Chapter 14 ♦ Retailing 1
CHAPTER 14 Retailing
This chapter begins with the learning outcome summaries, followed by a set of lesson plans for you to use
to deliver the content in Chapter 14.
• Lecture (for large sections) on page 3
• Group Work (for smaller sections) on page 4
Review and Assignments begin on page 5
Review questions
Application questions
Application exercise
Case assignment
Great Ideas for Teaching Marketing from faculty around the country begin on page 12
2 Chapter 14 ♦ Marketing Channels and Retailing
LEARNING OUTCOMES
14-1 Explain the importance of the retailer within the channel and the U.S. economy
Retailing represents all the activities directly related to the sale of goods and services to the ultimate consumer for
personal, nonbusiness use, and has enhanced the quality of our daily lives. When we shop for groceries, hair styling,
clothes, books, and many other products and services, we are doing business with retailers. Retailing affects all people
directly or indirectly. Trends and innovations relating to customer data, social media, and alternative forms of shopping
are constantly developing, and retailers have no choice but to react.
14-2 List and understand the different types of retailers
Retail establishments can be classified according to ownership, level of service, product assortment, and price. These
variables can be combined in several ways to create various retail operating models. Retail ownership takes one of three
forms: independent, part of a chain, or a franchise outlet. The service levels that retailers provide range from full-service
to self-service. Retailers can also be categorized by the width and depth of their product lines. Price is the fourth way to
position retail stores. Many stores fall into the basic types of retailers, but some companies have begun to experiment
with alternative formats.
14-3 Explain why nonstore retailing is on the rise and list the advantages of its different forms
Nonstore retailing enables customers to shop without visiting a physical store location. It adds a level of convenience for
customers who wish to shop from their current locations. Due to broader changes in culture and society, non-store
retailing is currently growing faster than in-store retailing. The major forms of non-store retailing are automatic vending,
direct retailing, direct marketing, and Internet retailing.
14-4 Discuss the different retail operations models and understand why they vary in strategy and
format
Retail formats are co-aligned with unique operating models that guide the decisions made by their managers. Each
operating model can be summarized as a set of guiding principles. Today, most retail stores remain operationally and
tactically similar to those that have been in business for hundreds of years; with one or more physical locations that the
customer must visit in order to purchase a stocked product, and with strategies in place to attract customers to visit.
14-5 Explain how retail marketing strategies are developed and executed
Retail managers develop marketing strategies based on the goals established by stakeholders and the overall strategic
plans developed by company leadership. Strategic retailing goals typically focus on increasing total sales, reducing costs
of goods sold, and improving financial ratios such as return on assets or equity. The first and foremost task in developing
a retail strategy is to define the target market. Then comes combining the elements of the retailing mix to come up with a
single retailing method to attract that target market.
14-6 Discuss how services retailing differs from goods retailing
The fastest-growing part of our economy is the service sector. Although distribution in the service sector is difficult to
visualize, the same skills, techniques, and strategies used to manage inventory can also be used to manage service
inventory, such as hospital beds, bank accounts, or airline seats. Because service industries are so customer oriented,
service quality is a priority.
14-7 Understand how retailers address product/service failures and discuss the opportunities that
service failures provide
No retailer can be everything to every customer, and by making strategic decisions related to targeting, segmentation,
and the retailing mix, retailers implicitly decide which customers will be delighted and which will probably leave the
store unsatisfied. The best retailers have plans in place not only to recover from inevitable lapses in service but perhaps
even to benefit from them.
14-8 Summarize current trends related to customer data, analytics, and technology
Retailers are constantly innovating. They are always looking for new products and services (or ways to offer
them) that will attract new customers or inspire current ones to buy in greater quantities or more frequently.
Big data analytics, shopper marketing, mobile technology, and social media are at the front of this innovation.
Some retailers have turned to channel omnification, while others have embraced click-and-collect.
TERMS
atmosphere
drugstore
retail channel
omnification
automatic vending
factory outlet
retailer
back stock
floor stock
retailing mix
beacon
franchise
retailing
big data analytics
franchisee
self-service
technologies (SST)
brand cannibalization
franchisor
shop-at-home
television network
category killer
full-line discount store
shopper analytics
chain store
gross margin
shopper marketing
click-and-collect
independent retailer
specialty discount
store
convenience store
layout
specialty store
department store
microtargeting
supercenter
destination store
nonstore retailing
supermarket
direct mail
off-price retailer
telemarketing
direct marketing (DM)
online retailing (e-tailing)
used goods retailer
direct retailing
restaurant
warehouse club
discount store
LESSON PLAN FOR LECTURE
Brief Outline and Suggested PowerPoint Slides:
Learning Outcomes and Topics
PowerPoint Slides
LO1 Explain the importance of the retailer within the channel
and the U.S. economy
14-1 The Role of Retailing
1. Retailing
2. Learning Outcomes
3. Learning Outcomes
4. The Role of Retailing
5. Retailing
6. The Role of Retailing
LO2 List and understand the different types of retailers
14-2 Types of Retailers and Retail Operations
7. Types of Retailers and Retail Operations
8. Classifications of Retail Operations
9. Classification of Ownership
10. Level of Service
11. Product Assortment
12. Price
13. Major Types of In-Store Retail Operations
14. Exhibit 14.1: Types of Stores and Their
Characteristics
4 Chapter 14 ♦ Marketing Channels and Retailing
Learning Outcomes and Topics
PowerPoint Slides
LO3 Explain why nonstore retailing is on the rise and list the
advantages of its different forms
14-3 The Rise of Nonstore Retailing
15. The Rise of Nonstore Retailing
16. Nonstore Retailing
17. Major Types of Nonstore Retail Operations
LO4 Discuss the different retail operations models and
understand why they vary in strategy and format
14-4 Retail Operations Models
18. Retail Operations Models
19. Retail Operating Models
20. Floor Stock and Back Stock
21. Operations Models Today
LO5 Explain how retail marketing strategies are developed
and executed
14-5 Executing a Retail Marketing Strategy
22. Executing a Retail Marketing Strategy
23. Retail Marketing Strategy
24. Defining a Target Market
25. Choosing the Retailing Mix
26. Exhibit 14.2: The Retailing Mix
27. Choosing the Retailing Mix
28. Retail Promotion Strategy
29. Place
30. The Proper Location
31. Retail Prices
32. Presentation of the Retail Store
33. Personnel
LO6 Discuss how services retailing differs from goods
retailing
14-6 Retailing Decisions for Services
34. Retailing Decisions for Services
35. Channel and Retailing Decisions for Services
LO7 Understand how retailers address product/service
failures and discuss the opportunities that service
failures provide
14-7 Addressing Retail Product/Service Failures
36. Addressing Retail Product/Service Failures
37. Channel and Retailing Decisions for Services
LO8 Summarize current trends related to customer data,
analytics, and technology
14-8 Retailer and Retail Customer Trends and
Advancements
38. Retailer and Retail Customer Trends and
Advancements
39. Big Data Analytics and Beacons
40. Shopper Marketing
41. Analytics
42. Future Developments in Retail Management
43. Chapter 14 Video
44. Part 4 Video
Suggested Homework:
• The end of this chapter contains assignments for the JCPenney case.
• This chapter’s online study tools include flashcards, visual summaries, practice quizzes, and other resources that can
be assigned or used as the basis for longer investigations into marketing.
LESSON PLAN FOR GROUP WORK
Application question 1 lends itself well to group work. For this activity, divide the class into small groups of four or five
people. Students from each group should read the question and then use their textbooks, or any work that was completed
previously, to perform the exercise. Then each group should discuss or present its work to the class.
Class Activity – Retail Location
Chapter 14 ♦ Retailing 5
Objective: This exercise should aid students in understanding the multitude of factors that must be considered when
selecting a site for a store.
Tell the class that the object of this exercise is to find the optimal location for a new retail establishment. Select a store
type that appeals to college students—a bar, bike shop, pizzeria, and so on.
Divide the class into “location consultant groups” with you, the instructor, being the client. If the class is extremely
large, you may want to have two or three types of retail stores. Each store should have three to four groups looking for a
location. The students need to find an actual available location to recommend. The report to the client should include
description, square footage, leasing terms or price, and a justification for the selection of the site. The group offering the
site that is selected by the client (instructor) receives bonus points.
REVIEW AND ASSIGNMENTS FOR CHAPTER 14
REVIEW QUESTIONS
1. Discuss the possible marketing implications of the recent trend toward supercenters, which combine a
supermarket and a full-line discount store.
Supercenters have been created to meet the needs of today’s customers for convenience, variety, and service.
2. Explain the function of warehouse clubs. Why are they classified as both wholesalers and retailers?
Although students’ answers will vary, they should address some of these points:
3. What advantages does franchising provide to franchisers as well as franchisees?
Benefits for franchisees include the use of a known name, product, and/or business methods. In addition, the
APPLICATION QUESTIONS
1. In order to fully appreciate the role retailing plays in the U.S. economy, it may be helpful to review a
selection of press articles related to the retailing industry. Search for articles pertaining to retailing. Read a
selection of articles, and report your findings to the class.
Student answers will vary depending on the articles read. You may wish to have students divide into small groups
2. Form a team with three classmates to identify the different retail stores in your city where pet supplies are
sold. Team members should divide up and visit all the different retailing outlets for pet supplies. Prepare a
report describing the differences in brands and products sold at each of the retailing formats and the
6 Chapter 14 ♦ Marketing Channels and Retailing
differences in store characteristics and service levels. For example, which brands are sold via mass
merchandisers versus independent specialty stores or other venues. Suggest why different products and
brands are distributed through different types of stores.
Answers will vary widely based on the variety of locations visited by students.
3. Go to the Gift Center at online wine retailer wine.com’s Web site at http://www.wine.com. How does this site
help shoppers select gifts?
4. How much does the most powerful computer with the fastest modem, most memory, largest monitor, biggest
hard drive, and all the available peripherals cost at http://www.dell.com? Then visit a store like Best Buy or
Circuit City and price a comparable computer. How can you explain any price differences between the two
retail operations? Explain any differences in features that you encountered. What conclusions can you draw
from your research?
5. Most catalog companies also offer online shopping. Visit the Web site of one of your favorite catalogs to see if
you can buy online. If so, surf the online catalog for a few minutes. Then compare the two retailing methods
(paper and Internet) for prices, products, and so forth. Which do you prefer—the paper catalog or online
shopping? Why?
Students’ answers will vary widely.
6. Curves is the world’s largest fitness franchise and the fastest-growing franchise of any kind. What do you
need to do to become a Curves franchisee? Visit the Web page (http://www.curves.com) to find out. Does
anything surprise you?
Students’ answers will vary.
7. Identify a successful retail business in your community. What marketing strategies have led to its success?
Although students’ answers will vary, the following is a basic model of a student response:
Oak Street Market is a highly successful, small specialty grocery store in my community. In the 1980s, Oak Street
8. How can a company create an atmosphere on its Web site? Visit the Web sites of some of your favorite
retailers to see if they have been able to re-create the store atmosphere on the Internet.
Students’ answers will vary. Many will cite elements of design as the ability to create atmosphere: color, layout,
APPLICATION EXERCISE
After reading the chapter, you can see that differences in retailing are the result of strategy. To better understand the
relationship between strategic retailing factors and consumer perceptions, you can conduct a simple observation exercise.
First, pick a product to shop for, and then identify two stores where you have never shopped as places to look for your
product. The two stores must be different types of retailers. For example, you can shop for a new HDTV at Best Buy
(category killer) and at local electronics stores (specialty retailer). Once you have identified what you are looking for and
where you’re going to look, visit each store and record your observations of specific strategic retailing factors.
Chapter 14 ♦ Retailing 7
Activities
1. Go through each store and make careful observations on the following:
• Location: Where is each store? How congested is the area of town where each store is located? What influence
does the neighborhood have on your impression of the store? Would you travel to this store under normal
circumstances? Write a detailed paragraph on the location of each store.
• Exterior atmosphere: How convenient is parking? Is parking adequate? How are other issues concerning
parking (cleanliness and size of the lot, size of spaces, well-lit, etc.)? What kinds of stores are around the store
you are visiting? Do you think being located next to them increases traffic at your store? Are direct competitors
nearby? Is the building modern or historic? Is it attractive, clean, and appealing? Is the entrance inviting to
shoppers?
• Interior atmosphere: Compare the following attributes at each store: aisle width; lighting; number of customers;
noise (background music, loudspeakers, etc.); store layout; signage; accessibility of the cashier; number of
products available (depth and width of assortment); ability to inspect the product before purchase; quality of the
fixtures (shelves, lights, etc.); availability of salespeople and their knowledge about the product; willingness of
salespeople to help.
• Product: Is your product available? If not, is there a satisfactory substitute? What is your perception of the
quality of goods offered? Why do you think as you do?
• Price: What is the price of the product/brand at this store? Is the price prominently displayed? How do the
prices at the two stores compare? How does the price compare to your expectations?
2. From which of these two stores would you actually purchase the item? Why, specifically? List the factors that
played a role in your decision. Which factor is most important to you? If you would not purchase the item at either
store, why not?
3. What are the three most important differences you observed between the stores?
4. Using the results of your research, write a short paper that outlines your observations. Conclude your paper with
your answers to questions 2 and 3.
Purpose: To have students think intentionally about differences in retailing establishments by comparing two stores at
which they have never shopped.
Setting It Up: Because this involves excursions, you may wish to set this up as a paired exercise. Alternatively, you can
pick the product for which the students will shop and direct teams to research the item, each at a different type of retailer.
Teams can share results, and the class can see the comparisons and draw conclusions as a whole.
This exercise was inspired by the following Great Idea in Teaching Marketing:
Amy R. Hubbert
University of Nebraska at Omaha
DISCOVERY OF STRATEGIC RETAILING FACTORS
The purpose of this assignment is to give students in the Principles of Marketing course an opportunity discover for
themselves the influence of strategic retailing factors (e.g., location, atmospherics, etc.) on consumer perceptions. The
project involves individual, detailed observation at two very different types of retail outlets and a four– to five-page
summary of the findings. An in-class activity enables groups of students to compare and contrast their findings and
reinforces the understanding of strategic retailing factors.
Each student selects an item categorized as a “shopping product” for which to shop. Students describe the product
attributes desired as specifically as possible. If it is a branded product, the brand sought is named. The intent of this
aspect of the assignment is to ensure students start out with a clear conception of the specific product for which they are
shopping. Students then select and compare two retailers who offer this product.
Two issues are critical in the selection of specific stores. First, retailing factors will be most salient if two very different
stores are compared. Therefore, each student chooses two types of retailers (specialty store, department store, discount
store, or category killer) and visits one store of each type. Second, it is imperative that students choose stores where they
have never shopped. Retailing factors will be most apparent, and observed most objectively, in unfamiliar stores.
Each student visits the two stores he or she selects and records observations of specific strategic retailing factors at each
store. The following guidelines encourage attention to detail and provide an outline for the discussion:
A. Location Factors
What is the type of location (traditional business district, community shopping center, etc.)? How congested is this part
of town in general? What influence does the neighborhood have on your impression of the store? Would you travel to
this store under normal circumstances to shop for your product?
B. Exterior Atmospherics
a. How convenient is it to get into the parking lot from the street? For example, do you have to drive by and make
a U-tum or can you turn in at a stoplight?
b. How adequate is the parking? What other parking issues do you notice? For example, is there a parking lot? Are
the slots wide or too narrow? Is it a short or long walk to the entrance? Are there are other cars in the lot (if not,
how does that make you feel)? How adequate is visibility? Describe the pedestrian traffic in the parking lot and
to the store.
c. Do you think nearby stores increase the number of customers to the store you are visiting, or is it more likely to
be the other way around? Are there direct competitors nearby?
d. Does the building have a modern appearance? Does it have an attractive appearance? Is the entrance inviting to
potential shoppers? Explain.
C. Interior Atmospherics
a. Aesthetics: Discuss aisle width in general and in comparison to the other store. Note the lighting. Is it too bright
or too dim? Is it used to emphasize the merchandise? How crowded does the store seem? Too deserted? Too
crowded? Describe any odors you detect. What is the noise level? Is there background music? If yes, note the
volume, tape quality, and appropriateness of the music.
b. Layout: How prominent is the department in which your product is located? How long did it take you to find
the department/product? Are more/better signs needed? How large is this department compared to others in the
store? How accessible is a cashier’s station? Is someone immediately available to take payment? If not, how
long would you have to wait?
c. Display: How deep and wide are the product lines compared to others in the store, the other store, and your own
expectations? What sources of information/promotion about your product are available? Are you able to inspect
the very unit you would purchase, or is it sealed in its package, located in a warehouse, etc.? What are your
perceptions of the quality of the fixtures, shelving, etc.?
d. Personnel: Are salespeople available to help? If yes, by what clues are the sales staff recognizable? Is a
salesperson willing and/or able to help you right away? Is the salesperson knowledgeable about the products
and services offered?
D. Product
Is your product available at the store? Is there a satisfactory substitute? What are your perceptions of the quality level of
the goods offered? Specifically identify the factors on which you base these perceptions.
E. Price
What is the price of the product/brand you would purchase from this store? Is the price prominently displayed? How
does the price compare to the other store’s price? How does the price compare to your expectations?
Students conclude their papers with reflections on the following questions:
a. From which of these two stores would you actually purchase the item? Why, specifically? List the factors that
play a role in your decision. Which factor is most important to you? If you would not purchase the item at either
store, why not?
b. What are the three most important differences you observed between the stores?
On the due date, an in-class activity offers the opportunity for students to share and compare their findings. Small groups
of four to five students are formed. Each group member names their product and identifies the types of retailers and
specific stores visited. Groups identify and discuss key differences among types of retailers. Based on their discussion,
each group identifies the three most important benefits offered by each type of retailer and lists these on the chalkboard.
The activity concludes with a classwide discussion of strategic retailing factors and how these relate to retail positioning
and customer satisfaction.
CASE ASSIGNMENT: JCPenney
It is common knowledge among consumers and retailers alike that apparel prices tend to be marked up artificially.
Years of coupons and promotions have trained customers to wait for price reductions, only shopping at department
stores when special sales are available. During the Great Recession, consumer confidence dropped and spending
slowed dramatically. As the economy has improved, department stores such as Macy’s and JCPenney have begun
looking for ways to increase customer spending. Many department stores have once again turned to steep sales and
special coupons, further encouraging the cycle of regular (lukewarm) business and sale–time frenzy.
Taking a different route, JCPenney moved to reduce the artificial markup so common to department store
apparel. Borrowing Walmart’s long-time “everyday low prices” strategy, JCPenney hoped to spur demand and
reduce off-sale shopper apathy with basic contemporary apparel, promotions such as “Best Price Fridays,” and
special month-long values. Customers accustomed to receiving a coupon before shopping did not respond well to the
new retail strategy, however, and JCPenney incurred substantial losses. The company launched an informative
marketing campaign extolling the great values available without needing coupons or special sales, but the public
remained unmoved. In April 2013, JCPenney ousted the man behind the change, Ron Johnson, as CEO and
promised a return to coupon-based sales.
Dana Mattioli, “Penney to Tweak Message, but Not Its Strategy,” Wall Street Journal, June 19, 2012,
http://online.wsj.com/article/SB10001524052702303703004577476830407027186.html (Accessed March 26,
2013).
TRUE/FALSE
1. JCPenney is not considered a retailer because it manufactures and sells clothing under its own private brand as well as
selling manufacturers’ brands.
10 Chapter 14 ♦ Marketing Channels and Retailing
2. JCPenney-branded products are only sold at JCPenney retail outlets, exemplifying exclusive distribution.
3. Because it carries a wide variety of shopping and specialty goods, including apparel, cosmetics, housewares, and
furniture, JCPenney is an example of a specialty store.
4. One of JCPenney’s key problems was that management lost sight of the customers it should have been serving, resulting
in an ill-defined target market.
5. Of the six retailing mix elements, JCPenney’s most critical errors were made in its decisions regarding place.
MULTIPLE CHOICE
1. Suppose JCPenney and Macy’s were both vying to carry an exclusive line of Heidi Klum-designed outerwear. This
would be an example of:
a.
Parallel conflict.
b.
Horizontal conflict.
c.
Perpendicular conflict.
d.
Vertical conflict.
e.
None of these.
2. Each JCPenney retail outlet is owned and operated by a single larger organization. JCPenney is a(n):
a.
Independent retailer.
b.
Chain store.
c.
Franchise.
d.
Discount store.
e.
None of these.
Chapter 14 ♦ Retailing 11
3. How could JCPenney have used shopper marketing to avoid alienating its customers and losing sales?
a.
It could have partnered with brands to advertise the most desirable products.
b.
It could have compared its loyal shoppers with brands’ core target consumers.
c.
It could have conducted a large–scale research project to gauge customers’ attitudes, perceptions,
emotions, and behaviors.
d.
It could have inspired managers to coordinate better, measure more, think more creatively, and move
faster.
e.
It could have done all of these.
4. Which of the retailing mix elements did JCPenney engage when it launched the informative marketing campaign
explaining its new pricing structure?
a.
Product.
b.
Place.
c.
Promotion.
d.
Presentation.
e.
Personnel.
5. _____ would have allowed JCPenney to use complex mathematical models to determine which products to stock at what
price, how to manage markdowns, and how to advertise to draw target customers.
a.
Data scrubbing
b.
Data mining
c.
Data scraping
d.
Data drilling
e.
Data scouring
12 Chapter 14 ♦ Marketing Channels and Retailing
GREAT IDEAS FOR TEACHING CHAPTER 14
James S. Cleveland, Sage College of Albany
DISCUSSION BOARD TOPICS TO ENCOURAGE PARTICIPATION
Discussion board questions provided to students to encourage them to engage in thinking and writing about the content
of the Principles of Marketing course usually take the form of a provocative statement to which students are asked to
respond. An example of this would be “All PR is good PR.”
Discussion topics such as this one are abstract and often require that the instructor provide an initial reply to show
students what is expected of them in their own replies. For students with limited work experience, this approach may be
quite appropriate. For adult students with extensive experience as employees and consumers, however, the abstract
nature of such topics can be frustrating.
I have developed, therefore, a series of discussion board questions to use with experienced, adult students. These
questions are designed to encourage them to use their experiences as employees and consumers as doorways to better
understand the course material, and to make their own responses more interesting to themselves and to the other students
in the class who will read and comment on them.
Each question has three parts:
1. First, there is a sentence or two from the students’ textbook introducing the topic. By using the text author’s
own words, students are enabled to locate relevant material in the text more easily, the text content is
reinforced, and confusion resulting from use of variant terms or expressions is minimized.
2. Second, there is a reference to text pages the students should review before proceeding. Since the goal of the
exercise is for students to apply the course content to their own experiences, reviewing the content first is
important.
3. Third, there is a request for the students to think about or remember some specific situation in their experiences
to which they can apply the text material, and a question or questions for them to address in their replies.
Here are additional such discussion board questions developed for Chapter 14 of MKTG10. Each is written to fit the
same text cited above but could easily be rewritten and revised to fit another text.
Series A
1. Organizations have three options for distribution intensity: intensive distribution, selective distribution, or
exclusive distribution.
2. Review the information about levels of distribution intensity from section 14-2 in your text.
3. Then select a product you recently purchased. At what level of distribution intensity is this product distributed?
Why do you think this might be the case? Explain your answer.
Series B
1. Because consumers demand convenience, nonstore retailing is currently growing faster than in–store retailing.
2. Review the information about nonstore retailing from section 14-5 in your text.
3. Then consider five recent purchases. Have any of them been through nonstore retailing? If so, list what type of
nonstore retailing, and explain why you choose that method over traditional stores. If not, classify the type of
stores you purchase from and why you choose those over nonstore retailing options.
David M. Blanchette, Rhode Island College
FRANCHISE EXPO
This exercise has several purposes. Most directly, students have the opportunity to internalize and apply concepts related
to obtaining and operating a retail franchise. Secondarily, students can practice their negotiation and management skills.
Ideally the exercise is done in groups of two to four, but can be easily done with individuals as well. The time devoted to
the exercise is very flexible, and can be done in as little as one hour or as long as one semester.
After presenting information to the class about franchising, students are separated into groups. Some groups are
“franchisors,” and some are potential “franchisees.” The premise is that there will be a franchise expo in which
franchisors sell franchises to prospective franchisees. (Normally, the number of potential franchisees will exceed that of
franchisors to encourage competition and negotiation, but this is up to the instructor.)
Franchisors initially need to determine the franchise they have for sale. A common restriction here is that the franchise
cost must be relatively low, as the franchisee groups are recent college graduates and of relatively modest means.
Franchisors can invent franchises or sell existing franchises (if preferred, the instructor may assign or give available
franchises for sale). Depending on the time devoted, franchisors can research these franchises to learn about their
characteristics, or simply make up characteristics that would be logical for the franchise. Specifically, franchisors need to
determine the offer to potential franchisees as well as the selection criteria they will use to determine which franchisee
offers to accept. Time permitting, franchisors may develop (or have the option of developing) an offering circular,
earnings representations, applications, etc., consistent with the Franchise Rule. Their task, then, is to prepare materials
and standards to be used to attract and retain desirable franchisees.
Potential franchisees initially need to determine the types of businesses they are interested in (and ideally have some
qualifications for). Also, franchisees need to calculate how much they have to spend, as well as the source of these
finances. (Alternatively, the instructor may assign an amount available to each group. However, while making the groups
even may seem fair, it hinders students from considering the important element of obtaining financing. Further,
competing investor groups are rarely even.). Franchisees should also give some thought to how their partnership should
be organized and structured. Lastly, the potential franchisees should develop some general goals and standards for
obtaining a franchise.
This initial organizational phase can be accomplished in as little as half an hour or take as long as the instructor deems
appropriate (even months). Following the organizational phase, groups are now ready to attend the franchise expo, where
franchisors attempt to attract and provide information to prospective franchisees. This can be an elaborate stage in the
exercise, where franchisors construct booths and exhibits, or as simple as rearranging desks in the classroom. For
extended exercises, the expo can emulate a normal trade fair, where brochures, samples, presentations, videos, and so on
are offered; general questions are answered; initial applications are offered (and sometimes accepted); and appointments
for future meetings made. These future meetings, inside or outside of class, may then be used for applications,
presentations, interviews, negotiations, and so forth. For shorter exercises, the expo can be used for both the preliminary
information gathering as well as the detailed negotiations. Phase two, then, is the initial attraction, contact, and
informational portion of the exercise.
Following this informational phase, groups negotiate (during the expo in short exercises, at later times in extended
exercises) to form franchise contracts. The terms of this contract are completely up to the parties. However, potential
franchisees are only allowed to enter into a single contract, while franchisors can enter into as many contracts as they
choose. Some time limit should be set as the deadline for all contracts to be sealed. (by handshake, signature, deposit,
etc.) Importantly, the terms of the contract should be reduced to writing, even for agreements in principle.
Finally, the negotiated contracts (as well as those negotiations that collapsed) are discussed in class. The selection criteria
for both franchisors and franchisees are first addressed. Terms of negotiated and failed contracts are then discussed. This
tends to be fascinating, entertaining, and illuminating as the implications of contract terms (as well as contract
omissions) are elaborated. For example, students often tend to negotiate contracts of very brief duration, forget important
fees (or express them in ambiguous terms—for example, is that 6% of gross, net, or what?), battle over advertising, or