Chapter 13 – Buying Merchandise
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CHAPTER 13
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.
I. Brand Alternatives
• Retailers and their buyers face a strategic
decision about the mix of national and
private-label brands sold exclusively by the
retailer.
See PPT 13-3
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
1. National Brands
• National brands, also known as
manufacturer brands, are products
designed, produced, and marketed by a
Ask students which brands on their “list of
favorite brands” are national brands?
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subbrand associated with the product.
• In other cases, vendors use individual brand
names for different product categories and
don’t associate the brands with their
companies.
B. Private-Label Brands
• Private-label brands (also called store
brands, house brands or own brands) are
products developed by retailers.
• In many cases, retailers develop the design
and specifications for their private-label
products and then contract with
manufacturers to produce those products.
• In recent years, as the size of retail firms has
increased through growth and consolidation,
more retailers have the economies of scale
to develop private-label 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 13-5
Ask students which brands on their “list of
favorite brands” are private-label brands?
Ask students why a manufacturer of national
brands would want to produce private-label
Ask students about the brand reputation and
quality of various private labels vis-à-vis
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
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different categories or develop category-
specific private brands.
• There are four categories of private brands:
• Copycat brands imitate the manufacturer’s
brand in appearance and packaging,
generally are perceived as lower quality, and
are offered at lower prices.
• Exclusive co-brands are brands developed
by a national brand vendor, often in
conjunction with a retailer, and sold
exclusively by the retailer such as the
American Beauty and Good Skin cosmetics
lines, developed by Estee Lauder for sale
exclusively at Kohl’s.
See PPT 13-6
C. National or Private-Label Brands?
• 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 13-7 and 13-8
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decrease store loyalty. If the brand is
available only at a limited number of
• Offering private-label brands has several
advantages: (1) exclusivity boosts store
loyalty, (2) well known, highly desirable
private-labels 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.
II. Buying National Brand Merchandise
• Buyers of fashion apparel and accessory
categories typically make major
merchandise buying decisions five or six
times a year for their core merchandise.
These purchases are made many months
before delivery to allow vendors to produce
and deliver the merchandise.
See PPT 13-9
A. Meeting National Brand Vendors
See PPT 13–10
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• A wholesale market for retail buyers is a
concentration of vendors within a specific
geographic location, perhaps even under one
roof or over the Internet.
Ask students if they think they would enjoy a
career as a retail buyer in the future? What do
they see as the pros and cons of retail buying as a
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.
B. National Brand Buying Process
• When attending market weeks or trade
shows, buyers and their superiors typically
make a series of appointments with key
See PPT 13-11
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vendors.
• The meetings during market weeks offer an
opportunity for in-depth discussions,
whereas trade shows provide the opportunity
III. Developing and Sourcing Private-Label
Merchandise
• Retailers use a variety of different processes
to develop and buy private-label
merchandise.
A. Developing Private-Label Merchandise
• Larger retailers that offer a significant
amount of private-label merchandise, like
Macy’s and The GAP, have large divisions
dedicated to managing their private-label
merchandise all the way from design, to
manufacture.
• Retailers with private-label departments or
divisions use different processes to develop
merchandise.
See PPT 13-12, 13-13
B. Sourcing Merchandise
• Once the decision has been made about
which and how much private-label
See PPT 13-14
1. Reverse Auctions
• Rather than negotiating with a specific
manufacturer to produce their private-label
Ask students to consider the costs and benefits
of the reverse auction from both retailer’s and
vendor’s sides.
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merchandise, some retailers use reverse
auctions to get quality private-label
merchandise at low prices.
• 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.
See PPT 13-15
B. Global Sourcing
• An important issue facing large retailers that
design and contract for the production of
private-label merchandise is to select a
manufacturer.
See PPT 13–16
Have students give examples of a product that
they believe has a higher/lower image than it
deserves just because of the country in which it
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.
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private-label merchandise from other
countries including foreign currency
fluctuations, tariffs, longer lead times, and
increased transportation costs.
• In general, since tariffs raise the cost of
imported merchandise, retailers have always
had a strong incentive to reduce them.
• It is also more difficult to predict exactly
how long lead time will be when sourcing
globally.
B. Managerial Issues Associated with Global
Sourcing Decisions
• When sourcing globally, it is more difficult
to maintain and measure quality standards
than when sourcing domestically.
• In addition, the collaborative supply chain
management approaches described in
Chapter 10 are more difficult to implement
V. Negotiating with Vendors
See PPT 13-17
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• When buying national brands or sourcing
private-label merchandise, buyers and firm
employees responsible for sourcing typically
enter into negotiations with suppliers.
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)
special margin-enhancing opportunities, (3)
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
• The retail buyer wants to buy the
merchandise at a low price to have a higher
gross margin while the vendor wants to sell
the merchandise at a higher price to achieve
better profits.
• Faced with this uncertainty, the buyer may
seek a margin guarantee, the vendors
See PPT 13–19
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promise to provide markdown money if
necessary.
• In addition to negotiating the wholesale
price, supermarket buyers often negotiate
slotting allowances. Slotting allowances, or
slotting fees, are charges imposed by a
retailer to stock a new item.
2. Additional Markup Opportunities
• As part of the negotiation, the vendor may
offer the buyer discounted prices to take
3. Terms of Purchase
• The buyer hopes to negotiate for a long time
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
• Retailers often negotiate with vendors for an
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competitors and realize higher margins due
5. Advertising Allowances
• Retailers often share the cost of advertising
through a cooperative arrangement with
vendors known as co-op (cooperative)
advertising – a program undertaken by a
vendor in which the vendor agrees to pay for
all or part of a pricing promotion.
C. Tips for Effective Negotiations1
See PPT 13-20
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 of equal
number.
1 These tips are based on Roger Fisher and William Ury, Getting to Yes (New York: Penguin, 1981).
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manner.
5. Insist on Objective Information
information.
6. Invent Options for Mutual Gain
• Inventing multiple options is part of the
planning process, but knowing when and
how much to give, or give up, requires quick
thinking at the bargaining table.
7. Let Them Do the Talking
• There’s a natural tendency for one person to
8. Know How Far to Go
• Recognize the fine line between negotiating
too hard and walking away from the table
with less than necessary.
Neither buyer nor vendor can afford to be
known in the trade as unfair, rude, or worse.
9. Don’t Burn Bridges
negotiating session. Both parties should also
possible after it ends.
10. Don’t Assume
• To be certain there are no
misunderstandings, participants should
VI. Strategic Relationships
• Maintaining strong vendor relationships is
an important method of developing a
See PPT 13-21
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sustainable competitive advantage.
A. Defining Strategic Relationships
• Relationships between retailers and vendors
are often based on arguing over splitting up
• 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 a win-win
relationship. Both parties benefit because the
size of the pie has increased – both the
retailer and vendor increase their sales and
profits. Strategic relationships are created
explicitly to uncover and exploit joint
opportunities.
See PPT 13-21
Ask students to identify the benefits of
well as some obvious costs of dealing with
partners who have only their own interests at
heart can be uncovered. By contrast, the
partnering relationship admits mutual goals,
a commitment to preserving the relationship
and may forsake short-term gains for a long-
term mutually profitable relationship.
B. Maintaining Strategic Relationships
• The four foundations of successful strategic
relationships are mutual trust, open
communication, common goals, and credible
commitments.
See PPT 13-23
1. Mutual Trust
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accurate, and timely.
• Trust is a belief that a partner is honest
(reliable, stands by its word, sincere, fulfills
obligations) and is benevolent (concerned
about the other party’s welfare).
necessary for strategic partnerships to
succeed.
2. Open Communication
• Buyers and vendors in a relationship need to
understand what’s driving each other’s
business, their roles in the relationship, each
firm’s strategies, and any problems that arise
over the course of the relationship.
3. Common Goals
Retailer and Vendor must have same goals,
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, coop advertising, and/or
inventory management systems
C. Building Partnering Relationships
• In the awareness stage, no transactions have
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taken place. Reputation and image of the
vendor can play an important role in
determining if the buyer moves to the next
stage.
• During the exploration phase, the buyer and
vendor begin to explore the potential
benefits and costs.
alienating their traditional retail customers.
VII. Legal and Ethical Issues
• Given the large number of negotiations and
interactions between retail buyers and
vendors, ethical and legal issues are bound
to arise.
Legal Issues are summarized in PPT 13–25
1. Terms and Conditions of Purchase
• The Robinson-Patman Act, passed by the
U.S. Congress in 1936, potentially restricts
the prices and terms that vendors can offer
to retailers. The Act forbids vendors from
See PPT 13–29
Ask students to suggest situations where
offering a different price to different retailers
2. Commercial Bribery
See PPT 13-30
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• Commercial bribery occurs when a vendor
or its agent offers to privately give or pay a
retail buyer “something of value” to
influence purchasing decisions.
3. Chargebacks
• A chargeback is a practice used by retailers
in which they deduct money from the
amount they owe a vendor.
See PPT 13-31
4. Buybacks
• The buyback (also known as stocklift or
lift-out) is a strategy vendors and retailers
use to get products into retail stores.
• A buyback can occur under two scenarios.
First, and most ethically troubling is when a
stocklifts from a competitor so often as to
See PPT 13-32
Ask students “how bad” an ethical situation
this practice seems to them.
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shut it out of a market. But such cases are
difficult to prove.
5. Counterfeit Merchandise
• Counterfeit merchandise includes goods
that are made and sold without permission
of the owner of a trademark, a copyright, or
a patented invention that is legally protected
in the country where it is marketed.
See PPT 13–26
Ask students what products they have seen that
they think are counterfeit.
6. Gray Markets and Diverted Merchandise
• A gray-market good possesses a valid U.S.
registered trademark and is made by a
foreign manufacturer, but is imported into
the United States without permission of the
U.S. trademark owner.
• Traditional retailers claim gray-market and
diverted merchandise has a negative impact
It is important to note that gray market
merchandise is not counterfeit! It is imported
and sold to the retailer without the knowledge
of (or profit to) the U.S. trademark owner.
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on the public. After sale service will be
unavailable and trademark images may be
hurt.
• Vendors wishing to avoid the gray-market
problem have several remedies.
7. Exclusive Dealing Agreements
• Exclusive dealing agreements occur when
a manufacturer or wholesaler restricts a
retailer into carrying only its products and
nothing from competing vendors.
• The effect on competition determines the
legality of these contracts.
See PPT 13-34
8. Tying Contracts
• 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
See PPT 13-35
Ask students to give an example of a product
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.
sole purpose of benefiting a competing
See PPT 13-36
The issue again is whether the vendor is large
enough to restrict trade or create a monopoly.
See exclusive territories.
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retailer.
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VI. Summary
• This chapter examines issues surrounding
purchasing merchandise and vendor
relations. Retailers can purchase either
ANSWERS TO “GET OUT AND DO ITS”
sports teams doing to prevent the sale of counterfeit merchandise? Will these measures be
effective? Explain why or why not.
From the CAPS web site:
The Coalition to Advance the Protection of Sports logos (CAPS) is an alliance formed by The
Collegiate Licensing Company, Major League Baseball Properties, Inc., NBA Properties, Inc.,
NFL Properties LLC, and NHL Enterprises, L.P. in 1992 to address common trademark
protection and enforcement matters of its members. Since then, CAPS members have worked
diligently to enforce their respective trademark rights by pursuing both civil and criminal legal
remedies. For example, CAPS works closely with law enforcement, providing valuable
assistance during the investigation, arrest, prosecution, sentencing and probation of those who
violate the trademark rights of the CAPS members and their affiliated member sports teams and
universities.