Chapter 1

Introduction to the World of Retailing

McGraw-Hill/Irwin Retailing Management, 7/e

2008 by The McGraw-Hill Companies, All rights reserved.

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The World of Retailing

Introduction to Retailing
Types of Retailers Multi-Channel Retailing

Customer Buying Behavior

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Questions

What is retailing? What do retailers do? Why is retailing important in our society? What career and entrepreneurial opportunities does retailing offer? What types of decisions do retail managers make?

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What is Retailing?
Retailing a set of business activities that adds value to the products and services sold to consumers for their personal or family use A retailer is a business that sells products and/or services to consumers for personal or family use.

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Examples of Retailers

Retailers:
Kohls, Macys, Wendys, Amazon.com, Jiffy Lube, AMC Theaters, American Eagle Outfitter, Avon, J.Crew

Firms that are retailers and wholesalers - sell to other business as well as consumers: Office Depot, The Home Depot, United Airlines, Bank of America, Costco
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Manufacturers Perspective
The Four Ps of Marketing
Retailers the Retailersare are part part of of the distribution channel distribution channel Product

Distribution

Price

Promotion

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Distribution Channel

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Typical Supply Chain Network

Customers

Suppliers

Plants
Distribution Centers retailers

A Retailers Role in a Supply Chain

Retailers are the final business within a supply chain which links manufacturers to consumers. A Supply Chain is a set of firms that make and deliver a given set of goods and services to the ultimate consumer.

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Manufacturing, Wholesaling and Retailing

Vertical Integration firm performs more than one set of activities in the channel Ex: retailer invests in wholesaling or manufacturing Backward Integration retailer performs some distribution and manufacturing activities Ex: JCPenney sells Arizona jeans (Private Label) Forward Integration manufacturers undertake retailing activities Ex: Ralph Lauren (New York Jones, Liz Claiborne) operates its own stores Large retailers engage in both wholesaling and retailing Ex: Wal-Mart, Lowes, Safeway, Brown Shoe Company
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Do Retailers Add Value?

Example

a box of crackers at a grocery store costs $1 to manufacturer sells at a price of $2

Retailers add significantly to the prices consumers face Why not buy directly from the manufacturer? Does that mean that grocery stores are very profitable?

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Why Not Get Rid of the Middlemen?

Price to Distributor $1.00

Price to Retailer $1.20

Price to Consumer $2.00

$.85

$.15

$.70

Manufacturer Vendor

Distributor Wholesaler

Retailer

Consumer
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Why Not Get Rid of the Middlemen?

Better services to customers More efficient

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Music Industry Channel

Composer

Lyricist

Publisher

Record Company

Music Retailer

Artist

Distributor

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Cost for CD

Retailer $5.00 Record Company Manufacturing .75 Distribution 1.50 Marketing 2.00 Coop advertising 1.00 Artist/Repertoire 1.00 Artist royalty 1.25 Lyricist .75 Overhead/Profit 2.00
Total 15.25

4 out of 5 CDs fail to make a profit

$300,000 cost to prepare a CD for release 30,000 recording artists

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How Retailers Add Value

Provide Assortment Buy other products at the same time Break Bulk Buy it in quantities customers want Hold Inventory Buy it at a convenient place when you want it Offer Services See it before you buy; get credit; layaway
Ryan McVay/Getty Images

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How Retailers Add Value

The value of the product and service increases as the retailer performs functions.
Bicycle can be bought on credit or put on layaway Bicycle is featured on floor display Bicycle is offered in convenient locations in quantities of one

Bicycle is developed in several styles

Bicycle is developed at manufacturer
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Examples: How Retailers Add Values

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

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Social and Economic Significance of Retailing

Retail Sales: Over $4.1 trillion in annual U.S. sales in 2005 Employment: Employs over 24 million people in 2005 One of the largest sectors for job growth in US Social responsibility Global player

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Social responsibility
Corporate social responsibility The voluntary actions taken by a company to address the ethical, social, and environmental impacts of its business operations, in addition to the concerns of its stakeholders Examples: Edun - a fair-trade fashion brand by the U2 lead singer Bono Starbucks: pays its farmers 42% more than the commodity price of Arabica coffee beans Target: community giving programs (5% of income, $3 million a week) Retail companies give away 1.7% of their profits, compared with about 0.9% for companies in other industries

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Worlds 20 Largest Retailers in 2005

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Structure of Retailing and Distribution Channels around the World: The United States
The United States CHINA

The nature of retailing and distribution channels in the U.S. is unique. Has the greatest retail density Has the greatest concentration of large retail firms Large enough to operate their own warehouses, eliminating the need for wholesaling. The combination of large stores and large firms result in a very efficient distribution system.
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Comparison of Distribution Channels around the World

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What have created these differences in distribution systems?

Social & Political Objectives Geography China, India: To reduce unemployment by protecting small businesses EU: To protect small retailers To preserve green spaces/town centers Much lower population density in the US than in India, China, and EU (where less low-cost real estate are available for building large stores) Large retail markets in US, India, China Countries in EU distribution channels and retail chains operate in a single country (no economy of scales to be achieved; trade barriers still exist)

Market size

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Nature of Retail Industry is Changing

To Todays Retailer

Mom and Pop Store

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Retailing is a High Tech Industry

Selling Merchandise through the Internet Using Internet to manage supply chains Analyze POS data to tailor assortments to stores

Computer systems for merchandise planning and tracking

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Retailers are a Business Like Manufacturers

Accounting Finance

Marketing MIS

Operations

Human Resources

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

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Opportunities in Retailing: Management opportunities

People with a wide range of skills and interests needed because retailers functions include Finance Purchase Accounting Management information system (MIS) Supply management including warehouse and distribution management Design and new product development Financially rewarding 5-year salary of buyers: $50,000 - $60,000 5-year salary of store managers: $120,000 - $160,000
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Opportunities in Retailing: Entrepreneurial opportunities

Wal-Mart: Sam Walton

Retailing provides opportunities for people who want to start their own business Some of the worlds richest people are retailing entrepreneurs

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

IKEA: Ingvar Kamprad

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Career Opportunities in Retailing Start Your Own Business

List of Retail Entrepreneurs on Forbes 400 Richest Americans
Walton Family (Wal-Mart) Fisher (The Gap) Wexner (The Limited) Menard (Menards) Marcus (The Home Depot) Kellogg (Kohls) Schulze (Best Buy) Levine (Family Dollar) Gold (99Cent Only)

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Misconceptions About Careers in Retailing

College not needed Low pay Long hours Boring Dead-end job No benefits Everyone is part-time Unstable environment No opportunity for women and minorities

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

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Why You Should Consider Retailing

Entry level management positions:

Department manager or assistant buyer/planner

Manage and have P&L responsibility on your first job Starting pay average with great benefits Some retailers pay graduate school No two days are alike

Buying and planning for financially analytically oriented

Management for people-people
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Types of Jobs in Retailing

Most entry level jobs are in store management or buying, but theres -accounting and finance
-real estate -human resource management -supply chain management -advertising -public affairs -information systems -loss prevention -visual merchandising
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Retail Management Decision Process

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Strategic Vs Tactical Decisions

Doing the Right Thing (direction) vs. Doing Things Right (execution) Strategic Decisions Are: Made Infrequently Long-term Require significant investment Not easily reversed

Location, Organization Design, Information and Distribution Systems, Customer Service

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Retail Strategy
Need to identify the competition intratype competition (e.g., Dillards vs. JCPenney) intertype competition (e.g., Dillards vs. Wal-Mart) Identifying customers What are the significant demographic and life-style trends Who are your target customers

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Retail Strategy
A retail strategy should identify the target market the product and service mix a long-term comparative advantage

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JC Penneys Strategic Evolution(1)

Main Street (small town) private label, soft goods (apparel, home furnishings), decentralized retailer Changes in environment -increased disposable income, growth of suburbs, interstate highway program Emulate Sears in moving to enclosed suburban malls Add hard goods (appliances, automotive) Diversify drug stores, insurance, specialty stores Develop catalog channel
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JC Penneys Strategic Evolution(2)

Focus on department store format and soft goods develop electronic retail channel Mid-market, mall based department store, between Wal-Mart/Target and Macys/Dillards Competition from Target, Kohls Centralization to reduce cost, increase responsiveness centralized buying, warehouse delivery Off the mall stores to increase customer convenience Improving store atmospherics Upgrading merchandise offering (e.g., Sephora, American Living by Polo Ralph Lauren)
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Wal-Marts Strategic Evolution

Small Town - Discount Store selling hard goods and soft goods limited service, efficient distribution Enter suburban markets Warehouse Clubs (Sams) Supercenters International Expansion Supermarkets, neighborhood markets

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Sears Strategic Evolution

Large number of merchandise categories -appliances, hardware, apparel Malls evolved into places for buying soft goods, hard goods sold at category killers The Softer Side of Sears Refocused on value -- Testing carts in stores Acquired Lands End Acquired by Kmart

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Whole Foods Implementation

Strategy - organic and natural foods supermarket chain Assortment beyond organic/natural foods Private labels - Whole Food, 360 Day Value Love, trust, and employee empowerment Equality in compensation

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Decision Variables for Retailers

Customer Service Store Design and Display Merchandise Assortment

Retail Strategy

Pricing

Location

Communication Mix
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Wal-Marts Retail Mix

Customer Service

Location

Store Design And Display

Retail Strategy

Merchandise Assortment

Communication Mix

Pricing

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Wal-Marts Retail Mix

Location Strategy

Free-standing Stores

Customer Service Store Display And Design

Merchandise Assortment

Communication Mix

Pricing
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Wal-Marts Retail Mix

Assortment Strategy

Customer Service

Location

Store Design and Display

Large Number of Categories Few Items in Each Category

Communication Mix

Pricing

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Wal-Marts Retail Mix

Location

Pricing Strategy
Merchandise Assortment

Customer Service

Store Design and Display

Communication Mix

Low, EDLP

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Wal-Marts Retail Mix

Customer Service

Location

Communication Mix
Store Design and Display Merchandise Assortment

Pricing

TV and Newspaper Insert Ads

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Wal-Marts Retail Mix

Store Design and Display

Customer Service

Location

Basic, Special Displays for Products

Communication Mix

Merchandise Assortments

Pricing

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Wal-Marts Retail Mix

Customer Service
Limited
Location Merchandise Assortment Store Design and Display Communication Mix
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Pricing

Claires Retail Mix

Customer Service

Location

Store Design and Display Retail Strategy

Merchandise

Assortment

Communication Mix

Pricing

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Claires Retail Mix

Location Strategy

Enclosed malls

Customer Service

Store Display And Design Merchandise Assortment

Communication Mix

Pricing

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Claires Retail Mix

Assortment Strategy

Customer Service Location

Store Design and Display

Jewelry, accessories and cosmetics for tweens and teens

Communication Mix Pricing

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Claires Retail Mix

Location

Pricing Strategy
Merchandise Assortment

Customer Service

Store Design and Display

Communication Mix

Modest with Sales

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Claires Retail Mix

Customer Service

Location

Communication Mix

Store Design And Display Merchandise Assortment

Pricing

TV and Magazine Ads

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Claires Retail Mix

Store Design and Display

Customer Service

Location

Bright, fashionable and fun boutique layout

Communication Mix

Merchandise Assortments

Pricing

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Claires Retail Mix

Customer Service
Modest
Location

Merchandise Assortment

Store Design and Display Pricing

Communication Mix

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Macys Retail Mix

Customer Service

Location

Store Design and Display Retail Strategy

Merchandise

Assortment

Communication Mix

Pricing

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Macys Retail Mix

Location Strategy

Enclosed Malls

Customer Service

Store Display And Design Merchandise Assortment

Communication Mix

Pricing

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Macys Retail Mix

Assortment Strategy

Customer Service Location

Store Design and Display

Many Items in Apparel and Soft Home

Communication Mix Pricing

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Macys Retail Mix

Location

Pricing Strategy
Merchandise Assortment

Customer Service

Store Design and Display

Communication Mix

Moderate with Frequent Sales

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Macys Retail Mix

Customer Service

Location

Communication Mix

Store Design And Display Merchandise Assortment

Pricing

TV, Newspaper Ads and

Special Events

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Macys Retail Mix

Store Design and Display

Customer Service

Location

Racetrack with Displays

Merchandise Assortments

Communication Mix

Pricing

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Macys Retail Mix

Customer Service

Modest
Location

Merchandise Assortment

Store Design and Display Pricing

Communication Mix

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Targets Retail Mix

Customer Service

Location

Store Design and Display Retail Strategy

Merchandise

Assortment

Communication Mix

Pricing

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Targets Retail Mix

Location Strategy

Free-standing Stores

Customer Service

Store Display
And Design Merchandise Assortment

Communication Mix

Pricing

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Targets Retail Mix

Assortment Strategy

Customer Service Location

Store Design and Display

Large Number of Categories

Private Labels Few Items in Each Category

Communication Mix Pricing

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Targets Retail Mix

Location

Pricing Strategy
Merchandise Assortment

Customer Service

Store Design and Display

Communication Mix

Low to Modest

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Targets Retail Mix

Communication Mix

TV and Newspaper Insert Ads

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Targets Retail Mix

Store Design and Display

Customer Service

Location

Colorful, wide aisles displays for products with a grid layout

Merchandise Assortments

Communication Mix

Pricing

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Targets Retail Mix

Customer Service

Limited
Location

Merchandise Assortment

Store Design and Display Pricing

Communication Mix

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Ethical Situations for a Retail Manager

Should a retailer sell merchandise that they suspect utilized child labor? Should it advertise that its prices are the lowest in an area even though some items are not? Should a buyer accept an expensive gift from a vendor? Should salespeople use high-pressure sales when they know the product is not the best for the customers needs? Should a retailer give preference to minorities when making a promotion decision? Should a retailer treat some customers better than others?

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Checklist for Making Ethical Decisions

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You are Faced with an Ethical Decision: What Can You Do?
Ignore your personal values and do what your company asks you to do you will probably feel dissatisfied with your job . Take a stand and tell your employer what you think. Work to change the policies. Refuse to compromise your principles you could lose your job!
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