Chapter 1 Introduction to the World of Retailing McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1

Introduction to the World of Retailing

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

1-2

1-3

The World of Retailing

Introduction to Retailing

Types of Retailers

Multi-Channel Retailing

Customer Buying Behavior

1-4

Questions

■ What is retailing?■ What do retailers do?■ Why is retailing important in our society?■ What career and entrepreneurial opportunities

does retailing offer?■ What types of decisions do retail managers

make?

1-5

What is Retailing?

Retailing – a set of business activities that adds value to the products and services sold to consumers for their personal or family use

A retailer is a business that sells products and/or services to consumers for personal or family use.

1-6

Examples of Retailers

Retailers: Kohl’s, Macy’s, Wendy’s,

Amazon.com, Jiffy Lube, AMC Theaters, American Eagle Outfitter, Avon, J.Crew

Firms that are retailers and wholesalers - sell to other business as well as consumers:

Office Depot, The Home Depot, United Airlines, Bank of America, Costco

1-7

Manufacturer’s Perspective

The Four P’s of Marketing

Distribution

Retailers are part of the

distribution channel

Retailers are part of the

distribution channelProduct

Price

Promotion

1-8

Distribution Channel

Typical Supply Chain Network

Suppliers Plants

DistributionCenters

Customers

retailers

1-9

1-10

A Retailer’s Role in a Supply Chain

Retailers are the final business within a supply chain which links manufacturers to consumers.

A Supply Chain is a set of firms that make and deliver a given set of goods and services to the ultimate consumer.

1-11

Manufacturing, Wholesaling and Retailing

Vertical Integration – firm performs more than one set of activities in the channel

Ex: retailer invests in wholesaling or manufacturing

Backward Integration – retailer performs some distribution and manufacturing activities

Ex: JCPenney sells Arizona jeans (Private Label)

Forward Integration – manufacturers undertake retailing activities

Ex: Ralph Lauren (New York Jones, Liz Claiborne) operates its own stores

Large retailers engage in both wholesaling and retailing

Ex: Wal-Mart, Lowe’s, Safeway, Brown Shoe Company

1-12

Do Retailers Add Value?

a box of crackers at a grocery store costs $1 to manufacturer sells at a price of $2

Retailers add significantly to the prices consumers face

Why not buy directly from the manufacturer?

Does that mean that grocery stores are very profitable?

Example

1-13

Manufacturer

Vendor

Distributor

Wholesaler

Retailer

$1.00 $1.20 $2.00

$.85 $.15 $.70

Consumer

Price to Distributor

Price to Retailer

Price to Consumer

Why Not Get Rid of the Middlemen?

1-14

Better services to customersMore efficient

Why Not Get Rid of the Middlemen?

1-15

Music Industry Channel

Composer

LyricistPublisher

Record

CompanyMusic Retailer

Artist Distributor

1-16

Cost for CD

Retailer $5.00Record Company Manufacturing .75 Distribution 1.50 Marketing 2.00 Coop advertising 1.00 Artist/Repertoire 1.00 Artist royalty 1.25 Lyricist .75 Overhead/Profit 2.00

Total 15.25

• 4 out of 5 CDs fail to make a profit

• $300,000 cost to prepare a CD for release

• 30,000 recording artists

1-17

How Retailers Add Value

■ Provide AssortmentBuy other products

at the same time■ Break Bulk

Buy it in quantities customers want

■ Hold InventoryBuy it at a

convenient place when you want it

■ Offer ServicesSee it before you

buy; get credit; layaway

Ryan McVay/Getty Images

1-18

How Retailers Add Value

The value of the product and service increases as the retailer performs functions.

Bicycle is developed at manufacturerBicycle is developed at manufacturer

Bicycle is developed in several styles

Bicycle is developed in several styles

Bicycle is offered in convenient locations in quantities of one

Bicycle is offered in convenient locations in quantities of one

Bicycle is featured on floor display

Bicycle is featured on floor display

Bicycle can be bought on credit or

put on layaway

Bicycle can be bought on credit or

put on layaway

1-19

Examples: How Retailers Add Values

BagBorrowerSteal.com jewelry and bag rental; Get (not buy, but borrow) exactly what you

want Home Depot

DIYer (Do-it-yourselfer); Learn how to do it yourself with in-store clinics and online workshops

1-20

Social and Economic Significance of Retailing

Retail Sales: Over $4.1 trillion in annual

U.S. sales in 2005 Employment:

Employs over 24 million people in 2005

One of the largest sectors for job growth in US

Social responsibility Global player

1-21

Social responsibility

Corporate social responsibility The voluntary actions taken by a

company to address the ethical, social, and environmental impacts of its business operations, in addition to the concerns of its stakeholders

Examples: Edun - a fair-trade fashion brand by the U2 lead singer Bono

Starbucks: pays its farmers 42% more than the commodity price of Arabica coffee beans

Target: community giving programs (5% of income, $3 million a week)

Retail companies give away 1.7% of their profits, compared with about 0.9% for companies in other industries

1-22

World’s 20 Largest Retailers in 2005

1-23

Structure of Retailing and Distribution Channels around the World: The United States

The nature of retailing and distribution channels in the U.S. is unique.

Has the greatest retail density Has the greatest concentration of

large retail firms Large enough to operate their

own warehouses, eliminating the need for wholesaling.

The combination of large stores and large firms result in a very efficient distribution system.

CHINAThe United States

1-24

Comparison of Distribution Channels around the World

1-25

What have created these differences in distribution systems?

Social & Political Objectives

China, India: To reduce unemployment by protecting small businesses EU: To protect small retailers

To preserve green spaces/town centers

Geography Much lower population density in the US than in India, China, and EU (where less low-cost real estate are available for building large stores)

Market size Large retail markets in US, India, China Countries in EU – distribution channels and retail chains operate in a single country (no economy of scales to be achieved; trade barriers still exist)

1-26

Opportunities in Retailing:Management opportunities

■ People with a wide range of skills and interests needed because retailers’ functions include

Finance Purchase Accounting Management information system (MIS) Supply management including warehouse and

distribution management Design and new product development

■ Financially rewarding 5-year salary of buyers: $50,000 - $60,000 5-year salary of store managers: $120,000 - $160,000

1-27

Nature of Retail Industry is Changing

Mom and Pop Store

To Today’s Retailer

1-28

Retailers are a Business Like Manufacturers

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

MIS

Real Estate

Operations

Finance

Promotion/Advertising

Human Resources

Loss Prevention

Store Design

1-29

Retailing is a High Tech Industry

Selling Merchandise through the Internet

Using Internet to manage supply chains

Analyze POS data to tailor assortments to stores

Computer systems for merchandise planning and tracking

1-30

Opportunities in Retailing:Entrepreneurial opportunities

■ Retailing provides opportunities for people who want to start their own business

■ Some of the world’s richest people are retailing entrepreneurs

■ Examples of retailing entrepreneurs Sam Walton (Wal-Mart) Jeff Bezos (Amazon.com) Ingvar Kamprad (IKEA) Anita Roddick (the Body Shop)

Wal-Mart: Sam Walton

IKEA: Ingvar Kamprad

1-31

Career Opportunities in RetailingStart Your Own Business

Walton Family (Wal-Mart) Fisher (The Gap) Wexner (The Limited) Menard (Menard’s) Marcus (The Home Depot) Kellogg (Kohl’s) Schulze (Best Buy) Levine (Family Dollar) Gold (99Cent Only)

List of Retail Entrepreneurs on Forbes 400 Richest Americans

1-32

Retail Management Decision Process

1-33

Strategic Vs Tactical Decisions

■ Doing the Right Thing (direction) vs. Doing Things Right (execution)

■ Strategic Decisions Are: Made Infrequently Long-term Require significant investment Not easily reversed

■ Location, Organization Design, Information and Distribution Systems, Customer Service

1-34

Retail Strategy

■ Need to identify the competition intratype competition

(e.g., Dillard’s vs. JCPenney) intertype competition

(e.g., Dillard’s vs. Wal-Mart)

■ Identifying customers What are the significant

demographic and life-style trends

Who are your target customers

1-35

Retail Strategy

■ A retail strategy should identify the target market the product and service mix a long-term comparative advantage

1-36

JC Penney’s Strategic Evolution(1)

Main Street (small town) private label, soft goods (apparel, home furnishings), decentralized retailer

Changes in environment -- increased disposable income, growth of suburbs, interstate highway program

Emulate Sears in moving to enclosed suburban malls

Add hard goods (appliances, automotive)

Diversify – drug stores, insurance, specialty stores

Develop catalog channel

1-37

JC Penney’s Strategic Evolution(2)

Focus on department store format and soft goods develop electronic retail channel

Mid-market, mall based department store, between Wal-Mart/Target and Macy’s/Dillards

Competition from Target, Kohl’s Centralization to reduce cost,

increase responsiveness - centralized buying, warehouse delivery

Off the mall stores to increase customer convenience

Improving store atmospherics Upgrading merchandise offering

(e.g., Sephora, American Living by Polo Ralph Lauren)

1-38

Wal-Mart’s Strategic Evolution

Small Town - Discount Store selling hard goods and soft goods limited service, efficient distribution

Enter suburban markets Warehouse Clubs (Sam’s) Supercenters International Expansion Supermarkets, neighborhood markets

1-39

Sears’ Strategic Evolution

Large number of merchandise categories -- appliances, hardware, apparel

Malls evolved into places for buying soft goods, hard goods sold at category killers

The Softer Side of Sears Refocused on value -- Testing carts in stores Acquired Lands’ End Acquired by Kmart

1-40

Whole Foods Implementation

Strategy - organic and natural foods supermarket chainAssortment beyond organic/natural foods

Private labels - Whole Food™, 360 Day Value™Love, trust, and employee empowermentEquality in compensation

1-41

Decision Variables for Retailers

Customer Service

Store Design and Display

MerchandiseAssortment

Communication Mix

LocationPricing

Retail

Strategy

1-42

Wal-Mart’s Retail Mix

Retail Strategy

Customer Service

Location

MerchandiseAssortment

PricingCommunication Mix

Store DesignAnd Display

1-43

Wal-Mart’s Retail Mix

Free-standing Stores

Customer Service

MerchandiseAssortment

PricingCommunication

Mix

Store DisplayAnd Design

Location Strategy

1-44

Wal-Mart’s Retail Mix

Location

PricingCommunication

Mix

Store Design and Display

Customer Service

Large Number of Categories

Few Items in Each Category

Assortment Strategy

1-45

Wal-Mart’s Retail Mix

Location

Communication Mix

Store Design and Display

Customer Service

Merchandise Assortment

Low, EDLP

Pricing Strategy

1-46

Wal-Mart’s Retail Mix

Communication Mix

TV and NewspaperInsert Ads

Location

Pricing

Store Design and Display

Customer Service

Merchandise Assortment

1-47

Wal-Mart’s Retail Mix

Store Design and Display

Basic, Special Displays

for Products

Customer Service Location

Merchandise Assortments

PricingCommunication

Mix

1-48

Wal-Mart’s Retail Mix

Customer Service

Limited

Location

Merchandise Assortment

Pricing

Communication Mix

Store Design and Display

1-49

Claire’s Retail Mix

Retail Strategy

Customer Service Location

Merchandise

Assortment

PricingCommunication Mix

Store Design

and Display

1-50

Claire’s Retail Mix

Enclosed malls

Customer Service

Merchandise

Assortment

PricingCommunication Mix

Store Display

And Design

Location Strategy

1-51

Claire’s Retail Mix

Location

Pricing

Communication Mix

Store Design

and Display

Customer Service

Jewelry, accessories and cosmetics for tweens and teens

Assortment Strategy

1-52

Claire’s Retail Mix

Location

Communication Mix

Store Design

and Display

Customer Service

Merchandise Assortment

Modest with Sales

Pricing Strategy

1-53

Claire’s Retail Mix

Communication Mix

TV and Magazine Ads

Store Design

And Display

Customer ServiceLocation

Merchandise Assortment

Pricing

1-54

Claire’s Retail Mix

Store Design and Display

Bright, fashionable and fun

boutique layout

Customer Service Location

Merchandise Assortments

PricingCommunication Mix

1-55

Claire’s Retail Mix

Customer Service

Modest

Location

Merchandise Assortment

Pricing

Communication Mix

Store Design and Display

1-56

Macy’s Retail Mix

Retail Strategy

Customer Service Location

Merchandise

Assortment

PricingCommunication Mix

Store Design

and Display

1-57

Macy’s Retail Mix

Enclosed Malls

Customer Service

Merchandise

Assortment

PricingCommunication Mix

Store Display

And Design

Location Strategy

1-58

Macy’s Retail Mix

Location

Pricing

Communication Mix

Store Design

and Display

Customer Service

Many Items in Apparel

and Soft Home

Assortment Strategy

1-59

Macy’s Retail Mix

Location

Communication Mix

Store Design

and Display

Customer Service

Merchandise Assortment

Moderate with

Frequent Sales

Pricing Strategy

1-60

Macy’s Retail Mix

Communication Mix

TV, Newspaper Ads and

Special Events

Store Design

And Display Merchandise Assortment

Pricing

Customer ServiceLocation

1-61

Macy’s Retail Mix

Store Design and Display

Racetrack with Displays

Customer Service Location

Merchandise Assortments

PricingCommunication Mix

1-62

Macy’s Retail Mix

Customer Service

Modest

Location

Merchandise Assortment

Pricing

Communication Mix

Store Design and Display

1-63

Target’s Retail Mix

Retail Strategy

Customer Service Location

Merchandise

Assortment

PricingCommunication Mix

Store Design

and Display

1-64

Target’s Retail Mix

Free-standing Stores

Customer Service

Merchandise

Assortment

PricingCommunication Mix

Store Display

And Design

Location Strategy

1-65

Target’s Retail Mix

Location

Pricing

Communication Mix

Store Design

and Display

Customer Service

Large Number of Categories

Private Labels

Few Items in Each Category

Assortment Strategy

1-66

Target’s Retail Mix

Location

Communication Mix

Store Design

and Display

Customer Service

Merchandise Assortment

Low to Modest

Pricing Strategy

1-67

Target’s Retail Mix

Communication Mix

TV and Newspaper

Insert Ads

Store Design

And Display

Customer ServiceLocation

Merchandise Assortment

Pricing

1-68

Target’s Retail Mix

Store Design and Display

Colorful, wide aisles displays

for products with a grid layout

Customer Service Location

Merchandise Assortments

PricingCommunication Mix

1-69

Target’s Retail Mix

Customer Service

Limited

Location

Merchandise Assortment

Pricing

Communication Mix

Store Design and Display

1-70

Ethical Situations for a Retail Manager

Should a retailer sell merchandise that they suspect utilized child labor?

Should it advertise that its prices are the lowest in an area even though some items are not?

Should a buyer accept an expensive gift from a vendor? Should salespeople use high-pressure sales when they know

the product is not the best for the customer’s needs? Should a retailer give preference to minorities when making a

promotion decision? Should a retailer treat some customers better than others?

1-71

Checklist for Making Ethical Decisions

1-72

You are Faced with an Ethical Decision: What Can You Do?

Ignore your personal values and do what your company asks you to do – you will probably feel dissatisfied with your job .

Take a stand and tell your employer what you think. Work to change the policies.

Refuse to compromise your principles – you could lose your job!

1-73

Careers in Retailing

Career Opportunities Store Management Merchandise Management Corporate Staff

1-74

Misconceptions About Careers in Retailing

■ College not needed■ Low pay■ Long hours■ Boring■ Dead-end job■ No benefits■ Everyone is part-time■ Unstable environment■ No opportunity for women and minorities

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

1-75

Why You Should Consider Retailing

■ Entry level management positions:

Department manager or assistant buyer/planner

■ Manage and have P&L responsibility on your first job

■ Starting pay average with great benefits

■ Some retailers pay graduate school

■ No two days are alike

■ Buying and planning for financially analytically oriented

■ Management for people-people

1-76

Types of Jobs in Retailing

Most entry level jobs are in store management or buying, but there’s…

-accounting and finance

-real estate

-human resource management

-supply chain management

-advertising

-public affairs

-information systems

-loss prevention

-visual merchandising