DC Outline Lecture Notes (Based on Text Chapters)


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DC Outline Lecture Notes (Based on Text Chapters)

  1. 1. SINGAPORE INSTITUTE OF MANAGEMENT BACHELOR OF BUSINESS (BUSINESS ADMINISTRATION Distribution Channels (MKTG 1058) LECTURE NOTES  Outline Chapter Summaries  Solutions to Computational Exercises (Selected Chapters)  Power Point Slides JANUARY 2011Please Note: the accompanying chapter summaries are based on therequired text for this course. You are reminded that reading theassigned chapters are absolutely essential and that the notesprovided are meant to supplement the text chapters. Please ensurethat you complete your reading of the text chapters for therespective lectures. 1
  2. 2. Week Topic Chapter1. Perspectives on Retailing 1&5 Managing the Supply Chain2. Market Selection & Location Analysis 73. Strategic Planning & Operation Management 2&4 Evaluating the Competition4. Retail Customers 3&6 Legal & Ethical Behaviour5. Store Layout & Design 136. Managing a Retailer’s Finances 87. Merchandise Buying & Handling 98. Merchandise Pricing 109. Advertising & Promotion 1110 Customer Service & Retail Selling 1211. Managing People 1412. Course Review (& Catch up lecture) 2
  3. 3. Lecture One Topics:Perspectives on RetailingManaging the Supply Chain Dunne: Chapters 1 and 5 3
  4. 4. Chapter 1 Perspectives on RetailingOverview:In this chapter, we acquaint you with the nature and scope of retailing. We present retailing as amajor economic force in the United States and as a significant area for career opportunities.Finally, we introduce the approach to be used throughout this text as you study and learn aboutthe operation of retail firms.Learning Objectives:After reading this chapter, you should be able to:1. Explain what retailing is.2. Explain why retailing is undergoing so much change today.3. Describe five methods used to categorize retailers.4. Understand what is involved in a retail career and be able to list the prerequisites necessary for success in retailing.5. Be able to explain the different methods for the study and practice of retailing.Outline:I. What Is Retailing? A. Retailing - consists of the final activities and steps needed to place a product in the hands of the consumer or to provide services to the consumer. B. Can be performed by any firm that sells a product or provides a service to the final consumer.II. The Nature of Change In Retailing – Retailing, which accounts for 20 percent of the worldwide labor force and includes every living individual as a customer, is the largest single industry in most nations and is currently undergoing many exciting changes. A. E-tailing – The great unknown for retail managers is what the ultimate role of the Internet will be. 1. It is still unclear if online shopping will reach its projections for ―every day‖ needs. 2. A dramatic change created by e-tailing is a shift in power between retailers and consumers. The information dissemination capabilities of the Internet are making consumers better informed and thus increasing their power when transacting and negotiating with retailers. B. Price Competition - Americans are price conscious, whether shopping at brick & mortar stores or on-line, and retailers that are able to cut costs in order to provide lower prices will be the winners. C. Demographic Shifts - Other significant changes in retailing over the past decade have resulted from changing demographic factors, such as: the fluctuating birth rate, the increasing number of immigrants, the growing importance of the 70 million Generation Y consumers, and the fact that Generation Xers are now middle-aged and baby boomers are now reaching retirement. 4
  5. 5. 1. Profit growth must come by either increasing same store sales at the expense of the competitions market share (Same store sales is a retailing term that compares an individual stores sales to its sales for the same month in the previous year. Market share refers to a retailers sales as a percentage of total market sales for the product line or service category under consideration.) or by reducing expenses without reducing services to the point of losing customers. 2. As a result, todays retail firms are run by professionals who can look at the changing environment and see opportunities, exert enormous buying power over manufacturers, and anticipate future changes before they impact the market, rather than just react to these changes after they occur. D. Store Size - The size of retail stores has increased in recent years because of: 1. The phenomenon referred to as scrambled merchandising, whereby stores handle many different unrelated items, and; 2. The growth of category killer stores. These retailers got their name from their marketing strategy: carry such a large amount of merchandise in a single category at such good prices that it makes it impossible for the customer to walk-out without purchasing what they needed; thus "killing" the competition.III. Categorizing Retailers - There are five popular schemes for categorizing retailers. A. Census Bureau Classification 1. North American Industry Classification System (NAICS) codes - Reflects the type of merchandise a retailer sells. The major portion of a retailers competition comes from other retailers in its NAICS category. 2. Three-digit codes are very broad; four-digit codes provide much more information on the structure of retail competition and are easier to work with. B. Number of Outlets 1. Another method of classifying retailers is by the number of outlets each firm operates. Generally, retailers with several units are a stronger competitive threat because they can spread many fixed costs, such as advertising and top management salaries, over a large number of stores and can achieve economies in purchasing. 2. Chain Stores - account 41% of all retail sales. a. Size categories - Broken down by the Census Bureau into "2 to 10 stores," and "11 or more stores" categories. b. Large chains take advantage of their economies of scale and centralized buying by using: (1) Standard Stock List - Method whereby all stores in a chain stock the same merchandise. (2) Optional Stock List - Method which gives each store in a retail chain flexibility to adjust its merchandise mix to local tastes and demands. (3) Providing Supply Chain Leadership - by directing the channel and having other channel members do what they might not otherwise do, the retailer by serving as the channel advisor can make it more effective. 5
  6. 6. (4) Private Label Branding - Chains use their own brand name instead of a manufacturers brand name; results in lower costs for consumers. 3. A shortcoming of using the number of outlets scheme for classifying retailers is that it addresses only traditional brick & mortar retailers, or those operating in a physical building.C. Margin vs. Turnover 1. Gross Margin Percentage - Indicates how much gross margin the retailer makes as a percentage of sales; gross margin is used to pay the retailers operating expenses. a. Gross Margin - Net sales minus the cost of goods sold. b. Operating Expenses - Expenses the retailer incurs while running the business other than the cost of merchandise [i.e., rent, wages, utilities, depreciation, insurance]. 2. Inventory Turnover - Number of times per year, on average, that a retailer sells its inventory. 3. Classifying Retailers by Margin/Turnover a. Low-margin/Low-turnover - These retailers will not be able to generate sufficient profits to remain competitive and survive. There are no good examples of successful retailers using this approach. b. Low-margin/High-turnover - Common in the United States. Examples include the discount department stores, the warehouse clubs, and the category killers. Amazon.com is probably the best known example of low-margin/high-turnover e-tailers. c. High-margin/Low-turnover - The types of retailers in this category include brick & mortar retailers such as furniture stores, high-end women’s specialty stores and furriers, jewelry stores, gift shops, funeral homes and most of the mom-and-pop stores located in small towns across the country. Some click & mortar retailers using this approach include Coach and Sharper Image. d. High-margin/High-turnover - Convenience store retailers fall into this category. Best able to withstand and counter competitive attacks. Because in the early stages of Internet commerce most retailers are trying to achieve a high turnover rate, there are not any examples of e-tailers using this strategy. 4. While the Margin/Turnover scheme provides an encompassing classification, it fails to capture the complete array of retailers operating in todays marketplace. For example, service retailers, and even some e- tailers, such as Priceline.com, carry no inventory. Thus, while this scheme is a good way of analyzing retail competition, it neglects an important type of retailing.D. Location - Retailers can improve financial performance results not only by improving the sales per square foot of traditional sites but by operating in new nontraditional retail areas or over the Internet.E. Size - Retailers are often classified by sales volume or by number of employees. 1. Operating performance tends to vary according to size; larger firms usually have lower operating costs per sales dollar. 2. While size has been useful in the past, it is unclear whether the changes brought about by technology will not make this obsolete. For example, 6
  7. 7. imagine a fully automated retailer, where as a consumer places an order on-line, an automated stock picking warehouse packages the selected merchandize and forwards it to the shipping area to be sent by UPS to the customer.IV. A Retailing Career A. Exposure to All Business Disciplines - Retailing provides professionals with the opportunity to gain knowledge on all facets of the business world. A retailers role may include a combination of the following positions and responsibilities: 1. Economist - Forecasting sales growth 2. Fashion Expert - Predicting consumer behavior and how it will affect future fashion trends. 3. Marketing Manager - Determining how to promote, price, and display your merchandise. 4. Financial Analyst - Reducing store expenses. 5. Personnel Manager – Hiring the right people, training them to perform their duties in an efficient manner, and developing their work schedules. 6. Logistics Manager - Arranging delivery of a ―hot item.‖ 7. Information System Manager - Analyzing sales and other data to determine opportunities for improved management practices. 8. Accountant – Arriving at a profitable bottom line. B. There are two major career paths in Retailing: 1. Store Management – Involves responsibility for selecting, training, and evaluating personnel, as well as in-store promotions, displays, customer service, building maintenance, and security. 2. Buying – Involves the use of quantitative tools to develop appropriate buying plans for the store’s merchandise lines. C. Common Questions About a Retailing Career 1. Salary – Starting salaries in executive training programs will be around $38,000 to $50,000 per year. That, however, is only the short-run perspective. In the long run, the retail manager or buyer is directly rewarded on individual performance. Entry-level retail managers or buyers who do exceptionally well can double or triple their incomes in three to five years and often can have incomes twice those of classmates who chose other career fields. 2. Career Progression - The speed of a retail professionals progression is dependent upon an individuals capabilities and the growth of the organization. There is no "standard" career progression for a retailer. 3. Geographic Mobility - The willingness and ability to make geographic moves often increases a retail professionals opportunities for advancement. 4. Women in Retailing - Retailing has always been viewed as a good career for women. Today females constitute over 50 percent of all department store executives, making it the profession where women have attained the highest level of achievement. 5. Societal Perspective - Leading retail executives are well-rounded individuals with a high social consciousness. Professionals entering the retail field must develop a sound set of ethical principles by which they may guide their actions. D. Prerequisites for Success 7
  8. 8. 1. Hard Work - A willingness to work extra hours, evenings and weekends often pays off through career advancements. 2. Analytical Skills - An ability to interpret the facts and data that are related to the past and present performance of a store, merchandise lines and departments. 3. Creativity - An ability to develop and capitalize on unique ideas and opportunities. 4. Decisiveness - The ability to make rapid decisions, render judgments, take action and commit oneself to a course of action until completion. 5. Flexibility - A willingness to and enthusiasm for accommodating change; ability to thrive in an "expect the unexpected" environment. 6. Initiative - The ability to originate action. 7. Leadership - The ability to inspire others to trust and respect your judgment and an aptitude for delegating, guiding and persuading others. 8. Organization - The ability to establish priorities and courses of action and to plan and follow up to achieve results. 9. Risk Taking - The willingness to take calculated risks and to accept responsibility for the results. 10. Stress Tolerance - Retailing is a fast-paced and demanding career in a changing environment. The retailing leaders of the 21st century must be able to perform consistently under pressure and to thrive on constant change and challenge. 11. Perseverance - Successful retailers must have perseverance. All too often retailers may become frustrated due to the many things occurring that they cant control. Individuals that have the ability to persevere and take marketplace changes in stride will find an increasing number of career advancement opportunities. 12. Enthusiasm - Successful retailers must have a strong warmth of feeling for their job, otherwise they will convey the wrong image to their customers and associates in their department. Retailers today are training their sales force to smile even when talking to customers on the telephone because it shows through in your voice.V. The Study and Practice of Retailing A. Analytical Method – The analytical retail manager is a finder and investigator of facts. The use of models and theories of retailing as a means of making systematic decisions about all aspects of the business; concentrate on facts. B. Creative Method – The creative retail manager is an idea person. The use of insight and intuition in the process of handling retail difficulties; emphasis is on ideas C. Two-Pronged Approach - The combination of creativity and analysis when responding to problems. D. A Proposed Orientation - The approach to the study and practice of retailing that is reflected in this book is an outgrowth of the previous discussion. This approach has four major orientations: 1. Environmental Orientation - Allows retailers to continuously adapt to external forces in the environment. 2. Management Planning Orientation - Allows retailers to adapt systematically to a changing environment. 8
  9. 9. 3. Profit Orientation - Allows retailers to focus on the fundamental management of assets, revenues and expenses. 4. Decision Making Orientation - Allows retailers to focus efforts on the need to collect and analyze data for making intelligent retail decisions.VI. Book Outline A. Introduction to Retailing (Chapters 1-2) B. The Retailing Environment (Chapters 3-6) C. Market Selection and Location Analysis (Chapter 7) D. Managing Retail Operations (Chapters 8-14) 9
  10. 10. Chapter 5 Channel BehaviorOverview:At the outset of this text, we pointed out that retailing is the final movement in the progressionof merchandise from producer to consumer. Many other movements occur through time andgeographical space, and all of them need to be executed properly for the retailer to achieveoptimum performance. Therefore, in this chapter, we examine the retailers need to analyzeand understand the supply chain in which it operates. After looking at the activities in thesupply chain, the chapter then reviews the various types of supply chains and the benefitseach one offers the retailer. The chapter concludes with some practical suggestions toimprove supply chain relationships, especially the use of a category manager.Learning Objectives:After reading this chapter, you should be able to:1. Discuss the retailers role as one of the institutions involved in the larger supply chain.2. Describe the types of supply chains by length, width, and control.3. Explain the terms dependency, power, and conflict and their impact on supply chain relations.4. Understand the importance of having a collaborative supply chain relationship.Outline:VII. The Supply Chain – It is important to understand the retailer’s role in the larger supply chain. A. A supply chain, which is often used interchangeably with the term channel, is a set of institutions that moves goods from the point of production to the point of consumption. B. The supply chain, or channel, is affected by five external forces: 1. Consumer behavior, 2. Competitor behavior, 3. The socioeconomic environment, 4. The technological environment, and 5. The legal and ethical environment. These external forces cannot be completely controlled by the retailer or any other institution in the supply chain, but they need to be taken into account when retailers make decisions. C. Eight marketing functions must be performed by a supply chain or channel: 1. Buying, 2. Selling, 3. Storing, 4. Transporting, 5. Sorting, 6. Financing, 7. Information gathering, and 8. Risk taking. 10
  11. 11. - Whether the economic system is capitalistic, socialistic, or communistic, these eight marketing functions will exist. - These functions cannot be eliminated. They can, however, be shifted or divided among the different institutions and the consumer in the supply chain. - No member of the supply chain would want, or be able, to perform all eight marketing functions. Thus, the retailer must view itself as being dependent on others in the supply chain. D. Marketing Institutions 1. Primary marketing institutions are supply chain members that take title to the goods. These include manufacturers, wholesalers, and retailers. 2. Facilitating marketing institutions are those that do not actually take title but assist in the marketing process by specializing in the performance of certain functions. These include agents/brokers, financial institutions, market researchers, transporters, advertising agencies, warehouses, and insurers.VIII. Types of Supply Chains- There are three strategy decisions to be made when designing an efficient and competitive supply chain: supply chain length, width, and control. A. Supply Chain Length refers to the number of institutions between the manufacturer and consumer. 1. Supply chains can be direct or indirect. a. A direct supply chain occurs when manufacturer sell their goods directly to the final consumer or end user. b. An indirect supply chain occurs once independent channel members (wholesalers and retailers) are added between the manufacturer and the consumer. 2. The desired supply chain length is determined by many customer-based factors, such as the size of the customer base, geographical dispersion, behavior patterns, and the particular needs of customers. B. Supply Chain Width - pertains to the number of retailers used to cover a given trading area. 1. Intensive distribution means that all possible retailers are used in a trade area. 2. Selective distribution means that a moderate number of retailers are used in a trade area. 3. Exclusive distribution means only one retailer is used to cover a trading area. C. Control of the Supply Chain- A pressing issue for all supply chains is "who should control the supply chain." In seeking to control or manage a supply chain, there are two basic supply chain patterns: the conventional marketing channel and the vertical marketing system. 1. A Conventional Marketing Channel is one in which each member of the channel is loosely aligned with the others and takes a short-term orientation. 2. Vertical Marketing Channels are capital-intensive networks of several levels that are professionally managed and centrally programmed systems to realize the technological, managerial, and promotional economies of long-term relationships. 11
  12. 12. a. The basic premise of working as a system is to operate as close as possible to that elusive 100 percent efficiency level. b. Since vertical channel members now realize that it is impossible to offer consumers "value" without being a low-cost, high efficiency supply chain, they have developed either quick response (QR) systems or ECR (Efficient Consumer Response) Systems and make use of category management techniques. c. There are three types of vertical marketing channels: (1) Corporate vertical marketing channels typically consist of either a manufacturer that has integrated vertically forward to reach the customer, or a retailer that has integrated vertically backward to create a self- supply network. (2) Contractual vertical marketing channels are supply chains that use a contract to govern the working relationship between the members. They include the following types: (a) Wholesaler-sponsored voluntary groups are created when a wholesaler brings together a group of independently owned retailers and offers them a coordinated merchandising and buying program that will provide these smaller retailers with economies similar to those obtained by their chain store rivals. (b) Retailer-owned cooperatives are wholesale operations organized and owned by retailers and are most common in hardware retailing. (c) Franchising is a form of licensing by which the owner of a trademark, service mark, trade name, advertising symbol or method obtains distribution through affiliated dealers. (3) Administered vertical marketing channels are similar to conventional marketing channels, but one of the members takes the initiative to lead the channel by applying the principles of effective interorganizational management, which is the management of relationships between the various organizations in the supply chain.III. Managing Retailer-Supplier Relations If retailers want to improve their performance in these channels, they must understand the principal concepts of interorganizational management. . A. Dependency – None of the respective institutions can isolate itself; each depends on others to do an effective job. B. Power is the ability of one member to influence the decisions of the other channel members. 1. There are six types of power: a. Reward power is based on the ability of A to provide rewards for B. b. Expertise power is based on Bs perception that A has some special knowledge. 12
  13. 13. c. Referent power is based on the identification of B with A. B wants to be associated or identified with A. d. Coercive power is based on Bs belief that A has the capacity to punish or harm B if B doesnt do what A wants. e. Legitimate power is based on As right to influence B, or Bs belief that B should accept As influence. f. Informational power is based on A’s ability to provide B with factual data. 2. Retailers and suppliers that use reward, expertise, referent and informational power can foster a healthy working relationship. 3. Coercive and legitimate power tend to elicit conflict and destroy cooperation in the channel. C. Conflict – It is inevitable in every channel relationship because retailers and suppliers are interdependent; that is, every channel member is dependent on every other member to perform some specific task. There are three major sources of conflict between retailers and their suppliers: 1. Perceptual incongruity occurs when the retailer and supplier have different perceptions of reality. 2. Goal incompatibility occurs when achieving the goals of either the supplier or the retailer would hamper the performance of the other. 3. Domain disagreements occur when there is disagreement about which member of the marketing channel should make decisions. Examples include: a. A diverter is an unauthorized member of a channel who buys and sells excess merchandise to and from authorized channel members. b. Gray marketing is when branded merchandise flows through unauthorized channels. c. Free-riding is when a consumer seeks product information, usage instructions, and sometimes even warranty work from a full-service store but then, armed with the brand’s model number, purchases the product from a limited service discounter or over the Internet.IV. Collaboration in the Channel – Although all channels experience some degree ofconflict, the dominant behavior in successful channels is collaboration. A. However, the management of collaborative relations is facilitated by three important types of behaviors and attitudes. These are: 1. Mutual trust, which occurs when both the retailer and its supplier have faith that each will be truthful and fair in their dealings with the other. 2. Two-way communication, which occurs when both the retailer and the supplier openly communicate their ideas, concerns, and plans. 3. Solidarity exists when a high value is placed on the relationship between a supplier and retailer. B. Category management – involves the simultaneous management of price, shelf space, merchandising strategy, promotional efforts, and other elements of the retail mix within the category based on the firm’s goals, the changing environment, and consumer behavior. 1. Retailers designate a category manager from among their employees 13
  14. 14. for each category sold in their store. The retailer defines specific business goals for each category. Subsequently, the category manager leverages detailed knowledge of the consumer and consumer trends, detailed POS information, and specific analysis provided by each supplier to the category.2. In some cases a supplier may serve as the retailer’s category manager. Termed category captains and/or category advisors, these suppliers work closely with the retail buyer ensuring that the retailer has the best assortment and the greatest possible sales. 14
  15. 15. Lecture Two Topic:Market Selection and Location Analysis Dunne: Chapter7 15
  16. 16. Chapter 7 Market Selection and Retail Location AnalysisOverview:In this chapter, we will review how retailers select and reach their target markets through thechoice of location. The two broad options for reaching a target market are store-based andnonstore-based locations. The chapters major focus is on the decision process used to selectstore-based locations. We describe the various demand and supply factors that must be evaluatedwithin each geographic market area under consideration. We conclude with a discussion ofalternative locations that retailers may consider as they select a specific site.Learning objectives:After reading this chapter, you should be able to:1. Explain the criteria used when selecting a target market2. Identify the different options, both store-based and nonstore-based, for effectively reaching a target market and discuss the advantages and disadvantages of business districts, shopping centers, and free-standing units as potential sites for retail location3. Define geographic information systems (GIS) and discuss their potential uses in a retail enterprise4. Describe the factors to consider in identifying the most attractive geographic market for a new store5. Discuss the attributes to consider in evaluating retail sites within a retail market6. Explain how to select the best geographic site for a storeOutline:IX. Selecting a Target Market - To be successful, a retailer must select a target market and identify the best way to reach this target market. D. Geographic space and cyberspace must be considered. 4. Traditionally, reaching the target market has been associated with selecting the best physical location for a store. 2. The Internet is becoming a viable alternative for reaching one’s customers. d. The equivalence of a store on the Internet is a retailers World Wide Web (www) site. e. The retailers home page is the introductory or first material viewers see when they access a retailers Internet site. It is equivalent to a retailers storefront in the physical world. f. Virtual store is the total collection of all the pages of information on the retailers Internet site. g. The counterpart to location on the Internet is the "ease of access." This refers to the consumer’s ability to find a Web site in cyberspace easily and quickly. E. Market segmentation - a method retailers use to segment, or break down, heterogeneous consumer populations into smaller, more homogeneous groups based on their characteristics. 16
  17. 17. 1. No single retailer can serve all potential customers; it is important that it segment the market and select a target market(s). 2. A target market is the segment of the market that the retailer decides to pursue through its marketing efforts. 3. The topics of target market selection and location analysis are combined because a retailer must identify its target market(s) before it decides how best to reach that market(s). F. Identifying a target market - requires meeting three criteria. 1. Measurability – a retailer should be able to describe the selected market segment using objective measures for which data is available, such as age, gender, income, education, ethnic group and religion. 2. Accessibility – the degree to which the retailer can target its promotional or distribution efforts to a particular market segment. 3. Substantialness - the segment must be substantial enough to be profitable for the retailer.X. Reaching Your Target Market - once a retailer identifies its target market, it must determine the most effective way to reach this market. A. Location of Store-Based Retailers - operate from a fixed store location that requires customers to travel to the store in order to view and select merchandise and/or services. 1. Business Districts. The central business district (CBD) usually consists of an unplanned shopping area around the geographic point at which all public transportation systems converge; it is usually located in the center of the city where the city originated historically. a. Strengths of the CBD include: easy access to public transportation; wide product assortment; variety in images, prices, and services; and proximity to commercial activities. b. Weaknesses of the CBD include: inadequate (and usually expensive) parking, older stores, high rents and taxes, traffic and delivery congestion, potentially high crime rate, and the often- decaying conditions of many inner cities. c. In larger cities, secondary business districts (SBD) and neighborhood business districts (NBD) have developed. A secondary business district is a shopping area that is smaller than the CBD and revolves around at least one department or variety store at a major street intersection. A neighborhood business district is a shopping area that evolves to satisfy the convenience-oriented shopping needs of a neighborhood and generally contains several small stores (with the major retailer being either a supermarket, super drugstore, or a variety store) and is located on a major artery of a residential area. 2. Shopping centers/malls - are centrally owned or managed shopping districts that are planned, have balanced tenancy (the stores complement each other in merchandise offerings), and are surrounded by parking facilities. a. A shopping center location can offer a retailer several major advantages over CBD location. These include: (1) heavy traffic resulting from the wide range of product offerings 17
  18. 18. (2) cooperative planning and sharing of common costs (3) access to highways and availability of parking (4) lower crime rate (5) clean, neat environment b. The disadvantages of locating in a shopping center include: (1) inflexible store hours (2) high rents (3) restrictions on merchandise the retailer may sell (4) required membership in the centers merchant organization (5) possibility of too much competition and the fact that much of the traffic is not interested in a particular product offering (6) dominance of the smaller stores by the anchor tenant. 3. Free-standing retailer - generally locates along major traffic arteries, without any adjacent retailers selling competing products. a. This location alternative has the following advantages: (1) lack of direct competition (2) generally lower rents (3) freedom in operations and hours (4) facilities that can be adapted to individual needs (5) inexpensive parking b. Free-standing locations also have multiple disadvantages: (1) lack of drawing power of from complementary stores (2) difficulties in attracting customers for the initial visit (3) higher advertising and promotional costs (4) operating costs cannot be shared with others (5) stores may have to be built rather than rented (6) zoning laws may restrict some activities 4. Nontraditional locations - offer more place utility or locational convenience. Examples include stores at military bases, college campuses, airports, hospitals, and cruise ships. 5. Nonstore-Based Retailers - include street peddlers, direct sellers, catalog retailers, automated merchandising systems (ATMs), and e-tailers. Since retailing is expected to remain predominantly store-based, we will focus our attention on location analysis for these retailers. However, it should be noted that some innovative retailers are using multiple retail formats to reach their target markets.XI. Geographic Information Systems (GIS) - computerized system that combines physical geography with cultural geography. A. Thematic maps - use visual techniques such as colors, shading, and lines to display cultural characteristics of the physical space. B. GIS can be used for many important retail decisions: 1. market selection 2. site analysis 3. trade area definition 4. estimating new store cannibalization 5. advertising management 6. merchandise management 7. evaluation of store managers 18
  19. 19. XII. Market Identification - involves three sequential steps. First, the retailer must identify the most attractive markets in which to operate. Second, one must evaluate the density of demand and supply within each market and identify the most attractive sites that are available within each market. Third, select the best site or sites available. A. Retail Location Theories 1. Retail gravity theory suggests that there are underlying consistencies in shopping behavior that yield to mathematical analysis and prediction that are based on the notion or concept of gravity. a. Reillys law of retail gravitation is based on Newtonian gravitational principles and explains how large urbanized areas attract customers from smaller rural communities. b. In effect, Reillys law states that two cities attract trade from an intermediate place approximately in direct proportion to the population of the two cities and in inverse proportion to the square of the distance from these two cities to the intermediate point. c. Reillys law was later revised to determine the boundaries of a citys trading area or to establish a point of indifference between two cities. (1) This point of indifference is the breaking point at which customers would be indifferent to shopping in either city. (2) Recent research on outshopping (i.e., leaving your community to shop) from rural areas suggests that factors other than those considered by retail gravity theory are also important. 2. Saturation theory examines how the demand for goods and services in a potential trading area is being served by current retail establishments in comparison with other potential markets. a. Retail store saturation is a condition where there are just enough store facilities, for a given type of store, to efficiently and satisfactorily serve the population and yield a fair profit to the owners. b. When a market has too few stores to satisfactorily meet the needs of the customer, it is understored. c. When a market has too many stores to yield a fair return on investment, it is overstored. d. The index of retail saturation is the ratio of demand for a product divided by available supply. The higher the IRS, the higher the potential for new retail space. 3. Buying Power Index - Sales & Marketing Management magazine annually publishes its Survey of Buyer Power. a. This data is available for metropolitan areas, cities, and states. b. The buying power index (BPI) is an indicator of a market’s overall retail potential and is comprised of weighted measures of effective buying income (personal income, including all non-tax payments such as social security, minus all taxes), retail sales, and population. c. The BPI is weighted in the following manner: 19
  20. 20. BPI = 0.5 (the areas percentage of U.S. effective buying income) + 0.3 (the areas percentage of U.S. retail sales) + 0.2 (the areas percentage of U.S. population). B. Other Demand and Supply Factors. 1. Market demand potential-some of the more important components of market demand potential are: a. population characteristics b. buyer behavior characteristics c. household income d. household age profile e. household composition f. community life cycle g. population density h. mobility 2. Market supply factors-some of the more important factors include: a. square feet per store b. square feet per employee c. growth in stores d. quality of competitionXIII. Site Analysis - is an evaluation of the density of demand and supply within each market with the goal of identifying the best retail site(s) available. A. Size of trading area - the trading area of specific sites will need to be estimated. 1. Applebaum developed a technique for estimating the trade area of a current store. It involved interviewing a customer for each $100 in weekly sales. The customers were randomly selected and their home addresses obtained. After the home addresses of the shoppers were plotted on a map one could make inferences about the trading area size and the competition. 2. For a new store the task is more difficult; however, there are some general rules that apply. a. Stores that sell convenience will have a smaller trading area than stores that sell so-called specialty products. b. As consumer mobility increases, the size of the stores trading area increases. c. As the size of the store increases, its trading area increases because it can stock a broader and deeper assortment of merchandise, which will attract customers from greater distances. d. As the distance between competing stores increases, their trading areas will increase. e. Natural and manmade obstacles such as rivers, mountains, railroads, and freeways can abruptly stop the boundaries of a trading area. B. Description of Trading Area - retailers can access, at relatively low cost, information concerning the trading area for various retail locations and the buyer behavior of the trading area. C. Demand Density - needs to be evaluated for various sites. 1. Demand density is the extent to which the potential demand for the retailers goods and services is concentrated in certain census tracts, ZIP code areas, or parts of the community. 20
  21. 21. 2. To determine the extent of demand density, retailers need to identify what they believe to be the major variables influencing their potential demand D. Supply density - is the extent to which retailers are concentrated in different geographic areas of a community. E. Site availability - one needs to determine which sites are available.XIV. Site Selection - once the best available sites within each market have been identified, the retailer needs to make the final location decision and select the best site(s). After all, all retailers should attempt to find a 100 percent location for their stores. A 100 percent location is a location where there is no better use for the site then the retail store that is being planned. Retailers should remember that what may be a 100 percent site for one store may not be for another. The best location for a supermarket may not be the best location for a discount department store. When reviewing a site, a retailer must consider A. Nature of Site – This entails determining whether or not the site is currently a vacant store, a vacant parcel of land, or the site of a planned shopping center. 1. Traffic Characteristics – The traffic that passes a site, whether it is vehicular or pedestrian, can be an important determinant of the potential sales at that site. 2. Types of Neighbors – A good neighboring business will be one that is compatible with the retailer’s line of trade. Store compatibility exists when two similar retail businesses locate next to one another and realize a greater sales volume than they would have achieved had they located apart from each other. B. Terms of Purchase or Lease – The retailer should review the length of the lease, the exclusivity clause, the guaranteed traffic rate, and an anchor clause. C. Expected Profitability – The final step in site selection analysis is the construction of a pro forma return on asset model for each possible site. This includes: 1. Net profit margin 2. Asset turnover 3. Return on assets 21
  22. 22. Solutions to computational questions from Chapter 7: Location Analysis10. Calculate the buying power indexes for the following three cities: Percent of Effective Percent of U.S. Percent ofU.S. City Buying Income Retail Sales U.S. PopulationMansfield 0.006 0.004 0.006Springfield 0.009 0.007 0.009Carlyle 0.007 0.005 0.007SOLUTION: (227)Tyler (BPI) = .5(.006) + .3(.004) + .2(.006) = .0054Little Rock (BPI) = .5(.009) + .3(.007) + .2(.009) = .0084Cheyenne (BPI) = .5(.007) + .3(.005) + .2(.007) = .006411. Compute the index of retail saturation for the following three markets. The data fordepartment stores are as follows: MARKET A B CRetail expenditures per household $789 $875 $943Square feet of retail space 600,000 488,000 808,000Number of households 121,000 102,000 157,000Based on these data, which market is most attractive? What additional data would you findhelpful in determining the attractiveness of the three markets? SOLUTION (226-227):IRS (Market A) = (121,000 x $789) / 600,000 = 159.12IRS (Market B) = (102,000 x $875) / 488,000 = 182.89IRS (Market C) = (157,000 x $943) / 808,000 = 183.23The most attractive market is Market-C with an IRS of 183.23 or $183.23 in expected sales persquare foot. It would be helpful if additional information on various factors that influencemarket demand potential such as population characteristics, buyer behavior characteristics,household income, household age profile, household composition, community life cycle,population density and mobility. In addition supply factors such as square feet per store, squarefeet of space per employee, store growth, and the quality of competition should be analyzed.Planning Your Own Retail Business:The retail store that you are planning has an estimated circular trade radius of four miles. Withinthis four-mile radius, there is an average of 1,145 households per square mile. In a normal year,you expect that 47 percent of these households would visit your store (referred to as penetration) 22
  23. 23. an average of 4.3 times (referred to as frequency). Based on these figures, what would youexpect to be the traffic (i.e., number of visitors to your store per year)? (Hint: Traffic can beviewed as the square miles of the trade area multiplied by the household density multiplied bypenetration, which is in turn multiplied by frequency.) Once you answer this question, do some sensitivity analysis, which is an assessment ofhow sensitive store traffic is to changes in your assumptions about penetration and frequency.What happens if penetration drops to 45 percent or rises to 50 percent? What happens iffrequency drops to 4.0 times annually or rises to 4.5 times annually? In this analysis, only changeone thing at a time and hold all other assumptions constant.Suggested Answer:One needs to first compute the following.1. square miles of trade area = r2 = (22/7)(4)2 = 50.2862. traffic = (square miles in trade area) x (household density) x (penetration) x (frequency) traffic = (50.286) x (1,145) X (47%) X (4.3) traffic = 116,364Next do some sensitivity analysis.Consider the following possible parameter values SQUARE HOUSEHOLD MILES IN (x) DENSITY (x) PENETRATION (x) FREQUENCY = TRAFFIC TRADE AREA1 50.286 x 1145 x 47% x 4.3 = 116,3642 50.286 x 1145 x 45% x 4.3 = 111,4123 50.286 x 1145 x 50% x 4.3 = 123,7924 50.286 x 1145 x 47% x 4.0 = 108,2465 50.286 x 1145 x 47% x 4.5 = 121,776 23
  24. 24. Lecture Three Topics:Strategic Planning and Operations Management Evaluating the Competition Dunne: Chapters 2 and 4 24
  25. 25. Chapter 2 Retail Strategic Planning and Operations ManagementOverview:In this chapter, we will explain the importance of planning in successful retail organizations.To facilitate the discussion, we introduce a retail planning and operations management model,which will serve as a frame of reference for the remainder of the text. This simple modelillustrates the importance of strategic planning and operations management. These twoactivities, if properly conducted, will enable a retail firm to achieve results exceeding those ofthe competition.Learning Objectives:After reading this chapter, you should be able to:1. Explain why strategic planning is so important and be able to describe the components of strategic planning: statement of mission; goals and objectives; an analysis of strengths, weaknesses, opportunities, and threats; and strategy.2. Describe the texts retail planning and operation management model which explains the two tasks that a retailer must perform and how they lead to higher profit.Outline:I. Components of Strategic Planning A. Planning - The anticipation and organization of what needs to be done to reach an objective. B. One form of planning is strategic planning. This type of planning involves adapting the resources of the firm to the opportunities and threats of an ever-changing retail environment. The strategic planning process consists of four components: 1. Mission Statement - Basic description of the fundamental nature, rationale, and direction of the firm. While mission statements vary from retailer to retailer, good ones usually include three elements: a. How the retailer uses or intends to use its resources b. How it expects to relate to the ever-changing environment c. The kinds of values it intends to provide in order to serve the needs and wants of the consumer 2. Statement of Goals and Objectives - Performance results intended to be brought about through the execution of a strategy. These goals and objectives should be derived from, and give precision and direction to, the retailer’s mission statement. A retailers objectives are usually categorized into four dimensions: a. Market Performance – establish the amount of dominance the retailer has in the marketplace. (1) Sales volume (2) Market share – the retailer’s total sales divided by total market sales. 25
  26. 26. b. Financial - A retailer analyzes its ability to provide an adequate profit level to continue in business. (1) Profitability - deal directly with the monetary return a retailer desires from its business. The most frequently encountered profit objectives in a retail enterprise are: (a) Net profit margin - the ratio of net profit (after taxes) to sales and shows how much profit a retailer makes on each dollar of sales after expenses and taxes have been met. (b) Asset turnover – total sales divided by total assets. This measure shows how many dollars of sales a retailer can generate on an annual basis with each dollar invested in assets. (c) Return on assets (ROA) - net profit (after taxes) divided by total assets. (d) Financial leverage - total assets divided by net worth or owners equity. This measure shows how aggressive the retailer is in its use of debt. (e) Return on net worth (RONW) - net profit (after taxes) divided by owners’ equity. (2) Productivity - Objectives that state how much output the retailer desires for each unit of resource input. The major resources at the retailers disposal are: (a) Space productivity - net sales divided by the total square feet of retail floor space. A space productivity objective states how many dollars in sales the retailer wants to generate for each square foot of store space. (b) Labor productivity - net sales divided by the number of full-time-equivalent employees. A labor productivity objective reflects how many dollars in sales the retailer desires to generate for each full-time-equivalent employee. (c) Merchandise productivity - net sales divided by the average dollar investment in inventory. This objective (also known as sales-to-stock ratio) states the dollar sales the retailer desires to generate for each dollar invested in inventory.c. Societal - reflect the retailers desire to help society fulfill some of its needs. (1) Employment - relate to the provision of employment opportunities for the members of the retailers community. (2) Payment of taxes - recognizes the retailers role in helping finance societal needs that the government deems appropriate. (3) Consumer choice – the goal to compete in such a way that the consumer will be given real alternatives. (4) Equity - reflects the retailers desire to treat the consumer and suppliers fairly. 26
  27. 27. (5) Benefactor - reflects the retailers desire to underwrite certain community activities. d. Personal - reflect the retailers’ desire to help individuals employed in retailing fulfill some of their needs. Generally retailers tend to pursue three types of personal objectives. (1) Self gratification - focused on the needs and desires of the owners, managers, or employees of the firm to pursue what they truly want out of life. (2) Status and respect - focus on the owners, managers, or employees need for status and respect in their community or within their circle of friends. (3) Power and authority - reflect the need of managers and other employees to be in positions of influence.3. Strategies - Carefully designed plans for achieving the retailers goals and objectives. It is a course of action that when executed will produce the desired levels of performance. a. Some experts believe retailers can operate with three basic strategies: (1) Get shoppers into your store. Many retailers think this is one of the most difficult tasks in retailing - getting people to visit your website or to come into your store. (2) Convert these shoppers into customers by having them purchase merchandise. This means having the right merchandise, using the right layout and display, and having the right sales force. (3) Do this at the lowest operating cost possible that is consistent with the level of service that your customers expect. b. Many retailers go further and use strategies that enable them to differentiate themselves from the competition in order to accomplish these three tasks. They do this by means of differentiation -- that is, what sets them apart from their competition: (1) Physical differentiation of the product (2) The selling process by offering outstanding service (3) After-purchase satisfaction by taking care of the customer after the sale has been made (4) Location or the ease with which the customer can get to the retailer (5) Never being out-of-stock on sizes, colors, and styles that the retailers target market expects the retailer to carry4. Identification and analysis of the retailers strengths and weaknesses as well as the threats and opportunities that exist in the environment. a. Before developing differentiation strategies, however, the retailer must also be aware of its current market position. It can do this with a SWOT Analysis: (1) Strengths - (a) What major competitive advantage(s) do we have? (b) What are we good at? (c) What do customers perceive as our strong points? 27
  28. 28. (2) Weaknesses - (a) What major competitive advantage(s) do competitors have over us? (b) What are competitors better at than we are? (c) What are our major internal weaknesses? (3) Opportunities - (a) What favorable environmental trends may benefit our firm? (b) What is the competition doing in our market? (c) What areas of business that are closely related to ours are undeveloped? (4) Threats - (a) What unfortunate environmental trends exist that may hurt our future performance? (b) What technology is on the horizon that may soon have an impact on our firm? b. After performing the SWOT Analysis, the retailer should generate strategies for achieving its goals. The retailer should have a fully developed marketing strategy that should include: (1) The specific target market or group(s) of customers that the retailer is seeking to serve. (2) The location(s) that is consistent with the needs and wants of the desired target market. (3) The specific retail mix that the retailer intends to use to appeal to its target market, and thereby meet its financial objectives. The retail mix is the combination of merchandise, price, advertising and promotion, location, customer services and selling, and store layout and design, that the retailer intends to use to appeal to its target market to meets its financial objectives.II. The Retail Strategic Planning and Operations Management Model - A retailer must take part in the following types of planning and management tasks: A. Strategic Planning - The process concerned with how the retailer responds to the environment in an effort to establish a long-term course of action. The strategic plan reflects the line(s) of trade in which the retailer will operate, the market(s) it will pursue, and the retail mix it will use. Strategic planning calls for the long- term commitment of resources. The strategic planning process requires a retailer to: 1. Define the mission; establish goals and objectives; perform a SWOT analysis. 2. After assessing the external environment in order to uncover opportunities to gain a differential advantage over competitors, the retailer should develop a strong marketing plan with both market and financial performance objectives. Major environmental factors that need to be considered include: a. Consumer Behavior - Understand the determinants of consumers shopping behavior. b. Competitor Behavior - Develop a competitive strategy that is not easily imitated. 28
  29. 29. c. Supply Chain Behavior - Keep abreast of supply chain members behavior and the possible effects it may have on ones strategy. d. Socioeconomic Environment - Understand how economic and demographic trends will influence future sales. e. Technological Environment - Gather knowledge in regard to opportunities for improving operating efficiency. f. Legal and Ethical Environment - Be familiar with local, state and federal regulations; stay current with evolving legal patterns that may effect the industry while operating at the highest ethical standards. 3. In addition, the retailer must consider the location of each retail establishment; often an uncontrollable factor.B. Operations Management – deals with activities directed at maximizing the efficiency of the retailer’s use of resources. It is frequently referred to as day-to- day management. C. High Performance Results - Achieved through the development and implementation of well-designed strategic, operational, and administrative plans. High performance results are indicative of industry leaders. Retailers must set high financial performance objectives so that they can at least maintain average operating results if planned results are not achieved. 29
  30. 30. CHAPTER 4 Evaluating the Competition in RetailingOverview:The behavior of competitors is an important component of the retail planning and managementmodel. Effective planning and execution in any retail setting cannot be accomplished without theproper analysis of competitors. In this chapter, we begin by reviewing the various models ofretail competition. The types of competition in retailing are described next. We then discuss theevolution of retail competition. Finally, we examine the upcoming retail revolution in nonstoreretailing, developing retail formats, global and technological changes, and the use of privatelabels as a strategic weapon.Learning Objectives:After reading this chapter you should be able to:1. Explain the various models of retail competition2. Distinguish between various types of retail competition3. Describe the four theories used to explain the evolution of retail competition4. Describe the changes that could effect retail competitionOutline:I. Models of Retail Competition – This chapter examines the effects of competition on a retailer’s performance. Today’s slower population growth rates have turned retailing into a business where successful regional and national retailers can grow only by taking sales away from competitors. Thus, a retailer must always be on the offensive by studying the changing competitive environment, especially its local competition, and differentiating itself from that competition. A. The Competitive Marketplace - Competition can be waged on many fronts, and a retailer must be clear about what advantages it will emphasize and where its resources will have the greatest effect in attracting and satisfying customers. B. Market Structure 1. Economists use four different economic terms to describe the competitive environment in the retailing industry: a. Pure Competition – occurs when a market has homogeneous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers. b. Pure Monopoly – occurs when there is only one seller for a product or service. c. Monopolistic Competition – occurs when the products offered are different, yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products. d. Oligopolistic Competition – occurs when relatively few sellers, or many small firms who follow the lead of a few larger firms, 30
  31. 31. offer essentially homogeneous products and any action by one seller is expected to be noticed and reacted to by the other sellers. 2. Retailing can be characterized as monopolistic or, in rare cases, oligopolistic competition. The distinction between monopolistic competition and oligopolistic competition lies in the number of sellers. a. Conventional economic thought suggests that for oligopoly to occur, the top four firms have to account for over 60 to 80 percent of the market. While some national retailers do have large market shares; oligopolistic competition does not actually occur on a national level. However, it is not uncommon at a local level. b. However, if local prices become too high, merchandise selection too limited, or services too poor, residents of these communities will travel to larger communities to shop. This is known as outshopping.C. Demand Side of Retailing - Most retailers face monopolistic competition where they are confronted with a negatively sloping demand curve caused by "the law of diminishing returns." D. Nonprice Decisions – Many customers place a value on attributes other than price when selecting a place to shop. Therefore, the retailer has to make decisions about the other elements (merchandise mix, advertising and promotion, customer services and selling, and store layout and design) of the retail mix in order to influence the quantity of merchandise it sells and the profit level it achieves. Here are some ways a retailer could make use of nonprice competition: 1. The retailer could position itself as different from the competition by altering its merchandise mix to offer higher- quality goods, greater personal service, special-orders handling, or a better selection of large sizes. 2. The retailer can offer private label merchandise that has unique features or offers better value than competitors. 3. The retailer could provide other benefits for the customer. For example, the retailer could effectively lower transportation costs for customers by providing free parking and/or gas. 4. The retailer could master stockkeeping with its basic merchandise assortment.E. Competitive Actions - With so many retail establishments competing against each other, the profitability of all the retailers suffers. 1. Market Equilibrium - When the return on investment is high enough to justify keeping capital invested in retailing, but not so high to invite more competition. 2. Measure of competitive activity - The number of retail establishments per household in a market. a. Overstored Market – a condition in a community when the number of stores in relation to households is so large that to engage in retailing is usally unprofitable or marginally profitable. b. Understored Market – a condition in a community when the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.F. Suppliers As Partners And Competitors – A retailer’s suppliers should be considered both partners and competitors for the customer’s dollars. 31
  32. 32. 1. Suppliers as competitors – Suppliers compete for gross margins throughout the supply chain. The retailer must develop a loyal group of patrons that encourages the supplier to accommodate the needs of its retail partner. 2. Suppliers as partners – Suppliers can be a critical competitive advantage to retailers when they provide a unique product or promotion.II. Types of Competition - Competition is quite intense in retailing and various classification schemes are used to describe this intensity. A. Intratype and Intertype Competition 1. Intratype Competition – occurs when two or more retailers, of the same type, compete with each other for the same household; the most common type of retail competition. 2. Intertype Competition – occurs when two or more retailers, of different types, compete directly by attempting to sell the same merchandise lines to the same households. B. Divertive Competition - When retailers intercept or divert customers from competing retailers. 1. This type of behavior can be either a form of intratype or intertype competition. 2. It is significant because many retailers operate close to their break-even point, thus making them susceptible to any downturn in sales.III. Theories of the Evolution of Retail Competition - Several theories have been developed to explain and describe the evolution of competition in retailing. A. Wheel of Retailing Hypothesis - New retailers enter the market as low-status, low-margin, low-price operators. However, as they meet with success, these new retailers gradually acquire more sophisticated and elaborate facilities making them vulnerable to new types of low-margin retail competitors who progress through the same pattern. The three stages are: 1. Entry Phase - New retailers enter the market as low-status, low-margin, low-profit operators. 2. Trading-Up Phase - The new retailers experience success and acquire more sophisticated and elaborate facilities. 3. Vulnerability Phase - Retailers find it necessary to raise prices and margins and therefore become susceptible to new types of low-margin competition. B. The Retail Accordion - Retail institutions evolve from outlets that offer wide assortments to specialty stores that offer narrow assortments and then return to the wide assortment stores and continue through the pattern again and again. C. The Retail Life Cycle - Some believe that retailing institutions pass through an identifiable cycle: 1. Introduction - This stage is initiated by an aggressive, bold entrepreneur who is willing and able to develop an approach to retailing that departs from conventional approaches. Sales will grow if consumers perceive the new advantage being offered as particularly significant. 2. Growth - Many new competitors enter the market to take part in the success of the new form of retailing; sales and profit growth are explosive. Market share and profits will approach their maximum levels. 32
  33. 33. 3. Maturity - Market share stabilizes and severe profit declines occur due to inadaptable managerial capabilities, over expansion, and competitive assaults by new forms of retailing. 4. Decline - Retailers experience major losses of market share, marginal profits and an inability to compete. Decline may be postponed by attempts to reposition, modify, or adapt the firm. D. Resource-Advantage Theory – Firms seek superior financial performance in an ever-changing environment. Retail demand is dynamic because consumer tastes are always changing, and supply is dynamic because, as firms search for a superior performance, they are forced to change the elements of their retail mix to match changing consumer preference and improve firm performance. 1. Superior performance – The result of achieving a competitive advantage in the marketplace as a result of some tangible or intangible entity. 2. All retailers cannot achieve superior results at the same time.IV. Future Changes in Retail Competition - Retailers in todays ever-changing marketplacecan expect dynamic changes in retail competition. A few of the trends shaping the retaillandscape include: A. Nonstore Retailing - Analysts contend that nonstore retailing (especially those that utilize the Internet) will experience significant growth during the next decade. 1. Some of the forces contributing to this growth are: a. Consumers’ need to save time. b. Consumers’ desire to ―time-shift.‖ c. The erosion of enjoyment in the shopping experience. d. The lack of qualified sales help in stores to provide information. e. The explosive development of the telephone, computer, and telecommunications equipment that facilitates nonstore shopping. f. The consumers preference for lower prices, which often eliminates the middlemans profit. 2. Nonstore retailers include: a. Direct Selling Establishments – Engage in the sale of a consumer product or service on a person-to-person basis away from a fixed retail location. b. Direct Marketers – Those who sell products by catalog, mail order, and the Internet. c. E-Tailing – The general belief by retail experts is that electronic, interactive, at-home shopping is definitely the place to be. Every major player in the retail industry, computer industry, telecommunications industry, and the transaction processing industry is committed to this growth. However, there are six reasons, why Internet sales will fail to reach 50 percent of total retail sales: (1) 26 percent of all retail sales involve automobile dealers. The taxes paid by new car dealers to their state governments will ensure that states will continue to ban Internet sales and protect the current system. 33
  34. 34. (2) Discounters, who account for a third of all general merchandise sales, will have a particularly difficult problem selling via the Internet. (3) Half of all food and beverage slaes, are sold by on- premise restaurants. (4) The U.S. is currently overstored. Thus, many consumers will purchase at a bricks & mortar retailer instead of waiting for an overnight delivery. (5) Some items, especially fashion clothing, must be tried on or seen in person before buying. (6) A final factor limiting e-commerce is the ―security issue.‖B. New Retailing Formats - Retailing is continually evolving. Innovation in retailing is the result of constant pressure to improve efficiency and effectiveness in serving the consumer. The pressure to better serve has also resulted in a shortened life cycle for retail formats. As a result, new formats are born and old ones die. 1. Supercenters – combine a discount store and grocery store and carry 80,000 to 100,000 products in order to offer one-stop shopping. a. These stores offer the customer one-stop shopping (and as a result are capable of drawing customers from up to a 60 - 80 mile radius in some rural areas) and lower the customers total cost of purchasing in terms of time and miles traveled without sacrificing service and variety. b. Recently, the supercenter concept has even branched out into the automobile market. 2. Recycled Merchandise Retailers – establishments that sell used and reconditioned products. 3. Liquidators - With over 15,000 retailers seeking the protection of the bankruptcy courts annually, liquidators are needed to come in and liquidate leftover merchandise so that the troubled retailer can shut down or down-size.C. Heightened Global Competition - The rate of change in retailing appears to be directly related to the stage and speed of economic development in the countries concerned. 1. Even the least-developed countries are experiencing dramatic changes in retailing activities as newer formats are introduced. 2. Retailing in other countries exhibits even greater diversity in its structure than retailing in the United States. 3. Tthe introduction of new retailing formats in one part of the country will impact retailers in other parts of the country. This is true regardless of whether the change occurs domestically or internationally. 4. Still, it is amazing that retailers from larger countries often do not have the level of success when entering a new country as compared to retailers from smaller countries. Retail experts attribute this failure by large country retailers to two factors. a. a lack of understanding of the new countrys culture. b. retailers from smaller countries have always had to deal with international issues if they were to expand.D. Integration of Technology - Technology is having and will continue to have a dramatic influence on retailing. 1. Technological innovations can be viewed under three main areas: 34
  35. 35. a. Supply chain management b. Customer management c. Customer satisfaction 2. Retailers on the forefront of technology who seek to understand their consumers will achieve higher levels of effectiveness in their efforts.E. Increasing Use of Private Labels – As retailing continues to change, the increased use of private labels has emerged as a key business asset in developing a differential advantage for retailers. Private labels can set the retailer apart from the competition, get customers into their store, and bring them back. Current strategies being used by retailers include: 1. Develop a partnership with well-known celebrities, noted experts, and institutional authorities. 2. Develop a partnership with traditionally higher-end suppliers to bring an exclusive variation on their highly regarded brand name to market. 3. Reintroduce products with strong name recognition that have fallen from the retail scene. 4. Brand an entire department or business; not just a product line. 35
  36. 36. Lecture Four Topics: Retail CustomersLegal and Ethical Behavior Dunne: Chapters 3 and 6 36