5th Edition

PPT 14-1

Chapter 14

Buying Merchandise

McGraw-Hill/Irwin PPT 14-2 Levy/Weitz: Retailing Management, 5/e

Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Merchandise Management

Retail Communication Mix

Planning Merchandise Assortments

Buying Merchandise Buying Systems Pricing

PPT 14-3

Merchandise Branding Strategies
• Manufacturer (National) Brands – Designed, produced, and marketed by a vendor and sold by many retailers •

Private-Label (Store) Brands – Developed by retailer and only sold in retailer’s outlets

Licensed Brand

– Developed by licensee and right sold to either manufacturer or retailer PPT 14-4

Spectrum of National vs. Private Label
% Store Brands The Gap Limited Marks & Spencer IKEA Macy’s Target National Brands Wal-Mart Home Depot

PPT 14-5

Relative Advantages of Manufacturer versus Private Brands
Type of Vendor Manufacturer Brands ? + + + ? + + + + + ?

Impact on Store Store loyalty Store image Traffic flow Selling and promotional expenses Restrictions Differential advantages Margins

Private-Label Brands

PPT 14-6

Private Labels
Advantages • Unique merchandise not available at competitive outlets • Difficult for customers to compare price with competitors • Higher margins
PPT 14-7

Disadvantages • Need to develop expertise in developing and promoting brand • Unable to sell excess merchandise • Typically less desirable for customers

Manufacturer (National) Labels
Advantages • More desired by customers • Resell excessive merchandise • Don’t need skills and people to develop and promote merchandise
PPT 14-8

Disadvantages • Lower margins • Vulnerable to competitive pressures

Most Recognized Apparel and Accessory Manufacturer Brands

PPT 14-9

Most Recognized Apparel and Accessory Private Label Brands

PPT 14-10

Examples of Private-Label Brands

PPT 14-11

Examples of Private-Label Brands

PPT 14-12

Examples of Private-Label Brands

PPT 14-13

Examples of Private-Label Brands

PPT 14-14

Private Label Options
• Bargain Branding
– no-frills product at a discount price.

• Copycat Branding
– imitates the manufacturer brand in appearance and trade dress

• Premium Branding
– private label at a comparable manufacturer-brand quality.

• Parallel Branding
– private labels that closely imitate the trade dress and product attributes of leading manufacturer brands.

PPT 14-15

Issues in International Sourcing of Private Label Merchandise
• Country of Origin Effects • Costs – Foreign Currency Fluctuations – Tariffs – Supply Chain Efficiency and Inventory Carrying Costs – Transportation costs • Quality Control
PPT 14-16

Regulations Affecting the Costs of Importing Goods

• World Trade Organization • NAFTA •Maquiladores • Free Trade Zones

PPT 14-17

Managing International Sources
• Quality Control •More difficult to maintain quality standards • Human Right Issues • Need to Build Strategic Partnerships

PPT 14-18

Domestic vs. International Sourcing
Domestic • Higher cost of merchandise • Shorter lead times – easier to use quick response systems • Easier to control human rights issues and quality control • Customer preferences for domestic manufactured products
PPT 14-19

International • Lower cost • Longer lead times • More control problems

Connecting with Vendors Going to Market
• Internet Exchanges • Wholesale Market Centers • Trade Shows • Resident Buying Offices • Meeting Vendors at Your Company

PPT 14-20

Functions Provided by Internet Exchanges • Product Directories • Use of Reverse Auctions • Collaboration in Planning – CPRF Software • General Information about Trends
PPT 14-21

Types of Exchanges
• Consortium Exchanges
– Transora – Worldwide Retail Exchange – GobalNetXchange

• Private Exchanges • Independent Exchanges

PPT 14-22

Online Reverse Auctions
• Auction
– A market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from market participants.

• Why reverse?
– Vendors bid for buyer’s business – Price falls

• One buyer, multiple vendors • Sealed vs. open bid auctions
PPT 14-23

B

Reverse Auctions

S

B

B S

Reverse Auction

Traditional Auction

S S
PPT 14-24

B

Reverse Auctions in Retail Buying
• Online vs. physical differences
– Reduced contact cost – Instant feedback – Bidder anonymity

• The retailer’s goals
– Gain competitive pricing – Open vendor base – Improve negotiation process – Maintain valuable relationships
PPT 14-25

Price Path on Open-Bid Auction

PPT 14-26

Issues in Using Reverse Auctions to Buy Products
• Private vs. Collaborative Auctions/Exchanges • Fixed Cost High for Software
– Standardized Software  Less Need for Collaborative Exchanges

• Collusion • Consideration of Quality Differences from Bidders • Impact on Supplier Relationships
– Used Primarily for Non-Resale Products – Carpet, Fixtures
PPT 14-27

Negotiating with Vendors
Two-way communication designed to reach an agreement when two parties have both shared and conflicting interests.
PPT 14-28

Planning Negotiations
• Consider prior history • Assess current situation
– General market conditions – Vendor’s position – Power of vendor

• Set goals • Be aware of vendor’s goal’s • Number of people involved
PPT 14-29

• Select an advantageous place

Issues to Negotiation
• Markup opportunities from excess from vendor’s excess merchandise • Purchase terms • Transportation costs • Delivery times • Exclusivity • Advertising allowances

PPT 14-30

Types of Negotiations
Vendor Win Lose

Win Buye r Lose

PPT 14-31

Win - Lose Negotiation
• Can be good in the short run and bad in the long-run • Short-term solution-- person you are negotiating with can’t lose all the time • Might degenerate into LOSE LOSE

PPT 14-32

Lose - Lose Negotiation
• Wastes time and energy • No relationships established • Objectives not met

PPT 14-33

Win - Win Negotiation
Collaboration Cooperation Long-term relationship Doesn’t mean “giving-in” Enhances vendor trust

PPT 14-34

Guidelines for Negotiations
• Separate people from problem • Insist on objective criteria to evaluate performance • Invent options for mutual gain • Let the other party do the talking • Know how far to go

PPT 14-35

Negotiating Tips
• Be aware of time • Location -- comfortable • Keep negotiating participants even • Be patient • Let him/her mention a figure • Don’t be afraid to say “no”

PPT 14-36

Negotiating Tips
• Don’t over negotiate • Don’t assume • Visualize the negotiation • Timing is everything • Always leave the door open • Maintain self-esteem

PPT 14-37

SUMMARY • Planning is critical • Knowledge is power • A person will only do what is right for him/her

PPT 14-38

Strategic (Partnering) Relationships
Retailer and vendor committed to maintaining relationships over the long-term and investing in mutually beneficial opportunities

PPT 14-39

Strategic Relationships
Win – Win --Concerned about expanding the pie, not how to divide the pie

Retailer
PPT 14-40

vs.

Vendo r

Building Blocks for Strategic Partnerships • Mutual Trust • Open Communications • Common Goals • Credible Commitments

PPT 14-41

Developing Trust: Capability or Competence
Competence
Salespeople demonstrate competence when they can show that they know what Requires knowledge they are talking about. of: The customer The product The industry The competition
PPT 14-42

Stages in Building Strategic Relationships • Awareness • Exploration • Expansion • Commitment

PPT 14-43

Legal and Ethical Issues
• Contractual Disputes • Chargebacks • Commercial Bribery • Slotting Allowances • Buybacks • Counterfeit Merchandise • Refusal to Deal • Tying Contracts
PPT 14-44

• Gray Markets and Diverted Merchandise • Exclusive Territories • Exclusive Dealing

Chargebacks
• A practice used by retailers in which they deduct money from the amount they owe a vendor. • Two Reasons: – merchandise isn’t selling – vendor mistakes • Can be a profit center – one senior executive at a large department store chain was told to collect $50 million on chargebacks
PPT 14-45

Commercial Bribery
• A vendor or its agent offers to give or pay a retail buyer “something of value” to influence purchasing decisions. • A fine line between the social courtesy of a free lunch and an elaborate free vacation. • Rule of thumb - accept only limited entertainment or token gifts.

PPT 14-46

Slotting Allowances
• Fees paid by a vendor for space in a retail store. • Currently aren’t legal. • Retailers argue that they are a reasonable method for ensuring that their valuable space is used efficiently. • Manufacturers view them as extortion. • $9 billion or 16% of all new product introduction costs in grocery industry.
PPT 14-47

Buybacks
• Used to get products into retail stores. • Two scenarios:
– Retailer allows a vendor to create space for its goods by “buying back” a competitors inventory and removing it from a retailer’s system. – Retailer forces a vendor to buyback slow-moving merchandise.

PPT 14-48

Counterfeit Merchandise
• Goods made and sold without the permission of the owner of a trademark, a copyright, or a patented invention that is legally protected in the country where it is marketed. • Major problem is counterfeiting intellectual property.

PPT 14-49

What to do About Counterfeiters
• Trademark,copyright, and/or patent products in the countries in which they’re sold. • US government is engaged in bilateral and multicultural negotiations and education to limit counterfeiting. (WTO) • Take steps to protect yourself.

PPT 14-50

Gray-Market and Diverted Merchandise
• Gray- Market Merchandise possesses a valid U.S. registered trademark and is made by a foreign manufacturer but is imported into the United States without permission of the U.S. trademark owner. • Not Counterfeit. • Is legal. • Diverted Merchandise is similar to graymarket merchandise except there need not be distribution across international boundaries.
PPT 14-51

Gray-market and Diverted Merchandise: Taking Sides
• Discount stores argue customers benefit because it lowers prices. • Traditional retailers claim important service after sale will be unavailable • May hurt the trademark’s image.

PPT 14-52

Avoiding the Gray-Market Problem
• Require customers to sign a contract stipulating that they will not engage in gray marketing. • Produce different versions of products for different markets.

PPT 14-53

Exclusive Territories
• Granted to retailers so no other retailer in the territory can sell a particular brand. • Benefits vendors by assuring them that “quality” retailers represent their products. • Assure retailers adequate supply. • Grants retailers a monopoly. • Illegal when they restrict competition.

PPT 14-54

Exclusive Dealing Agreements
• Occur when a manufacturer or wholesaler restricts a retailer into carrying only its products and nothing from competing vendors. • Illegal when they restrict competition.

PPT 14-55

Tying Contracts
• An agreement that requires the retailer to take a product it doesn’t necessarily desire to ensure that it can buy a product it does desire. • Illegal when they lessen competition. • Ok to protect goodwill and quality reputation of vendor.

PPT 14-56

Refusals to Deal
• Suppliers and retailers have the right to deal or refuse to deal with anyone they choose. • Except when it lessens competition.

PPT 14-57

Terms of Purchase
• Discounts
– Trade (Functional) Discounts – Chain Discounts – Quantity Discounts – Seasonal discounts – Cash discounts • ROG and EOM dating – Anticipation discounts

PPT 14-58

• Shipping Terms and Conditions

A Sample Price List

Price to Wholesaler Quantity per Order 1 - 10 11 - 25 26 + Discount 40 - 5% 50 - 10 50-10-5 Price $57* 45 42.75

Price to Retailer Discount 30% 40 40-10 Price $70 60 54

* Based on a $100 suggested retail price.
PPT 14-59

Example of a Cash Discount

1/30, n/60

Nov 1 Date of Invoice

Dec 1 30 days 1% discount

Jan 1 60 days Full amount Due

PPT 14-60

Example of ROG Dating

ROG Dating

Nov 1 Date of invoice

Nov 15 Merchandise arrives

Dec 15 30 days ROG 1% discount

Jan 15 60 days ROG Full amount due

PPT 14-61

Example of EOM Dating

EOM Dating

Nov 1 Date of invoice

Dec 1 30-day discount period begins

Jan 1 Feb 1 30 days EOM 60 days EOM 1% discount Full amount due

PPT 14-62

Example of EOM Dating, Grace Period
EOM Dating, Grace Period

Oct 25 Date of invoice

Nov 1

Dec 1 Jan 1 Feb 1 30-day 30 days EOM 60 days EOM discount 1% discount Full amount period due begins

PPT 14-63

Example of Extra Dating
Extra Dating

Nov 1 Date of invoice

Dec 1 Jan 1 30-day 60-day discount Extra period discount begins period begins

Feb 1

Mar 1 Apr 1 60 days Full Extra amount 1% discount due

PPT 14-64

Alternative Shipping Terms and Conditions

Owns Merchandise Pays Freight Charges in Transit and Files Claims (If Any)

F.O.B. origin, freight collect F.O.B. origin, freight prepaid F.O.B. destination, freight collect F.O.B. destination, freight prepaid

Retailer Supplier Retailer Supplier

Retailer Retailer Supplier Supplier

PPT 14-65

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