978-1337116800 Chapter 14 Solution Manual Part 2

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Chapter 4: Retailing

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 groups uniform/even in number 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

as to how their partnership should be organized and structured. Lastly, the potential franchisees

should develop some general goals and standards for obtaining a franchise.

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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, it can be 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 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. There is no better illustration of how delicate and difficult it

is to hold onto cash and profits than to use 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, use $100 in cash and three student volunteers. One could use play money if

necessary with the understanding that students can trade the play money profits for real cash at

the end of the game; 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. Ask for two students who are interested in the retail business and who want to sell an

item for $100 with the understanding that they can split the profits. The third student is the firm’s

controller. Apparel is used as the specialty store’s merchandise item because this is an area in

which most students are familiar with. 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 shown below.

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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 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. It

is believed that 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

students for this challenge, “Analyzing Retailing on the Internet” for use in the introductory

marketing course has been developed.

The assignment has two goals; first, to teach students how to use Internet search engines, and

second, to require students to think analytically about how to effectively market products over

the Internet. The assignment is a useful learning exercise and usually one that students like.

How It Works

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Students are assigned by the instructor to one of seven product or service categories. These

categories can include 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 website?

b. Which site in particular do you think is most likely to be successful in reaching its target

market, and why?

c. Which site was your favorite, 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 marketing students

involved in the assignment. The results indicated that the assignment met its stated goals. Nearly

all students (86.5 percent) 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 percent spent more than five hours completing the assignment, with 22

percent spending over nine hours), even though it was worth less than 6 percent 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 that the assignment was a considerable

amount of work, but it was also a fun and useful learning experience.

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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?

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

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

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

What distinguishes 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, 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. On the board list 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, 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

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is transformed from a list in the textbook to a living, real-world phenomenon. 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

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 to 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.

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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 was more meaningful and interesting for the students.

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 website. 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

real-time 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

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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 in 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

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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

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

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

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downloadable product such as Angry Birds.

3. As of this writing, you cannot download Angry Birds on to your BlackBerry phone. As yet,

Angry Birds can’t achieve the economies of scale that it could while producing the app.

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

Multiple Choice

1. What Microsoft did to make 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

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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/at Game Stopper and the like

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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

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Cutco Cutlery Corporation: Direct to Consumers 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 several

companies.

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:

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

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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.

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consumption.

Sources: CUTCO website, www.cutco.com (Accessed February 28, 2011); Vector Marketing

website, www.vectormarketing.com (Accessed February 28, 2011).

Open-ended questions

1. Why would a company such as CUTCO Cutlery opt for the direct 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

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 website

(www.dsa.org). Examples of large and well-known direct selling companies are:

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• Shaklee Corporation

There are 202 companies that are members of the Direct Selling Association. Students

should be directed to the website to look at the types of products sold via direct selling

retailing.

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 economies 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.

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PTS: 1 OBJ: 14-3 TOP: AACSB Reflective Thinking

KEY: CB&E Model Distribution MSC: BLOOMS Level I Knowledge

Multiple Choice

1. Vector Marketing is a(n) _____.

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 economies

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?

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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 salespersons 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 one of the following applies to CUTCO’s success?

price

place

product

personnel

promotion