Chapter 1

Perspectives on Retailing

Learning Objectives

• Explain what retailing is and why it is undergoing so much change today• Describe the five methods used to categorize

retailers• Understand what is involved in a retail career

and be able to list the prerequisites necessary for success in retailing• Explain the different methods for the study

and practice of retailing

What is Retailing, and Why is it Undergoing so Much Change Today?

• Retailing: Consists of the final activities and steps needed to place merchandise made elsewhere into the hands of the consumer or to provide services to the consumer

• Any firm that sells a product or provides a service to the final consumer is said to be performing the act of retailing

• What trends do you see in Retailing? LO 1

What is Retailing, and Why is it Undergoing so Much Change Today?

• E-tailing• Price competition• Demographic shifts• Store size• Eco-tailing• Social Media Marketing 1

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What is Retailing, and Why is it Undergoing so Much Change Today?

• Anything that affects how consumers choose to spend money affects the retailing industry

• Retailers must consider the changes in the external environment

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E-Tailing

• The great unknown for retail managers will be the ultimate role of the Internet

• Bricks-and-mortar retailers: Operate out of a physical building

• M-tailing - Shoppers use their smartphones to purchase merchandise and services• Apps - Digital services that can be downloaded• Fastest growing form of e-tailing

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E-Tailing

• Growth of the Web 2.0 has important implications for retailers with the Internet becoming interactive

• To combat e-tailing, bricks-and-mortar retailers must give their customers more control over the shopping experience

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E-Tailing

• Has caused a shift in power between retailers and consumers• Traditionally, the retailers’ control over pricing

information provided them the upper hand in most transactions

• Today, the information dissemination capabilities of the Internet are making consumers better informed

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E-tailing challenges

• Check out (abandoning the cue)• Shipping/Returns • Touching merchandise• Impulse buys• Data Base Security (Target)• In-store experience

• Who are the biggest on-line retailers

Top on-line Retailers

• Amazon• Netflix• QVC• Apple• Cabelas• Avon• JCP• NewEgg

• LLBean• TigerDirect• VictoriasSecret

• Which are e-tailers only and which are click and mortar

Peapod (Other on-line retailers?)

E-Tailing

• Channel surfing: Occurs when the customer gets needed information in the stores and then orders it online for a lower price• To avoid paying state sales tax

• Retailers must keep experimenting with various strategies• Next generation of technology will change the

consumers’ expectations of what they demand from retailers

LO 1

Price Competition

• Sam Walton forever changed the face of retailing by realizing that most of any product’s cost gets added after the item is produced • Walton made a major commitment to computerizing

WalMart as a means to reduce expenses

• Operating efficiency: Operating costs as a percentage of sales

• Costco, a retailer, seeks to boost store traffic by lowering prices on key products

LO 1

Is Wal-mart good for America?

• Inexpensive goods for many people• Lots of jobs

• Low wages• Mom and Pop stores out of business• Non-union• Low benefits• Discrimination Law suit

• Yearly membership• Sales grown 39% since

2009• Hourly works $20.89

(Walmart $12.67)• 88% company

sponsored Health insurance

• Gas as loss leader• No more than 15%

mark-up

Demographic Shifts

• Significant changes in retailing over the past decade have resulted from changing demographic factors such as:• The fluctuating birthrate• The growing importance of the 70 million

Generation Y consumers• The move of Generation X into middle age

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Demographic Shifts• The beginning movement of the baby boomer

generation into retirement• The increasing number of women relative to men

graduating from college and concurrent rise in unemployment among men relative to women

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Demographic Shifts

• Successful retailers must:• Become more service-oriented• Offer better value in price and quality• Have more convenient store hours• Be more promotion-oriented• Be better attuned to their customers’ needs

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Demographic Shifts

• Profit growth must come by either:• Increasing same-store sales at the expense of the

competition’s market share• Reducing expenses without reducing services to

the point of losing customers

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Demographic Shifts

• Same-store sales: Compares an individual store’s sales to its sales for the same month in the previous year

• Market share: The retailer’s total sales divided by total market sales

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Store Size

• As stores increase in size the retailer often employs a scrambled merchandising strategy

• Scrambled merchandising: Exists when a retailer handles many different and unrelated items• It is the result of the pressure being placed on

many retailers to increase profits

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Store Size• Retailers realized that having supersized stores

increased several major costs: • Rent• Inventory costs, and• Labor costs.

• Two retail formats that have recently seen a significant decrease in average store size and a decrease in number of stores are:• Department stores and • Category killers. (Is the category killer dying?)

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Store Size

• Retailers have found that reducing their store size is a pathway to improved profitability• Consumers prefer smaller stores due to the

convenience of getting in and out faster• More personalized service

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Experience and Niche Retailing

• A trend occurring in shopping malls is to transform them into exciting experience platforms• Eu Yan Sang is a major health-care brand in Asia,

and it has created a Chinese medicine clinic that includes a yoga studio, spa, and health food café

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Exhibit 1.2 - External Environmental Forces Confronting Retail Firms

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Categorizing Retailers

• Census bureau• Number of

outlets• Margin versus

turnover• Location• Size

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Census Bureau

• The U.S. Bureau of the Census, for purposes of conducting the Census of Retail Trade, classifies all retailers using three-digit North American Industry Classification System (NAICS) codes

• Shortcoming of using the NAICS codes:• They do not reflect all retail activity• Comparisons between years may not be accurate

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Number of Outlets• Retailers with several units are a stronger

competitive threat because they can:• Spread many fixed costs over a larger number of

stores• Achieve economies in purchasing

• Advantages of single-unit retailers:• They have harder-working, more motivated

employees• They can focus and tailor their efforts and

merchandise in one trade area

LO 2

Number of Outlets

• Standard stock list: All stores in a retail chain stock the same merchandise

• Optional stock list: Each store in a retail chain is given the flexibility to adjust its merchandise mix to local tastes and demands

LO 2

Number of Outlets

• Channel advisor or channel captain: Institution in the marketing channel who is able to plan for and get other channel institutions to engage in activities they might not otherwise engage in• Large store retailers are able to perform the role

of channel captain

LO 2

Number of Outlets

• Private label branding: Occurs when a retailer develops own brand name and contracts with a manufacturer to produce the merchandise with the retailer’s brand on it instead of the manufacturer’s name• Also called store branding

LO 2

Number of Outlets

• The major shortcoming of using the number-of-outlets scheme for classifying retailers is that it addresses only traditional bricks-and-mortar retailers

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Margins Versus Turnover

• Gross-margin percentage: Measure of profitability derived by dividing gross margin by net sales

• Gross margin: Difference between net sales and cost of goods sold

• Operating expenses: Expenses the retailer incurs in running the business other than the cost of the merchandise

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Margins Versus Turnover

• Inventory turnover: The number of times per year, on average, that a retailer sells its inventory

• High-performance retailers: Produce financial results substantially superior to the industry average

• Low-margin/low turnover retailer: Operates on a low gross margin percentage and a low rate of inventory turnover

LO 2

Margins Versus Turnover

• Low-margin/high turnover retailer: Operates on a low gross margin percentage and a high rate of inventory turnover

• High-margin/low turnover retailer: Operates on a high gross margin percentage and a low rate of inventory turnover

• High-margin/high turnover retailer: Operates on a high gross margin percentage and a high rate of inventory turnover

LO 2

Location

• The most significant of the new nontraditional shopping locations could be the one which combines culture with entertainment or shopping

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Size

• The reason for classifying by size is that the operating performance of retailers tends to vary according to size

• With advances in technology, using classification of size is unclear

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Exhibit 1.5 - Retailing’s Two Career Paths

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Career Path• Store management: The retailing career path

that involves responsibility for:• Selecting• Training• Evaluating personnel • In-store promotions• Displays• Customer service• Building maintenance• Security

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Career Path

• Buying: The retailing career path whereby one uses quantitative tools to develop appropriate buying plans for the store’s merchandise lines

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Common Questions About a Retailing Career

• Salary - Entry-level retail managers or buyers who do exceptionally well can double or triple their incomes in three to five years

• Career progression - Person capable of handling increasing amounts of responsibility can move up quickly

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Common Questions About a Retailing Career

• Geographic mobility - Person must be willing and able to make several moves, even if the changes may not be attractive in terms of an individual’s lifestyle

• Societal perspective - Leading retail executives are well-rounded individuals with a high social consciousness

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Prerequisites for Success

• Hard work• Analytical skills• Creativity• Decisiveness• Flexibility• Initiative

• Leadership• Organization• Risk taking• Stress tolerance• Perseverance• Enthusiasm

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The Study and Practice of Retailing

• Analytical method• Creative method• A two-pronged approach• A proposed orientation

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Analytical Method

• The analytical retail manager is a finder and investigator of facts

• Analytical perspective can result in a standardized set of procedures, success formulas, and guidelines

• A small retailer can consider watching the Russell 2000 Index• Forecasting tool for future business conditions

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Creative Method

• The creative retail manager is an idea person• Trader Joe’s has sales higher than leading

competitors due to its creative business model of clerks in Hawaiian shirts giving high-fives and free cookies

LO 4

Two-Pronged Approach

• Involves the synthesis of creativity and analysis

• Retailers are duplicators rather than originators• To decide who or what to duplicate requires

creativity and an analysis of the strategies that other retailers are pursuing

• Sales and profits = Creativity• Profit and sales statistics = Analysis

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A Proposed Orientation• Four major orientations:• Environmental - Allows the retailers to anticipate

and adapt continuously to external forces in the environment

• Management planning - Helps the retailers to adapt systematically to a changing environment

• Profit - All retail decisions will have an effect on the firm’s financial performance

• Decision making - Allows the retailers to focus on the need to collect and analyze data to make intelligent retail decisions

LO 4

Exhibit 1.6 - The Importance of Proactive Planning

LO 4