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14 Chapter 14 ♦ Marketing Channels and Retailing

focus almost exclusively on financial matters. Shorter exercises, which do not permit as much research and thought, tend

to produce contracts that allow for much instruction, while longer exercises, as expected, produce more thoughtful

contracts (though still with suboptimal terms) where student learning is reflected. In either case, students have the chance

not only to apply important franchising concepts but to manage partnerships and partnership tasks, as well as to practice

negotiation. Some instructors may prefer to make the exercise more competitive by allowing for winners and losers

(based on expected profitability).

This exercise is most appropriate for retail management classes, but may also be used for other marketing and

management classes.

Chris Pullig, Louisiana State University

RETAIL PROFITS: NO ROOM FOR ERROR

In discussing the small profit margin accomplished by many retail firms, I have found that most students do not stop and

think about what a 3 percent to 5 percent profit margin really means. They seem to write the figure down and continue to

assume that if one opens a store and charges a huge marked up price, profits automatically follow.

One way to demonstrate how slim retail margins are is to use real money and mock invoices for the expenses normally

encountered. As a former business person, I know there is no better illustration of how delicate and difficult it is to hold

onto cash and profits than to have your own money and expenses and then see the process unfold until you are left with

the 3 percent margin that is near the industry norm.

For this illustration, I use $100 in cash and three student volunteers. I suppose one could use play money if necessary

with the understanding that they can trade the play money profits for real cash at the end of the game, but I find that the

acquisition and then subsequent payout of the real money results in a more realistic demonstration. Two of the student

volunteers act as partners in a small specialty retail firm. I ask for two students who are interested in the retail business

and who want to sell me an item for $100 with the understanding that they can split the profits. The third student is the

firm’s controller. In my example, I use apparel as my specialty store’s merchandise item because this is an area I am

familiar with, as are most students. But other items may be used.

The students come to the front of the room where I would buy an apparel item (e.g., a sports jacket) for $100 in cash. I

give the $100 to one the two partners, but at the same time I give the controller a stack of bills that have to be paid today.

The controller is instructed to present the invoices in the following order to the partners, and of course, payment is made

directly back to me. I use card–size documents with large letters noting “Invoice” and the nature of the debt. These

invoices and amounts are presented in order, as follows:

Cost of Merchandise $50

Markdowns on Other Goods $10

Advertising $3

Rent $10

Salaries and Wages (give $1 to the Controller) $15

Insurance and Local Taxes $2

Utilities $2

Travel to Market $2

Misc. Supplies (sacks, tickets, hangers) $1

Shrinkage $2

(The students should be left with $3 at this point)

Each invoice provides an opportunity to discuss a cost issue and possible strategic alternatives. For instance, the cost of

merchandise indicates only a 50 percent initial markup; perhaps the students should have tried for a higher markup. The

markdowns on other goods and advertising can be used as an example of the cost of having a sale, and also perhaps the

reason for their current customer’s store visit. While the cost of rent, salaries and wages, insurance, utilities, and

miscellaneous supplies might be somewhat exaggerated, they demonstrate much of the unavoidable costs of a retail

business. The travel to market and shrinkage costs are deliberately high to demonstrate the need for control in the retail

Chapter 14 ♦ Retailing 15

organization. Maybe on the next market trip our young businesspeople will not stay at the Plaza Hotel in New York City.

Also, they might work in the store more themselves to reduce the salaries expense and to control shrinkage better. Oh, by

the way, do not forget to collect $1 in federal income taxes from the students. This will leave them with a dollar each in

profits. While this is well under industry norm, there are probably many small retail firms with years just like the one just

demonstrated.

John T. Drea, Western Illinois University

Mandeep Singh, Western Illinois University

ANALYZING RETAILING ON THE INTERNET

The Internet is an increasingly important marketing tool for a variety of products and services. We believe students

entering marketing careers in the coming years will need to know how the Internet can be used to market products to

target markets across the globe. To prepare our students for this challenge, we developed “Analyzing Retailing on the

Internet” for use in our introductory marketing course.

The assignment has two goals: to teach students how to use Internet search engines, and to require students to think

analytically about how to effectively market products over the Internet. Our experiences suggest that the assignment is

both a useful learning exercise and one that students like.

How It Works

Students are assigned by the instructor to one of seven product or service categories: shoes, men’s clothing, women’s

clothing, sporting goods, furniture, financial products, and travel. (We match categories to student interests whenever

possible.) The assignment itself has three parts.

Part 1: Students are instructed to use a search engine to locate and compile a list of as many retailers as they can find

who sell their assigned product category on the Web. Only Internet retailers in the assigned category who sell products or

services directly online may be included in the list (i.e., no mailing or faxing order forms). Students compile and submit

a list of these sites and the corresponding URL addresses.

Part 2: Next, students select five of the above sites and describe them in detail: What is the range of products sold? How

user-friendly was the site? Was it interesting? Informative? These are written in an essay format.

Part 3: Finally, students are required to use the knowledge gathered from completing parts one and two to address each

of the following questions:

(a) What are the characteristics of a good Web site?

(b) Which site in particular do you think is most likely to be successful in reaching its target market, and why?

Assignments are graded according to the number of correct sites found relative to each product category (i.e., we don’t

expect a student assigned to furniture to find as many sites as one assigned to travel), and the completeness of the

descriptions in parts 2 and 3. We also spot-check addresses to see if they are accurate—students lose points for each

incorrect URL.

The Results

Follow-up research was conducted with two sections of introductory market students concerning the assignment. The

results indicate that the assignment meets its stated goals. Nearly all students (86.5%) indicated the assignment was a

positive learning experience (a score of 5–7 on a seven-point scale). Students also devoted a considerable amount of time

to the assignment (over 50% spent more than five hours completing the assignment, with 22% spending over nine hours),

even though it was worth less than 6% of the course grade. The assignment grade was positively correlated with the

amount of time spent on the assignment (r = .73, p = .000), suggesting that students do better on the assignment when

they devote more time. Student written comments indicated the assignment was a considerable amount of work, but it

was also a fun and useful learning experience.

16 Chapter 14 ♦ Marketing Channels and Retailing

Mark B. Houston, Bowling Green State University

Beth A. Walker, Arizona State University

BRINGING THE RETAIL MIX TO LIFE

When students are first introduced to the retail mix (store location, pricing, merchandise variety and assortment,

promotion and layout, and customer service and personal selling) in a Retail Management course, they may not

recognize the degree to which the competitiveness of a business depends on these elements. “Oh yeah, this is kind of like

that marketing mix we saw in Principles. What was that fourth P, anyway?”

Beyond providing a definition of the mix [i.e., “the combination of factors retailers use to satisfy customer needs and

influence their purchase decisions” (Levy and Weitz 1995, p. 22)], there is a simple, effective exercise that helps students

recognize the practical importance of the mix. The insights they develop energize later class sessions that explore each

mix element.

To facilitate involvement, students are asked to form groups (three to five students) and to discuss and list specific

responses to the following questions:

• What distinguishes . . .

Gap from Walmart?

Kroger from Barney’s (a local convenience store chain)?

the Union Cafeteria from Kaufman’s (a local sit-down restaurant)?

McDonald’s from Rally’s (a drive-through hamburger chain)?

Finders from Madhatters (two popular local music retailers)?

• Why would anyone buy a Sunbeam toaster from Elder Beerman (a regional department store chain) when they

could buy the same thing at Walmart at a lower price? Why doesn’t Walmart sell all the Sunbeam toasters sold

in America?

After 10 minutes or so, I ask the class for their responses. Since most students have frequented all of the retailers chosen,

they have incorporated their personal insights into identifying the differences in each set of retailers. A large number of

students get involved in providing responses and giving examples. I list on the board the key differences identified,

highlighting those responses that are mentioned frequently. The list usually grows to 15–20 items, containing things like

“different types of merchandise,” “big differences in quality,” “they provide a lot more personal attention,” “they are

trying to reach different customers,” “price,” “number of different items,” “image or prestige,” “convenience,” and so

forth. As the discussion begins to slow, I ask students if the list on the board reminds them of anything. After a few

moments of stunned silence, someone will recognize, “Hey, that’s the retail mix we talked about at the end of class last

time.” As this statement soaks into students’ minds across the classroom, the retail mix is transformed from a list in the

textbook to a living, real-world phenomenon. I show how their individual responses can be neatly categorized into the

retail mix. Students have, for themselves, just described how retailers use the retail mix to differentiate their stores from

competitors’ and to target their efforts toward specific target markets.

Discussion of the questions regarding the toaster illustrates that it is not just the core product or service that drives

consumer choice, but that other elements of the retail mix have significant influence. Individual mix elements have

differing relevance across target markets.

This type of activity is also very useful for introducing the marketing mix (the four Ps) in a Principles of Marketing class.

Reference: Levy, Michael and Barton A. Weitz (1995), Retail Management. 2nd ed., Chicago: Irwin.

Karen L. Stewart, Richard Stockton College

RETAIL STORE CLASSIFICATIONS

Chapter 14 ♦ Retailing 17

I have typically found it quite tedious to lecture on the various types of retail stores. This term I decided to try a different

approach. (I alerted the students prior to starting the retailing chapter that it was important to read the chapter prior to

coming to class since we would be doing an in-class exercise.) I made a chart for the students for work on during class.

The chart had seven headings across the top of the page: 1) name of store; 2) ownership (chain, independent, franchise);

3) level of service (limited, moderate, extensive); 4) product assortment (narrow, wide); 5) depth of assortment (shallow,

deep); 6) price (low, moderate, high); and 7) major type of store (department, specialty, discount, etc.). Students were

told to begin by listing in the first column 10 stores that reflect where they shop and that are somewhat different from

one another. Then they were instructed to fill out the remainder of the table. The class came up with a variety of stores—

some very familiar to all; some that were truly out of the ordinary. Once in a while, they’d come up with something I

didn’t expect like the Home Shopping Network. That presented the opportunity to introduce nonstore retailing. It also

quickly became apparent that retailing is dominated by chain stores. We could also see how some of the classification

lines have blurred over time.

Also, I attached several other handouts to the chart discussed above. One page was a floor plan for a typical hypermarket.

The other pages consisted of the following questions:

1. List anything you have purchased in the last few years from a direct mail offer. This would include items purchased

from so-called “junk” mail.

2. Lists items purchased via catalogs over the last few years.

3. Have you purchased anything online? If so, what? Have you considered purchasing anything online, even if you

didn’t follow through? If so, what?

4. What advantages and disadvantages do you associate with buying from a supercenter?

5. How can smaller stores attempt to compete with superstores?

6. Attached is a copy of a floor plan for a hypermarket. Hypermarkets have been very successful in Europe but have

failed in the United States. (Note: The Carrefour in the Philadelphia area closed in 1994.) What is it about

Americans’ shopping habits that would help to account for this failure?

7. What reasonable explanations account for vending machine prices being so high? Or is this just marketers taking

advantage of your hunger and thirst?

8. Name a successful retail business in your area. What marketing strategy has led to its success?

9. What retail store do you most dislike? What accounts for your negative feelings?

I found that this approach took about the same total time as lecturing on retailing but the overall learning experience as

more meaningful and interesting for the students.

18 Chapter 14 ♦ Marketing Channels and Retailing

Part 4 – Integrated Case Assignments

MARKETING MISCUES

MICROSOFT IMPLIES DISTRIBUTION OF ANGRY BIRDS ON WINDOWS PHONE 7

Rovio Mobile is a leading independent developer of wireless games. The company has developed games for

companies such as Electronic Arts, Nokia, Vivendi, NAMCO Bandai, and Mr. Goodliving/Real Networks. As a

leading provider to platforms such as the iOS and Android, the company was not pleased when Microsoft included a

screenshot of an Angry Birds icon in promotional material on the Windows Phone 7 Web site. According to Rovio,

the two companies had not agreed that the Windows Phone 7 would be a distributor of the Angry Birds game.

Rovio Mobile and Angry Birds

Rovio Mobile started in the early 2000s when three students at the Helsinki University of Technology participated in

a mobile game development competition sponsored by Nokia and Hewlett Packard. The students won the

competition with a real-time multiplayer game called King of the Cabbage World and started their own company

called Relude. The first commercial realtime multiplayer mobile game in the world, King of the Cabbage World was

later sold to Digital Chocolate and renamed Mole War.

After a round of angel investment in 2005, the company changed its name to Rovio Mobile. This was the beginning

of the development of numerous successful games that gave the company a reputation for innovative game design.

The company’s ability to create both two– and three-dimensional games meant that it could offer product for a

variety of platforms, including Nokia’s N–Gage, Flash, and Apple’s iOS.

Angry Birds was released in December 2009 for Apple’s iOS platform. The game is a puzzle video game in which

players use slingshots to launch birds with the intent of destroying pigs on the playing field. Angry Birds can be

played on personal computers, gaming consoles, and touchscreen-based smartphones. Since its release, over six

million copies of the smartphone game have been purchased from the iTunes Store, making it one of the top-selling

paid applications. The Android version of Angry Birds was downloaded over two million times in the first weekend

of its release, and Rovio is said to receive around $1 million revenue per month from the advertising that appears in

the Android version of the game.

The popularity of the Angry Birds game is exemplified by the download reports and logged playing time. According

to the company, there are more than one million hours of game time logged on the iOS version of the game. Other

reports suggest that no other game even comes close to having the following that Angry Birds captures in the

marketplace. The game’s success is attributed to a successful combination of addictive gaming, comical

presentation, and low price.

Windows Phone 7

Launched in 2010 and developed by Microsoft, Windows Phone 7 is a re–branding of Windows Mobile and is

targeted to the consumer marketplace instead of the business marketplace. As such, it competes with the Android

and the Apple platforms. Nokia is a major partner with Windows Phone 7. Since the phone was developed by

Microsoft, it has access to Outlook, Internet Explorer, and, of course, Xbox Live. With Angry Birds holding the top

spot for mobile accessed games, it was not surprising that Microsoft wanted to distribute the game on the Windows

Phone 7.

Microsoft, however, apparently jumped the gun on saying that it would be a distributor of Angry Birds. Just days

before the actual launch of the phone, with an Angry Birds icon on the phone’s launch site, Rovio said that it had not

committed to doing a Windows Phone 7 version of the game and that Microsoft had posted the icon without

permission. Interestingly, it was not that Rovio did not plan to do a Windows Phone 7 version of Angry Birds—it

was that the two companies had not come to such an agreement yet.

SOURCES: Rovio Mobile Web site, http://rovio.com (Accessed May 2, 2011); Jon Mundy, “Interview: Rovio on the Origin of Angry Birds,

Being Inspired by Swine Flu, and Why You May Never See an Angry Birds 2,” Pocket Gamer, October 13, 2010,

www.pocketgamer.co.uk/r/Various/Angry+Birds/news.asp?c=24243; Ian Paul, “Angry Birds Maker Is Angry with Microsoft,” PCWorld,

October 11, 2010, www.pcworld.com/article/207421/angry_birds_maker_is_angry_with_microsoft.html; Helen Popkin, “Angry Birds Fail to

Negotiate Peace Treaty,” Technolog, November 22, 2010, http://technolog.msnbc.msn.com/_news/2010/11/22/5509508-angry-birds-fail-to–

negotiate-peace-treaty.

Chapter 14 ♦ Retailing 19

Open-ended questions

1. Describe the channel of distribution for Angry Birds.

Rovio creates an Angry Birds version for various platforms. Customers do not obtain the game generically from

2. Who has the channel power in the distribution of online games?

The popularity of Angry Birds has clearly given Rovio the channel power, regardless of provider/middleman.

Close-ended questions

TRUE/FALSE

1. Rovio Mobile, in its ongoing negotiations with Microsoft described in the case, was being courted by the software giant

to sell Angry Birds to the users of its Windows Phone 7 platform.

2. None of the classic marketing discrepancies apply to the marketing channels for a downloadable product such as Angry

Birds.

3. At this writing, you cannot download Angry Birds for your BlackBerry phone. As yet Angry Birds can’t achieve the kind

of economies of scale it could producing the app.

4. Online sales of apps should always be seen as a direct channel to consumers.

MULTIPLE CHOICE

1. What Microsoft “jumped the gun” on in making it possible for users of its Windows Phone 7 to play Angry Birds can

best be described as __________.

intellectual theft, at least temporarily

an intermediary

a reseller

a wholesale distributor

a franchisee

2. Just like a company that manufacturers the smartphones on which users can play Angry Birds, Rovio Mobile benefits

from the principle of __________ in distributing its product via Microsoft, the App Store, and Android Market?

economies of scale

intermediaries

contact efficiency

overcoming discrepancies

all of the above

3. Which of the following channel functions applies in the download delivery of Angry Birds?

logistics

facilitating

promoting

assorting

all of the above

4. Because the Angry Birds app is sold through __________ you will probably never see it sold __________.

wholesale distributors/directly to consumers

virtual distributors/in a box

virtual distribution/in spinoff forms for non–phone platforms

retail channels/as a standalone product

app stores alone/Game Stopper and the like

Chapter 14 ♦ Retailing 21

5. Given that Angry Birds is available for iPhones, Microsoft, and Android phones, it is fair to say it enjoys __________.

multiple distribution

economies of scale in regard to marketing channels

high-profile placement

a price monopoly

market segmentation

6. Which of the following nonstore outlets would best describe Microsoft’s mode of selling Angry Birds?

automatic vending

online retailing

online vending machine

direct retailing

none of the above since an app store is a store

CRITICAL THINKING CASE

CUTCO CUTLERY CORPORATION: DIRECT TO CONSUMER FOR OVER 60 YEARS!

CUTCO Corporation, the largest manufacturer and marketer of high-quality kitchen cutlery and accessories in the

United States and Canada, celebrated its 60th anniversary in 2009. With the design and manufacture of the highest–

quality product as its primary objective, over 100 kitchen cutlery products are sold under the CUTCO name. The

company also carries a line of cookware, sporting/pocket knives, and garden tools. The CUTCO corporate family

consists of:

• CUTCO Corporation—parent company

• CUTCO Cutlery Corporation—manufacturer of CUTCO products since 1949

• Vector Marketing Corporation—exclusive marketer of CUTCO products, which are sold direct to

consumers

• CUTCO International, Inc.—marketer of CUTCO products internationally

• KA-BAR Knives, Inc.—maker of quality sporting knives

• Schilling Forge—manufacturer of precision forgings

All businesses within the corporate family, except for Schilling Forge, are located in Olean, New York (USA),

where the company has over 700 manufacturing and administrative employees. Schilling Forge is located in

Syracuse, New York. Only a very small percentage of the company’s items are manufactured outside the United

States and that is only when the company cannot find a partner in the United States that meets stringent quality

standards while simultaneously meeting the pricing needs of the company and its customers. The quality built into a

CUTCO product at the point of manufacturing is reinforced by the company’s direct–to-consumer channel of

distribution, which enables high-quality consumer engagement during the selling process.

The Producer

CUTCO’s commitment to quality and innovation is evident throughout every step of the manufacturing process—

from the selection of steel to final inspection. The company stands behind each and every product with a FOREVER

satisfaction guarantee. The guarantee has four components:

22 Chapter 14 ♦ Marketing Channels and Retailing

1. FOREVER Performance Guarantee

2. FOREVER Sharpness Guarantee

3. FOREVER Replace Service Agreement for Misuse or Abuse

4. 15-Day Unconditional Money-Back Guarantee

CUTCO Cutlery’s American–made products and the hard-working craftsmen and women dedicated to creating this

high-quality kitchen cutlery were featured on the Travel Channel’s John Ratzenberger’s Made in America program.

With its reputation for high quality, accompanied by a FOREVER satisfaction guarantee, CUTCO Cutlery

Corporation distributes its products direct to the consumer via its Vector Marketing sales force.

The Consumer

CUTCO Cutlery Corporation has approximately 18 million satisfied consumers in North America. Customer

response to CUTCO research directs the development of new products and services and the sharing of personal

stories about special times with family and friends serves as an inspiration to everyone in the company. Thousands

of customers have written letters telling the company about the role the company has played in their lives. These

customer letters tell how CUTCO has helped them slice and dice fruits and vegetables for weeknight dinners, create

weekend party fare, and chop and carve food for holidays, birthdays, and anniversaries. CUTCO cutlery is given as

gifts to newly married sons and daughters and is handed down from generation to generation as a family heirloom.

The customers praise the quality of CUTCO and offer thanks for the comfort of the ergonomically designed handles

and the CUTCO FOREVER Guarantee.

Product to Consumer Direct Channel via Vector Marketing Corporation

Unlike many competitive cutlery products, CUTCO cutlery products are not available in mass merchandise or

specialty stores. Boasting annual sales of over $200 million, Vector Marketing Corporation is a direct sales firm and

the sole distributor of Cutco Cutlery. The independent sales representatives of Vector Marketing Corporation are

largely college students from campuses across the nation. According to a company spokesperson, Vector

Marketing’s sales force is a group of dynamite individuals who represent the company to the consumer in the same

high-quality fashion as the CUTCO product. The sales representatives contact potential consumers via referrals,

referred to as the “friends of friends” approach. Conversely, consumers can contact the company directly and be

connected to a salesperson in the same geographic region.

Divided into six regions (Northeast, Midwest, Eastern, Central, Southwest, and Western), Vector Marketing has

over 300 offices across the United States and Canada. Regional headquarters are in Philadelphia (Pennsylvania),

Detroit (Michigan), Milwaukee (Wisconsin), Dallas (Texas), Austin (Texas), San Diego (California), and Toronto

(Canada). Vector Marketing Corporation belongs to the Direct Selling Association (DSA), whose members are

leading companies engaged in direct selling in the United States. All DSA members adhere to a strict code of ethics

and promote a high standard of integrity in direct selling.

From production through sales, the CUTCO Corporation takes ownership of its products. Using this direct–to–

consumer channel enables the company to guarantee quality from production to consumption.

SOURCES: CUTCO Web site, www.cutco.com (Accessed February 28, 2011); Vector Marketing Web site, www.vectormarketing.com (Accessed February 28, 2011).

Open-ended questions

1. Why would a company such as CUTCO Cutlery opt for the diect channel instead of the retailer channel for

its consumer products?

Direct selling is a method of marketing and retailing products and services directly to the consumer via person–

to-person or party plan selling and away from permanent retail locations. Direct selling offers customers the

Chapter 14 ♦ Retailing 23

2. What other companies are similar to CUTCO Cutlery in its approach to direct retailing?

Direct sales representatives are generally independent, self-employed individuals. They earn commissions and

pay their own expenses and taxes. Other companies that use a direct selling sales force for retailing are found

easily on the Direct Selling Association’s Web site (www.dsa.org). Examples of large and well-known direct

selling companies are:

Closed Ended Questions

TRUE/FALSE

1. CUTCO’s college student sales force performs the role of channel members.

2. In a strict sense, only CUTCO enjoys an economy of scale, not its direct sellers.

3. Students who work for Vector Marketing are a form of selective distribution.

4. CUTCO is the channel member with channel control and power over the student sales force.

MULTIPLE CHOICE

1. Vector Marketing is a(n) __________.

24 Chapter 14 ♦ Marketing Channels and Retailing

independent direct marketer for CUTCO

merchant wholesaler

CUTCO broker

corporate subsidiary of CUTCO

CUTCO agent

2. CUTCO is an example of a company that concentrates on __________ to achieve its economy of scale in cutlery and

related implements.

distribution

direct sales

franchising with college students

manufacturing

all of the above

3. “Products that are more complex, customized, and expensive” benefit from direct marketing channels. Knives and

scissors are fairly low-tech. Why does CUTCO use direct sales?

Because it is located in New York State.

Because its products are difficult to find

CUTCO sells to an exclusive market—newlyweds, professional chefs, cooking schools, and the like.

Direct sales forces can demonstrate CUTCO’s product factors over cheaper retail and imported cutlery

to justify its price.

Actually, the technology used to make high-quality CUTCO products at the factory is customized and

complex.

4. Which of the following businesses does not use direct retailing?

Vector Marketing

Tupperware

Pampered Chef

Amway

CUTCO independent sales representatives

5. Why are CUTCO sales people not small-scale franchisees?

They do not establish retail outlets.

They only deal with Vector Marketing for the only product they sell.

They do not pay a royalty.

They do not pay Vector Marketing for the right to sell CUTCO products.

all of the above

6. In the retailing mix, which of the following only applies to CUTCO’s success?

price

place

product

personnel

promotion