a special
promotion.
 Direct-mail and e-mail communication
channels were used along with supporting
in-store promotions and existing
advertising.
 A what-if analysis was conducted and the
campaign plan was built with all the details
and responsibilities of each department.
 The action plan included all the required
steps in the campaign process, along with
costs, dependencies, and deadlines on the
marketing production schedule.
 The successful campaign was then
templated for future use. Management was
able to optimize resources and manage
deadlines and deliverables, thus increasing
productivity, efficiency, and ROI.

IV. Summary
 A communication program can be
designed to achieve a variety of objectives
for the retailer such as building brand
image, increasing sales and store traffic,
providing information about the retailer’s
location and offerings, and announcing
special activities.

 Retailers communicate with customers

through advertising, sales promotions,
store atmosphere, Web sites, salespeople,
email, direct mail, M-commerce,
community building, publicity and word-
of-mouth.

 These elements in the communication mix

must be coordinated so customers have a
 clear, distinct image of the retailer and are
not confused by conflicting information.

16
MANAGING THE STORE

ANNOTATED OUTLINE INSTRUCTOR NOTES

 Store managers are on the firing line in

retailing. Due to their daily contact with See PPT 16-5
customers, they have the best knowledge Have a store manager or a department
of customer needs and competitive manager speak in class about problems they
activity. From this unique vantage point, have encountered and how they handled
retail managers play an important role in
them.
formulating and executing retail strategies.
 Even in national chains, store managers are
treated as relatively independent managers Discuss the factors affecting store employee
of a business within the corporation. Some performance and management tools used by
department store managers are responsible store mangers to impact these factors.
for $150 million in annual sales and
manage over 1,000 employees.

I. Store Management Responsibilities

 The responsibilities of managers are See PPT 16-6
divided into four major categories: For most retailers, the store management
managing employees, controlling costs, activities are becoming more important
managing merchandise, and providing while the importance of buying activities is
customer service. declining. Why is this change occurring?
 Store managers are responsible for
increasing the productivity of two of the
retailer’s most important assets: the firm’s
investment in its employees and its real
estate.
 In addition to increasing labor
productivity, store managers affect their
stores’ profits by controlling costs. These
costs include compensation and benefits
for employees, and the costs associated
with operating and maintaining their
buildings.
 Store managers increase the productivity of
the store's employees by (1) recruiting and
selecting effective people, (2) improving
 their skills through socialization and
training, (3) motivating them to perform at
higher levels and then, (4) evaluating and
rewarding them.
 Store managers also need to develop
employees who can assume more
responsibility and be promoted to
higher-level management positions.
 By developing subordinates, the firm
benefits from having more effective
managers, and the manager benefits
because the firm has a qualified
replacement when the manager is
promoted.

II. Recruiting And Selecting Store

Employees See PPT 16-9 to review the steps in the
 To effectively recruit employees, store employment management process.
managers need to undertake a job analysis,
prepare a job description, find potential
applicants with the desired capabilities and Ask students if they think good employees
screen the best candidates to interview. are made or born. In other words, which is
more important, recruiting (step 1) or
training and motivation (steps 2 & 3).
A. Job Analysis
 The job analysis identifies essential See PPT 16-10 for a list of sample
activities and is used to determine the questions to aid in the job analysis process
qualifications of potential employees.
 Managers can obtain the information Ask students to analyze the job of a
needed for a job analysis by observing salesperson in a specialty store using the
employees presently doing the job and by questions and write a job description.
determining the characteristics of
exceptional performers. Information
collected in the job analysis is used to
prepare a job description.

B. Job Description
 A job description includes (1) activities
the employee needs to perform and (2) the
performance expectations expressed in
quantitative terms.
 The job description is a guideline for
recruiting, selecting, training, and
eventually evaluating employees.

C. Locating Prospective Employees

  Staffing stores is a critical problem
because changing demographics are
reducing the size of the labor pool. Ask students to list the sources a sporting
 In addition to placing ads in local goods store could use for salespeople, store
newspapers and posting job openings on managers, accountants, and a manager for
Web sites are: its computer information system.
1. Recruiting Minorities, Immigrants, and
Older Workers
 Retailers may use strategies like printing
application forms in multiple languages
and developing training programs for
people who aren’t familiar with U.S.
business practices to reach potential
employees in immigrant populations.
 Seniors are another attractive source for
new recruits. Retailing is often attractive to
seniors because its wide range of store
hours fits seniors’ need for flexible work
schedules.

2. Partnering with Government Agencies

 Partnering with local employment offices,
religious and social organizations is
another option for retail recruiting. These
partnerships provide mutual benefit,
helping to employ individuals in the
communities while providing retailers with
the staff they need.

3. Use of Employees as Talent Scouts

 Retailers often ask their own employees if
they know someone they could hire, if they
have recently encountered a particularly
good salesperson at another store, or if
they know of a customer whom they
believe would make a good employee.

4. Using the Storefront Creatively

 Today’s retailers are getting creative with
their store signage announcing job
opportunities: going beyond the typical
“Help Wanted” sign.

D. Screening Applicants to Interview

 The screening process matches the
applicants' qualifications with the job
 description.
 Many retailers use automated pre-
screening programs as a low-cost method
for identifying qualified candidates.

1. Application Forms
 Job application forms contain Ask the students to comment on
information about the applicant's applications they have completed.
employment history, previous
compensation, reasons for leaving previous
employment, education and training,
personal health, and references.
 This information enables the manager to
determine whether the applicant has the
minimum qualifications and also provides
information for interviewing the applicant.

2. References
 A good way to verify the application Have students role play a telephone
form's information is to contact the conversation requesting references on a
applicant's references or do an online specific student being considered for a job.
check. One student can play the employment
manager and another can play the student's
 Due to potential legal problems, however,
many companies have a policy of not
professor listed as a reference. Ask student
commenting on past employees. how useful they feel references are.

 Store managers generally expect to hear

favorable comments from an applicant’s
references or previous supervisors, even if
they may not have thought highly of the
applicant. One approach for reducing this
bias is to ask the reference to rank the
applicant relative to others in the position.
 The Internet has become an excellent
source of information on prospective
employees.

3. Testing
 Intelligence, ability, personality, and Ask students to indicate the type of tests
interest tests can provide insights about they would use to hire salespeople,
potential employees. management trainees, and buyers for The
Gap, Radio Shack, or Home Depot. Ask
 It is illegal to use tests assessing factors
students to comment on employment tests
that are not job related or that discriminate
against specific groups.
they have taken.

 Due to potential losses from theft, many

retailers require applicants to take drug
 tests. Some use tests to assess applicants’
honesty and ethics.
 The use of lie detectors in testing
employees is prohibited.

4. Realistic Job Preview

 Turnover is reduced when the applicants
understand both the attractive and
unattractive aspects of the job.
 Retailers typically want their new hires to
have previous retail experience. This
experience will give the applicant an
understanding of what working retail is all
about.
 Retail internships are an excellent way for
the employee to gain a realistic view of
what a more permanent job might entail,
and the retailer gets access to good talent
and potential future full-time employees.

E. Selecting Applicants
 After screening applications, the selection Should employers use a student’s grades
process typically involves a personal when determining who to interview and
interview. selecting people to hire? Why or why not?
 Since the interview is usually the critical
factor in the hiring decision, the store
manager needs to be well prepared and to
have complete control over the interview.

1. Preparation for the Interview

 The objective of the interview is to gather
relevant information, not simply to ask a
lot of questions.
 The most widely used interview technique,
the behavioral interview, asks candidates
how they handle actual situations they
encountered in the past--situations
requiring skills outlined in the job
description.
 Managers should develop objectives for
what they want to learn about the
candidate.
 The broad opening question is followed by
a sequence of more specific questions.
  Managers need to avoid asking questions
that are discriminatory.

2. Managing the Interview

 Some suggestions for questioning the See PPT 16-11 - 16-13
applicant include (1) encouraging longer
responses by asking broader questions, (2) Have students role play an employment
avoiding questions that have multiple interview. One student is looking for a
parts, (3) avoid asking leading questions,
management trainee position at J.C.
and (4) be an active listener.
Penney and the other student is looking for
 Some managers interview candidates while a personnel manager position.
giving a candidate a tour through the store.
This gives the manager an opportunity to
find out if the candidate will jump in and
help out in straightening out a display.

F. Legal Consideration in Selecting and Hiring

Store Employees See PPT 16-15
 Title VII of the Civil Rights Act prohibits
discrimination on the basis of race,
national origin, sex, or religion in company
personnel practices.
 Discrimination is specifically prohibited in
recruitment, hiring, discharge, layoff,
discipline, promotion, compensation, and
access to training. In 1972, the Civil
Rights Act was expanded by the Equal
Employment Opportunity Commission
(EEOC) to allow employees to sue
employers that violate the law.
 Discrimination arises when a member of a
protected class (women, minorities, etc.) is
treated differently from nonmembers of
that class (disparate treatment) or when
an apparently neutral rule has an
unjustified discriminatory effect
(disparate impact).
 The Age Discrimination and Employment
Act makes it illegal to discriminate in
hiring and termination decisions
concerning people between the ages of 40
and 70.
 The American with Disabilities Act (ADA)
requires employers to provide
accommodating work environments for the
disabled. A disability is defined as any
physical or mental impairment that
 substantially limits one or more of an
individual's major life activities or any
condition that is regarded as being such
impairment.

III. Orientation and Training Programs for

New Store Employees See PPT 16-16
 After hiring employees, the next step in The text indicates that turnover of retail
developing effective employees is employees is very high. Ask student why
introducing them to the firm and its they think this is the case? Ask students to
policies. comment on the differences between life as
a student and what they would expect life to
be as a management trainee

A. Orientation Programs
 Orientation programs are critical in Where should an orientation program take
overcoming entry shock and socializing place for newly hired management trainees
new employees. — in the stores or corporate headquarters?
How long should the orientation program
 Orientation programs can last from a few
be – a day, a week, or a month? Why?
hours to several weeks.
 Effective orientation programs need to
avoid information overload and one-way
communication. Managers need to give
newly hired employees a chance to have
their questions and concerns addressed.
 The orientation program is just one
element in the overall training program. It
needs to be accompanied by a systematic
follow-up to ensure that any problems and
concerns arising after the initial period are
considered.

B. Training Store Employees

 Effective training for new store employees Have a recruiter from a retail recruiting
includes both structured and on-the-job firm on campus describe their company's
learning experiences. management training program.

1. Structured Program
 During the structured program, new Ask students whether they would prefer to
employees are taught the basic skills and go to work for a company with a structured
knowledge they will need to do their job. or unstructured training program. Why?
From the company's viewpoint, what are
 The initial training might be done using
the advantages of a structured versus
virtual or real classrooms or with manuals
and correspondence distributed to new
unstructured program?
employees.
  Some larger firms are finding that
structured programs using e-training over
the Internet has some benefits over on-the-
job training. E-training offers greater
consistency, lower costs, and more flexible
scheduling.
 Structured training programs need to be
supplemented with on-the-job training so
that new employees learn to apply the
policies and skills they’ve learned about.

2. On-the-Job Training
 In the next training phase new employees Ask students if they would rather work for a
are assigned a job, given responsibilities, company that emphasizes on-the-job
and coached by their supervisor. training versus classroom training. Why?
 New employees learn by doing activities,
making mistakes, and then learning how
not to make those mistakes again.
 Information learned through classroom
lectures tends to be forgotten quickly
unless it’s used soon after the lecture.

3. The Blended Approach

 Because of the relative advantages of
structured and on-the-job training, many
firms use a blended approach.

4. Analyzing Successes and Failures

 Store managers should provide an Ask students if they analyze their successes
atmosphere in which salespeople try out and failures in classes. Why or why not?
different approaches for providing Have them describe a success and a failure
customer service and selling merchandise. and give the reasons for both. Use this to
illustrate that people tend to blame failures
 Managers should not criticize an individual
salesperson for mistakes. Instead, they
on others and take credit for successes.
should talk about the situation, analyze What impact does this bias have on
why the approach did not work, and learning?
discuss how the salesperson could avoid
the problem in the future.
 Managers can help salespeople to
constructively analyze their successes and
failures by asking salespeople “why”
questions that force them to analyze the
reason for effective and ineffective
performance.

IV. Motivating And Managing Store

 Employees See PPT 16-17
 After employees have received their initial
training, managers must work them to help
them meet their performance goals.

A. Leadership
 Leadership is the process by which one Ask students what are the characteristics of
person attempts to influence another to a good leader?
accomplish some goal or goals.
 Store mangers are leaders of their group of
employees.

1. Leader Behaviors
 Leaders engage in task performance and Ask students to describe managers who
group maintenance behaviors. they have worked for that were very
effective and not very effective. When it is
 Task performance behaviors are the store good for a leader to be task-oriented?
manager's efforts to make sure that the
Relations-oriented?
store achieves its goals, such as planning,
organizing, motivating, evaluating, and
coordinating store employees' activities.
 Group maintenance behaviors are
activities store managers undertake to
make sure that employees are satisfied and
work well together. These activities
include considering employees' needs,
showing concern for their well-being, and
creating a pleasant work environment.

2. Leader Decision Making

 Store managers vary in how much they See PPT 16-18
involve employees in making decisions.
 Autocratic store managers make all
decisions on their own and then announce
them to employees.
 A democratic store manager seeks
information and opinions from employees
and bases decisions on this information.

3. Leadership Styles
 Store managers tend to develop a specific
leadership style. They emphasize either
task performance or group maintenance
behaviors. They range from being
autocratic to democratic in their decision-
making style.
  Effective managers use all styles, selecting
the style most appropriate for each
situation.
 Effective store managers must consider
both their firm's objectives and their
employees' needs. They must recognize
that employees aren’t all the same, and use
different approaches or styles for managing
each employee.
 Transformational leaders get people to
transcend their personal needs for the sake Ask students to analyze the leadership styles of
of the group or organization. They several retail chain CEOs and identify if
generate excitement and revitalize anyone fits the role of a transformational
organizations. leader.
 Transformational store managers create
this enthusiasm in their employees through
their personal charisma.
 Finally, transformational leaders delegate
challenging work to subordinates, have
free and open communication with
subordinates, and provide personal
mentoring to develop subordinates.

B. Motivating Employees See PPT 16-20

 Motivating employees to perform up to
their potential is maybe a store managers'
most important and frustrating task. Ask students, if they were a store manager,
what would they do to motivate their
 One method is to provide more incentive employees.
compensation, but there are others that
merit attention.

C. Setting Goals or Quotas

See PPT 16-21
 Employee performance improves when
employees feel that (1) their efforts will
enable them to achieve the goals set for
them by their managers and (2) they will Ask students what happens to motivation if
receive rewards they value if they achieve goals are set too low. If they are set too
their goals. high. How can managers make sure they
are set at the right level? Should newly
 If goals are set too high, employees might
hired salespeople have the same sales per
become discouraged, feel the goals are
unattainable, and thus not be motivated to hour selling goal as more experienced
work harder. salespeople? What are the advantages and
disadvantages of having different goals for
 If goals are set too low, employees can each employee? What are the advantages
achieve them easily and won’t be and disadvantages of having employees
motivated to work to their full potential.
participate in establishing goals?
D. Maintaining Morale See PPT 16-24
 Store morale typically goes up when things
are going well and employees are highly
motivated. But when sales are not going
well, morale tends to decrease and
employee motivation declines.
 Store managers could build morale by
having storewide or department meetings
prior to the store opening, educating
employees about the firm's finances and
having parties when such goals are met,
etc.

E. Sexual Harassment
See PPT 16-25
 Managers must avoid and make sure that
store employees avoid actions that are, or
Should a manager avoid dating an employee?
can be interpreted as, sexual harassment.
Based on the EEOC guidelines, when would
 EEOC guidelines define sexual such a behavior be interpreted as sexual
harassment as a form of gender harassment?
discrimination: "Unwelcome sexual
advances, requests for sexual favors, and
other verbal and physical conduct of a
sexual nature constitutes sexual harassment
when … submission to or rejection of such
conduct by an individual is used as a basis
for employment decisions affecting such
individual, or … such conduct has the
purpose or effect of unreasonably
interfering with an individual's work
performance or creating an intimidating,
hostile, or offensive working
environment."

V. Evaluating Store Employees And See PPT 16-26

Providing Feedback
 The objective of the evaluation process is
to identify employees who are performing
well and those who are not.
 Based on the evaluation, high-performing
employees should be rewarded. Plans need
to be developed to increase the
productivity of employees performing
below expectations.

A. Who Should Do the Evaluation? See PPT 16-28

 In large retail firms, the evaluation system Ask students to discuss the advantages and
is usually designed by the human resources disadvantages of having the employee's
 department. But the evaluation itself supervisor evaluate them versus a human
should be done by the employee's resource specialist.
immediate supervisor -- the manager who
works most closely with the employee.
 Inexperienced supervisors are often
assisted by a senior manager in evaluating
employees.

B. How Often Should Evaluations Be Made?

 Most retailers evaluate employees annually
or semiannually. What problems arise if evaluations are
done too frequently? Not frequently
 Feedback from evaluations is the most
effective method for improving employee enough. Should newly hired salespeople be
skills. Thus, evaluation should be done evaluated more frequently than
more frequently when managers are experienced salespeople? Why? Should
developing inexperienced employees' senior executives be evaluated more
skills. frequently than management trainees?
Why?
 Manager should supplement formal
evaluations with frequent informal ones.

C. Format for Evaluations

 Evaluations are only meaningful if See PPT 16-29
employees know what they're required to
do, what level of performance is expected, Ask students to compare and evaluate the
and how they'll be evaluated. criteria used by Foley's and The Gap to
 An employee's formal, six-month evaluate salespeople. How do the
evaluation form may list results for various differences in the evaluation affect the
factors in terms of what's considered motivation and performance of salespeople
average performance for the company, and in the two firms?
the employee's actual performance.

D. Evaluation Errors
 Managers can make evaluation errors by See PPT 16-30
first forming an overall opinion of the
employee's performance and then allowing
this opinion to influence the ratings of each Review the evaluation errors. What can
performance factor (haloing). managers do to minimize the effects of
 Managers are often unduly influenced by
these errors?
recent events (recency) and by their
evaluations of other salespeople (contrast).
 Managers have a natural tendency to
attribute performance (particularly poor
performance) to the salesperson and not to
the environment the salesperson is working
in.
  To avoid potential biases in evaluations,
most ratings might be based on objective
data.
 To avoid potential bias when making
subjective ratings, managers should
observe performance regularly, record their
observations, avoid evaluating many
salespeople at one time, and remain
conscious of the various potential biases.

VI. Compensating And Rewarding Store See PPT 16-31

Employees
 This is the final step in improving
employee productivity. Store employees Employees work for different reasons.
receive two types of rewards from their They seek different rewards. Ask students
work -- extrinsic and intrinsic. what rewards they are seeking from their
first job after graduation. What rewards
 Extrinsic rewards are rewards provided might a part-time salesperson be seeking?
by either the employee's manager or the
Why does a parent who has been raising
firm such as compensation, promotion, and
recognition. children decide to return to the working
force when the children are in high school
 Intrinsic rewards are rewards employees or college?
get personally from doing their job well.

A. Extrinsic Rewards
 Store employees don’t all seek the same
rewards. Some employees want more To illustrate the differences between
compensation; others strive for a intrinsic and extrinsic rewards have student
promotion in the company or public discuss the rewards they get from attending
recognition of their performance. a class. What are their intrinsic rewards?
 Large retailers find it difficult to develop What are the extrinsic rewards? Are the
unique reward programs for each intrinsic rewards affected when the
individual. One approach is to offer à la extrinsic rewards (high grades) are
carte plans that give effective employees a reduced (pass-fail versus grades)?
choice of rewards for good performance.
This type of compensation plan enables
employees to select the rewards they want.
 Recognition is an important nonmonetary
extrinsic reward for many salespeople.
Telling employees they have done a job
well is appreciated.
 It's typically more rewarding when good
performance is recognized publicly.
Public recognition can motivate all store
employees because it demonstrates
management’s interest in rewarding
employees.
  An emphasis on extrinsic rewards can
make employees lose sight of their job’s
intrinsic rewards.

B. Intrinsic Rewards
 When employees find their job intrinsically Ask students why employees are motivated
rewarding, they are motivated to learn how to learn and try new, creative approaches
to do it better. when they have a high level of intrinsic
interest in their work. How can managers
 One approach to making work fun is to
make work fun -- intrinsically rewarding?
hold contests with relatively small prizes.
Contests are most effective when everyone
Ask students to share experience when they
has a chance to win. have had fun doing a job.

 Another approach for motivating more

experienced employees is providing
intrinsic rewards through job enrichment.
Job enrichment is the redesign of a job to
include a greater range of tasks and
responsibilities. These could include
giving employees responsibility for
merchandising a particular area, training
new salespeople, or planning and
managing a special event.

C. Compensation Programs See PPT 16-32

 The objectives of a compensation program
are to attract and keep good employees,
motivate them to undertake activities
consistent with the retailer's objectives, and
to reward them for their effort.
 A compensation plan is most effective for
motivating and retaining employees when
the employees feel the plan is fair when
their compensation is related to their
efforts.

1. Types of Compensation Plans

 Retail firms typically use one or more of Review the advantages and disadvantages
the following compensation plans: straight of compensation plans that emphasize
salary, straight commission, salary plus incentives versus salary.
commission, and quota-bonus.
 With straight salary compensation,
salespeople or managers receive a fixed
amount of compensation for each hour or
week they work.
 Under a straight salary plan, the retailer
has flexibility in assigning salespeople to
 different activities and sales areas.
 The major disadvantage of the straight
salary plan is employees' lack of
immediate incentives to improve their
productivity.
 Incentive compensation plans reward
employees on the basis of their Ask students why retailers use incentive
productivity. Under some incentive plans, compensation plans. What are the positive and
a salesperson's income is based entirely on negative consequences?
commission – called a straight
commission.
 By using different percentages for
calculating commissions, the retailer
provides additional incentives for its
salespeople to sell specific items.
 Incentive plans may include a fixed salary
plus a smaller commission on total sales or
a commission on sales over a quota.
 Incentive compensation plans are a
powerful motivator for salespeople to sell
merchandise, but they have a number of
disadvantages. These disadvantages
include employees' reluctance to perform
non-selling activities and a lack of loyalty
to the firm.
 To provide a more steady income for
Why do retailers use drawing accounts?
salespeople under high incentive plans,
Should drawing accounts be used for all
some retailers offer a drawing account.
salespeople -- newly hired and experienced?
 With a drawing account, salespeople For which types of merchandise would the use
receive a weekly check based on their of drawing accounts make more sense --
estimated annual income. Then underwear and hosiery, toys, men's clothing,
commissions earned are credit against the women's clothing, gifts?
weekly payments.
 Quotas are often used with compensation
plans. A quota is a target level used to
motivate and evaluate performance.
 A quota-bonus plan provides sales
associates with a bonus when their
performance exceeds their quota. What factors would you use to set quotas for an
incentive compensation plan for buyers,
 A quota-bonus plan's effectiveness salespeople, store managers, the CEO of the
depends on setting reasonable, fair quotas. company?
 Quotas should be developed for each
salesperson based on his or her experience
and the nature of the store area where he or
 she works.

2. Group Incentives Ask students what are the advantages and

disadvantages of individual and group
 To encourage employees in a department
incentives? When are group incentives
or store to work together, some retailers
provide additional incentives based on the more important than individual incentives?
performance of the department or store as a
whole.
 The group incentive encourages
salespeople to work together on nonselling
activities and handling customers so the
department sales target will be achieved.

D. Designing the Compensation Program

See PPT 16-33
 A compensation program’s two elements
are the amount of compensation and the
percentage of compensation based on
incentives. Ask students if people always take the
highest paying job? What are the factors
 Typically, market conditions determine the
amount of compensation. When market
they consider in taking a job after
conditions are good and labor is scarce, graduation? Will they take the best paying
retailers pay higher wages. job? Why? What can a retailer do to
attract and keep good employees and not
 Incentive compensation plans are most offer more compensation then competitors?
effective when a salesperson's performance
can be measured easily and precisely.
Review the factors used to determine the
 When the salesperson’s activities have a
great impact on sales, incentives can appropriate use of incentives. For which of
provide additional motivation. the following situations would you place
more emphasis on incentives versus salary
 Incentives are less effective with -- a counter person in a fast food
inexperienced salespeople because they restaurant: the manager of the fast food
inhibit learning.
restaurant; a department store salesperson
 Compensation plans with too many in the hosiery and underwear department,
incentives may not promote good customer designer dresses, men' suits, women's
service. Salespeople on commission sportswear; a department manager in a
become interested in selling anything they discount store; the manager of an exclusive
can to customers. restaurant?
1. Setting the Commission Percentage
 Assume that a specialty store manager
wants to hire experienced salespeople. To
get the type of person she wants, she feels
she must pay $12 per hour. Her selling
costs are budgeted at 8 percent of sales.
With compensation of $12 per hour,
salespeople need to sell $150 worth of
merchandise per hour ($12 divided by 8
 percent) for the store to keep within its
sales cost budget.
 The manager believes the best
compensation would be one-third salary
and two-thirds commission, so she decides
to offer a compensation plan of $4 per hour
salary (33 percent or $12) and a 5.33
percent commission on sales.
 If salespeople sell $150 worth of
merchandise per hour, they’ll earn $12 per
hour ($4 per hour in salary plus $150
multiplied by 5.33 percent, which equals
$8 per hour in commission).

E. Legal Issues in Compensation

 The Fair Labor Standards Act of 1938
set minimum wages, maximum hours,
child labor standards, and overtime pay
provisions. Enforcement of this law is
particularly important to retailers because
they hire many low-wage employees and
teenagers and have their employees work
long hours.
 The Equal Pay Act, now enforced by the
EEOC, prohibits unequal pay for men and
women who perform equal work or work
of comparable worth.

VII. Controlling Costs

 Labor scheduling, making stores “green” See PPT 16-34
and more energy efficient, and store
maintenance, offer three opportunities for
reducing store operating expenses.

VIII. Reducing Inventory Shrinkage

 Inventory losses due to employee theft, See PPT 16-35
shoplifting, mistakes and inaccurate
records must be reduced.
 Although shoplifting receives most of the
publicity, employee theft accounts for
about the same amount of inventory loss.
 The key to an effective loss prevention
program is determining the most effective
way to protect merchandise while
preserving an attractive atmosphere and a
feeling among employees that they are
 trusted.

A. Calculating Shrinkage
 Shrinkage is the difference between the
recorded value of inventory (at retail
prices) based on merchandise bought and
received, and the value of the actual
inventory (at retail prices) in stores and
distribution centers divided by retail sales
during the period.

B. Organized and High-Tech Retail Theft See PPT 16-37

 Professional shoplifters account for an
estimated 25% of retail shoplifting cases
($15-30 billion in losses annually).
 These gangs of professional thieves
concentrate in O-T-C medicines, infant
formula, health and beauty items,
electronics and specialty clothing.

 The Internet, especially auction sites, has

proven to be a ready market for these types
of shoplifted merchandise.

C. Detecting and Preventing Shoplifting

 Losses due to shoplifting can be reduced See PPT 16-38
by store design, employee training, and
special security measures.

1. Store Design Many department stores have small

boutiques in the store. Does this increase
 Security issues need to be considered when
shoplifting? Why?
placing merchandise near store entrances,
delivery areas, and dressing rooms.
 Dressing room entrances should be visible
to store employees.

2. Merchandise Policies
 Requiring receipts for all returns and
locking up small, expensive items are two
merchandise policies that should be used to
reduce inventory shrinkage.

3. Security Measures See PPT 16-40

 Security measures to help reduce inventory

shrinkage include: using closed-circuit TV
cameras that can be monitored from a Security measures reduce shoplifting.
central location. What negative consequences do they have?
  Using electronic article surveillance
(EAS) systems. With the EAS system, An example of such a tag is a small strip
special tags are placed on merchandise. enclosed within a plastic-wrapped DVD. The
When the merchandise is purchased, the POS deactivates the security device without the
tags are deactivated by the POS scanner. need to cut open the plastic cover.

4. Personnel Policies
 The following personnel policies may help
to deter shoplifting:
 Using mystery shoppers

 Having store employees monitor fitting

rooms

 Training employees to be alert to possible

shoplifting situations

 Providing excellent customer service

5. Prosecution
 Many retailers have a policy to prosecute
all shoplifters.
 Some retailers also sue shoplifters in civil
proceedings for restitution of the stolen
merchandise and the time spent in the
prosecution.

B. Reducing Employee Theft

 The most effective approach for reducing See PPT 16-40
employee theft and shoplifting is to create
a trusting, supportive work environment.
Retailers with a highly committed work Would you expect employee theft to be
force and low turnover typically have low higher in an independent, women's
inventory shrinkage. specialty store or in a chain like the
 Additional approaches for reducing Limited? Why?
employee theft are carefully screening
employees, creating an atmosphere that
encourages honesty and integrity, using
security personnel, and establishing
security policies and control systems.

1. Screening Prospective Employees

 Many retailers use paper-and-pencil Ask students if they have taken drug tests or
honesty tests and make extensive reference paper and pencil honesty tests when
 checks to screen out potential employee applying for jobs. What do they think of
theft problems. these screening techniques?
 A major problem related to employee theft
is drug use. Some retailers now require
prospective and current employees with
erratic performance to submit to drug tests
as a condition of employment.

2. Using Security Personnel

 In addition to uniformed guards, retailers
often use undercover shoppers to
discourage and detect employee theft.

3. Establishing Security Policies and

Control Systems
 To control employee theft, retailers need to
adopt policies relating to certain activities
that may facilitate theft. In addition,
computer software is available to detect
unusual activity at POS terminals.

IX. Summary
 Effective store management can have a
significant impact on a retail firm’s
financial performance. Store managers
increase profits by increasing labor
productivity, decrease costs through labor
deployment decisions, and reduce
inventory loss by developing a dedicated
workforce.
ANSWERS TO “GET OUT AND DO ITS”

5. INTERNET EXERCISE Read the description of IntelliVid ®, Video Intelligence Software for the retail
industry at http://www.americandynamics.net/products/IntelliVid_Video_Intelligence.aspx. How does
this high-tech system help retailers reduce shrinkage, track suspicious behavior, and support loss
prevention staff?
From the web page, http://www.tycosecurityproducts.com/RetailHome.aspx:
Retail global shrinkage totaled US$114.8 billion in 2009. Global shrink increased 5.9% from 2008
to 2009. North America experienced the greatest year over year increase at 8.1%.*
The majority of the increase in shrink is attributed to an increase in shoplifting, due to the global
economic situation. However, a significant portion of total shrink is attributed to employee theft,
depending on the region the ratios vary. North America and Latin America have the largest
percentage of shrink from employee theft.
Challenge
These are shocking statistics but account for only some of the issues facing today's retailers.
Trip/Slip claims and business efficiencies such as queue management, merchandising trends and
warehouse controls are all common challenges for the retail industry and can be met with an
integrated solution from Tyco Security Products.
Solution
Theft
Having cameras positioned effectively and recording high quality images is an essential
deterrent. Our integrated solution can monitor suspect areas or be linked to the point of sale
which is in turn recorded via the integrated digital video recorder when an alarm/event is
activated. Video clips can be quick exported to DVD/USB for any ensuing police investigation.
Violence/Abuse Against Staff
This is a totally unacceptable issue facing staff but with an effective CCTV monitoring system
employees have the peace of mind to know that any incidents will be seen on cameras and then
recorded onto the Video Management System.
Business Efficiencies
An integrated video & access control system can improve retailers' business efficiencies. A store
manager responsible for many stores must have the ability to monitor them all remotely from
any location. Using the free remote monitoring software supplied with every Intellex, store
efficiency can be enhanced by monitoring queues, car parks, the effectiveness of in store
promotions and much more. Trip/Slips claims can also be validated by using the advanced search
facility on our Management System greatly reducing insurance claims.
 Using our access control software can help establish clearly defined access zones in
warehouses/loading bays/storage rooms ensuring only authorized personnel are admitted at the
correct times. Any unauthorized access attempts will trigger an alarm that will be captured by
the cameras and then recorded onto the video management system where an alarm is activated,
displayed live on the Tyco access control system enabling the operator to respond in an
appropriate manner.
With an integrated solution from Tyco Security Products we can provide a proven application for
your unique retail requirements.
*Figures from the 2009 Global Retail Theft Barometer

6. LIBRARY EXERCISE: Go to one of you library’s business databases and find an article that describes a
case of a retailer violating title VII in either their hiring or promotion practices. Summarize the case and
court decision. What should this retailer do differently in the future to improve their employment
policies?
Student responses will vary. This could be a good class or team discussion topic.
You may decide to assign one of the following articles so that the class can discuss the same
case.
Retail store image, bona fide occupational qualifications, and job discrimination: Establishing the
essence of the business for retail organizations. By: Borna, Shaheen; Stearns, James M. Stearns;
Smith, Brien N.; Emamalizadeh, Kian. Marketing Management Journal, Spring 2008, Vol. 18 Issue
1, p54-62, 9p.
The business case for diversity and the perverse practice of matching employees to customers.
By: Bendick Jr, Marc; Egan, Mary Lou; Lanier, Louis. Personnel Review, 2010, Vol. 39 Issue 4,
p468-486, 19p.
Reflections from Employers on the Disabled Workforce: Focus Groups with Healthcare,
Hospitality and Retail Administrators. By: Hernandez, Brigida; McDonald, Katherine; Divilbiss,
Marielle; Horin, Elizabeth; Velcoff, Jessica; Donoso, Oscar. Employee Responsibilities & Rights
Journal, Sep 2008, Vol. 20 Issue 3, p157-164,

7. INTERNET EXERCISE: Go to the homepage for Greening Retail and examine their research and
programs that help retailers implement environmental best practices at http://www.greeningretail.ca.
Select a company in the “Featured Retailer Archive”
(http://www.greeningretail.ca/featured/archive.dot) as a case example and briefly describe what this
retailer is doing to be a more sustainable company.
From the web page students will pick one of these retailers:
TESCO CARREFOUR

MUSGRAVE MOUNTAIN EQUIPMENT CO-OP

MONSOON ACCESSORIZE HOME DEPOT

MONOPRIX LUSH

MARKS AND SPENCER IKEA

ALLIANCE BOOTS H-E-B GROCERY

If IKEA was selected this is the type of information available:

IKEA has received recognition at the community, national and international levels for their far-
reaching and innovative programs related to sustainability. IKEA was founded in the south of
Sweden by a farmer's son, Ingvar Kamprad, in 1943. Today the company has 231 stores in 24
countries.
COMPANY CULTURE
Sustainability has long been core to IKEA's culture. In more recent years, it has become
formalized into strategies, policies and processes throughout the company.
Every new employee at IKEA is given environmental training, and the aim is for all co-workers to
receive regular follow-up courses.
CODES OF CONDUCT
IKEA monitors the sustainability of its supply chain practices through their IWAY Code of Conduct
for purchasing and distribution.
Every two years, IWAY-approved suppliers are audited to make sure they maintain their IWAY
status
Third-party auditors always take part in Compliance and Monitoring Group (CMG) audits, and
they also conduct their own audits at IKEA
ENERGY USE
Webess is an IT application used by IKEA buildings for reporting energy consumption, including
electricity, fuel oil, gas and water. Through this monitoring system, energy consumption can be
compared between buildings.
IKEA co-workers in Shanghai, China, have reduced energy use per sold cubic meter by 23 percent
in their store. Lighting is turned off during non-business hours, and a new system controls the use
of air-conditioning.
By installing motion sensors that regulate store lighting in the IKEA distribution centre in Tejon,
electricity costs have been reduced by 50 percent. The motion sensors allow the company to light
only areas which are in use.
SOLID WASTE
 IKEA tries to minimize damage to products. However, when damage does occur, they attempt to
repair the products, which can then be used as spare parts, or they are sold at a reduced price.
The Canadian operation has a 64% damaged goods recovery rate, but has targeted 75%.
Approximately 0.41% of their goods are internally damaged; thus, a significant amount of money
can be saved through the recovery program.
Waste could amount to $600,000 to $700,000 per year for the Canadian operation, thus,
reducing waste is a priority. An individual was recently hired to oversee this area.
Packaging is constantly being scrutinized for ways of reducing its size and weight. Recently, 1 cm
was removed from sofa packaging, which resulted in four more units being added to a container
and decreasing the transportation cost per unit.
TRANSPORTATION
IKEA ships all its furniture in flat packs, resulting in greater density, fewer journeys, less fuel and
fewer emissions
Generally IKEA tries to locate the stores in areas where there is efficient public transport. The
company has formulated a list of requirements for efficient public transport:
IKEA stores in North York and Etobicoke in Canada have shuttle buses running between each
store and downtown Toronto. Nearly 300,000 passengers took advantage of the service during
2006.
The company has increased the number of meetings done online or through video conferencing.
Management believes this not only reduces their carbon footprint and saves money, but also
promotes a healthier lifestyle and a greater life/work balance.
IKEA is SmartWay-compliant under the U.S. Environmental Protection Agency. This is a model to
continuously decrease greenhouse gases.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

87. 1. How do on-the-job, Internet training, and classroom training differ? What are the
benefits and limitations of each approach?

Classroom training might Include lectures, audiovisual presentations, manuals, and correspondence
distributed to the new employees. The initial structured program should be relatively short so new
employees don't feel they are simply back in school. Effective training programs try to bring new
recruits up to speed as quickly as possible and then get them involved in doing the job for which
they've been hired.
 Use of the Internet for training store employees has become increasingly popular. The Internet
provides a lower cost alternative, allowing employees a preparation phase before on-the-job
training without the costs associated with classroom training. Benefits of training employees online
include greater consistency as all employees are trained with the same program, lower costs, and
the ability to launch significant programs over a large geographic area quickly.

The next training phase emphasizes on-the-job training. New employees are assigned a job, given
responsibilities, and coached by their supervisor. The best way to learn is to practice what has been
taught. New employees learn by doing activities, making mistakes, and then learning how not to
make those mistakes again. Information learned through classroom lectures tends to be forgotten
quickly unless it's used soon after the lecture. The actual hands-on experience and getting feedback
provides more complete and lasting knowledge.

88. 2. Give examples of a situation in which a manager of a McDonald's fast-food

restaurant must utilize different leadership styles.

In the text, we discuss leadership styles in terms to type of leader behaviors, task
performance and group maintenance, and two types of decision-making approaches,
authoritative and participative.
Task performance behaviors are the McDonalds manager's efforts to make sure that the store
achieves its goals.
Group maintenance behaviors are activities undertaken by the store managers to make sure
that McDonald's employees are satisfied and work well together.
Autocratic When the McDonald manager make all decisions on their own and then announce
the decision to employees.
Democratic When the McDonald manager seeks information and opinions from employees
and bases decisions on this information.
Effective managers use all styles, selecting the style most appropriate for each situation. For
example, the McDonald manager might be more autocratic and relations-oriented with an
insecure new trainee and more democratic and task-oriented with an effective, experienced
employee.
The also discusses another style, transformation leadership, getting people to transcend their
personal needs for the sake of the group or organization. This style might be very useful
when the store manager is new and trying to turn around a poor-performing restaurant—
trying to generate excitement and revitalize restaurant's employees.
89. 3. Use the interview questions in Exhibit 16-4 and role play with another student in the
class as both the interviewer and the applicant for an Assistant Store Manager position
with the store of your choice.

Students should be encouraged to select a variety of questions for their role plays.
Additionally, encourage them to remember the following: (1) word questions to require
longer responses, (2) avoid leading questions, and (3) be an active listener. Evaluate the
information being presented to sort out important and unimportant points.

90. 4. Name some laws and regulations that affect the employee management process.
Which do you believe are the easiest for retailers to adhere to? Which are violated the
most often?

Title VII of the Civil Rights prohibits discrimination on the basis of race, national origin, sex,
or religion in company personnel practices. Potential violations are investigated by the Equal
Employment Opportunity Commission (EEOC).
The Age Discrimination and Employment Act makes it illegal to discriminate in hiring
and termination decision concerning people between the ages of 40 and 70.
Americans with Disabilities Act (ADA) opens up job opportunities for the disabled by
requiring employees to providing accommodating work environments.
Sexual harassment includes lewd sexual comments and gestures, sexual joking, showing
obscene photographs, staring at a co-worker in a sexual manner, alleging that an employee
got rewards by engaging in sexual acts, and commenting on an employee's moral reputation.
Managers must avoid such behaviors because they are both unethical and illegal.
Equal Pay Act, now enforced by the EEOC, prohibits unequal pay for men and women who
perform equal work. Equal work means that the jobs require the same skills, effort, and
responsibility and are performed in the same working environment.
The Fair Labor Standards Act of 1938 set minimum wages, maximum hours, child labor
standards, and overtime pay provisions.
Retailers may find that acts are very specific, such as the Age Discrimination and
Employment Act and the Equal Pay Act, are more easily adhered to as compared to others
that require detailed examination and assessment of each situation.
Enforcement of the Fair Labor Standards Act is particularly important to retailers because
they hire many low-wage employees and teenagers and have their employees work long
hours. Some would argue that this may be violated the most.

91. 5. What's the difference between extrinsic and intrinsic rewards? What are the effects
of these rewards on the behavior of retail employees? Under what conditions, would
you recommend that a retailer emphasize intrinsic rewards over extrinsic rewards?
 Extrinsic rewards are rewards provided by the retailer. These rewards include financial
compensation and recognition. Intrinsic rewards are positive feelings that people get from
doing the job well. For instance, retailers can help employees identify the intrinsic rewards
of their jobs through contests, which emphasize the "fun" aspects of their jobs and through
job enrichment programs.

Retail employees feel a sense of fulfillment and motivation by these rewards. The employees
in turn will work harder because they feel motivated. However, extrinsic rewards often make
employees feel the only purpose of their job is to make money and they lose sight of all
intrinsic rewards. Intrinsic rewards should be emphasized over extrinsic rewards in order to
avoid making the employees feel they only come to work to get a paycheck. Intrinsic rewards
should be used when an employee feels his job is mundane and boring. These rewards can
make the jobs feel rewarding and motivate employees to learn how to do their jobs better.
For example, experienced employees often lose interest in their jobs. They no longer find
them exciting and challenging. Extrinsic rewards, such as pay or promotion might not be so
attractive to them. They might be satisfied with their present income and job responsibilities.
Intrinsic rewards should be emphasized in this case to motivate and inspire the employees.

92. 6. Many large department stores such as JC Penney, Sears, and Macy's are changing
their salespeople's reward system from a traditional salary to a commission-based
system. What problems can incentive compensation systems cause? How can
department managers avoid these problems?

Accountability will be the watchword of this decade; all will have to know that they are paid
based on their production. Since the sales manager is the direct link from the corporate
office to the sales people it is up to him/her to convince the sales people to accept the change.
To begin with, the department manager is going to have to eliminate the suspicion that the
new system is designed to help management get larger profits at the expense of the sales
force. The manager should show how employees' earnings should not be negatively affected.
In fact, the effective department manager will use this as an opportunity to show how
earnings can be increased. The sales manager must be especially careful to explain all facets
of the change so that employees' questions and concerns are addressed. The new system
should also be periodically examined and discussed with employees to get their feedback.

93. 7. When evaluating retail employees, some stores use a quantitative approach that
relies on checklists and numerical scores similar to the form in Exhibit 16-6. Other
stores use a more qualitative approach whereby less time is spent checking and adding
and more time is devoted to discussing strengths and weaknesses in written form.
Which is the best evaluation approach? Why?

Each evaluation approach has its strengths. Quantitative methods are useful in that they
provide a scale that can be utilized uniformly across departments and stores. This enables
evaluators to get a more balanced appraisal of performance from a broad perspective. In
addition, quantitative methods leave little question as to the relevant evaluative criteria, such
 as, did the salesperson make quota, or what were the total sales for the individual for a
specific period? Qualitative methods allow the manager to give individual insight into
strengths and weaknesses, and suggestions to correct the weaknesses. They allow the
evaluator to focus on the sales person as an individual and therefore allows for specific
evaluation pertinent to each person. An effective evaluation system should probably use a
combination of both.

94. 8. Explain how changing demographics of the workforce are affecting staffing and
recruiting efforts for retail sales and management positions.

Retailers may use strategies like printing application forms in multiple languages and developing
training programs for people who aren’t familiar with U.S. business practices to reach potential
employees in immigrant populations.

Seniors are another attractive source for new recruits. Retailing is often attractive to seniors because
its wide range of store hours fits seniors’ need for flexible work schedules. he compensation
methods

95. 9. List the skills, knowledge, and abilities that can be successfully taught to new retail
employees through an orientation program, a formal training program and on-the-job
training.

Training is very important at all three levels. Orientation serves to introduce new employees
to the firm and its policies. It can help new hires to have a clear understanding of the
retailer’s programs and practices. In the formal, structure training program, new employees
learn the basic skills and knowledge they’ll need to do their jobs including company policies,
how to use the point-of-sale terminals, basic selling skills, procedures for receiving
merchandise, handling complaints, etc. On-the-job training translates this basic learning into
practice: new employees are assigned a job, given responsibilities and coached by their
supervisors. Because of the relative advantages of structured programs and on-the-job
training, many retailers use a blended approach.

96. 10. Discuss how retailers can reduce shrinkage from shoplifting and employee theft.

Losses due to shoplifting can be reduced by store design, employee training, and special
security measures. To stop employee theft, retailers can screen perspective employees,
encourage honesty and integrity, use security personnel, and administer security policies and
control systems.
97. 11. Drugstore retailers, such as CVS, place diabetic test strips and perfume behind
locked glass cabinets and nearly all over-the-counter medicines behind Plexiglas panels.
These efforts are designed to deter theft. How do these security measures impact honest
customers.

Despite their effectiveness in reducing losses through shoplifting, the security measures
described above can unfortunately make the shopping experience less pleasant for honest
customers. These customers are inconvenienced by the need to request assistance in getting
to the merchandise they wish to buy. Retailers must carefully balance security with
convenience. In the situation described above, the retailer should clearly remind customers
that its security precautions help to service its loyal customer by keeping losses, and
therefore merchandise prices, down for everyone.
 These Web sites may also be used for social shopping, where consumers use the Internet to shop by
engaging with other product users, family and friends on product reviews, preferences and opinions.
Many retailers encourage customers to post reviews of products they have bought or used.
Research has shown this technique to increase customer loyalty, providing a competitive advantage
for sites that use them.

98. 10. Where do you think pop-up stores would be most successful? Why? Why type of
merchandise would sell well from this format? Explain.

An extreme type of sales promotion is a pop-up store. Pop-up stores are temporary storefronts that
exist for only a limited time and generally focus on a new product or limited group of products
offered by a retailer. They are also used by some retailers during the holiday season to increase
exposure and convenience shopping for their customers without having to invest in a long-term
lease.
Seasonal merchandise, specialized or unique merchandise, to launch a new product or line, as a
charity event, to test a new market, can generate publicity, etc.

17
STORE LAYOUT, DESIGN, AND VISUAL MERCHANDISING

ANNOTATED OUTLINE INSTRUCTOR NOTES

 Recognizing the significant impact of store

environment on shopping behavior on
shopping behavior, retailers have devoted
considerable resources to their store design
and merchandise presentation.

I. Store Design Objectives See PPT 17-4

  When designing or redesigning a store, Pick a store the students know and have
managers must meet five objectives. them evaluate the store based on these
objectives.
A. Store Design and Retail Strategy See PPT 17-5
 To meet the first objective, retail managers
must define the target customer and then
design a store that complements the For examples of retail store design strategies
customers' needs. used abroad, see PPT 17-7, 17-8, 17-9

 Customers would find it hard to accurately

judge value if the physical environment
were inconsistent with merchandise or
prices.

B. Influence on Consumer Buying Behavior

 To meet the second design objective of
influencing customer buying decisions,
retailers concentrate on store layout and
space planning issues.
 The store design should: attract consumers
to the store, enable them to easily locate
merchandise of interest, keep them in the
store for a long time, motivate them to
make unplanned impulse purchases, and
provide them with a satisfying shopping
experience.
 Customers' purchasing behavior is also
influenced, both positively and negatively,
by the store's atmosphere.
 The influence of store design on buying
behavior is increasing with the rise in two-
income and single head-of-household
families. Due to the limited time these
families have, they are spending less time
planning shopping trips and making more
purchase decisions in stores.

C. Flexibility
 Store planners attempt to design stores
with maximum flexibility. Flexibility can
take two forms: the ability to physically
move store components and the ease with
which components can be modified.
 Stores with better designs can respond to
seasonal changes and renew themselves
from an image perspective without the
 need for large-scale renovations.
 Fixtures are the equipment used to display
merchandise.

D. Cost See PPT 17-10

 The fourth design objective is to consider
the costs associated with each store design
element versus the value received in terms
of higher sales and profits.
 The best locations within a store are worth
the most, so they're reserved for certain
types of merchandise. Retailers develop
maps called planograms that prescribe the
location of merchandise based on
profitability and other factors.
 When considering the atmospheric issues
of store design, retailers must weigh the
costs along with the strategy and customer
attraction issues.

E. Legal Considerations-Americans with

Disabilities Act Ask students to identify a store that would be
 A critical objective in any store design or inaccessible to a disabled person.
redesign decision is to be in compliance
with the 1990 Americans with Disabilities
Act (ADA). See PPT 17-11
 Besides providing for a nondiscriminatory
work environment for the disabled, the
ADA, calls for "reasonable access" to
merchandise and services in a retail store
that was build before 1993. Stores built
after 1993 must be fully accessible.
 Accessibility answers are not clear or easy;
they are being considered on a case-by-
case basis in federal courts around the
United States.

F. Design Trade-Offs See PPT 17-13

 A store design rarely achieves all of the
design objectives described above.
Managers need to make trade-offs
among them.
 One common trade-off is between
stimulating impulse purchases and
making it easy to buy products.
  Another trade-off occurs between making
the shopping environment interesting
and entertaining and making
merchandise easy for customers to find.
 One more trade-off is the balance
between giving customers adequate
space in which to shop and productively
using the space for merchandise.

II. Store Design See PPT 17-14

 To design a good store layout, store Ask students what stores seem to draw them
designers must balance many objectives-- around to view more merchandise than they
objectives that often conflict. expected to. Ask them if a store layout ever
makes them feel too crowded.
A. Layouts
 One method of encouraging customer See PPT 17-15
exploration is to present them with a layout
that facilitates a specific traffic pattern.
 Another method of helping customers to
move through the store is to provide
interesting design elements.
 Today’s modern retailers use three general
types of store layout design: grid,
racetrack, and free-form.

1. Grid Layout
 The grid layout is best illustrated by most See PPT 17-16 for a description and
grocery and drug store operations. It illustration of the grid layout
contains long gondolas of merchandise and
aisles in a repetitive pattern.
 The grid is not the most aesthetically Ask students what is the best types of stores
pleasing arrangement, but it is very good for a grid design and why.
for shopping trips in which customers need
to move throughout the entire store and
easily locate products they want to buy.
 The grid layout is also cost-efficient
because space productivity is enhanced and
fixtures are standardized.
 One problem with the grid layout is that
customers typically aren’t exposed to all of
the merchandise in the store.

2. Racetrack Layout
 The racetrack layout (also known as a See PPT 17-17
 loop) is a type of store design that provides
a major aisle to facilitate customer traffic, Ask students to give examples of different
with access to the store's multiple stores that have a "racetrack" design. What
entrances. This aisle loops through the are the advantages and disadvantages?
store, providing access to all the
departments.
 The racetrack design encourages impulse
purchasing.

3. Free-Form Layout
 A free-form layout (also known as See PPT 17-19 for a description and
boutique layout) arranges fixtures and illustration of the free-form layout
aisles asymmetrically. It is successfully
used primarily in smaller specialty stores
or within the departments of larger stores. Ask students why upscale specialty stores
 In this relaxed environment, customers feel often use a free-form design.
like they are in someone's home, which
facilitates shopping and browsing.
 A pleasant atmosphere may be expensive
due to expensive fixtures, higher
occurrence of theft, and the sacrifice of
storage and display space.

B. Signage and Graphics Ask students to discuss ways to enhance the

 Signage and graphics help customers effectiveness of a retailer’s signage.
locate specific products and departments,
provide product information, and suggest
items or special purchases. See PPT 17-20

 Additionally, graphics, such as photo

panels, can enhance the store’s image.

 Retailer’s visual communications are used

to:

 Identify the location of merchandise

 Identify the types of products offered

within a category

 Describe special offers to entice customers

into the store

 Provide price and other information about

a product at the point-of-sale

 Create moods that encourage customers to

 buy products

 Suggestions for effectively using signage

are discussed on page 517.

1. Digital Signage See PPT 17-22

 Many retailers are beginning to replace
traditional signage with digital signage Ask students to develop a list of the benefits
systems. of digital signage.
 Digital signage is signs whose visual
content is delivered digitally through a
centrally managed and controlled network
and displayed on a television monitor or
flat-panel screen. The content delivered
can range from entertainment to price
information.

 Digital signage provides a number of

benefits over traditional signage for the
retailer.

C. Feature Areas See PPT 17-23

 Feature areas are areas within a store

designed to get the customer's attention.

1. Entrances
 The entry area is often referred to as the
decompression zone because customers are
making an adjustment to a new
environment. This area provides the
retailer its first opportunity to create a
visual impression.

2. Freestanding Displays
 Freestanding displays and mannequins
located on aisles are designed primarily to
get customers’ attention and bring them
into a department.
 These fixtures often display and store the
newest, most exiting merchandise in the
department.

3. Cash Wraps
 Cash wraps, also known as point-of- Tell students that you know that none of
purchase (POP) counters or checkout them would pick up tabloids at the checkout
areas, are places in the store where stand because they are upscale, educated
 customers can purchase merchandise. consumers. But, why do so many other
people do so? (Because they are stuck at the
 These areas can be the most valuable point-of-sale and have nothing better to do.)
piece of real estate in the store, because
the customers often wait there for the
transactions to be completed.

4. End Caps
 End caps are displays located at the end of
the aisle.
 Due to their high visibility, end caps can
also be used to feature special promotional
items, like beer and potato chips before the
Fourth of July.

5. Promotional Aisle or Area

 A promotional aisle or area is an aisle or
area used to display merchandise that is
being promoted.

6. Walls
 Since retail space is often scarce and
expensive, many retailers have
successfully increased their ability to store
extra stock, display merchandise, and
creatively present a message by utilizing
wall space.

7. Windows
 Although window displays are clearly
external to the store, they can be an
important component of the store layout.

 Properly used, windows can help draw

customers into the store. They provide a
visual message about the type of
merchandise for sale in the store and the
type of image the store wishes to portray.
They can also be used to set the shopping
mood for a season or holiday.

8. Fitting Rooms
 Today, retailers are recognizing the
importance of fitting rooms as the crucial
space in which customers decide whether
to make a purchase.
 Fitting rooms must be large, clean and
 comfortable. A fitting room that makes a
person feel good also makes that shopper
more likely to get in the mood to buy
something.
 Many fitting rooms today are equipped
with technology that enhances the buying
experience. Shoppers can check in-stock
items and view accessory options. Some
also offer customers the capability of e-
mailing friends a photo of the outfit they
are considering or viewing the outfit on a
“virtual” model.

III. Space Management

 The space within stores and on the stores’
shelves and fixtures is a scarce resource.
Space management thus involves: (1) the
allocation of store space to merchandise
categories and (2) the location of
departments or merchandise categories in
the store.

A. Space Allocated to Merchandise Categories

 Retailers consider four factors when See PPT 17-24
deciding how much floor or shelf space to
allocate to merchandise categories and
brands.

1. Space Productivity
 A simple rule of thumb for allocating space
is to allocate on the basis of merchandise
sales.
 In practice, retailers should allocate space
to a merchandise category based on its
effect on the profitability of the entire
store.
 Two commonly used measures of space
productivity are: sales per square foot (for
retailers that display most of their
merchandise on freestanding fixtures) and
sales per linear foot (for retailers
displaying most merchandise on shelves).
 A more sophisticated productivity
measure, such as gross margin per square
foot would consider the profits generated
by the merchandise, not just the sales.
 2. Inventory Turnover
 Inventory affects space allocation in two
ways.
 First, both inventory turnover and gross
margin contribute to GMROI. Merchandise
categories with higher inventory turnover
merit more space than merchandise
categories with lower inventory turnover.
 Second, the merchandise displayed on the
shelf is depleted quicker for fast selling
items with high inventory turnover so more
space needs to be allocated to fast selling
merchandise.

3. Impact on Store Sales

 Retailers need to consider the allocation
impact on the entire store. The objective of Ask students to consider situations in which
space management is to maximize the the retailer might strategically want to
productivity of the store, not just a “over-allocate” space to certain
particular merchandise category or
merchandise categories.
department.

4. Display Considerations
 Finally, the physical limitations of the store
and its fixtures will necessarily affect
space allocation.

B. Location of Merchandise Categories and See PPT 17-27

Design Elements
 The location of merchandise categories
plays a role in how customers navigate
through the store.
 By strategically placing impulse and
demand/destination merchandise
(products that customers have decided to
buy before entering the store) throughout
the store, retailers increase the chances that
customers will shop the entire store and
that their attention will be focused on the
merchandise that the retailer is most
interested in selling.
 The retailer’s entry area is often referred to
as the decompression zone because
customers are making an adjustment to the
new environment.

 Next, customers often turn right into the

 area referred to as the strike zone, a
critical area because it creates the
customers’ first impressions of the retailer.

 From here, the most heavily trafficked and

viewed area is the right-hand side of the
store.

1. Impulse Merchandise
 Impulse merchandise is products that
customers purchase without prior plans,
like fragrances, cosmetics and magazines.
 They are almost always located near the
front of the store where they are seen by
everyone and may actually draw people
into the store.

2. Demand Merchandise
 Children's, expensive specialty goods, and
furniture departments as well as customer- Ask students where they would expect to find
service areas like beauty salons, credit the travel and/or beauty salon (in an out-of-
offices, and photography studios are the-way location).
usually located off the beaten path – in
corners and on upper floors.
 These departments are known as
demand/destination areas because
demand for their products or services is
created before customers get to their
destination. Thus, they don't need prime
locations.

3. Special Merchandise
 Some merchandise categories, for instance
expensive, fragile items or highly personal
items like lingerie, involve a buying
process that is best accomplished in a
lightly trafficked area.
 Categories like furniture and appliances
that require large portions of floor space
are often located in less desirable areas.

4. Adjacencies
 Retailers often cluster complementary Ask a student what he/she purchased on
products together to facilitate multiple their last trip to a drug store. Assuming
purchases. other customers purchase a similar market
basket, the store could group these
categories together.
C. Location of Merchandise within
a Category: The Use of Planograms
 To determine where merchandise should
be located within a department, retailers of
all types generate maps known as
planograms.

1. Planogram A sample planogram is shown in PPT 17-29

 A planogram is a diagram created from

photographs, computer output or artists’
renderings that illustrates exactly where
every SKU should be placed.
 Electronic planogramming requires the
user to input model numbers or UPC
codes, product margins, turnover, sizes of
product packaging or actual pictures of the
packaging, and other pertinent information
into the program. The computer plots the
planogram based on the retailer's priorities.
 Planograms are also useful for
merchandise that doesn't fit nicely on
gondolas in a grocery or discount store.

2. Videotaping Consumers
 Some retailers are utilizing consulting
firms to videotape consumers as they move
through the store. These videos can be
used to improve layouts and planograms
by identifying the causes of slow-selling
merchandise, such as poor shelf placement.

 The videos allow retailers to learn where

customers pause or move quickly. This
information can help retailers decide
whether the current layout is working or
needing revision.

3. Virtual Store Software

 Another tool used to determine the best
place to put merchandise and test
consumers’ responses to merchandise
placement is virtual store software.

IV. Visual Merchandising

 Visual merchandising is the presentation of
a store and its merchandise in ways that
 will attract the attention of potential
customers.

A. Fixtures See PPT 17-30

 The primary purposes of fixtures are to
efficiently hold and display merchandise.
At the same time, they must help define
areas of a store and encourage traffic flow.
 Fixtures come in an infinite variety of
styles, colors, sizes, and textures, but only
a few basic types are commonly used.
 For apparel, retailers utilize the straight
rack, rounder, and four-way. The mainstay
fixture for most other merchandise is the
gondola. See PPT 17-31
 The straight rack consists of a long pipe
suspended with supports going to the floor
or attached to a wall. See PPT 17-32
 A rounder (also known as a bulk or
capacity fixture) is a round fixture that
sits on a pedestal . Although smaller than
the straight rack, it's designed to hold a See PPT 17-33
maximum amount of merchandise.
 A four-way fixture (also known as a
feature fixture) has two cross bars that sit
perpendicular to each other on a pedestal,
holds a large amount of merchandise, and
allows the customer to view the entire See PPT 17-34
garment.
 Gondolas are extremely versatile and used
extensively in grocery and discount stores
to display everything from canned foods to
baseball gloves.

B. Presentation Techniques See PPT 17-35

1. Idea-Oriented Presentation See PPT 17-36
 Some retailers successfully use an idea-
oriented presentation - a method of
presenting merchandise based on a specific
idea or image of the store.
 Individual items are grouped to show
customers how the items could be used and
combined.
 This approach encourages the customer to
 make multiple complementary purchases.

2. Style/Item Presentation
 Organizing stock by style or item is
probably the most common presentation
technique.
 Arranging items by size is a common
method of organizing many types of
merchandise, from nuts and bolts to
apparel.

3. Color Presentation
 This is a bold merchandising technique
where products, especially seasonal
fashion goods, are displayed at the same
place.

4. Price Lining
 Price lining is the technique when retailers
offer a limited number of predetermined
price points within a classification.
 Organizing merchandise in price categories
is a strategy that helps customers easily
find merchandise at the price they wish to
pay.

5. Vertical Merchandising
 Another common way of organizing
merchandise is vertical merchandising.
Merchandise is presented vertically using
walls and high gondolas.
 Customers shop much as they read a
newspaper--from left to right, going down
each column, top to bottom.

6. Tonnage Merchandising
 As the name implies, tonnage
merchandising is a display technique in
which large quantities of merchandise are
displayed together to enhance and
reinforce a store's price image.
 Using this display concept, the
merchandise itself is the display.

7. Frontal Presentation
 Frontal presentation is a method of
 displaying merchandise in which the
retailer exposes as much of the product as
possible to catch the customer's eye.

V. Atmospherics
 Atmospherics refers to the design of an See PPT 17-37
environment via visual communications,
lighting, colors, music, and scent to
stimulate customers' perceptual and
emotional responses and ultimately to
affect their purchase behavior.

A. Lighting
 Lighting in a store is used to highlight See PPT 17-38
merchandise, sculpt space, and capture a
mood or feeling that enhances the store's
image.
 Lighting can also be used to downplay less
attractive features that cannot be changed.

1. Highlighting Merchandise
 A good lighting system helps create a
sense of excitement in the store. At the
same time, lighting must provide an
accurate color rendition of the
merchandise.
 Another key use of lighting is called
popping the merchandise-- focusing
spotlights on special feature area or items.
Using lighting to focus on strategic pockets
of merchandise trains shoppers' eyes on the
merchandise and draws customers
strategically through the store.

2. Mood Creation
 Traditionally, U.S. specialty and Ask students if they ever noticed dramatic
department stores have employed mood changes in the ambiance of various
incandescent lighting sources to promote a departments in a department store, or going
warm and cozy ambience from one store to another in a mall.
 The European method of lighting can now
be found in the most exclusive specialty
stores of Rodeo Drive and Bal Harbor and
even some department stores like
Bloomingdale's. European stores have
long favored high light levels, cool colors,
and little contrast or accent lighting.
 3. Energy Efficient Lighting
 As the price of energy soars and retailers
and their customers become more energy
conscious, retailers are looking for ways to
cut their energy costs and be more
ecological.
 Retailers are switching from incandescent
lighting to more energy efficient
fluorescent lights.

B. Color See PPT 17-39

 The creative use of color can enhance a
retailer’s image and help create a mood. Have students choose two very different
 Warm colors (red and yellow) are thought stores, like a men’s and a women’s clothing
to attract customers and gain attention, yet store, and compare the color schemes.
they can be distracting and even
unpleasant.
 In contrast, research has shown that cool
colors, like blue or green, are relaxing,
peaceful, calm, and pleasant.
 Thus, cool colors may be most effective
for retailers selling anxiety-causing
products, such as expensive shopping
goods.

C. Music See PPT 17-40 and 17-41

 Music can either add or detract from a
retailer's total atmospheric package.
Ask students if they are aware of stores that
 Unlike other atmospheric elements, use music to their advantage/disadvantage.
however, music can be easily changed.
 Research has shown that the presence of
music positively affects customers'
attitudes toward the store.
 Retailers can also use music to impact
customers' behavior. Music can control
the pace of store traffic, create an image,
and attract or direct consumers' attention.
 Changing music in different parts of a store
can help alter a mood or appeal to different
markets.

D. Scent See PPT 17-42

 Many buying decisions are based on
emotions, and smell has a large impact on
our emotions.
  Research has shown that scent, in Ask students if they notice a scent in a store.
conjunction with music, has a positive
impact on impulse buying behavior and
customer satisfaction.
 Retailers must carefully plan the scents
that they use, depending on their target
market. Gender of the target customer
should be taken into account in deciding on
the intensity of the fragrance in a store.

E. How Exciting Should a Store Be? See PPT 17-43

 The impact of the store’s environment
depends on the customer’s shopping goals.
The two basic shopping goals are task
completion and recreation.

 When customers are shopping to complete

a task that they view as inherently
unrewarding, they want to be in a soothing
and calming environment.

 When customers are shopping for fun, they

want to be in an exciting and engaging
atmosphere.

 This means retailers must consider the

typical shopping goals for their customers
when designing their store environments.

VI. Web Site Design See PPT 17-44 and 17-45

 Retailers should also consider design
elements when creating their web sites. Ask students to describe retail web sites they
consider to be well and poorly designed.
A. Simplicity Matters
 It is not necessary to mention all
merchandise available at the site on each
page. It is better to present a limited
selection tailored to the customer’s needs
and then provide links to related
merchandise and alternative assortments.

B. Getting Around
 The web site design should incorporate
many local links internal to the site to help
customers navigate easily.
C. Let Them See It
 The design should incorporate realistic
colors and sharpness.

D. Blend the Web Site with the Store

 The design should visually reassure
customers that they are going to have the
same experience on the web site that they
expect from the retailer’ stores.

E. Prioritize
 The site should be designed to advise the
customer and guide them to the most
important or promising choices, while
ensuring their freedom to go anywhere that
they please.

F. Type of Layout
 The design should strike a balance between
keeping customers’ interests and providing
them with a comfort level based on
convention.

G. Type of Layout
 Physical stores recognize the peril of long
checkout lines and take steps to alleviate
the problem.

 For Internet retailers, the problem of

abandoned shopping carts is even more
acute. Estimates indicate that as many as
half of all online customers abandon their
purchases during the checkout process.

 Tips to lessen the abandoned cart problem

include:

 Making the process seem clear and simple

 Closing off the checkout process

 Making the process navigable with no

threat of lost information

 Reinforcing trust in the checkout process

VII. Summary
 Some objectives for a store design are to:
(1) implement the retailer’s strategy, (2)
influence customer buying behavior, (3)
provide flexibility, (4) control design and
maintenance costs, and (5) meet legal
requirements. Typically a store cannot
achieve all of these objectives, so
managers make trade-offs among
objectives such as providing convenience
versus encouraging exploration.

 Although a retailer’s Web site is different

than its physical store, in many but not all
cases, good design principles that apply to
a physical store space can also be applied
to a Web site.

18
CUSTOMER SERVICE

ANNOTATED OUTLINE INSTRUCTOR NOTES

 Customer Service is the set of activities and

programs undertaken by retailers to make
the shopping experience more rewarding
for their customers. These activities See PPT 18-4
increase the value customers receive from
the merchandise and services they
purchase. All employees of a retail firm and Generate a discussion among students about
all elements of the retailing mix provide their experience with customer service at
services that increase the value of the various retailers. What were the possible
reasons for good service at some retailers
merchandise.
versus bad service at others?
 Most of the services provided by retailers
furnish information about the retailer's
offering and make it easier for customers to
locate and buy products and services.
 Retailers can take advantage of the
opportunities to develop strategic
advantage by providing high-quality service.
I. Strategic Advantage Through Customer See PPT 18-6
Service
 Successful retailers differentiate their retail
offerings, build customer loyalty, and
develop a sustainable competitive
advantage by providing excellent customer Ask students if they had chosen to buy a
service. Good service keeps customers branded good at a specific retailer, even
returning to a retailer and generates though it was available at other stores in
positive word-of-mouth communication, the area. If so, was the decision to
which attracts new customers. patronize a specific retailer due to the
better service at that store?
 Providing high-quality service is difficult for
retailers. Automated manufacturing makes
quality of most merchandise consisted from
item to item. But the quality of retail
service can vary dramatically from store to
store and from salesperson to salesperson
within a store.
 In addition, most services provided by
retailers are intangible – customers can't
see or feel them. Intangibility makes it hard
to provide and maintain high-quality service
because retailers can't count, measure, or
check service before it's delivered to
customers.
 The challenges of providing consistent high-
quality service provides an opportunity for a
retailer to develop a sustainable competitive
advantage.

A. Customer Service Strategies

 Personalized and standardized are two See PPT 18-7
approaches retailers use to develop a Ask students for examples of retailers that
sustainable customer service advantage. use customized and standardized service
 Successful implementation of the approaches. What are the advantages and
personalized approach relies on the disadvantages of each of these
performance of sales associates and service approaches? What are the factors that
providers, while the standardized approach retailers should consider when deciding
relies more on policy, procedures, and store which approach to use?
design and layout

1. Personalized Approach
 The customization approach encourages
service providers to tailor the service to
meet each customer's personal needs. See PPT 18-8
 Some retailers, such as Lands' End, are
introducing a human element into their
electronic channel. At Lands' End,
customers can simply click on a button and
chat – referred to as instant messaging –
with a service provide.
 At other retail stores, such as Target, several
employees called guest ambassadors roam
the store looking for customers who need
assistance.
 The customized approach typically results in
customers receiving superior service. But
the service might be inconsistent because
service delivery depends on the judgment
and capabilities of the service providers.
 In addition, providing the customized
service is costly since it requires more well-
trained service providers or complex
computer software.

2. Standardized Approach
 The standardized approach is based on
establishing a set of rules and procedures
and being sure that they are implemented See PPT 18-9
consistently. By strict enforcement of these
procedures, inconsistencies in the service
are minimized.
 Store or website design and layout also play
an important role in the standardization
approach.

3. Cost of Customer Service See PPT 18-10

 Providing high quality service, particularly
customized service, can be very costly.
 However, from a long-term perspective,
good customer service can actually reduce
costs and increase profits.
B. Customer Evaluation of Service Quality
 When customers evaluate retail service,
they compare their perceptions of the Ask students to describe a situation in
service they receive with their expectations. which they received good and poor service
 Customers are satisfied when the perceived from a retailer. What factors influenced
service meets or exceeds their expectations. their perceptions?
They are dissatisfied when they feel the
service falls below their expectations.

1. Role of Expectations See PPT 18-13

 Customer expectations are based on
knowledge and past experiences with a Describe the role of expectations. Relate
retailer and its competitors. the role of expectations to the student
 Technology is dramatically changing the descriptions of service encounters. Ask
ways in which customers and firms interact. students what factors influence their
Customers can now interact with companies expectations?
through automated voice response systems
and place orders and check on delivery
through the Internet. But customers still
Get students to provide examples of
expect dependable outcomes, easy access,
unusual service situations, both good and
responsive systems, flexibility, apologies,
bad. Then get them to provide examples of
and compensation when things go wrong.
ordinary service. They won’t know what to
 Expectations vary depending on the type of do about the ordinary service situation
store. Since expectations aren't the same question because they won’t remember
for all types of retailers, a customer may be any. They will remember, however, really
satisfied with low levels of actual service in good or really bad service.
one store and dissatisfied with high service
levels in another store.
 Customer service expectations vary around
the world. Although Germany's
manufacturing capability is world
renowned, its poor customer service is also
well known. Because Germans are
accustomed to good service, they don’t
demand it. On the other hand, Japanese
expect excellent customer service. Ask students if they had received
unexpected services from a retailer.
II. The Gaps Model For Improving Retail
Service Quality See PPT 18-14 and 18-15
 When customers' expectations are greater
than their perceptions of the delivered
service, customers are dissatisfied and feel
the quality of the retailer's service is poor.
 Thus, retailers need to reduce the service
gap – the difference between customers'
expectations and perceptions of customer
service -- to improve customers' satisfaction
with their service.
Four factors affect the service gap:
 Knowledge gap: The difference between
customer expectations and the retailer's
perception of customer expectations.
 Standards gap: The difference between the
retailer's perceptions of customer’s
expectations and the customer service
standards it sets.
 Delivery gap: The difference between the
retailer's service standards and the actual
service provided to customers.
 Communication gap: The difference
between the actual service provided to
customers and the service promised in the
retailer's promotion program.
 These four gaps add up to the service gap.
The retailer’s objective is to reduce the
service gap by reducing each of the four
gaps.

A. Knowing What Customers Want: The

Knowledge Gap See PPT 18-16
 The most critical step in providing good
service is to know what the customer wants.
 Retailers can reduce the knowledge gap and
develop a better understanding of customer
expectations by undertaking customer
research, increasing interactions between
retail managers and customers, and
improving the communication between
managers and employees who provide
customer service.
 Market research can be used to better
understand customers’ expectations and the
quality of service provided by a retailer.
 Methods for obtaining this information
range from comprehensive surveys to
simply asking some customers about the
 store’s service.

1. Comprehensive Studies Work with students to develop a

 Some retailers have established programs questionnaire that could be used to assess
for assessing customers’ expectations and customer satisfaction with service provided
service perceptions. by a local retailer.

2. Gauging Satisfaction with Individual

Transactions Have students go to a shopping center and
 Another method for doing customer ask customers about the service they
research is to survey customers immediately received.
after a retail transaction has occurred.
 Customer research on individual
transactions provides up-to-date
information about customers' expectations
and perceptions. The research also indicates
the retailer's interest in providing good
service.
 Since the responses can be linked to a
specific encounter, the research provides a
method for rewarding employees who
provide good service and correcting those
who exhibit poor performance.

3. Customer Panels and Interviews Work with students to develop a procedure

 Rather than surveying many customers, for conducting a customer panel. How
retailers can use panels of 10 to 15 many customers? What types of
customers to gain insights into expectations customers? When and where would it
and performance. meet? What specific questions would be
asked?
4. Interacting with Customers
 Owner-managers of small retail firms Ask students what retail managers can do
typically have daily contact with their to improve communications with contact
customers and thus have accurate first-hand people.
information about them.
 In large retail firms, managers often learn
about customers through reports so they
miss the rich information provided by direct
contact with customers.

5. Customer Complaints
 Complaints allow retailers to interact with Ask students what retailers could do to
their customers and acquire detailed stimulate comments and complaints about
information about their service and service.
merchandise.
  Handling complaints is an inexpensive
means to isolate and correct service
problems.
 Although customer complaints can provide
useful information, retailers can't rely solely
on this source of market information.
 Typically dissatisfied customers don't
complain. To provide better information on
customer service, retailers need to
encourage complaints and make it easy for
customers to provide feedback about their
problems.

6. Using Technology
 New, affordable information technology
packages are enabling even small retailers
to improve their customer service by
maintaining and providing customer
information to sales associates.

7. Feedback from Store Employees

 Salespeople and other employees in regular
contact with customers often have a good
understanding of customer service
expectations and problems. This
information will improve service quality only
if they're encouraged to communicate their
experiences to high-level managers who can
act on it.

8. Using Customer Research Ask students if retail managers really need

 The service gap is reduced only when to interact with customers to determine
retailers use this information to improve customer expectations and perceptions?
service. Can't they learn this through talking with
employees and looking at market
 Feedback on service performance needs to research?
be provided in a timely manner.
 Feedback must be prominently presented so
service providers are aware of their
performance.

B. Setting Service Standards: The Standards Gap

 Service standards should be based on See PPT 18-17
customers’ perceptions rather than on Ask students what a retailer can do to
internal operations. remind employees about the need to
 To close the standards gap, retailers need to provide good customer service.
(1) commit their firms to providing high-
quality service, (2) develop innovative
solutions to service problems, (3) define the
role of service providers, (4) set service
goals, and (5) measure service performance.

1. Commitment to Service Quality See PPT 18-18

 Service excellence occurs only when top
management provides the leadership and
demonstrates commitment. Top
management must be willing to accept the
temporary difficulties and even increased
costs associated with improving service
quality.
 Store managers are the key to achieving
service quality standards.

2. Defining the Role of Service Providers See PPT 18-19

 Mangers can tell service providers that they
need to provide excellent service, but not
clearly indicate what excellent service
means. Without a clear definition of the
retailer’s expectations, service providers are
directionless.

3. Setting Service Goals

 Retailers often develop service goals based Ask student to give specific example of
on their beliefs about the proper operation services goals that might be set for a sales
of the business rather than the customers' associate in a Gap store.
needs and expectations.
 Employees are motivated to achieve service
goals when the goals are specific,
measurable, and participatory in the sense
that they participated in setting them.
 Employee participation in setting service
standards leads to better understanding and
greater acceptance of the goals.

4. Measuring Service Performance

 Retailers need to continuously assess
service quality to ensure that goals will be Query students on the types of information
achieved. that could be collected by mystery
 Retailers also use mystery shoppers to shoppers.
assess their service quality. Mystery
 shoppers are professional shoppers who
“shop” a store to assess the service
provided by store employees and the
presentation of merchandise in the store.

5. Giving Information and Training

 Store employees need to know about the
retailer’s service standards and the
merchandise they offer, as well as their
customers’ needs. With this information,
employees can answer customers’ questions
and suggest products.
 In addition, store employees need training
in interpersonal skills.

III. Meeting And Exceeding Service Standards:

The Delivery Gap See PPT 18-20
 To reduce the delivery gap and provide Ask students to indicate the kind of
service that exceeds standards, retailers information a salesperson in the following
must give service providers the necessary departments of a department store should
knowledge and skills, provide instrument have: china, consumer electronics, men’s
and emotional support, improve internal ties, women’s hosiery, and men’s suits.
communications and reduce conflicts, and
empower employees to act in the
customers’ and firm’s best interests.

1. Providing Instrumental and Emotional See PPT 18-21

Support Ask students to give examples of emotional
 Service providers need to the have the and instrumental service support they
instrumental support -- the appropriate might have received when working in a
systems and equipment – to deliver the retail outlet.
service desired by customers.
 In additional to instrumental support,
service providers need emotional support
from their coworkers and supervisors.
Emotional support involves demonstrating
a concern for the well-being of others.
Dealing with customer problems and
maintaining a smile in difficult situation is
psychological demanding.
 Service providers need to be in a supportive
and understanding atmosphere to deal with
these demands effectively.

2. Improving Internal Communications

 When providing customer service, store
employees must often manage the conflict
between customers’ needs and the retail
firms’ needs.
 Retailers can reduce certain conflicts by
having clear guidelines and policies
concerning service and by explaining the
rationale for these policies.
 Conflicts can also arise when retailers set
goals inconsistent with the other behaviors
expected from store employees.
 Finally, conflicts can also arise between
different areas of the firm.

3. Empowering Store Employees

 Empowerment means allowing employees See PPT 18-22
at the lowest level of the firm to make
important decisions on how service is Ask students what effects does empowering
provided to customers. When the store employees have on the employees?
employees responsible for providing service
On customers? Have students relate work
are authorized to make important decisions,
experiences they have had in which their
the quality of service improves.
lack of empowerment reduced the quality
 However, empowering service providers can of service they could provide.
be difficult and the benefits may not justify
the costs.

4. Providing Incentives Ask students about the benefits and

 Many retailers use incentives, like paying problems with offering incentives. Review
commissions based on sales to motivate the material on incentives in 17.
employees.
 But retailers have found that commissions
on sales can decrease customer service and
job satisfaction. Incentives can motivate
high-pressure selling which leads to
customer dissatisfaction.
 However, incentives can also be used to
effectively improve customer service when
the rewards are tied to solving customer
problems and the rewards are provided at
about the same time the appropriate
behavior occurred.

5. Developing Solutions to Service Problems

  Retailers also use systems and technology to
close the delivery gap.

a. Developing New Systems

 Finding ways to overcome service problems
can improve customer satisfaction, and in
some cases, reduce costs.

6. Using Technology See PPT 18-25

 Many retailers are installing kiosks with
broadband Internet technology in their Ask students to describe customer service
stores to allow customers to order technologies they have encountered in
merchandise and to provide routine retail stores.
customer service, freeing employees to deal
with more complicated customer service
issues.
 Other technology applications used to
enhance customer service are hand-held
scanners and “intelligent” shopping carts.

A. Communicating the Service Promise: The

Communications Gap See PPT 18-27
 The fourth factor leading to a customer Discuss the paradox of wanting to tell
service gap is a difference between the customers about great customer service
service promised by the retailer and the but not wanting to raise expectations too
service actually delivered. high.
 Overstating the service offered raises
customer expectations. Then, if the retailer
doesn’t follow through, expectations exceed
perceived service, and customers are
dissatisfied.
 The communication gap can be reduced by
making realistic commitments and by
managing customer expectations.

1. Realistic Commitments
 Advertising programs are typically
developed by the marketing department,
while the store operations division delivers
the service. Poor communication between
these areas can result in a mismatch
between an ad campaign's promises and the
service the store can actually offer.

2. Managing Customer Expectations Ask students to indicate some complaints

  Information presented at the point of sale they have made about service provided by
can be used to manage expectations. a retailer. Use these situations in a role
playing exercise assigning one student to
 Communication programs can inform play the part of the customer and the other
customers about their role and to be the retail employee receiving the
responsibility in getting good service, complaint.
and can give tips on how to get better
service, such as the best times of the day
to shop and the retailer's policies and
procedures for handling problems.

VI. Service Recovery

 Rather than dwelling on negative aspects of See PPT 18-28
customer problems, retailers should focus Have students relate service failures they
on the positive opportunities they generate. have experienced and describe situations
 Service problems and complaints are an in which the retailer made a good recovery
excellent source of information about the and a poor recovery.
retailer's offering – its merchandise and
service.
 Armed with this information, retailers can
make changes to increase customer
satisfaction.
 Service problems also enable a retailer to
demonstrate its commitment to providing
high-quality customer service.
 Most retailers have standard policies for
handling problems, however, in many cases,
the cause of the problem may be hard to
identify, uncorrectable, or as a result of the
customer's unusual expectations. In such
cases, service recovery might be more
difficult.
 The steps in effective service recovery are:
(1) listen to the customer, (2) provide a fair
solution, and (3) resolve the problem
quickly.

A. Listening to the Customer

 Customers can become very emotional over Ask students why it is important for an
their real or imaginary problems with a employee to listen carefully to the
retailer. Often this emotional reaction can complaint. Why is the best policy always to
be reduced by simply giving customers a give the complaining customer what he or
chance to get their complaints off their she wants? Do customers always know
what they want?
 chests.
 Store employees should allow customers to
air their complaints without interruption.
 Customers want a sympathetic response to
their complaints.
 Employees also need to listen carefully to
determine what the customer perceives to
be a fair solution.

B. Providing a Fair Solution

 Favorable impressions arise when
customers feel they have been dealt with
fairly. When evaluating the resolution of
their problems, customers compare how
they were treated in relation to others with
similar problems or how they were treated
in similar situations by other retail service
providers.
 Customers’ evaluations of complaints’
resolutions are based on distributive
fairness and procedural fairness.

1. Distributive Fairness See PPT 18-30

 Distributive fairness is the customer’s Ask Students: What is distributive and
perceptions of the benefits received procedural fairness? Which one is more
compared to their costs (inconvenience or important? Why?
loss). Customers want to get what they
paid for.
 Customers typically prefer tangible rather
than intangible resolutions to their
complaints.
 Customers may want to “let off steam,” but
they also want to feel the retailer was
responsive to their complaint. If providing a
tangible restitution is not possible, the next
best alternative is to let customers see that
their complaints will have an effect in the
future.

2. Procedural Fairness
 Procedural fairness is the perceived fairness
of the process used to resolve complaints.
 Customers consider three questions when
 evaluating procedural fairness: (1) Did the
store employee collect information about
the situation? (2) Was this information used
to resolve the complaint? and, (3) Did the
customer have some influence over the
outcome?
 Discontent with the procedures used to
handle a complaint can overshadow the
benefits of a positive outcome.
 Customers typically feel they are dealt with
fairly when store employees follow
company guidelines.

3. Resolving Problems Quickly Ask Students: What can retailers do to resolve

complaints quickly? Is it always best to
 Customer satisfaction is affected by the time
resolve complaints as quickly as possible?
it takes to get an issue resolved.
 Retailers can minimize the time to resolve
complaints by reducing the number of
people the customer must contact,
providing clear instructions, and speaking in
the customer's language.

1. Reducing the Number of Contacts

 As a general rule, store employees who deal
with customers should be made as self-
sufficient as possible to handle problems.
 Customers are more satisfied when the first
person they contact can resolve a problem.

2. Giving Clear Instructions

 Customers should be told clearly and
precisely what they need to do to resolve a
problem.

3. Speaking the Customer’s Language

 Customers can become very annoyed when
store employees use company jargon to
describe a situation. To communicate
clearly, store employees should use terms
familiar to the customer.

IX. Summary
 Due to the inherent intangibility and
inconsistency of services, providing high-
quality customer service is challenging.
 However, customer service also provides an
opportunity for retailers to develop a
strategic advantage.
 Retailers use two basic strategies for
providing customer service: the
personalized approach and the standardized
approach.
 The personalized approach relies primarily
on sales associates. The standardized
approach places more emphasis on
developing appropriate rules, consistent
procedures, and optimum store designs.