CHAPTER 12
BUYING MERCHANDISE
ANNOTATED OUTLINE
INSTRUCTOR NOTES
I. Introduction
• After creating an assortment plan for the category,
forecasting sales, and developing a plan outlining the flow
of merchandise, the next step in the merchandise
management process is to buy the merchandise.
• An examination of the legal, ethical, and social
responsibility issues surrounding the buying of
merchandise must also be considered.
II. Brand Alternatives
• Retailers and their buyers face a strategic decision about
the mix of national and private-label brands sold
exclusively by the retailer.
LO 12-1 Identify the branding
options available to retailers.
See PPT 12–3
Ask students to name several of
their favorite brands. What
appeals to them about these
brands? In contrast, what brands
do they truly dislike? Ask for their
reasoning.
A. National Brands
Ask students which brands on
their “list of favorite brands” are
program to establish an appealing brand image.
• Some vendors use an umbrella or family brand associated
with their company and a subbrand associated with the
product.
B. Store Brands
• Store brands (also called private-label brands, house
brands or own brands) are products developed by
retailers.
• In recent years, as the size of retail firms has increased
through growth and consolidation, more retailers have the
economies of scale to develop store-brand merchandise
and to use this merchandise to establish a distinctive
identity. Also, manufacturers and national-brand suppliers
are more willing to accommodate the needs of retailers
and develop exclusive private labels for them.
See PPT 12–5
Ask students which brands on
their “list of favorite brands” are
store brands.
manufacturer brands in some
items, e.g., jeans (Gap versus
Levi’s), shoes (Nike versus
Payless), and cheese (Kraft versus
local supermarket brand). What
are the reasons behind these
differences in perceived brand
reputations and quality? When
1. Premium Store Brands
• Premium store brands offer the consumer a product that is
comparable to a manufacturer’s brand quality, sometimes
with modest price savings, such as Kroger’s Private
Selection.
2. Exclusive Brands
• An exclusive brand is a brand developed by a national-
brand vendor, often in conjunction with a retailer, and sold
3. Copycat Brands
• Copycat brands imitate the manufacturer’s brand in
appearance and packaging, generally are perceived as
lower quality, and are offered at lower prices. For instance,
CVS or Walgreens brands are placed next to the
manufacturer’s brands and often look like them.
B. Generic Brands
C. National Brands or Store Brands?
• When determining the mix between national versus store
brands, retailers consider the effect on their overall
assortment, profitability, and flexibility.
• Buying from vendors of national brands can help retailers
build their image and traffic flow and reduce their
selling/promotional expenses. Retailers need to spend
relatively less money selling and promoting national
brands.
See PPT 12–7 and 12–8
1. Store Brands Enhance and Expand Assortments
• Retailers examine their assortments to make sure they are
providing what their customers want. They may introduce
2. Profitability
• Offering store brands has several advantages: (1)
exclusivity boosts store loyalty, (2) well known, highly
desirable store brands enhance the retailer’s image and
draw in customers, (3) relatively lower prices for
consumers, (4) fewer restrictions on merchandise display,
promotion or pricing, and (5) potentially greater gross
margin opportunities.
3. Flexibility
• National brands can limit a retailer’s flexibility. Vendors of
strong brands can dictate how their products are displayed,
advertised, and priced
III. Buying National-Brand Merchandise
LO 12-2 Describe how retailers
• Retail buyers of national brands meet with vendors, review
the merchandise they have to offer at wholesale markets,
and place orders.
buy national brands.
See PPT 12–9
A. Meeting National-Brand Vendors
See PPT 12–10
1. Wholesale Market Centers
• For many types of merchandise, particularly fashion
apparel and accessories, buyers regularly visit with vendors
in established market centers.
2. Trade Shows
• Trade shows provide an opportunity for buyers to see the
latest products and styles and to interact with vendors.
• Trade shows are typically staged at convention centers not
associated with wholesale market centers. Vendors display
their merchandise in designated areas and have sales
representatives, company executives, and sometimes
celebrities available to talk with buyers as they walk
around the exhibit area.
B. National–Brand Buying Process
• When attending market weeks or trade shows, buyers and
See PPT 12–11
their superiors typically make a series of appointments
with key vendors.
IV. Developing and Sourcing Store-Brand Merchandise
• Retailers use a variety of different processes to develop
and buy store brands.
LO 12-3 List the issues retailers
consider when developing and
sourcing store-branded
merchandise internationally.
A. Developing Store Brands Larger retailers that offer a significant
amount of store-brand merchandise, like Kroger, J.Crew, H&M,
and IKEA have large divisions dedicated to managing their
store-brand merchandise all the way from design to
manufacture.
See PPT 12–12, 12–13
B. Sourcing Store-Brand Merchandise
• Once the decision has been made about which and how
much store-brand merchandise will be acquired, the
designers develop a complete specification and work with
the sourcing department to find a manufacturer for the
merchandise.
See PPT 12–14
1. Costs Associated with Global Sourcing Decisions
• Retailers use production facilities located in developing
economies for much of their private-label merchandise
because of the very low labor costs in these countries.
times, and increased transportation costs.
• A tariff, also known as a duty, is a tax placed by a
government upon imports. Import tariffs have been used
to shield domestic manufacturers from foreign competition
and to raise money for the government.
2. Managerial Issues Associated with Global Sourcing
Decisions
• Whereas the cost factors associated with global sourcing
are easy to quantify, some more subjective issues include
quality control, time to market, and sociopolitical risks.
Ask students to discuss barriers to
the development of global
collaborative supply chain
relationships.
3. Resident Buying Offices
• Many retailers purchasing private-label merchandise use
resident buying offices, which are organizations located in
major market centers that provide services to help retailers
buy merchandise.
1. Reverse Auctions
• Rather than negotiating with a specific manufacturer to
produce their store-brand merchandise, some retailers use
reverse auctions to get quality store-brand merchandise at
low prices.
Ask students to consider the costs
and benefits of the reverse auction
from both retailer’s and vendor’s
sides.
manufacturing firms.
• In reverse auctions, retail buyers provide specifications for
what they want a group of potential vendors to bid on. The
competing vendors then bid on the price at which they are
willing to sell until the auction is over.
V. Negotiating with Vendors
• When buying national brands or sourcing store-brand
merchandise, buyers and firm employees responsible for
sourcing typically enter into negotiations with suppliers.
LO 12-4 Understand how
retailers prepare for and
conduct negotiations with their
vendors.
See PPT 12–17
A. Knowledge Is Power
• The more the buyer knows about the retailer’s and
vendor’s situations, as well as trends in the marketplace,
the more effective he or she will be in negotiations.
B. Negotiation Issues
• Buyers should be prepared to cover a variety of issues in
their meeting with the vendor including: (1) price and gross
margin, (2) additional markup opportunities, (3) terms of
purchase, (4) exclusivity, (5) advertising allowances, and (6)
transportation.
Ask students to consider the
positions of both the buyer and
the vendor on each of these six
issues. What position will each of
them bring to the negotiation?
1. Price and Gross Margin
See PPT 12–19
profits.
• Although the wholesale price the buyer negotiates might
enable achievement of gross margin goals, if the
merchandise not sell as expected, the merchandise may
have to be put on sale, falling short of the margin goal.
• When a vendor agrees to pay that fee, the retailer will
stock the product for a period of time, assess its sales and
margin, and, if successful, continue to offer the product
after the trial period.
• Vendors may view slotting allowances as extortion, and
small vendors believe these fees preclude their access to
retail stores. However, retailers, and most economists,
agree that slotting allowances are a useful method to
determine which new products the retailer should carry.
2. Additional Markup Opportunities
• As part of the negotiation, the vendor may offer the buyer
discounted prices to take excess merchandise.
3. Terms of Purchase
• The buyer hopes to negotiate for a long period in which to
pay for the merchandise to improve cash flow, lower
liabilities, and even reduce interest expense if it is
borrowing money to pay for its inventory. In contrast, the
vendor would like to be paid soon after the merchandise is
delivered.
4. Exclusivity
arrangement so that no other retailer can sell the same
item or brand. This helps the retailer differentiate from
competitors and realize higher margins due to reduced
price competition.
5. Advertising Allowances
• Retailers often share the cost of advertising through a
cooperative arrangement with vendors known as
cooperative (co-op) advertising – a program undertaken by
a vendor in which the vendor agrees to pay for all or part
of a pricing promotion.
6. Transportation
C. Tips for Effective Negotiatiating
See PPT 12–20
1. Have at Least as Many Negotiators as the Vendor
• Retailers have a psychological advantage at the negotiating
table if the vendor is outnumbered. At the very least, the
negotiating teams should be the same size.
2. Choose a Good Place to Negotiate
3. Be Aware of Real Deadlines
• Recognizing important deadlines will help the parties come
to closure in a timely manner.
4. Separate the People from the Problem
5. Insist on Objective Information
• The best way to separate people from business
information is to rely on objective information.
6. Invent Options for Mutual Gain
requires quick thinking at the bargaining table.
7. Let Them Do the Talking
• There’s a natural tendency for one person to continue to
talk if the other person involved in the conversation
doesn’t respond. If used properly, this can work to the
negotiator’s advantage.
8. Know How Far to Go
9. Don’t Burn Bridges
• The world of retailing is relatively small. Neither buyer nor
vendor can afford to be known in the trade as unfair, rude,
or worse.
10. Don’t Assume
• To be certain there are no misunderstandings, participants
VI. Strategic Relationships
• Maintaining strong vendor relationships is an important
method of developing a sustainable competitive
advantage.
LO 12-5 Determine why retailers
build strategic relationships
with their vendors.
See PPT 12–21
A. Defining Strategic Relationships
party’s welfare.
• A strategic relationship, also called a partnering
relationship, is when a retailer and a vendor are
committed to maintaining the relationship over the long
term and investing in opportunities that are mutually
beneficial to the parties.
• A strategic relationship is like a marriage. When businesses
form strategic relationships, they are wedded to their
partners for better or worse.
partnering relationships. The
costs of transactions,
negotiations, as well as some
obvious costs of dealing with
partners who have only their own
interests at heart can be
uncovered. By contrast, the
B. Building Partnering Relationships
See PPT 12–22
1. Awareness
• In the awareness stage, no transactions have taken place.
Reputation and image of the vendor can play an important
role in determining if the buyer moves to the next stage.
2. Exploration
3. Expansion
4. Commitment
• If both parties continue to find the relationship mutually
beneficial, it moves to the commitment stage and becomes
a strategic relationship. The buyer and vendor make
significant investments in the relationship and develop a
long-term perspective toward it.
C. Maintaining Strategic Relationships
See PPT 12–23
1. Mutual Trust
• The glue in strategic relationships is trust.
If the retailer doesn’t trust their
vendors, they won’t be willing to
2. Common Goals
• Shared goals give both members of the relationship
incentive to pool their strengths and abilities, and to
exploit potential opportunities between them.
• Common goals also help to sustain the partnership when
expected benefit flows aren’t realized.
Retailer and vendor must have the
same goals, such as maintaining
high product image, limiting
distribution outlets, and
maintaining suggested retail
prices.
3. Open Communication
4. Credible Commitments
• Credible commitments are tangible investments in the
relationship.
• Credible commitments involve spending money to
improve the supplier’s products or services provided to
the customer.
Some vendors help retailers by
investing in store displays, co-op
advertising, and/or inventory
management systems
VII. Legal, Ethical, and Social Responsibility Issues for Buying
Merchandise
LO 12-6 Indicate the legal,
ethical, and social responsibility
A. Legal and Ethical Issues
• Some practices that arise in buyer–vendor negotiations
that may have legal and/or ethical implications are
counterfeit merchandise, gray-market, terms and
conditions purchase, commercial bribery, chargebacks,
buybacks, exclusive dealing agreements, tying contract and
refusal to deal.
12–
1. Counterfeit Merchandise
• Counterfeit merchandise includes goods that are made
and sold without permission of the owner of a trademark
or copyright. Trademarks and copyrights are intellectual
property.
• The nature of counterfeiting has changed over time.
Counterfeit name-brand merchandise, such as women’s
handbags or dresses, has improved in quality, making these
items more expensive and difficult to distinguish from the
real merchandise.
• Also, there is a thriving business in counterfeit information
See PPT 12–26
Ask students what products they
have seen that they think are
counterfeit.
products such as music, software, and Blu-rays. This type of
merchandise is attractive to counterfeiters because it has a
relatively high unit value, is easy to duplicate and
transport, and prompts high consumer demand.
2. Gray-Market, Diverted, and Black-Market Merchandise
• This term applies to merchandise that is diverted from its
legitimate channel of distribution. The diversion often
involves a wholesaler (the diverter) and a discount store
operator.
• Some discount store operators argue that customers
benefit from the lack of restriction on gray-market and
diverted goods because it lowers prices.
• First, they can require all of their retail and wholesale
customers to sign a contract stipulating that they will not
engage in gray marketing.
• Another strategy is to produce different versions of
products for different markets.
See PPT 12–33
Ask students to discuss the
3. Terms and Conditions of Purchase
• The Robinson-Patman Act, passed by the U.S. Congress in
1936, potentially restricts the prices and terms that
4. Commercial Bribery
• Commercial bribery occurs when a vendor or its agent
offers or a buyer asks for “something of value” to influence
purchase decisions.
• To avoid such problems, many retailers forbid employees
to accept any gifts from vendors.
5. Chargebacks
6. Buybacks
• The buyback (also known as stocklift or lift-out) is a
strategy vendors and retailers use to get products into
retail stores.
See PPT 12–32
Ask students “how bad” an ethical
situation this practice seems to
7. Exclusive Dealing Agreements
• Exclusive dealing agreements occur when a manufacturer
or wholesaler restricts a retailer into carrying only its
See PPT 12–34
products and nothing from competing vendors.
• The effect on competition determines the legality of these
contracts.
8. Tying Contract
• A tying contract exists when a vendor and a retailer enter
into an agreement that requires the retailer to take a
product it does not necessarily desire (the tied product) to
ensure it can buy a product it does desire (the tying
product).
See PPT 12–35
Ask students to give an example of
a product that could be
legitimately used in a tying
contract (e.g., McDonald‘s ground
9. Refusal to Deal
• Generally, both a supplier and a retailer have the right to
deal or refuse to deal with anyone they choose. There are
exceptions to this general rule when there is evidence of
anti-competitive conduct by one or more firms wielding
market power.
See PPT 12–36
The issue again is whether the
vendor is large enough to restrict
trade or create a monopoly. See
exclusive territories.
B. Corporate Social Responsibility
• Corporate social responsibility (CSR) describes the voluntary
actions taken by a company to address the ethical, social, and
environmental impacts of its business operations.
• These initiatives and many others suggest a complicated
business model. Some are more expensive than traditional
products and initiatives.
• Greenwashing (doing a green whitewash) or practicing green
sheen, is the disingenuous practice of marketing products or
services as being environmentally friendly with the purpose of
gaining public approval and sales rather than actually
improving the environment.
VIII. Summary
• Buying merchandise sometimes is facilitated by resident
buying offices.
• Buyers of both national brands and store brands engage in
negotiating a series of issues with their vendors, including
prices and gross margin, additional markup opportunities,
terms of purchase, exclusivity, advertising allowances, and
transportation. Successful vendor relationships depend on
planning for and being adept at negotiations.
ANSWERS TO SELECTED “GET OUT AND DO ITS”
2. Go to the home page for the Private Label Manufacturer’s Association (PLMA), and read
the “What are Store Brands?” page, which can be found at
http://plma.com/storebrands/facts13.html. What are store-brand products? Who purchases
store brands? Who makes store brands? What store brands are you purchasing on a regular
basis?
What are store brands?
According to the website:
Store brand products encompass all merchandise sold under a retail store’s private label. That
label can be the chain’s own name or a brand name created exclusively by the retailer for their
stores. In some cases, a store may belong to a wholesale buying group that owns labels that are
available to the members of the group. These wholesaler-owned labels are referred to as
controlled labels.
Retail chains of all sizes develop and market store brands in various ways. They may create a
whole line of products around a particular feature — such as Safeway’s O Organics and Eating
Right offerings, or Kroger’s Private Selection and Albertsons Wild Harvest organic lines. In other
cases, a majority of the store brand items in a chain may carry the same name — such as
Costco’s Kirkland, Wal-Mart’s Great Value or Whole Foods’ 365 Everyday Value products.”
Who purchases store brands?
Last year, American shoppers who reached for the store brand version of their favorite food and
non-food grocery products rather than the national brand enjoyed an estimated $32 billion in
Who makes store brands?
More and more store brands are appearing on the shelves of stores throughout the country. But
how do they get there, why are they there and who makes them? For many consumers, store
brands have become an important ally in how they provide their families with high quality,
Historically, store brands signified good value for consumers while national brands were usually
seen as the premium item in a category. That is no longer true. Store brands have come to mean
more than value. Many chains now offer a range of products that are not solely focused on
value. They offer premium products just like the national brands. As they become more than just
a place to buy products, stores are involved in finding and developing new items they can put
their own name or brand on.
Store brand manufacturers who meet those high standards come in all sizes and many are listed
on stock exchanges. There are thousands of companies in hundreds of categories that produce
the products in partnership with retailers.
What store brands are you purchasing on a regular basis?