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Chapter 4: Retailing
20
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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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
Chapter 4: Retailing
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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
Chapter 4: Retailing
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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.
Chapter 4: Retailing
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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
Chapter 4: Retailing
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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.
Chapter 4: Retailing
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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
Chapter 4: Retailing
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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
Chapter 4: Retailing
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
Chapter 4: Retailing
29
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 _____.
a.
intellectual theft, at least temporarily
b.
an intermediary
c.
a reseller
d.
a wholesale distributor
e.
a franchisee
Chapter 4: Retailing
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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?
a.
economies of scale
b.
intermediaries
c.
contact efficiency
d.
overcoming discrepancies
e.
all of the above
3. Which of the following channel functions applies in the download delivery of Angry Birds?
a.
logistics
b.
facilitating
c.
promoting
d.
assorting
e.
all of the above
4. Because the Angry Birds app is sold through _____ you will probably never see it sold
_____.
a.
wholesale distributors/directly to consumers
b.
virtual distributors/in a box
c.
virtual distribution/in spinoff forms for non-phone platforms
d.
retail channels/as a standalone product
e.
app stores alone/at Game Stopper and the like
Chapter 4: Retailing
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5. Given that Angry Birds is available for iPhones, Microsoft, and Android phones, it is fair to
say it enjoys _____.
a.
multiple distribution
b.
economies of scale in regard to marketing channels
c.
high-profile placement
d.
a price monopoly
e.
market segmentation
6. Which of the following nonstore outlets would best describe Microsoft’s mode of selling
Angry Birds?
a.
automatic vending
b.
online retailing
c.
online vending machine
d.
direct retailing
e.
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
Chapter 4: Retailing
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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
Chapter 4: Retailing
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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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:
Chapter 4: Retailing
35
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• 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.
Chapter 4: Retailing
36
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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) _____.
a.
independent direct marketer for CUTCO
b.
merchant wholesaler
c.
CUTCO broker
d.
corporate subsidiary of CUTCO
e.
CUTCO agent
2. CUTCO is an example of a company that concentrates on _____ to achieve its economies
of scale in cutlery and related implements.
a.
distribution
b.
direct sales
c.
franchising with college students
d.
manufacturing
e.
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?
Chapter 4: Retailing
37
a.
Because it is located in New York State.
b.
Because its products are difficult to find
c.
CUTCO sells to an exclusive market—newlyweds, professional chefs, cooking
schools, and the like.
d.
Direct sales forces can demonstrate CUTCO’s product factors over cheaper retail
and imported cutlery to justify its price.
e.
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?
a.
Vector Marketing
b.
Tupperware
c.
Pampered Chef
d.
Amway
e.
CUTCO independent sales representatives
5. Why are CUTCO salespersons not small-scale franchisees?
a.
They do not establish retail outlets.
b.
They only deal with Vector Marketing for the only product they sell.
c.
They do not pay a royalty.
d.
They do not pay Vector Marketing for the right to sell CUTCO products.
e.
all of the above
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6. In the retailing mix, which one of the following applies to CUTCO’s success?
a.
price
b.
place
c.
product
d.
personnel
e.
promotion
