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Chapter 16 - Retailing and Wholesaling
16-21
d. Payless ShoeSource. Low value added; narrow product line.
• Economies of scale are achieved through centralized advertising,
merchandising, buying, and distribution.
• Its stores:
– Have the same design, layout, and merchandise.
– Are often referred to as “cookie-cutter” stores.
B. Retailing Mix
The retailing mix:
• Includes activities related to managing the store and the merchandise in the store.
• Includes retail pricing, store location, retail communication, and merchandise.
1. Retail Pricing. In setting prices for merchandise, retailers must decide on:
a. Markup. Refers to how much should be added to the cost the retailer paid for
a product to reach the final selling price.
• Original markup. Is the difference between retailer cost and initial selling
price.
• Maintained markup. Is the difference between the final selling price and
retailer cost. It is also called the gross margin.
[See CH16StandardMarkupCost.xls]
b. Markdown. Occurs when the product does not sell at the original price and an
adjustment is necessary. In this case, the product has been discounted.
[See CH16Markdown.xls]
• New models or styles force the price of existing items to be marked down.
• Discounts may be used to increase demand for complementary products.
• The timing of a markdown can be important:
– Many retailers take a markdown:
* As soon as sales fall off to…
* Free up valuable selling space and cash.
– Other stores delay markdowns to:
– Retailers consider how the timing of markdowns affects future sales.
• Frequent promotions increase consumers’ ability to recall regular prices.
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c. Many retailers use price discounts as a part of their merchandising policy.
• Everyday low pricing (EDLP).
– Emphasizes consistently low prices and eliminates most markdowns.
– Causes the brand name of the product and the image of the store to
become important decision factors.
• Everyday fair pricing.
– Is advocated by retailers that do not offer the lowest price.
d. Consumers often use the prices of benchmark or signpost items to form an
overall impression of the store’s prices.
e. Price is likely to influence consumers’ assessment of merchandise value.
f. When store prices are based on rebates, retailers must be careful to avoid
negative consumer perceptions if the rebate processing time is long (6 weeks).
g. A special issue for retailers trying to keep prices low is shrinkage, or
breakage, theft, and fraud by customers and employees.
• The National Retail Federation estimates that the average retailer loses
1.38 percent of sales to shrinkage each year, totaling $45 billion.
• Shoplifting accounts for 39 percent of losses.
• About 35 percent of retail shrinkage is due to employee theft.
h. Off-price retailing.
• Involves selling brand-name merchandise at lower than regular prices.
• The difference between the off-price retailer and a discount store is that:
– Off-price retailers buy merchandise from manufacturers with excess
inventory at prices below wholesale prices.
• The way off-price retailers purchase merchandise makes their selection of
specific goods unpredictable.
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• Off-price retailers can save consumers up to 70 percent off the prices of a
traditional department store.
• There are three types of off-price retailers:
– Warehouse clubs.
* Are large stores (more than 75,000 to 190,000 square feet).
* Are stark outlets with no elaborate displays.
* Require an annual membership fee (ranging from $45 to $110).
* Carry a smaller assortment of items (3,700 to 8,000).
* Stock just one brand of an appliance or a food product.
– Outlet stores.
* Offer products for 25 to 75 percent off the suggested retail price.
* Used to clear excess merchandise inventory from manufacturers.
* Reach consumers who focus on value shopping.
* Allow retailers to maintain an image of offering merchandise at
– Single-price or extreme value stores.
* Average about 6,000 square feet in size.
* Attract customers who want value.
2. Store Location.
• Issue #1: Choosing where to locate each store.
• Issue #2: Deciding how many stores to have.
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a. Department stores.
• Started downtown in most cities.
• Followed customers to the suburbs.
b. Central business district.
• Is the oldest retail setting located in the community’s downtown area.
• Was the major shopping location until people moved to the suburbs.
• Consumers view downtown shopping as less convenient because of:
– A lack of parking.
• Many cities have:
– Revitalized shopping in central business districts by…
– Attracting new offices, entertainment, and residents to the downtown.
c. Regional shopping centers.
• Consist of 50 to 150 stores.
• Attract customers who live or work within a 5- to 10-mile range.
d. Community shopping center.
• Has one primary store (usually a department store branch).
• Often has 20 to 40 smaller outlets.
• Serves a population that is within a 10- to 20-minute drive.
e. Strip mall.
• Consists of clusters of stores in neighborhoods.
• Serves people who are within a 5- to 10-minute drive.
• Its composition (mix of stores) is unplanned.
f. Power center.
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• Is a variation of the strip mall with multiple anchor stores like Home
Depot or Best Buy.
3. Retail Communication.
a. A retailer’s communication activities play an important role in:
• Positioning a store.
• Creating its image.
b. Image is “the way in which the store is defined in the shopper’s mind” and
consists of:
• Functional qualities, which refers to mix elements, such as:
– Price ranges. – Breadth of merchandise lines.
– Store layouts. – Depth of merchandise lines.
• Psychological attributes, which are the intangibles such as:
– Sense of belonging. – Style.
– Excitement. – Warmth.
• A store’s image is based on:
– Consumers’ impressions of the corporation that operates it.
– The category or type of store.
c. Closely related to the concept of image is the store’s atmosphere or ambiance.
• Retailers believe sales are affected by:
– Layout. – Music.
• This concept leads many retailers to use shopper marketing:
– Is the use of displays, coupons, product samples, and other brand
communications to influence shopping behavior in a store.
– Can also influence behavior:
* In an online shopping environment when shoppers…
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* Use smartphone apps to identify shopping needs or make purchase
decisions.
• A retail store tries to:
– Attract its target audience with what it seeks from the buying
experience.
4. Merchandise.
a. Retail buyers who manage product line breadth and depth are familiar with:
• The needs of the target market.
• The alternative products available from the various manufacturers that
want to sell their products in a store.
b. Category management:
• Is a popular approach to managing the assortment of merchandise.
• Assigns a manager with the responsibility for selecting all products that:
– A market segment view as substitutes to…
– Maximize sales and profits in the category.
• A category manager would consider the following:
c. Retailers use metrics to assess the effectiveness of a store or retail format.
• Customer measures.
– The number of transactions per customer.
– The average transaction size per customer.
• Store and product measures.
– The level of inventory. – Inventory turnover.
– The number of returns. – Inventory carrying cost.
– The average number of items per transaction.
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• Financial measures.
– Gross margin. – Return on sales.
– Sales per employee. – Markdown percentage.
• The two most popular measures for retailers are:
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APPLYING MARKETING METRICS
Why Apple Stores May Be the Best in the United States!
Sales per Square Foot and Same-Store Growth Percent
Information related to (1) sales per square foot and (2) same store sales growth can be
displayed in a marketing dashboard.
Your Challenge.
To evaluate the Apple store retail format, use (1) sales per square foot as an indicator
of how effectively retail space is used to generate revenue and (2) same-store sales growth to
compare the increase in sales of stores that have been open for the same period of time. The
calculations for these indicators are:
[See UMD16StoreSalesSqFtGrowth.xls]
Your Findings.
You decide to collect sales information for Target, Neiman Marcus, Best Buy,
Tiffany, and Apple stores to allow comparisons with other successful retailers. The
information you collect allows the calculation of sales per square foot and same-store growth
for each store. The results are then easy to compare in the graphs displayed on the marketing
dashboard.
Your Actions.
The results of your investigation indicate that Apple stores’ sales per square foot are
Chapter 16 - Retailing and Wholesaling
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LEARNING REVIEW
16-9. What are the two dimensions of the retail positioning matrix?
16-10. How does original markup differ from maintained markup?
16-11. A huge shopping strip mall with multiple anchor stores is a __________ center.
V. THE CHANGING NATURE OF RETAILING [LO 16-5]
• Retailing is the most dynamic aspect of a channel of distribution.
• New retailers enter a market and search for a new position that will attract customers.
A. The Wheel of Retailing
• [Figure 16-9] The wheel of retailing is a concept that describes how new forms
of retail outlets enter the market.
a. [Box 1] These outlets:
• Enter as low-status, low-margin stores.
• Have few amenities.
b. [Box 2] Next:
• Fixtures and embellishments are gradually added to the stores to increase
their attractiveness to customers.
• With these additions, prices and status rise.
c. [Box 3] Then, as time passes:
• These outlets add still more services.
• Their prices and status increase even further.
d. [Box 4] This opens an opportunity for a new form of retail outlet:
• A low-price, low-margin, low-status operator.
• And the wheel of retailing turns as the cycle starts to repeat itself.
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• In 1955, McDonald’s:
a. Originally opened late and closed early.
b. Offered a very limited menu for lunch and dinner; no breakfast.
c. Had no inside seating for customers in most stores.
• Today, McDonald’s:
a. Offers an extensive menu.
b. Provides seating and wireless services.
c. Regularly tests new products and formats.
• These changes leave room for new forms of outlets to enter the market as the low-
price, low-status offering.
[Video 16-5: McDonald’s Video]
• In some cases, the wheel has come full circle: Taco Bell is now opening small,
limited-offering outlets in gas stations, discount stores, and other venues.
• The wheel of retailing also applies to discount stores:
a. Were a major new retailing form in the 1960s and priced their products below
those of department stores.
b. As prices in discount stores rose in the 1980s, they found themselves
overpriced compared with a new form of retail outlet—the warehouse club.
c. Today, off-price retailers and factory outlets are offering prices even lower
than warehouse clubs.
B. The Retail Life Cycle
[Figure 16-10] The retail life cycle describes the process of growth and decline that
retail outlets, like products, experience. Its four stages are:
• Early growth.
a. The retail outlet first emerges, with a sharp change from existing competition.
b. Market share rises gradually.
c. Profits are low due to start-up costs.
• Accelerated development.
a. Market share and profit achieve their greatest growth rates.
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b. Multiple outlets are established due to a focus on distribution.
c. Competitors enter.
d. The goal is to have a dominant market share.
• Maturity.
a. Some competitors drop out.
b. New retail forms enter.
• Decline.
a. Profit and market share fall rapidly.
b. These retailers need to discourage their customers from moving to:
• Low-margin, mass-volume outlets.
• High price, high-service boutiques.
VI. FUTURE CHANGES IN RETAILING
Two trends in retailing are likely to lead to future changes for retailers and consumers:
• The growth of multichannel retailing.
• The use of data analytics.
A. Multichannel Retailing
• Retailers in the future are likely to combine many of the formats to
a. Offer a broader spectrum of benefits and experiences.
b. Appeal to different segments of consumers.
• Multichannel retailers.
a. Utilize and integrate a combination of traditional store formats and…
b. Nonstore formats such as catalogs, television, and online retailing
• Multichannel retailers:
a. Have often been viewed as alternatives that might cannibalize each other.
b. When the channels are integrated, they can:
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• Offer many opportunities to interact with and create value for a consumer.
• Become a series of touch points:
– Use a mobile app to scan a QR code from a catalog.
– Place an order online.
– Pick up the product from the nearest store.
• In this way, the channels:
– Become complementary.
– Lead to omnichannel retailing (omni meaning ‘combining’).
c. Benefit from the synergy of sharing information among the different channels.
• Online retailers:
a. Recognize that the Internet:
• Serves as a source of information and a transactional tool…
• Rather than a relationship-building medium.
b. Are working to find ways to complement traditional customer interactions.
MARKETING MATTERS
Customer Value: The Multichannel Marketing Multiplier
Multichannel marketing is the blending of different communication and delivery
channels that are mutually reinforcing in attracting, retaining, and building relationships with
consumers who shop and buy in the traditional marketplace and marketspace. Industry
analysts refer to the complementary role of different communication and delivery channels as
an influence effect.
Retailers that integrate and leverage their stores, catalogs, and websites have seen a
sizable lift in yearly sales recorded from individual customers. Multichannel customers have
been found to be three times as profitable as single-channel customers.
JCPenney has seen similar results. As a leading multichannel retailer, the company
reports that a JCPenney customer who shops in all three channels—store, catalog, and
website—spends four to eight times as much as a customer who shops in only one channel.
B. Data Analytics
• Described as the “new science of retailing.”
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• Combination of data from wearable technology and growth of multichannel
marketing complement the substantial amount of data already collected through
scanners and loyalty card systems.
• Use of data analytics can benefit retailers:
a. Understanding how consumers use multiple channels, information sources,
and payment options can help predict shopping behavior.
b. Detailed customer-specific data allows merchants to provide personalized,
real-time messaging and promotions.
c. Retailers can offer innovative products, maintain optimal inventory, and
manage prices.
LEARNING REVIEW
16-12. According to the wheel of retailing, when a new retail form appears, how would
you characterize its image?
16-13. Market share is usually fought out before the __________ stage of the retail life
cycle.
16-14. What is an influence effect?
VII. WHOLESALING (LO 16-6)
Many retailers depend on intermediaries that engage in wholesaling activities—selling
products and services for the purposes of resale or business use.
A. Merchant Wholesalers
• Merchant wholesalers:
a. Are independently owned firms that take title to the merchandise they handle.
b. Are also called industrial distributors.
• Most of the firms engaged in wholesaling activities are merchant wholesalers.
• Merchant wholesalers are classified as either full-service or limited-service
wholesalers, depending on the number of functions performed.
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• Full-service wholesalers. Two major types exist:
a. General merchandise (or full-line) wholesalers.
• Carry a broad assortment of merchandise.
• Perform all channel functions.
• Don’t maintain depth of assortment within specific product lines.
• Examples: Hardware, drug, and clothing industries.
b. Specialty merchandise (or limited-line) wholesalers.
• Offer a relatively narrow range of products.
• Have an extensive assortment within the product lines carried.
• Limited-service wholesalers. Four major types exist:
a. Rack jobbers.
• Furnish the racks or shelves that display merchandise in retail stores.
• Perform all channel functions.
• Sell on consignment to retailers, which means they:
– Retain the title to the products displayed.
b. Cash and carry wholesalers.
• Take title to merchandise.
• Sell only to buyers who:
– Call on them.
– Pay cash for merchandise.
• Carry a limited product assortment.
• Do not:
– Make deliveries.
– Extend credit.
• Examples: Electric and office supplies and groceries.
c. Drop shippers or desk jobbers.
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• Own the merchandise they sell.
• Do not physically handle, stock, or deliver it.
• Solicit orders from retailers and other wholesalers.
d. Truck jobbers.
• Are small wholesalers that:
– Have a small warehouse from which they…
– Stock their trucks for distribution to retailers.
• Handle limited assortments of fast-moving or perishable items.
• Sell products for cash directly from trucks in their original packages.
• Examples: Bakery items, dairy products, and meat.
B. Agents and Brokers
• Agents and brokers:
a. Do not take title to merchandise.
b. Perform fewer channel functions.
c. Make their profit from commissions or fees paid for their services.
• Producers use two types of agents:
a. Manufacturer’s agents or manufacturer’s representatives.
• Work for several producers.
• Carry noncompetitive, complementary merchandise in an exclusive
territory.
b. Selling agents.
• Represent a single producer.
• Are responsible for the entire marketing function of a producer:
– Design promotional plans.
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– Set prices.
• Examples: Textile and home furnishings industries.
• Brokers are independent firms or individuals whose principal function is to bring
buyers and sellers together to make sales.
a. Brokers, unlike agents:
• Have no continuous relationship with the buyer or seller.
• Negotiate a contract between two parties and then move on.
• Examples: Seasonal food products and real estate.
b. A food broker:
• Represents buyers and sellers in the grocery industry.
• Acts on behalf of producers on a permanent basis.
• Receives a commission for services rendered.
C. Manufacturer’s Branches and Offices
• Manufacturer’s branches and sales offices:
a. Are wholly owned extensions of the producer that perform wholesaling
activities.
b. Are used when there are:
• No intermediaries to perform wholesaling functions.
• Two types exist:
a. Manufacturer’s branch office.
• Carries a producer’s inventory.
• Performs the functions of a full-service wholesaler.
b. Manufacturer’s sales office.
• Does not carry inventory.
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LEARNING REVIEW
16-15. What is the difference between merchant wholesalers and agents?
16-16. Under what circumstances do producers assume wholesaling functions?
Chapter 16 - Retailing and Wholesaling
APPLYING MARKETING KNOWLEDGE
1. Discuss the impact of the growing number of dual-income households on (a) nonstore
retailing and (b) the retailing mix.
Answers:
2. How does value added affect a store’s competitive position?
3. In retail pricing, retailers often have a maintained markup. Explain how this
maintained markup differs from original markup and why it is so important.
4. What are the similarities and differences between the product and retail life cycles?
5. How would you classify Walmart in terms of its position on the wheel of retailing
versus that of an off-price retailer?
16-39
6. Develop a chart to highlight the role of each of the four main elements of the retailing
mix across the four stages of the retail life cycle.
7. Refer to Figure 16-8 and review the position of Payless ShoeSource on the retail
positioning matrix. What strategies should Payless ShoeSource follow to move itself
into the same position as Tiffany & Co.?
8. Breadth and depth are two important components in distinguishing among types of
retailers. Discuss the breadth and depth implications of the following retailers
discussed in this chapter: (a) Nordstrom, (b) Walmart, (c) L.L. Bean, and (d) Best
Buy.
