Chapter–by–chapter aids: Chapter 12
Instructor’s Manual to Accompany Essentials of Marketing IV–12-1
CHAPTER 12: RETAILERS, WHOLESALERS, AND THEIR
STRATEGY PLANNING
CHAPTER 12 – COMMENTS ON QUESTIONS AND PROBLEMS
12– 1. The purpose of this question is to have students recognize a marketing mix for retailers. This
also allows them to compare an online retailer with a local brick–and–mortar store. The exercise
can be challenging for students who are not used to thinking about the entire marketing mix –
12– 2. Specialty shops offer a service to particular groups of target consumers. Organizing a chain of
specialty shops is a possibility when there are similar target consumers in many different
geographic markets and the special offering would appeal to them equally. Without this
relatively homogeneous demand in different markets, centralized management and selection of
are some exceptions among chains of specialty shops; they include shops like SunGlasses
Hut, which benefits from national advertising and economies of scale in buying. It relies on
information technology and very detailed (and nearly immediate) analysis of sales data in each
12– 3. Discount houses have a policy of low–margin selling to obtain large sales volume. Low–margin
selling is the policy around which much of the rest of the marketing mix is shaped. Discount
selling refers to a competitive reaction (by “conventional” stores) to meet low–margin selling in
certain lines. No intention to shift to a low–margin policy is implied by a discount selling policy –
Mass–merchandising carries low–margin selling even further – emphasizing price for all kinds of
products – including food, clothing, and appliances. While the discount houses tend to handle
manufacturer brands of hard goods for which price discounts could be shown more clearly, the
economic shoppers around. “Target–marketing” thinking should be applied here, however, to
see that not all retailing will follow the mass–merchandising route. With increasingly affluent
consumers with different desires, we will also see successful specialty shops and limited–line
There is no doubt that price competition is building among some Internet merchants, in part
because once a consumer has decided to seek a particular brand from a seller on the Internet,
it is relatively easy to compare prices and availability using online price comparison sites.
it will take a while for some type(s) of new distribution support system(s) to develop. It will need
to make purchasing convenience products on the Internet a more economical alternative than
it is at present (because of the costs of the logistics arrangements after the purchase).
Internet websites, and the like. Deregulation of the transportation industry has increased
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part IV
competition and lowered prices in that area, and that has lowered the costs of shipping
products, especially small ones. There is an increasing poverty of time – especially with more
households with two adults in the work force. This gives families the incentive to try using the
Internet for at least some shopping, and many who try it like it. The same goes for telephone
promotion has made more customers aware of these shopping alternatives. Also, for those
customers who have given it a try, a number of firms have done a very good job of providing
quality customer service at reasonable prices.
thus it, at least implicitly, focuses on final consumers rather than business customers. On the
other hand, this discussion can be expanded to include the changes taking place in
12– 6. Usually, established retailers become comfortable withtheir ongoing strategies and seem
unable to adapt to changing conditions. Sometimes they get locked into serving their present
customers because the new needs are not yet large enough to justify changing the whole
strategy. This allows room for a small newcomer to come in and provide for these special
rather than seeking new opportunities that might require obsoleting the old facilities. The
newcomer, on the other hand, has no established facilities to worry about obsoleting – and
therefore is quite willing to adopt revolutionary approaches that do not require the use of
would like to use more fully.
12– 7. This question draws on the text discussion in section “Retailer Size and Profits.” Basically, a
chain type operation offers the potential for economies of scale and greater purchasing power.
For example, economies of scale may develop with respect to advertising (one ad serves
many outlets) and certain types of specialization (one set of top managers, one credit
assured of delivery when product shortages exist, better attention from salespeople about
upcoming promotions, etc.). That does not mean that a small retailer doesn’t have some
advantages in competing against a chain. Large organizations tend to be more bureaucratic
markets where its stores compete. Sears, for example, has faced this problem. To make
themselves more appealing in local markets, many chains centralized administrative functions,
but at the same time gave local store managers a significant amount of flexibility in adjusting to
international markets. Walmart and Toys ‘R’ Us are good examples of that. Retailing formats
that are popular in one country (culture) may prove to be popular in other countries as well.
However, as a practical matter, opportunities for retailers in international markets are probably
more limited than for producers. A producer can pursue opportunities in international markets
by simply working with international intermediaries to export the company’s existing products –
Chapter–by–chapter aids: Chapter 12
Instructor’s Manual to Accompany Essentials of Marketing IV–12-3
without a major investment (and thus without significant longer term risk). To expand into
international markets, a retailer must set up and operate facilities in a foreign nation, perhaps
with inadequate knowledge of uncontrollable factors in the marketing environment that may
A producer often can rely on patents and other legal protections as it moves into a foreign
market. On the other hand, innovations in retailing tend to spread across the globe and grow in
relevant markets, sometimes with adaptations to the characteristics of local markets, because
there is not a good way to protect a basic idea. Generally, there are few barriers to entry to
Actually running a retail facility means managing personnel. Approaches that work in one
culture may not be at all effective in another.
manage warehousing activities – including use of computers in automatic order picking
systems. Many wholesalers are now using computer–to–computer hookups with their
customers – so orders can be placed immediately and accurately. Computer programs are
generate. Of course, there are a whole host of other uses of computers in wholesaling – but
these are among the most important and are the ones stressed in the text.
Retailers use computers for the same reasons. Of course, the most obvious (visible) use of
computers is at checkout. Increasingly, scanners are being used to feed data into computers
provide a constant flow or “real time” information about what is purchased every minute of
every day. Scanners provide the retailer with powerful information about the profitability of
meet the needs of their suppliers and customers – or disappear. We explain many of the
changes taking place in wholesaling, including some changes that have been brought on by
the changes in retailing (which are also discussed in some detail). Thus, students should think
about and organize what they have read.
The changes taking place in wholesaling are less visible to students (and consumers in
general) than the changes taking place in retailing. However, some of the trends discussed in
changes taking place at the retail end of the channel are also likely to effect the wholesalers
with whom they work. For example, as retailers have moved to scrambled merchandising,
there has been pressure for wholesalers to also scramble their lines – to provide what their
channel partners need. At the same time, the growth of retail chains and mass–merchandisers
has put more cost pressure on wholesalers. As noted in the chapter, some of the retail chains
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part IV
“Traditional retailers” are being squeezed by retailers who have adopted the mass–
merchandising concept. That means that the wholesalers who have focused on serving these
warehouses have become more important in wholesaling, just as they have in all other types of
businesses. In addition, there is a trend toward wholesalers’ salespeople not being just order
takers, but rather pro–active advisors and consultants who help their retail customers.
12–11. Wholesalers need to constantly reevaluate the product lines they handle. As with other
members of the channel, wholesalers have a variety of potential opportunities and they must
decide how they are going to use their resources (warehouse space, promotion effort, etc.). As
market needs change, a wholesaler must adapt. For example, if retailers being served by a
working. Yet, it may be a new product from a new company that will provide a new way to meet
customers’ needs – perhaps starting a totally new product life cycle. A wholesaler who is not
attentive to new ways of serving the market may find itself handling only products for which the
by those machines. Over time, the use of carbon paper has all but disappeared (thank
heavens!) and been replaced with alternative ways to make copies.
sell, and then (2) stop selling the Maytag brand. Otherwise, the retailer would face the problem
of “free riders”–consumers who would come to the store to check out the washer and ask
questions of salespeople. In general, consumers would take advantage of the retailer’s
We say that the retailer would want to replace Maytag because that’s the emotional reaction.
After all, the appearance is that Maytag is taking steps to do the retailer in. On the other hand,
riding,” that might give the retailer a chance to turn them into customers. So, on the surface, it
appears that Maytag’s Internet sales of washers would cause conflict in the channel and
prompt retailers to change suppliers, but the actual result would probably depend on how
12-13. Risks assumed include product deterioration, obsolescence, theft, fire, damage, and price
changes over time. Risk is not constant – it depends upon the product. There would be much
more risk for fresh strawberries than for kegs of nails.
12–14. It might wish to offer more technical service than the established wholesalers could or would
provide. Also, sales branches might be set up in large cities only – where large sales volumes
and greater profits could be obtained.
Chapter–by–chapter aids: Chapter 12
Part IV
DISCUSSION OF COMPUTER-AIDED PROBLEM 12: SELECTING CHANNEL
INTERMEDIARIES
A producer of glass gift items wants to expand into a new territory – and is trying to decide whether to use
a merchant or agent wholesaler to reach gift shop retailers. The agent requires less investment, but the
merchant wholesaler may provide access to more gift shops. The student analyzes the trade–offs
between the two alternatives under different conditions, including different levels of demand for the
product. This problem highlights the differences in various types of wholesalers – and why the differences
can have a dramatic effect on profits.
This problem helps get students more interested and involved in this important topic. They see that the
type of wholesaler selected (and what functions are provided) can be quite important. The problem is
especially useful in drawing out some of the more important differences between agent and merchant
wholesalers.
The initial spreadsheet for this problem is presented below:
P L U S – Spreadsheet
Merchant
Agent
Expected Quantity by Merchant Wholesaler
4500
*
Percent of Quantity Agent Could Sell
75.00
*
Agent’s Commission Percent
8.00
*
Quantity Agent Could Sell
3375
Art Glass Selling Price
12.00
*
14.00
*
TOTAL Revenue
54000.00
47250.00
Expenses: Unit Shipping Costs
0.60
*
2.00
*
Total Shipping Expense
2700.00
6750.00
Advertising Expense
8000.00
*
0.00
*
Agent’s Total Commissions
3780.00
TOTAL Expense
34100.00
28080.00
Total Contribution to Profit
19900.00
19170.00
Quantities at Which Agent Contribution
& Merchant Contribution Are the Same
4124
3093
Profit Contribution at This Quantity
17568.80
17568.24
Answers to Computer–Aided Problem 12:
a. Given the expected sales quantity (4,500 units by the merchant wholesaler, or 3,375 units for the
agent wholesaler), the merchant contributes more to profit: $19,900 vs. $19,170 for the agent. See
Chapter–by–chapter aids: Chapter 12
Part IV
This case can be used to discuss some pros and cons of online retailing. The instructor might compare
and contrast DrJane.com with a brick–and–mortar competitor like Vitamin Shoppe or GNC. Why would a
customer go to DrJane.com versus one of these other stores? Which company can offer better customer
service – an online retailer or a brick–and–mortar store? The answers to these questions are not clear, but
a class discussion can illuminate differences in customer service delivery across the two types of stores.
See case discussion.
This case can be used here to illustrate the need for retailers to aim at clearly defined target markets and
develop appropriate marketing mixes for them. This company is a wholesaler (not a retailer) selling
business products. It is a retailer only when selling consumer products to final consumers – as it does to
some serious amateurs. But the new venture was obviously a retailing activity – and it is this lack of fit
and experience with the “amateur” consumer market that caused the poor sales result. See case
discussion.
This case can be used to illustrate the functions of a drop–shipper. It is also possible to discuss what
merchant wholesalers (and retailers) do—Jimmy Olson‘s customers in this case. But the major emphasis
should be on the fact that Jimmy is considering a change in the wholesaling functions he will provide. He
will become a manufacturers‘ agent – and for a producer with a “really new idea,” which will require some
(probably difficult) pioneering work. This would be a major change for him. See case discussion.
Bass Pro Shops is the nation’s leading retailer of outdoor gear. It also is regarded as a master marketer
for a unique shopping experience that blends goods and services with theater and entertainment—a trend
in retailing called “destination development.” Destination retailers don’t just sell a product; they create an
unforgettable experience for their customers. Bass Pro Shops strategy is unique for a retailer. For more
details, see the Video Instructor’s Manual on the Instructor’s Resource CD or the instructor side of the
Online Learning Center (www.mhhe.com/fourps).
This video focuses on the current problems of suburban regional and superregional shopping centers.
Southdale Center located in suburban Minneapolis is considered the prototype for most of the suburban
regional and superregional shopping malls built during the second half of the twentieth century. Southdale
opened in 1956 and featured 70 retail tenants in an 800,000 square foot enclosed, climate–controlled
mall, anchored by two department stores. This provides an opportunity to discuss how retailing has
evolved over the years – and to discuss where it is likely to go in the future. For more details, see the
Chapter–by–chapter aids: Chapter 12
Situation: Farmers in poor countries get very little money for crops—such as coffee, cocoa, and
bananas—that they grow for export. Some consumers in prosperous nations are willing to pay retailers
higher prices for “fair trade” goods so that the farmers receive greater compensation. But critics question
whether fair trade works as it should. For example, Sainsbury’s is a popular British food retailer. It was
charging $2.74 per pound for “fair trade” bananas versus only $.69 per pound for regular bananas.
Farmers, however, only got $.16 extra from that $2.05 price premium. Critics charge that Sainsbury’s
This scenario was written based on a Wall Street Journal article, “What Price Virtue? At Some Retailers,
‘Fair Trade’ Carries a Very High Cost,” (June 8, 2004). A Google search should lead to a copy of the
article. The stated goal of fair trade efforts is to pay struggling farmers a fair price for the commodity
products they grow. Many consumers are willing to pay a higher price for products if they know that part
of what they pay is going toward helping poor farmers.
Questions of ethics arise when retailers make a larger premium from fair trade prices than do the poor
farmers they are designed to help. Are consumers aware of how much of the premium in the fair trade
price goes to the farmer as contrasted with how much to the retailer? Sainsbury’s counters this criticism
by noting that its stores have generated more than $1.8 million of funds for fair–trade projects. Tesco,
another UK retailer, claims that criticisms are unfair because costs are higher for fair trade products and
that its profit margin for these goods is actually lower than for non–fair trade products. It is probably true
The AMA Statement of Ethics does not directly address this type of issue. Some people think that it is
incumbent on the retailers to make sure customers know how much of the premium they pay actually
makes it to the farmers. On the other hand, based on observation, it seems that most retailers feel that it
is sufficient to respond to consumer interest in “fair trade” products—without providing information that
many customers don’t request.
Part IV
The addition of kennel services to HVC’s product offering should be pursued with care. There are clearly
operational issues, but from a marketing standpoint it would be extremely important for the kennel
services to be consistent with the clinic’s current positioning (which focuses on “compassionate care”).
This could require more service and staff than many kennels now provide – and that could raise costs
and prices. As long as HVC feels there is a large enough local target market that is less price sensitive
and more interested in service, the kennel could be a success.