WRITING EXERCISE

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1 Introduction to Retailing

C h a p t e r 1 Perspectives on Retailing

C h a p t e r 2 Retail Strategic Planning and Operations Management

Perspectives on Retailing

OVERVIEW: In this chapter, we acquaint you with the nature and scope of retailing.

We present retailing as a major economic force in the United States and as a significant area for career opportunities. Finally, we introduce the

approach to be used throughout this text as you study and learn about the operation of retail firms.

LEARNING OBJECTIVES: After reading this chapter, you should be able to: 1. Explain what retailing is and why it is undergoing so much change

today. 2. Describe the five methods used to categorize retailers. 3. Understand what is involved in a retail career and be able to list the

prerequisites necessary for success in retailing. 4. Explain the different methods for the study and practice of retailing.

What Is Retailing, and Why Is It Undergoing So Much Change Today?LO 1

What is retailing, and why is it undergoing so much change today?

It is easy to take for granted the impact retailing has on our economy and lifestyle. The full importance of this statement was recently pointed out to one of the authors when his niece, after working in New York City and Atlanta, made a career move to a town of 15,000 in the upper Midwest. While the town had a regular Walmart (not a Supercenter), she was now 41 miles from a Target and Walmart Supercenter and almost three hours from a major department store. While she now spent less time in stores, she was frustrated by the lack of selections. As a result, her overall spending declined. This situation illustrates the impact retailing has on the economic pros- perity of any nation as well as the lifestyle of individuals. History has shown that the nations that have benefited from the greatest economic and social progress have been those with a strong retail sector.1 After all, it is retailing that is responsible for matching the individual demands of the consumer with vast quantities of supplies produced by a huge range of manufacturers and service providers.

Retailing’s contribution to a nation’s economic growth can be further pointed out by these two examples. First, in 2006, the Nobel Peace Prize was given to Bangladesh economist Muhammad Yunus and the Grameen Bank, a microretail bank which he founded decades earlier. The prize committee recognized the importance of financing the business aspirations of ‘‘millions of small people’’ with

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loans as little as $20 to help some of the world’s most impoverished people start businesses so that they could work to bring about their own development by establishing small retail outlets that helped build the retailing sector of the economy.

The second example can be found by looking at the impact of the world’s largest retailer, Walmart, on the U.S. economy. One business writer suggested tongue in cheek that Walmart, which was founded in Arkansas fewer than 50 years ago, deserved the Nobel Peace Prize. Since the award is given to an individual and not an organization and since Sam Walton is deceased, the company will never be considered for such an award. Nonetheless, consider the retailer’s many con- tributions to society, which include the following.2

& Walmart provides employment to more than 2 million people. The best defense against poverty is a job.

& The company pays hundreds of millions of dollars each year in dividends that help fund the retirement of millions of people.

& Walmart sells food, clothing, and other necessities at prices that are 15 percent to 25 percent below what other supermarkets charge. This not only helps millions of low-income families stretch their dollars but also provides shopping alternatives for many people in small-town markets.

& The company helps push down the inflation rate and keep interest rates low. This is particularly beneficial for millions of families when making payments on their homes, household appliances, or autos. (In fact, one study concluded that Walmart has raised consumer discretionary income by almost 1 percent per year because of its low prices.3) Even Warren Buffett, the famous investor, noted that the retailer has ‘‘contributed more to the financial well-being of the American public than any other institution I can think of.’’ His own back-of-the-envelope calculation of this contribution: $10 billion a year.4

& Walmart has developed an emergency-relief standard to get supplies to areas devastated by hurricanes, fires, and tornados that has resulted in better coordination between private companies and the Federal Emergency Management Agency.5

& Walmart has distributed $415 million in cash and in-kind merchandise annually to 100,000 charitable organizations around the world.

& The company enhances the business of other nearby stores because the retailer increases the area from which to attract customers.

& Walmart has been pursuing environmental sustainability from windmills to recycling to other energy-saving measures.6

& Walmart has more organic produce than most of its competitors.

Still, not everyone likes and admires Walmart. For example, in Fortune maga- zine’s annual poll of 1,000 chief executive officers (CEOs), Walmart has gone from being the nation’s most admired company (in both 2003 and 2004) to fourth in 2005, 12th in 2006, 19th in 2007, and off the top 20 list entirely in 2008.7 However, most retail analysts attribute this dropoff to growing criticism of this nonunion company by two labor union–funded groups (Walmart Watch and Wake-Up Walmart),8 the settlement of 63 lawsuits about shortchanging employees on overtime wages,9 and a slumping stock price since 2000. However, the northwest Arkansas retailer has since returned to its core retail strategies and worked closely with activists to improve its labor, health care, and environmental practices.10 In fact, during the recent

Chapter 1: Persp ectives on Retailing 3

recession, Walmart and McDonald’s were the only major retailers to see both their sales and stock prices increase. This increase in popularity with consumers and investors resulted in the company being ranked 11th in 2009.11

Another criticism of Walmart is the popular belief that Walmart has a signif- icant negative effect on the mom-and-pop business sector. Academic research, however, has found that such beliefs are statistically unfounded. The research concluded that ‘‘after examining a plethora of different measures of small business activity and growth. . .it can be firmly concluded that [Walmart] has had no sig- nificant impact on the overall size and growth of U.S. small business activity.’’12

Thus, while Walmart may cause some poorly managed mom-and-pop businesses in outlying towns to fail, those failures actually pave the way for the entry of other new small businesses that increase overall consumer satisfaction and productivity.

What about those countries without an efficient and effective retailing system? History has clearly shown that nations that have failed to develop a productive and customer-focused retailing system will ultimately have to devise one in order to improve their populations’ well-being. One reason Eastern European countries experienced such low rates of economic growth when they were under Communist control was their lack of a retail structure. Consumers were forced to shop in stores that offered outdated merchandise and were barely the size of a large room. Interestingly, when American and Western European retailers opened for business in these countries, they became instant successes. The joy and excitement these new forms of retailing provided the citizens was amazing and illustrated the value people of all cultures place on a retailing system that is responsive to their needs and wants. Even Albania, a nation of 3 million and one of Europe’s most depressed countries due to its long-standing communist rule, had its first modern mall open in 2009. This 150-store center, which includes a hypermarket, is located between Tirana and Durres. The mall has generated great excitement as consumers, especially young people, can now save time and do all their shopping at one place.13

Therefore, the rest of this text will be dedicated to showing how a retail system works and how it can always be improved.

Retailing, as we use the term in this text, consists of the final activities and steps needed either to place a product in the hands of the consumer or to provide a service to the consumer. In fact, retailing is actually the last step in a supply chain that may stretch from Europe or Asia to your hometown. Therefore, any firm that sells a product or provides a service to the final consumer is performing the retailing function. Regardless of whether the firm sells to the consumer in a store, through the mail, over the telephone, through the Internet, door to door, or through a vending machine, the firm is involved in retailing.

The Nature of Change in Retailing Many observers of the American business scene believe that retailing is the most ‘‘staid and stable’’ sector of business. While this observation may have been true in the past, quite the contrary is occurring today. Retailing includes every living individual as a customer and accounts for 20 percent of the worldwide labor force, and consumer spending represents nearly a third of America’s total economy. As the largest single industry in most nations, retailing, or spending by consumers, is necessary for businesses to ‘‘grow and hire again.’’ This was especially evident when the government directed its 2009 stimulus packages toward increasing the con- sumers’ spending power.14

Today, retailing is undergoing many exciting changes, only a few of which will be covered in this chapter. However, each chapter of this text has a ‘‘What’s New?’’

retailing Consists of the final activ- ities and steps needed to place merchandise made elsewhere into the hands of the consumer or to provide services to the consumer.

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box just to discuss in greater detail some of the other changes taking place that will impact the future of retailing. These boxes will address the new practices, skills, and strategies that retailers are using to stay ahead of the competition. Remember that during the recent recession, the number one reason most CEOs were replaced was for mismanaging change, such as failing to anticipate how the credit crisis would impact their business. Sometimes the new approaches implemented by retailers don’t work as planned. This is illustrated in this chapter’s ‘‘Retailing: The Inside

R e t a i l i n g : T h e I n s i d e S t o r y

Airlines: Being Lucky Is Better than Planning Well

In the mid-1990s, as a way of improving their profits, without

increasing their cost structure, air carriers began to sell their

tickets over the Internet in order to eliminate the travel

agents with their 10-percent to 15-percent commission. The

idea worked so well that within a few years nearly half of all

available seats on U.S. airlines were sold on the Internet.

However, by posting their prices online, the carriers

created a marketplace in which every consumer had easy

access to every airline’s lowest fares. In addition, the explosive

growth of discount airlines in the unregulated industry forced

the major carriers to reduce the price on even more seats.

The consumer now had all the information (prices, departure

and arrival times, available seats, and past performance

records) readily available. Over the next decade, airline

profits continued to slide, despite the absence of commissions

paid to travel agents, as the web surfers’ ability to find bargain

fares caused average revenue per mile to drop. Even worse,

powerful new third-party travel websites—Priceline.com,

Expedia.com, Orbitz.com, and Travelocity.com—were soon

offering even better deals on flights that further reduced the

carriers’ profits.

The airlines were a mess. Then fate dealt them a benefit

disguised as a bombshell. The price of oil—the biggest

expense in operating an airline flight—jumped from less than

$50 a barrel in 2007 to nearly $150 in the summer of 2008.

Soon the airlines cut back on their flights and instituted a

‘‘fuel surcharge’’ on checked bags. A few airlines even went so

far as to institute a fee on frequent-flyer reward tickets. Since

oil was so high, consumers, while not liking them, accepted

these ‘‘new’’ fees. Within months, though, oil was back to its

2007 levels or below. However, most of these airline fees

remained. Why?

Well, airlines had finally found a way to extract more

revenue out of customers than just fares. The 2008 fuel crisis

enabled them to finally charge for different services—like

using an à lá carte menu at the restaurant. The baggage fees,

charges to purchase sandwiches on board, and the charges to

use telephone reservationists have significantly improved the

profitability of the entire industry. Some airlines even began

to charge for those once-free soft drinks and packages of trail

mix besides doubling the price of beer and wine. In addition,

in 2009, the airlines, always desperate for new sources of

revenue, started offering access to the Internet. Here,

however, despite the high markup on the service, passengers

welcomed the new service as an end to web withdrawal.15

After all, in Europe Ireland’s Ryanair had been using such a

pricing system for the prior three years and had seen its

profits soar.16 However, in 2009, it had to beat a hasty retreat

after introducing the idea of charging for use of the on-flight

restroom.

As a result, every extra service now requires a fee. The

concept of charging for what people use or don’t use is

something that is here to stay in the airline industry. Gone are

the days of free hot meals in coach. Now, unless one airline

determines it can capture its competitors’ customers by

dropping one or more of these fees, fliers will pay for

everything from pillows to bottled water. After all, if the

other airlines match the lone competitor, all the airlines will

suffer a drop in profits.

Actually, the reality of oil at $150 per barrel, instead of

destroying the industry, gave the airlines the courage to

pursue a strategy they wanted to pursue for years—being able

to increase revenue without having to make expensive

upgrades to the system.

Thus, was it good planning that achieved this or the ever-

changing environment that did it? That sudden shock to the

U.S. economy in the summer of 2008 actually may have saved

the air carriers. In addition, it also paved the way for a new set

of websites, such as TripAdvisor.com, whose fee estimator

adds baggage charges into fares and shows on-board costs

like meals and headsets.17 Who said you can’t make lemonade

out of lemons?

Chapter 1: Persp ectives on Retailing 5

Story’’ box detailing how, as a result of attempting to improve profits by eliminating the travel agent’s commission; airlines saw their revenues decline only to be rescued by a major increase in oil prices.

According to the U.S. Census Bureau, cur- rently there are slightly more than 1.1 million retail establishments selling physical or tangible products in the United States with total annual sales approaching $3.7 trillion, or nearly $12,500 per capita.18 There are 10 retail establishments for every 1,000 households. This equates to average annual sales of roughly $3.3 million per store.19

Most retailers, however, are smaller, and many have annual sales of less than $750,000 annually. On the other hand, a single retail store can easily have sales in excess of $50 million annually, which is common for a Walmart Supercenter or a Ford or Toyota new car dealership selling 1,500 new cars annually.

These figures don’t reflect the changes that have occurred behind these dollar amounts. The number of new retail enterprises that were developed in the last quarter-century is truly amazing. Most of these new businesses have actually been new institutional forms such as Internet retailing, warehouse retail- ing, supercenters, and home delivery of fast foods. Change is truly the driving force behind retailing. Let’s explore some of the trends that are affecting retailing today.

E-Tailing Interestingly, embedded in the word retail is one of

the most important trends in the retail industry, and that is e-tailing (just remove the ‘‘r’’ from retailing and you have e-tailing).

The great unknown for retail managers is what the ultimate role of the Internet will be. Contrary to the fears of many retailers a decade ago, the Internet hasn’t destroyed brick-and-mortar retailers, or those operating in a physical building. But the Internet, which accounts for less than 5 percent of retail sales, has changed con- sumer behavior. Today brick-and-mortar retailers have to adapt to changing custo- mers. These customers, especially the younger ones, are accustomed not only to the speed and convenience of purchasing online but also to the control it gives them. E- tailing, after all, enables consumers to shop when they like and from where they like. In addition, it provides access to vast amounts of information, ranging from a product’s attributes to who has the lowest price. No real-world store can match that.

With the growth of the web 2.0, the Internet has become much more inter- active and social in nature. This has important implications for retailers. For instance, with some Internet websites, individuals can band together for group buying; the group is able to negotiate with a retailer or manufacturer for a large transaction size represented by dozens or even hundreds of potential customers. Also, many e-tailers offer personalized help online. For instance, K-Swiss allows visitors to its website to chat with a customer service representative seven days a week, 24 hours a day.

brick-and-mortar retailers Retailers that operate out of a physical building.

International travelers not only face additional costs of travel as explained in the Inside Retailing story but also the increased level of security and custom inspections add psychic costs and make travel less appealing.

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To combat e-tailing, brick-and-mortar retailers must give their customers more control over the shopping experience, even if it means bringing web-style technology into the store in an attempt to replicate the best things about online shopping but in a more personal way. Retailers should not fight this trend because the customer is already bringing the web into the store. For instance, young shoppers with cell phones send photos of a potential purchase to their friends and then friends text message back, which allows the young shopper to get input on the potential purchase. Consequently, the retailer needs to get on the web technology trend. In-store kiosks, for example, are particularly useful to show the final product before a special, customized order is placed. They allow a shopper to see the finished product before purchasing and provide an online experience in the store. Other retailers have set up their own websites, while others have begun to use nontraditional methods to reach out to the consumer. However, the sad truth is that as consumers flock to social-networking sites and virtual worlds, retailers aren’t always there for them. This chapter’s ‘‘What’s New?’’ box describes the way retailers can use YouTube to reach their target markets.

However, the most important thing for physical store retailers to grasp is the shift in power between retailers and consumers. Traditionally, the retailers’ control over pricing information provided them the upper hand in most transactions. Today the information dissemination capabilities of the Internet have made con- sumers better informed. This has increased their power when transacting and negotiating with retailers. The web has provided consumers with detailed pricing information about products ranging from bikes to office supplies to digital tele- visions, thus enabling them to negotiate better deals. Some brick-and-mortar retailers may have to discontinue some product categories as consumers engage in an activity called outshopping. Outshopping, which will be discussed in greater detail in Chapters 4 and 7, occurs when the customer gets needed information (such as proper size or how to assemble a product) in the store and then orders it online for a lower price and to avoid paying state sales tax.

Retailers must keep experimenting with various strategies, both in-store and online because the next generation of technology will change the consumers’ expectations of what they demand from their retailers. That is why stores like Walmart, Gap Inc., Target Corp., Sears Holdings Corp., and Amazon.com Inc. are pushing new mobile programs. They hope these efforts make it easier for customers to shop online with their cell phones. Even if the prices touted digitally are basically the same as those offered in the store, retailers say customers can get news of sales earlier than with other methods, such as commercials or circulars. After all, failure to keep up with the Internet will spell failure for the retailer.

Price Competition Some people claim that America’s fixation with low prices began after World War II when fair-trade laws, which allowed the manufacturer to set a price that no retailer was allowed to sell below, paved the way for America’s first discounter, E. J. Corvett. Actually, this revolution more than likely began with the birth of Walmart in Rogers, Arkansas, in 1962. At the time, there were 41 publicly held discount stores and another two dozen privately owned chains already in business.20 What Sam Walton did that forever changed the face of retailing was to realize, before everybody else, that most of any product’s cost gets added after the item is pro- duced. As a result, Walton began enlisting suppliers to help him reduce these costs and increase the efficiency of the product’s movement from production to place- ment on store shelves. Also, Walton, who had never operated a computer in his life,

Chapter 1: Persp ectives on Retailing 7

W h a t ’ s N e w ?

YouTube: Retailing’s Inexpensive Way to Reach Consumers

In the early 1990s, as the Internet emerged it was seldom used

by retailers. At best, it was similar to an electronic newspaper

or Yellow Pages where retailers could post pop-up advertise-

ments; in short, it was primarily one way retailers pushed

information to potential customers. However, with the

emergence of the web 2.0, the Internet has become more

collaborative. In fact, there is more traffic that involves

individual customers talking to and sharing information with

each other than the retailer sharing information or having

conversations with consumers. Nonetheless, retailers can

benefit from this more conversational and interactive web

by understanding how their customers are using the Internet

to communicate.

Now social networks, ranging from MySpace to Facebook

to LinkedIn to YouTube, are what drive Internet usage and

traffic. Social-network systems use online technologies and

practices enabling consumers to communicate among them-

selves by sharing content, opinions, insights, experiences,

perspectives, and media. In fact, one of the worst things you

can do to somebody is to delist him or her as friend on a social

network.

However, more importantly with social networking today,

the customer is becoming both a producer and a consumer.

This is especially true with YouTube, where individuals

produce videos or short films and then post them for others

to view. Not surprisingly, the videos can be a form of positive

praise for the retailer but also negative such as when

disgruntled employees or customers decide to tell the world

about their experiences. For instance, in April 2009 two

Domino’s Pizza employees produced and posted a video on

YouTube that showed one of them preparing sandwiches after

putting the cheese up his nose. This was a clear violation of

health standards and disgusting for people to watch. Worse

yet, it was a public relations nightmare for Domino’s Pizza.

YouTube went online in 2005, and in 2006 was purchased

by Google for $1.65 billion. Today YouTube has 100 million

video views per day and ranks only behind Yahoo and Google

as the most visited site on the Internet.

An average YouTube viewer is 32 years old. In terms of

consumer behavior, 40 percent of YouTube viewers regularly

advise others about products or services, 29 percent purchase

online regularly, and 63 percent occasionally buy online.

Although the customer can be the source of the video this

does not prevent the retailer from producing its own videos.

In fact, YouTube is becoming an important medium for

informing consumers about products and services, influencing

consumption, and managing brand image. For example,

Blendtec, a blender manufacturer, developed a campaign

video series on YouTube. Various household objects such as

rake handles and iPods, were run through its blender in the

extreme blending series ‘‘Will It Blend.’’ Blendtec created a

companion microsite, WillItBlend.com, to go with its

YouTube videos. Employees were e-mailed and asked to

pass on information about the videos and the website.

Customers also were involved in this social network system

when they received e-mails asking for suggestions of things to

blend. Their combination of videos on YouTube and the

website and consumer involvement was developed on a

limited budget, but the campaign received media attention.

Blendtec spokespeople appeared on a Today Show segment and

iVillage Live, and they were interviewed by Newsweek, Playboy,

and the New York Times. Company sales of commercial and at-

home blenders increased significantly because of this cam-

paign. Blendtec’s marketing focus on something fun and

worth watching encouraged consumers to pass on informa-

tion. YouTube helped Blendtec establish its brand and

demonstrate its product. The targeted ‘‘Will It Blend?’’ series

helped web revenue increase four times over the previous top

month of sales.

YouTube is an excellent way for small and large businesses

alike to market their products and attract new customers.

Businesses benefit from the inexpensive cost of advertising on

YouTube. One expert has recommended eight reasons for a

firm to promote its business on YouTube:21 (1) increase brand

awareness, (2) advertise products, (3) create retail promotions,

(4) generate direct sales, (5) support products, (6) educate

consumers on product use, (7) communicate with employees,

and (8) recruit new personnel. This expert further suggests

that in order for a video to attract the viewer’s eye and have

value it must be entertaining, educational, or informational.

Best of all, the outcome for many businesses using YouTube

for retail marketing is a large return on a small investment.

Source: This box was prepared by Pauline Sullivan and Katherine Shaw, both from Florida State University.

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made a major commitment to computerizing Walmart as a means to reduce these expenses. As a result of the introduction of the computer to retail management, Walmart’s selling, general, and administrative costs as a percentage of sales reached a low of only 16 percent by the early 1990s. Since that time they have risen a bit to around 18 percent to 19 percent, and this has been due to global expansion efforts and a variety of other factors. Importantly, both in the 1990s and today, all of its competitors’ operating expenses are 3 percent to 5 percent higher, which continues to put Walmart at a relative competitive advantage. Simply put, Walmart became the world’s largest retailer by relentlessly cutting unnecessary costs and demanding that its suppliers do the same. Those who claim that Walmart is obsessed with its bottom line (profits) miss the point: Walmart is obsessed with its top line (sales), which it grows by focusing on the consumer’s bottom line. Costco is another retailer that seeks to boost store traffic by getting shoppers to come in for a ‘‘super, low price’’ on key products. Consider gasoline. The chain uses gas as a loss leader (selling a product at or below its cost) to generate traffic and increase its inside- of-the-store-sales. The success of this strategy is shown by the fact that during the recent recession, almost a third of the U.S. population used an alternative gasoline retailer, such as warehouse clubs and supercenters, to get gas. This was up 50 percent from three years earlier.22 In addition, Costco’s 29 million member households need a membership card, which costs $50 to $100 a year and goes straight to the firm’s bottom line (net profit on an income statement).23

Demographic Shifts Other significant changes in retailing over the past decade have resulted from changing demographic factors such as (1) the fluctuating birthrate, (2) the growing

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When fuel prices soar quickly as they did in the summer of 2008 many households direct more of their gasoline purchases to Costco or Walmart. Often these large retailers sell gasoline at 7 cents to 10 cents a gallon less than nearby competitors. The price of gasoline is important to all retailers because for every extra dollar spent on gasoline, the consumer has that much less to spend on other merchandise.

Chapter 1: Persp ectives on Retailing 9

importance of the 70 million Generation Y consumers (those born between 1978 and 1994), (3) the move of Generation X into middle age, (4) the beginning movement of the baby boomer generation into retirement, and (5) the increasing number of immigrants. Many people simply failed to realize how these factors, which had profound effects on our society, could also impact retailing. For example, a decade ago how many people realized the advent of the three-generation household, where not only the kids return after college but also the grandparents move in instead of entering an assisted living quarters. Some experts believe that ‘‘ParentCare Centers’’ will soon replace today’s KinderCare Centers. In addition, consider how America’s recent immigrants have made once-exotic foods like sushi and burritos everyday options. Also, quick meals of all sorts can now be found in supermarkets, convenience stores, even vending machines. Even supermarkets, which were long thought to be the only retailer capable of catering to all markets, must be aware of the effect of these demographic changes on their business.

Successful retailers must become more service oriented, offering better value in price and quality, as well as more convenient store hours; more promotion oriented to include more effective and useful in-store signage; and better attuned to their customers’ needs. For example, one of the reasons that Lowe’s is threatening Home Depot’s dominance in the do-it-yourself market is due to Lowe’s awareness of its core customer: the female, who is directly responsible for 80 percent of home- improvement sales.

With population growth slowing, retailers are no longer able to sustain their long-term profit projections simply by building new stores to gain additional sales as they did in the past. Profit growth must come by either increasing same-store sales at the expense of the competition’s market share or reducing expenses without reducing services to the point of losing customers. (Same-store sales is a retailing term that compares an individual store’s sales to its sales for the same month in the previous year. Market share refers to a retailer’s sales as a percentage of total market sales for the merchandise line or service category under consideration.) As a result, today’s retail firms are run by professionals who are able to look at the changing environment and see opportunities, exert enormous buying power over manufacturers, and anticipate future changes before they impact the market rather than just react to these changes after they occur. After all, whereas in the past retailers drove the market, in today’s economy and the economy of the future, it will clearly be driven by the consumer. However, not even the best of these profes- sionals can always agree about what the consumer will want in the future.

Store Size Prior to the recession of 2008, the emphasis for many retailers was to increase store size because of the old axiom that said ‘‘The more merchandise customers see, the more they will buy.’’ This idea can best be seen by looking at the country’s two largest drugstore chains: Walgreens and CVS. Drug stores, in addition to selling over-the-counter remedies and prescriptions at the back of the store, now have clinics that millions of Americans can use instead of going to emergency rooms for common ailments.24 In addition, they use the front end of these stores to sell general merchandise. In fact, the majority of their sales come from many different unrelated nondrug items, such as food, apparel, photo supplies, greeting cards, seasonal items such as school supplies, gardening supplies and Christmas decora- tions. This phenomenon is referred to as scrambled merchandising. Scrambled merchandising is the result of the pressure being placed on many retailers to increase profits by carrying additional merchandise or services (with higher profit

same-store sales Compares an individual store’s sales to its sales for the same month in the previous year.

market share Is the retailer’s total sales divided by total market sales.

scrambled merchandising Exists when a retailer handles many different and unrelated items.

10 Part 1: Introduction to Retailing

margins) that will also increase store traffic. As a result, nearly half of the consumers entering a drugstore are not there to have a prescription filled (low-margin business) but to purchase substantially higher margin items from the front end. Another example of scrambled merchandising is the convenience store that sells low-margin gasoline but makes its money selling higher-margin bread, milk, beer, cigarettes, magazines, lottery tickets, and fast food.

However, the recent economic downturn and the resulting slowdown in con- sumer purchasing has caused some retailers to reevaluate their strategies. These retailers realized that having supersized stores increased several major costs:

1. rent—which is usually paid on the square feet of space used;

2. inventory costs—if spending is down, retailers may reduce their various selections offered within the product categories; and

3. labor costs—the larger the store, the greater the staffing needs.

Furthermore, retailers have found out that some consumers actually prefer smaller stores, since these stores provide the convenience of being able to get in and out more quickly. Therefore, retailers have recently begun reducing their store size. If they were locked into a lease or owned their building, they expanded their scrambled merchandising policy. For example, drugstores have recently added medical clinics, and supermarkets have added banks and dry cleaners inside their stores. One supermarket in England has even introduced a dental clinic.25 This scrambling of merchandise also applies to services, such as ATMs, phone cards, and car wash services. Today this practice has gone so far that consumers can now pick up gift cards for home improvement retailers (Home Depot and Lowe’s), restau- rants (Outback and Olive Garden), and even prepaid debit cards next to the greeting cards in supermarkets, drugstores, and convenience stores.

Probably the best example of scrambled merchandising is the supercenter, which is a combination of the more traditional general merchandise store with a

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RediClinic is just one of numerous low-cost medical clinics found in supermarkets, drugstores and large retail stores such as Walmart beginning to proliferate throughout the United States.

Chapter 1: Persp ectives on Retailing 11

supermarket and an automotive service center. Earlier in this chapter, it was pointed out that Walmart was the only general merchandise retailer to experience an increase in sales and stock price during the past recession. This was a direct result of the chain’s emphasis on supercenters. The customer could save money by only traveling to one location to buy everything from gasoline to food to pre- scription drugs. In fact, even before the economic slowdown and oil crisis of 2008, Americans made fewer shopping trips per week.26 It is expected that this trend will continue for the foreseeable future regardless of economic conditions.

Two retail formats that have recently seen not only a significant decrease in average store size but also a decrease in number of stores are department stores and category killers. Department stores are closing their downtown locations, which often were their largest stores, because the downtown areas of many cities have become ‘‘ghost towns.’’ Also, what initially made the department stores success- ful—having a large selection of different merchandise categories under one roof— was superseded by the mall. Sears Holdings, which is a combination of the Sears and Kmart chains, attempted to overcome this demise of the department store with a new format: Sears Grand. Its plan was to compete with the new breed of smaller strip shopping centers, anchored by stores like Best Buy, Home Depot, and Target. Sears stores, after all, were losing prized customers to the smaller centers. But by converting old Kmart stores, which were near the smaller centers, into Sears Grands, the company hoped to lure shoppers back to buy Kenmore washers, Craftsman tools, and Diehard car batteries. The project flopped despite the fact that Sears later renamed the stores Essentials, but not because Kmart shoppers rejected Sears products. It failed because the experiment seemed to consist only of tossing Kenmore stoves and Craftsman hammers into an old Kmart store, rather than creating a vibrant new shopping experience.27 In addition, several other department store chains have either gone out of business or merged with another chain negating the need for the merged chain to continue to operate two stores at a given location—be it downtown or in the small mall.

The term category killer derives from its marketing strategy: Carry a large amount of merchandise in a single category at such low prices that it makes it impossible for customers to walk out without purchasing what they need, thus ‘‘killing’’ the competition.

Toys ‘‘R’’ Us, which began operations in 1948 and became publicly traded in 1978, was the first category killer.28 Sadly, the company also has the unfortunate distinction of being the largest category killer to fail. In 2005, the entire company, in an attempt to avoid bankruptcy, was sold to a group of investors as it and other independent toy retailers suffered from highly competitive toy merchandising efforts of Walmart and Target. These two discounters introduced brutal low prices year-round on a limited selection of toys, but during the all-important holiday shopping season, when busy parents were already in the discount stores they found a triple- or quadruple-sized toy section. The changing tastes of children also contributed to the woes of toy retailers. Today’s kids are migrating to electronic and computer games at an earlier age. Today, the future looks a little brighter for Toys ‘‘R’’ Us, which in 2008 after closing almost 100 stores the previous two years, started replacing its older stores with larger superstores combined with Babies ‘‘R’’ Us outlets.29

Other well-known category killers include Best Buy, Home Depot, Office Depot, BuyBuy Baby, PetSmart, and Bed Bath & Beyond. In addition, category killers have diverted business away from traditional wholesale supply houses. For example, Home Depot appeals to the professional contractor and Office Depot to the business owner who traditionally purchased supplies from hardware

category killer Is a retailer that carries such a large amount of merchandise in a single category at such good prices that it makes it impossible for customers to walk out without pur- chasing what they need, thus killing the competition.

12 Part 1: Introduction to Retailing

wholesalers and office-supply and office-equipment wholesalers. However, in recent years, several other ‘‘killers’’—Circuit City, FAO Schwarz, and CompUSA— have fallen on bad times.

Many new students to retailing believe that what happens in the United States occurs around the world. This isn’t the case. One former student, who sold grocery products in both the United Kingdom and Latin America, described the differences between these markets. In the United Kingdom, one of his customers (Boots Chemist) accounted for 60 percent of his business. Contrast that with Latin America (excluding Chile), which has a highly fragmented trade structure. In these countries, more than three-quarters of the consumers buy their wares from mom-and-pop stores, some no bigger than a closet. These outlets are crammed with food and other household items and serve as the pantries of the world’s poorest consumers for whom both money and space are tight. In Latin America, instead of having one major account, he distributed the same product to more than 6,000 stores. His largest customer was chain with 70 stores, and the next largest had only 25 stores.

Many analysts initially believed that when Walmart and the United Kingdom’s Tesco, which has 4,000 stores across 14 countries, entered these developing mar- kets, the mom-and-pop shops would disappear. Actually, the opposite happened. As these countries’ economies grew, more tiny shops opened to serve the market. The ex-student also noted that

besides the economic differences, there is a vast social/cultural difference between the Latin American and North American markets. Latin American cities are much more like Europe (or New York/San Francisco) than Dallas or Houston. Families have one car (or no car), so they typically walk to purchase their things. After all, who wants to walk home carrying four or five bags of groceries, even if you could afford it? Thus, even though Mexico is one of [Walmart’s] most successful markets, high-frequency stores are still regularly visited by two-thirds of the population.30

This chapter’s ‘‘Global Retailing’’ box illustrates that the opportunities for success in retailing are available both in the United States and globally for those who create exciting and engaging shopping experiences coupled with more cus- tomized offerings.

Success in retailing depends on a retail manager’s ability to properly interpret what societal changes are occurring and what these changes mean to the store’s customers, and then build a strategy to respond to these changes. Therein lies the excitement and challenge of retailing as a career. After all, 50 years ago, the Walmart strategy of building a major enterprise in small town America and offering ‘‘everyday low prices’’ was probably considered foolhardy. This was at a time when retailers thought growth could be achieved only by competing in the big cities where large population bases were located. Yet someone who purchased 100 shares of Walmart when it went public on October 1, 1970, for $16.50 a share and reinvested the dividends would, by 2010, be holding more than 200,000 shares worth more than $9 million. This is the reason that the Walton family members are always near the top of Forbes’s list of the richest people in the world—Sam Walton had invested vir- tually everything he had in his firm and refused for many years to allow the company to pay dividends but felt the Walton family and shareholders were better off by reinvesting earnings in the firm. Unlike other entrepreneurs who achieved wealth and ‘‘cashed out,’’ he did not sell any of his stock. He felt this would send the wrong message to Walmart associates and also the investment community. Anyone else

Chapter 1: Persp ectives on Retailing 13

G l o b a l R e t a i l i n g

It Is Not All about Mass Merchandising

A variety of social commentators proclaim that retailing

around the globe is being taken over by large mass

merchandisers such as Walmart, Carrefour, and Aldi. How-

ever, a careful study around the world clearly demonstrates

that there is a revival of uniqueness and novelty and in many

cases centered on creating unique and not mass-produced

merchandising and shopping experiences. Consider for exam-

ple, the Museum of Contemporary Art in Los Angeles, which

recently created a merchandising event especially for Japanese

artist Takashi Murakami by offering Louis Vuitton handbags

as well as other luxury merchandise. The Louis Vuitton

handbags featured designs by Murakami. Shoe companies are

moving toward more mass customization, and this not only

includes Nike but also Steve Madden, who offers customized

heels designed by customers. Schedoni, an Italian leather

crafter, has teamed up with PUMA to produce a line of

customer footwear.

Another trend is also occurring in the renovation of

shopping malls to transform them into more exciting

experience platforms. Consider Tokyo Midtown, which is part

of a multiuse development that has been upgraded to appeal to

upscale shoppers. Even more extreme is when a shopping center

can be built from the ground up. For instance, VivoCity in

Singapore not only has 300 retailers under one roof but also an

outdoor amphitheatre, a 300-meter harbor front promenade,

and a 20,000-square-foot open plaza. Shopping in VivoCity one

finds constant surprise and nonstandardized offerings. For

instance, Eu Yan Sang is a major health-care brand in Asia, and

it has created a Chinese medicine clinic that includes a yoga

studio, spa, and health food café. In the store, it sells traditional

Chinese medicine products to complement the services offered

by the Chinese medicine clinic.

In São Paulo, Brazil, where Carrefour entered the retail

market more than 30 years ago and Walmart in the last

decade, there still remains creative merchants who cater to

niche markets and provide highly differentiated offerings. For

instance, an independently owned and operated nonchain

bookstore in São Paulo has an in-house movie theater (which

This wine shop in a grocery store in Sao Paolo, Brazil, carries wines that sell for up to the equivalent of $3,000 U.S. dollars.

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who invested a similar amount of money in Walmart stock in 1970 and continued to hold the stock would be equally wealthy today.

Of course, the future can never be predicted with certainty. This text attempts to provide you with the tools to meet these upcoming challenges and be a success in retailing. The answer to what the future will bring lies in the disquieting fact that retailers do not operate in a static, closed environment; they operate in a contin- uously changing and competitive one. These changes are discussed in greater detail in Chapters 3 through 6. For now, we will concentrate on the following environ- mental elements: the behavior of consumers, the behavior of competition, and the behavior of supply-chain members (the manufacturers and wholesalers that the

helps to build store traffic) and a large children’s section in

which a dragon more than 30 feet tall (as shown in the

photograph) captures the attention and builds the imagina-

tion of children. Another local merchant in São Paulo is a

family owned grocery store that has been operating for more

than 75 years and is able to position itself to avoid direct mass

market and merchandising competition with Carrefour and

Walmart by serving a local niche market of high-income

households. From the accompanying photo you can guess

that having a wine selection with prices as high as $6,600 real

(about $3,000 U.S.) means that their target market are the

wealthy and well-to-do citizens of São Paulo.

Undoubtedly, Walmart and Carrefour will continue to

build hypermarkets or superstores with nearly 100,000

stockkeeping units (SKUs) in more than 140,000 square feet

of space. Nonetheless, as these mass merchandisers continue

their global expansion and as markets become more

overstored, the global trend and opportunity is to create

exciting and engaging shopping experiences coupled with

more customized offerings.

This bookstore in Sao Paulo with dragon aims to capture the imagination of children.

G l o b a l R e t a i l i n g (continued )

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retailer buys from), the legal system, the state of technology, and the socioeconomic nature of society. Exhibit 1.1 depicts these elements.

A final comment about the changing face of retailing: Remember, business entrepreneurs are not obliged to conform to old norms and social standards. They are free to forge new retail approaches that capitalize on emerging market opportunities. In retailing, this is all the more evident when we consider fashion trends; what in the past would have lasted for years now may last only a few months.

Categorizing RetailersLO 2

Describe the five methods used to categorize retailers.

Categorizing retailers can help the reader understand competition and the changes that occur in retailing. There is no single acceptable method of classifying retail competitors, although many classification schemes have been proposed. The five most popular schemes used today are described in Exhibit 1.2.

Exhibit 1.1 External Environmental Forces Confronting Retail Firms

Behavior of

Consumers

Behavior of

Competition

Socioeconomic Environment

Behavior of the

Supply Chain

State of

Technology

Legal and Ethical System

Retail Firm

Census Bureau Number of Outlets

Margin/Turnover Location Size

3-digit NAICS code Single unit Low margin/low turns Traditional By sales volume

4-digit NAICS code 2--10 units Low margin/high turns Central shopping districts

5-digit NAICS code 11þ units High margin/low turns Shopping centers By number of employees High margin/high turns Free-standing nontraditional

Exhibit 1.2 The Five Methods Used to Categorize Retailers

16 Part 1: Introduction to Retailing

Census Bureau The U.S. Bureau of the Census, for purposes of conducting the Census of Retail Trade, classifies all retailers using three-digit North American Industry Classifi- cation System (NAICS) codes. The website for locating these codes is www.cen- sus.gov/epcd. Some examples of these NAICS codes are shown in Exhibit 1.3.

As a rule, these three-digit NAICS codes are too broad to be of much use to the retail analyst. Four-digit NAICS codes provide much more information on the structure of retail competition and are easier to work with. For example, NAICS 454 is nonstore retailing, which consists of approximately 50,000 retailers. Within this are NAICS 4541, which consists of 16,000 electronic shopping and mail-order houses, L.L. Bean (www.LLBean.com) and Harry and David (www.harryandda- vid.com), for example; NAICS 4543, consisting of 28,000 direct-selling estab- lishments, and so on.31

In almost all instances, the NAICS code reflects the type of merchandise the retailer sells. The major portion of a retailer’s competition comes from other retailers in its NAICS category. General merchandise stores (NAICS 452) are the exception to this rule. General merchandise stores, due to the variety of general merchandise carried, compete with retailers in most other NAICS categories. For example, department stores compete for clothing sales with specialty apparel stores, such as Gap and The Limited; mail-order retailers, such as L.L. Bean; or off-priced stores, such as T.J. Maxx or Ross Dress for Less. In fact, most retailers must compete to a considerable extent with general merchandise stores because these larger stores usually handle many of the same types of merchandise that smaller,

Code Type of Business Number of Establishments

(thousands)

Percent of Total

Sales (billions)

Percent of Total

Number of Employees (thousands)

Percent of Total

44-45 Retail Trade 1,123 100% 3,688 100% 15,339 100%

441 Motor Vehicle & Parts Dealers

129 11% 886 24% 1,948 13%

442 Furniture & Home Furnishings Stores

66 6% 112 3% 576 4%

443 Electronics & Appliance Stores

50 4% 102 3% 469 3%

444 Building Material & Garden Equipment and Supplies Dealers

87 8% 327 9% 1,263 8%

445 Food & Beverage Stores

153 14% 515 14% 2,938 19%

446 Health & Personal Care Stores

85 8% 209 6% 1,037 7%

447 Gasoline Stations 117 10% 374 10% 909 6%

448 Clothing & Clothing Accessories Stores

151 13% 202 5% 1,556 10%

451 Sporting Goods, Hobby, Book, & Music Stores

61 5% 82 2% 631 4%

452 General Merchandise Retailers

46 4% 525 14% 2,671 17%

453 Miscellaneous Store Retailers 128 11% 108 3% 820 5%

454 Nonstore Retailers 50 4% 247 7% 521 3%

Exhibit 1.3 Using NAICS Codes

Chapter 1: Persp ectives on Retailing 17

more limited retailers sell. In a very broad sense, all retailers compete with each other since they all compete for the same limited consumer dollars.

A second cautionary note about using this Census Bureau data is that com- parisons between years may not be accurate. In a note on its website, the Census Bureau cautions that sales made to a customer in a foreign country through a U.S. website are included in the bureau’s estimates. Thus, when the dollar is strong, many foreign customers may purchase from an American e-tailer and vice versa when the dollar is weak, Americans may purchase on overseas websites. For example, Blue Nile, the Seattle-based online jewelry retailer, recently reported a sales increase of 3.8 percent over the previous year. However, the company said that all of that gain came from Internet sales to customers outside the United States due to a weak dollar. Thus, while the sales increase was good for the company, it actually doesn’t indicate strength in overall U.S. retail spending.32

Another shortcoming of using the NAICS codes is that they do not reflect all retail activity. The Census Bureau’s definition equates retailing only with the sale of ‘‘tangible’’ goods or merchandise. However, by our definition, selling of services to the final consumer is also retailing. This suggests that retailing is also conducted by businesses such as barber and beauty shops, health clubs, dry cleaners, banks, insurance agencies, funeral homes, movie theaters, amusement parks, maid services, medical and dental clinics, one-hour photo labs, and so on. For instance, NAICS 772, which is not classified under retail trade, consists of almost 490,000 eating and drinking establishments. Remember, any time the consumer spends money, whether on tangibles (merchandise) or intangibles (services), retailing has occurred.

Number of Outlets Another method of classifying retailers is by the number of outlets each firm operates. Generally, retailers with several units are a stronger competitive threat because they can spread many fixed costs, such as advertising and top management salaries, over a larger number of stores and can achieve economies in purchasing. However, single-unit retailers, such as your neighborhood IGA grocery store, do have several advantages. They are generally owner- and family-operated and tend to have harder-working, more motivated employees. Also, they can focus all their efforts on one trade area and tailor their merchandise to that area while gaining buying efficiencies by being a member of the IGA group. In the past such stores were usually able to spot emerging customer desires sooner and respond to them faster than the larger multiunit operations.

Any retail organization that operates more than one unit is technically a chain, but this is really not a very practical definition. Therefore this text will only con- sider a retail operation to be a chain if it has 10 or more stores. Various trade associations estimate that chain stores account for 43 percent of all retail sales (including 99 percent of all department store sales and 66 percent of all grocery store sales). Though chain operations account for 60 percent of nondurable goods sales, they account for only about 23 percent of durable goods sales. After all, most auto dealerships and furniture stores are still independent or have fewer than 10 units.33

Not all chain operations enjoy the same advantages. Small chains are local and may enjoy some economies in buying and in having the merchandise tailored to their market needs. Large chains are generally regional or national and can take full advantage of the economies of scale that centralized buying, accounting, training, advertising, and information systems, and a standard stock list can achieve. A standard stock list requires that all stores in a retail chain stock the same

standard stock list Is a merchandising method in which all stores in a retail chain stock the same merchandise.

18 Part 1: Introduction to Retailing

merchandise. Other national chains such as Walmart, recognizing the variations of regional tastes, use the optional stock list approach, which gives each store the flexibility to adjust its merchandise mix to local tastes and demands. This point is driven home by the name of a retail consulting firm composed of former Walmart employees—4 R’s of Retailing, Inc. (right merchandise, right quantity, right place, and right time.) After all, as one JCPenney executive told the authors, stores in the Rio Grande Valley of Texas sell primarily smalls and mediums in men’s shirts, while in Minnesota the chain sells a preponderance of larger sizes.

Both types of stock lists provide scale advantages in other retailing activities. For example, promotional savings occur when more than one store operates in an area and can share advertising, even while tailoring specific merchandise to specific stores.

Finally, chain stores have long been aware of the benefits of taking a leadership role in the marketing supply chain. When a chain store retailer is able to achieve critical mass in purchases, it can get other supply-chain members—wholesalers, brokers, and manufacturers—to engage in activities they might not otherwise engage in, and it is then referred to as the channel advisor or channel captain. For example, the chain store retailer might get other supply-chain members to include direct-to-store deliveries, increased promotional allowances, extended payment terms, or special package sizes, all of which help the retailer operate more efficiently.

In recent years, chains (as will be discussed in greater detail in Chapter 4) have relied on their high level of consumer recognition to engage in private-label branding. Private-label branding may be store branding, when a retailer develops its own brand name and contracts with a manufacturer to produce the product with the retailer’s brand, or designer lines, where a known designer develops a line exclusively for the retailer. Thus, instead of competing with another retailer selling the same brand, here the retailer is the only one selling the product. Today, the whole concept of private labels has taken on a new dimension as retailers have nationally promoted these items. These private labels are advertised in the news- paper as brands and are heavily promoted in stores.

In the past, private labels were inexpensive knockoffs of popular items. Today, though, some of the best retailers have significantly increased the quality and style of their private merchandise to promote it front and center. Retailers target these private labels, which have their own distinct personality, to specific markets and advertise them in their own promotional pieces. Consider, for example, the American Living brand, JCPenney’s comprehensive lifestyle brand created by a division of Polo Ralph Lauren. It includes a full range of apparel for women, men, and children, along with footwear, accessories, home furnishings, and textiles offering an updated classic style with impeccable quality at a smart price. Just as many consumers believe Arizona Jeans to be a national brand, Penney’s hopes to do the same with its American Living brand. In addition, Walmart recently expanded its private-label line of food and household cleaners to take advantage of recession- pinched consumers’ increasing desire to buy cheaper store brands rather than more expensive brand-name products.34

Another reason why private labels are so popular with retailers is that by designing and manufacturing their own labels, retailers can cut out the designer and the middleman. Doing so can translate into profit margins that can be at least 20 percent better than a manufacturer’s name-brand label. Some chains, such as Save-A-Lot, a unit of Supervalu, have dropped national brands like Fritos, Dr. Pepper, Pampers, and Coca-Cola and replaced them with their own brands: Corntitos, Dr. Pop, Waddles, and Bubba Cola. Small retailers, because of their lack of economies of scale, can’t use private labels unless they are part of a buying group.

channel advisor or channel captain Is the institution (manu- facturer, wholesaler, bro- ker, or retailer) in the marketing channel that is able to plan for and get other channel institutions to engage in activities they might not otherwise engage in. Large store retailers are often able to perform the role of chan- nel captain.

private label branding May be store branding, when a retailer develops its own brand name and contracts with a manu- facturer to produce the product with the retailer’s brand, or designer lines, where a known designer develops a line exclusively for the retailer.

optional stock list Is a merchandising method in which each store in a retail chain is given the flexibility to adjust its merchandise mix to local tastes and demands.

Chapter 1: Persp ectives on Retailing 19

The major shortcoming of using the number-of-outlets scheme for classifying retailers is that it addresses only traditional bricks-and-mortar retailers. This scheme thus ignores many nontraditional retailers such as catalog-only sellers and e-tailers. How many outlets does Amazon.com have? One could argue that each new online computer is a potential retail outlet for the e-tailing giant.

Margins versus Turnover Retailers can also be classified in regard to their gross-margin percent and rate of inventory turnover. The gross-margin percentage shows how much gross margin (net sales minus the cost of goods sold) the retailer makes as a percentage of sales; this is also referred to as the gross-margin return on sales. A 40-percent gross margin indicates that on each dollar of sales the retailer generates 40 cents in gross- margin dollars. This gross margin will be used to pay the retailer’s operating expenses (the expenses the retailer incurs in running the business other than the cost of the merchandise—e.g., rent, wages, utilities, depreciation, insurance). Inventory turnover refers to the number of times per year, on average, that a retailer sells its inventory. Thus, an inventory turnover of 12 times indicates that, on average, the retailer turns over or sells its average inventory once a month. Like- wise, an average inventory of $40,000 (retail) and annual sales of $240,000 means the retailer has turned over its inventory six times in one year ($240,000 divided by $40,000), or every two months.

High-performance retailers, those that produce financial results substan- tially superior to the industry average, have long recognized the relationship between gross-margin percent, inventory turnover, and profit. One can classify retailers into four basic types by using the concepts of margin and turnover: (1) low margin, low turnover; (2) high margin, low turnover; (3) low margin, high turnover; and (4) high margin, and high turnover.

Typically, the low-margin, low-turnover retailer will not be able to generate sufficient profits to remain competitive and survive. Thus, there are no good

JC Penney ‘‘American Living’’ private label logo. In addition to American Living, Penney’s has introduced the following exclusive designer lines: I Heart Ronson, Nicole by Nicole Miller, Allen B, Bisou Bisou, and Le Tigre in recent years.

operating expenses Are those expenses that a retailer incurs in running the business other than the cost of the merchandise.

gross-margin percentage A measure of profitability derived by dividing gross margin by net sales.

gross margin Is the difference between net sales and cost of goods sold.

inventory turnover Refers to the number of times per year, on aver- age, that a retailer sells its inventory.

high-performance retailers Are those retailers that produce financial results substantially superior to the industry average.

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low-margin/low- turnover retailer Is one that operates on a low gross margin per- centage and a low rate of inventory turnover.

20 Part 1: Introduction to Retailing

examples of successful retailers using this approach. High-margin, low-turnover retailers (bricks and mortar) are quite common in the United States. Furniture stores, high-end women’s specialty stores and furriers, jewelry stores, gift shops, funeral homes, and most of the mom-and-pop stores located in small towns across the country are generally good examples of high-margin, low-turnover operations. Some clicks-and-mortar retailers sell both online and in physical stores; examples include Coach and Tiffany’s.

On the other hand, the low-margin, high-turnover retailer only really developed after World War II with the advent of the discount store. Sam Walton ran a Ben Franklin five-and-dime store and was among the first to see that selling one item a week for 99 cents with a 50-cent margin wasn’t as good as selling six of those items a week at 69 cents and making 20 cents on each. Bernie Marcus and Arthur Blank revolutionized the hardware business by starting Home Depot with its low-margin, high-turnover strategy and replacing smaller hardware stores using a high–low approach. Amazon.com is probably the best-known example of a low- margin, high-turnover e-tailer.

Finally, some retailers find it possible to operate as high-margin, high- turnover retailers. As you might expect, this strategy can be very profitable. Probably the most popular examples are convenience food stores such as 7-Eleven, Circle K, and Quick Mart; and the concessions and sports apparel businesses at major athletic events. However, because in the early stages of Internet commerce most e-tailers are trying to achieve a high turnover rate, there are no examples of e-tailers using this strategy.

As noted above, the low-margin, low-turnover retailer is the least able of the four to withstand a competitive attack because this retailer is usually unprofitable or barely profitable; when competition increases, profits are driven even lower. On the

The Kindle is an electronic book reader which allows customers to download an entire book. Consequently it reduces the inventory of books for Amazon.com and thus increases inventory turnover. Some "experts" predict that within a decade all textbooks will come this way.

high-margin/low- turnover retailer Is one that operates on a high gross margin per- centage and a low rate of inventory turnover.

low-margin/high- turnover retailer Is one that operates on a low gross margin per- centage and a high rate of inventory turnover.

clicks-and-mortar retailers Retailers that sell both online and in physical stores.

high-margin/high- turnover retailer Is one that operates on a high gross margin per- centage and a high rate of inventory turnover.

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other hand, the high-margin, high-turnover retailer is in an excellent position to withstand and counter competitive threats because profit margins enable it to finance competitive price wars.

While the margin and turnover scheme provides an encompassing classi- fication, it fails to capture the complete array of retailers operating in today’s marketplace. For example, service retailers and even some e-tailers such as Priceline.com carry no inventory. Thus, while this scheme provides a good way of analyzing retail competition, it neglects an important type of retailing: service retailers. Keep in mind, however, that with a bit of imagination the concept may still apply. Often in a service-retailing business such as a restaurant or barber or beauty shop what the retailer needs to turn is not inventory but people. If you have worked in a restaurant then you probably know the concept called ‘‘turning the tables,’’ which is the practice of getting customers in and serving them quickly and efficiently and getting them out so the table can be used to serve other guests. In a fine-dining establishment, a dinner can take three hours and thus the turnover of tables or customers is low but the gross margin on the food and beverages is quite high. On the other hand, with a cafeteria the visitors go through the serving line and are seated and depart in 30 minutes. Margins are lower but turnover of tables or customers is higher. Think of how this concept could apply to a beauty shop.

Location Retailers have long been classified according to their location within a metropolitan area, be it the central business district, a regional shopping center, or a neighbor- hood shopping center or as a freestanding unit. These traditional locations will be discussed in greater detail in Chapter 7. However, the last decade saw a major change in the locations that retailers selected. Retailers are now aware that opportunities to improve financial performance can result not only from improving the sales per square foot of traditional sites but also from operating in new and nontraditional retail areas.

In the past, rather than expand into untested territories, many retailers simply renovated their existing stores. Not today. Now retailers are reaching out for alternative retail sites. American retailers today are testing all types of nontradi- tional locations to expand their businesses. For example, to get more people to eat pizza when they rent videotapes, Pizza Hut introduced kiosks in video rental stores with direct phone lines to the local Pizza Hut. McDonald’s has locations in service stations along interstate highways, airports and even in some Walmart stores. Loblaw, a Canadian grocer, has a women’s health club in its store near Toronto, E*Trade, the online brokerage firm, is expanding its non-Internet presence with financial service centers in Target stores. Even the brick-and-mortar banks now realize that their locations are now less of a vehicle for transactions and much more a vehicle for selling financial products: mutual funds, mortgages, trusts, and investment services. As a result, they are putting in pharmacies, little post offices, and even Starbucks in their buildings as a means of increasing traffic.35

Also, given the high income levels of many airline travelers and the increasing amount of layover time between flights and the absence of food on many flights, many retailers have opened stores in airports, an idea that originated with and has long been used by European and Asian retailers. Airport retailers have been able to succeed by offering fast service, convenience, pleasant and clean environments, product variety and quality, entertainment, and competitive prices. For example, one of New York City’s toniest retail venues today—where shoppers can browse in

22 Part 1: Introduction to Retailing

boutiques featuring merchandise from DKNY, adventure sports outfitter ExOffi- cio, Japanese housewares retailer Muji, Ron Jon Surf Shop, H. Stern Jewelers, and Danish designer Sand—isn’t on Fifth or Madison avenues. It’s The Shops at John F. Kennedy International Airport. In addition, a wide selection of food and a spa and pharmacy with an on-site nurse are available there, too. Travelers can also find Brooks Brothers in Pittsburgh’s airport and Coach and Body Shop in San Fran- cisco’s. So popular have these stores become with passengers that retail rents now account for more than 50 percent of airport revenues.36 Probably the most significant of the new nontraditional shopping locations today is the combination of culture with entertainment and shopping, something that was unheard of a decade ago. Today such locations, such as Bass Pro hunting and fishing superstores, have proven that the edges are blurring between shopping and entertainment for the masses.

Retailers do not want to miss out on urban or inner-city neighborhoods, which frequently have large minority populations. By 2015, it is projected that the spending power of Latinos and African Americans will reach $1.4 trillion and $1.1 trillion, respectively. Dollar Tree, Dollar General, Jewel-Osco, and Pathmark are leaders in opening stores in urban locations.

Before ending our discussion of location, it is important to point out that this is an area of retailing that may undergo significant changes in the next decade. The Internet suggests that future locations may be as close as a consumer’s computer or BlackBerry. Some retailers today are now able to operate out of an office in the home or car equipped with an iPod.

Size Many retail trade associations classify retailers by sales volume or number of employees. The reason for classifying by size is that the operating performance of retailers tends to vary according to size; that is, larger firms generally have lower operating costs per sales dollar than smaller firms do. For example, based on the

Walmart operates large discount stores around the world, however, most locations they select require the availability of large parking lots because most customers transport their purchases back home in their automobiles.

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Chapter 1: Persp ectives on Retailing 23

recently available information from various trade associations, the authors concluded that operating expenses were 39 percent for firms with sales between $5 million and $45 million and 35 percent for larger operations. These retail trade associations provide confidential information to their members showing similar breakdowns on gross margins, net profits, net markups, sales per square foot of selling space, and so forth. Retailers will find this information meaningful when comparing their results against others of a similar size within their product category.

While size has been useful in the past, it is unclear whether the changes brought about by technology will make this classification obsolete. For example, imagine a fully automated retailer where, as a consumer places an order online, an automated stock-picking warehouse packages the selected merchandise and for- wards it to the shipping area to be sent by UPS to the customer. Is Blockbuster comparable to Netflix or Target to Overstock.com in terms of the number of employees needed?

A Retailing CareerLO 3

What is involved in a retailing career?

Retail is the largest industry in the nation. That means there are many different kinds of retail entities that fuel our nation’s economy. Someone once said that ‘‘managing a retail store is an easy job. All you have to do is get consumers to visit your store (traffic) and then get these consumers to buy something (convert the traffic into customers) while operating at a lower cost than your competition (financial management).’’ Assuming that this simplistic statement is correct and forgetting what is involved in each of these tasks, what type of person is needed to manage a retail store?

an economist Yes ___________________________________________________ No ___________________________________________________

a fashion expert Yes ___________________________________________________ No ___________________________________________________

a marketer Yes ___________________________________________________ No ___________________________________________________

a financial analyst Yes ___________________________________________________ No ___________________________________________________

a personnel manager Yes ___________________________________________________ No ___________________________________________________

a logistics manager Yes ___________________________________________________ No ___________________________________________________

an information systems analyst Yes ___________________________________________________ No ___________________________________________________

an accountant Yes ___________________________________________________ No ___________________________________________________

In reality, the answer is ‘‘yes’’ to all of these roles. A retail store manager needs to be knowledgeable in all these areas. As we have pointed out, few industries offer a more fast-paced, ever-changing environment where results are quickly seen on the bottom line than retailing. Few job opportunities will train you to become an expert not in just one field but in all business disciplines. Retailing offers you the econ- omist’s job of forecasting future sales, the fashion expert’s job of predicting con- sumer behavior and how it will affect future fashion trends, and the marketing manager’s job of determining how to promote, price, and display your merchandise. Further, it offers the financial analyst’s job of seeking ways to reduce various expenses; the personnel manager’s job of hiring the right people, training them to perform their duties in an efficient manner, and developing their work schedules; the logistics manager’s job of arranging delivery of a ‘‘hot item’’; the information systems analyst’s job of analyzing sales and other data to determine opportunities for improved management practices; and the accountant’s job of arriving at a profitable bottom line.

24 Part 1: Introduction to Retailing

In summary, a retailer is like a master chef. Anyone can buy the ingredients, but only a master chef can make a masterpiece. Over the course of a career, you will have to deal with many issues. Among them are:

1. what product(s) or service(s) to offer,

2. what group of customers to target,

3. where to locate the store,

4. how to train and motivate your employees,

5. what price level to use,

6. what levels of customer service (store hours, credit, staffing, parking, etc.) to offer your customers,

7. how to lay out the store,

8. how to control store operating expenses and police employees and customers to cut down on shoplifting and employee theft of merchandise, and

9. how to leverage the Internet to support your mission.

Exhibit 1.4 illustrates the career paths available to the college graduate at a typical retailer. Note that there are two major paths: store management and buyer. (For a more detailed discussion of the various careers available today in retailing, including jobs in accounting, finance, advertising, information technology, logis- tics, and store design, see the excellent discussion of retailing careers at www. macyscollege.com/college/careers/careerpaths. In addition, CareerBuliders.com provides information on all aspects of the job search. This site offers tips on resume writing, distributing the resume, interviewing, and even career assessment.)

VP of Stores

Regional Manager

Store Manager

Co-store Manager

Assistant Store Manager

Assistant Merchandise Manager

Buyer

Assistant Buyer

Merchandise Planner Training Program

College Graduate

Divisional Merchandise Manager

Exhibit 1.4 Retailing’s Two Career Paths

Chapter 1: Persp ectives on Retailing 25

If you elect the store-management path, you will have many decisions to make that affect the store’s profitability. Selecting, training, evaluation, and all other aspects of personnel management are your responsibility. This path is very people skill oriented as you will be responsible for in-store promotions, displays, customer service, building maintenance, and store security. In addition, there is a need to coordinate your efforts with buyers and department managers in order to meet customers’ needs, thus maximizing store sales. This career path does require frequent moves as you increase your responsibilities. In addition, this path involves working weekends and evenings. In fact, former students who have chosen this career path say they loved being a manager. Every day is different from the previous one, but most of all, they loved teaching, mentoring, and coaching the young people who are in their first job. What the ex-students disliked most about being a manager was dealing with ‘‘poor work ethic’’ employees and shoplifters. Still, this path offers a very rewarding pay package as you advance to store manager and beyond. Several of the ex-students, while still in their 30s, were making substantial six-figure incomes.

If your inclination is toward buying, you can follow that career path. After spending some time as an assistant buyer, you will be promoted to buyer, which is the equivalent of the CEO of a small business unit. Buyers will use quantitative tools such as the merchandise budget and open to buy in their work. Buyers, who usually work out of the retailer’s main office but do spend a great amount of time traveling have to develop appropriate buying plans for their merchandise lines. Also, buyers are not only responsible for selecting the merchandise but also must select the vendors and negotiate terms with them. In fact, as a buyer you could also serve on a team with the retailer’s product development staff as it works with a supplier to design a private- label offering for your store. Finally, buyers must coordinate with store managers to ensure that they are meeting the customers’ needs. The former students who have chosen this path say that the high they get after a successful trip to market can’t be matched. At the same time, there is no low like the one you get when you realize you’ve bought a product your customers don’t want.

If you consider that there are 10,000 possible combinations of products and at least 10 possible combinations of the other seven issues, then there are more than 10 billion different possible retailing formats. No wonder no other occupation offers the immediate opportunities and challenges that retailing does. Yet many students do not consider retailing when exploring career opportunities, or they do not consider all they can do in a retailing career. One of the greatest opportunities for people entering a retailing career is in online retailing, or e-tailing. One particular e-tailing field that is attracting many job seekers is the retailing of online information, which is pro- viding unheralded opportunities to those seeking new challenges.

Common Questions about a Retailing Career As a student considering your future career, you may have certain questions about what opportunities a career in retailing may offer. To help you understand both the positive and negative sides of retailing, we will examine a few of the most frequently asked questions.

Salary

Are salaries in retailing competitive? Generally, starting salaries in executive- training programs will be around $42,000 to $56,000 per year, depending on the geographic area. That, however, is only the short-term perspective. In the long run,

store management The retailing career path that involves responsibil- ity for selecting, training, and evaluating personnel, as well as in-store promo- tions, displays, customer service, building mainte- nance, and security.

buying The retailing career path whereby one uses quan- titative tools to develop appropriate buying plans for the store’s merchan- dise lines.

26 Part 1: Introduction to Retailing

the retail manager or buyer is directly rewarded on individual performance. Entry-level retail managers or buyers who do exceptionally well can double or triple their incomes in three to five years and often within seven to 10 years can have incomes twice those of classmates who chose other career fields. As mentioned earlier, it is not uncommon for a college graduate with five to eight years of experience to earn a six-figure income. In fact, Macy’s Chairman and CEO Terry Lundgren was president of Federated Department Stores at age 35.

Career Progression

Can one advance rapidly in retailing? Yes. Obviously, this answer depends on both the retail organization and the individual. A person capable of handling increasing amounts of responsibility can move up quickly. There is no standard career pro- gression chart; http://retailindustry.about.com/od/retailjobscareers/Retail_Jobs_ Career_Advancement.htm shows career opportunities available with many of the country’s leading retailers by geographic area as well as other fine companies seeking college graduates. Keep in mind that franchising (discussed in Chapter 5) is also a potential career option at some point in your retailing career. Even when he sold his retail chain (Mervyns) to Dayton-Hudson more than 25 years ago, Mervyn Morris decided he wanted to become a Cadillac dealer and thus became the operator of a franchise business.

Geographic Mobility

Does a retailing career allow one to live in the area of the country where one desires? Yes and no. Retailing exists in all geographic areas of the United States with sufficient population density. In the largest 300 cities in the United States, there will be sufficient employment and advancement opportunities in retailing. In order to progress rapidly, a person must often be willing and able to make several moves, even if the changes may not be attractive in terms of an individual’s lifestyle. Rapidly growing chain stores usually find it necessary to transfer individuals, especially those in the store-management career path, in order to open stores in new geo- graphic areas. Fortunately, these transfers are generally coupled with promotions and salary adjustments. Finally, a person may stay in one geographic area if he or she desires. However, this may cost that person some opportunities for advance- ment and salary increases.

Societal Perspective

Professional merchants are considered respected and desirable members of their communities, state, and nation. Leading retail executives are well-rounded indi- viduals with a high social consciousness. Many of them serve on the boards of nonprofit organizations, as regents or trustees of universities, as active members of the local chambers of commerce, on school boards, and in other service-related activities. Retailers serve society not only outside their retailing career but also within it as well. For example, civic events such as holiday parades are often sponsored by local merchants. In addition, many retail firms support local groups and charities with cash, food, and other goods and services as a means to ‘‘reinvest’’ some of their profits in the communities they serve.

Unfortunately, there are also unscrupulous, deceiving merchants that society can do without. This is true in all professions. There are unscrupulous lawyers, bankers, doctors, and police officers who give their professions a negative image at times. On the other hand, there are professional and ethical lawyers, bankers, doctors, and police officers who are good for their professions and for society as a

Chapter 1: Persp ectives on Retailing 27

whole. It is not the profession that dictates one’s contribution to society but the soundness of one’s ethical principles. Early in your career (preferably as a student), you need to develop a firm set of ethical principles to help guide you throughout your managerial career.

Prerequisites for Success What’s required for success as a retail manager? Let’s look at several factors that influence a retailer’s success.

Hard Work

Most successful retailers, like successful individuals, will respond to the preceding question with a simple ‘‘hard work.’’ Beginning retailers have long known that they earn their salary 9 to 5, Monday through Friday, but earn their advancement after 5 o’clock. Still, one can have a balanced and happy life coupled with a retailing career by using good time-management and planning skills.

Analytical Skills

The retail manager must be able to solve problems through numerical analysis of facts and data in order to plan, manage, and control. The retail manager is a problem solver on a day-to-day basis. An understanding of the past and current performance of the store, merchandise lines, and departments is necessary. It is the analysis of these performance data that forms the basis of future actions in the retailing environment. Today’s retailer must be able to analyze all the financial data that are available before going to market. For example, Costco has had vendors redesign product packages to fit more items on a pallet, the wooden platforms it uses to ship, and display its goods. In one case, the retailer had the manufacturer put cashews into square containers instead of round ones, which enabled the retailer to decrease the number of pallets shipped by 24,000 a year, cutting the number of trucks needed by 600. Likewise, by having other manufacturers reshape everything from laundry detergent buckets to milk jugs; Costco was able to reduce the number of pallets per year by 200,000.37

In addition, quantitative and qualitative analysis of customers, competitors, suppliers, and other constituencies often help to identify emerging trends and innovations. Combined with current performance results and market knowledge, continual monitoring of these constituencies provides insight into past perfor- mance and alerts the retailer to new directions. Many retailers also get information from reading trade journals, such as Stores, Women’s Wear Daily, Progressive Grocer, and Chain Store Age; discuss current happenings with their buying office; visit markets; and even talk to their competitors as a means to keep up. One successful retailer told the author to not just analyze the merchandise, customers, competi- tors, and suppliers, but to do the same with its employees. Do they understand the retailer’s philosophy, its values, preferred behavior, and code of conduct? It is amazing that Walmart always invokes the image of Sam Walton and what he stood for, but very few current employees were working for the retailer when Mr. Sam , as he was known by everyone in the chain, died.

Creativity

The ability to generate and recognize novel ideas and solutions is known as crea- tivity. A retail manager cannot operate a store totally by a set of preprogrammed

28 Part 1: Introduction to Retailing

equations and formulas. Because the competitive environment is constantly changing, there is no standard recipe for retailing. Therefore, retail executives need to be idea people as well as analysts. After all, success in retailing is the result of sensitive, perceptive decisions that require imaginative and innovative techniques.

For example, as the American economy continued in its slowdown a few years ago, many retailers were afraid to embrace new ideas. Instead of using their creative power to increase their competitive advantage, these retailers either just continued doing things as they always had done them, cut costs without thinking about the impact on customer satisfaction, or copied what their competitors were doing.

S e r v i c e R e t a i l i n g

Using Creativity to Take on Walmart

Moore’s Bicycle Shop is located in a southern college town of

50,000 and is surrounded by three Walmart Supercenters. A

couple of years ago, its owner, James Moore, became

frustrated when he noticed customers walking out of his

shop without making a purchase when he was unable to offer

them a $125 bicycle. His previous source of these ‘‘inexpen-

sive’’ bikes was Mongoose. However, Mongoose had earlier

discontinued selling to independent bicycle retailers, such as

Moore, in favor of having an exclusive contract with the much

larger Walmart.

Recently, Moore began to notice customers bringing in

some Walmart bikes for repair. These bikes, which were sold

as ‘‘clearance specials’’ consisted of defects or returns that

Walmart would put on the sidewalk and sold ‘‘as is.’’

Unfortunately for the customers, the cost of the work needed

to make their bikes safe and functional often exceeded what

they originally paid, and the customers often left without

getting the necessary repairs.

Using his creativity, Moore wrote the three Walmart

managers, offering to purchase sight unseen all of their

returned bicycles on the condition that he get all the returns

and not just the worst of the batch. He offered a simple rate

structure of $10 for kid’s bikes and $15 for adult bikes. He

also addressed the issue that the practice of selling defective

merchandise was not good from a liability standpoint. In

addition, he suggested that their customers might feel cheated

with their bargains when they learned the ‘‘clearance bikes’’

were not cost-effective to fix. In short, Moore noted that

Walmart might be selling potentially dangerous products to

disappointed customers.

At first, Walmart offered him 68 bicycles at an average

price less than $12. A few bikes only needed a flat repaired,

most needed a minimal degree of time and parts, while a few

were only usable for parts. James took the best six bikes and

within two hours had them repaired and sold for enough to

pay for all 68 used bikes.

Today Moore prices most of these repaired bikes either at

Walmart’s regular price or even higher after explaining the

higher price included the shop’s six-month comprehensive

warranty and the fact that the bikes had already gone through

the critical break-in period (where most adjustments are

needed) and had been serviced by ‘‘expert’’ mechanics.

Over the past couple of years, Moore has purchased

several hundred more Walmart returns, resulting in a win–

win situation for all three parties.

Walmart wins because it no longer has lines of defective

merchandise greeting customers at the front door, and the

managers are able to clear their storage clutter with one

phone call.

The customer wins as they are no longer being sold bikes

that are unsafe to ride and too costly to repair. More often

than not, the victims of these sidewalk ‘‘specials’’ were the

customers least able to afford making a buying mistake by

purchasing a faulty or unusable product.

Moore won for two reasons. First, he was now able to

provide an identical product to the price-conscious shopper at

the same price as Walmart. Second, in the future many of his

‘‘new’’ customers would often trade that ‘‘inexpensive’’ bike in

for a better-quality bike. The shop also wins because its labor

productivity is now maximized as it always has a backlog of

Walmart returns to repair during its otherwise slower periods.

Consequently, the shop mechanics now work year-round.

However, nothing excites Moore more than the thought

that, with a little creativity, he is now able to take a product

that costs less than $12 and, after investing about 15 minutes

of employee time and $5 in parts, he can sell it for $125.

Source: This box is based on information supplied by James Moore, Moore’s Bicycle Shop, Hattiesburg, Mississippi, and used with his written permission.

Chapter 1: Persp ectives on Retailing 29

None of these actions enabled the retailer to actually differentiate itself from the competition. In fact, many students mistakenly assume that price is the only way for retailers to compete and that the arrival of a discount chain always spells disaster for small-town retailers. After all, the small local stores cannot match the discounters’ purchasing volume. This is not the case if the retailer is able to use creativity to differentiate itself from the competition. The chapter’s ‘‘Service Retailing’’ box illustrates one of the most creative ways a small bike sales and repair retailer took on the big discounters. Moore’s Bicycle Shop simply did it by using the discounter as a supply source.

Decisiveness

The ability to make rapid decisions, and to render judgments, take action, and commit oneself to a course of action until completion is termed decisiveness. A retail manager must be an action person. Better decisions could probably be made if more time were taken to make them. However, more time is frequently unavailable because variables such as fashion trends and consumer desires change quickly. Thus, a manager must make decisions quickly, confidently, and correctly in order to be successful even if perfect information is not always available. For example, buyers often make purchase decisions six months to a year before the merchandise arrives at the store.

Flexibility

The ability to adjust to the ever-changing needs of the situation calls for flexibility. The retail manager must have the willingness and enthusiasm to do whatever is necessary (although not necessarily planned) to get the job completed. Because plans must be altered quickly to accommodate changes in trends, styles, and atti- tudes, successful retail managers must be flexible. For example, changes in e-tailing occur continuously as retailers adjust prices and product offerings to changing consumer tastes and the competitive actions of other retailers.

Creativity is one of the easiest ways for small retailers to compete with the discounters. Witness the action of Moore’s Bicycle Shop in its dealings with Walmart.

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30 Part 1: Introduction to Retailing

Initiative

Retail managers are doers. They must have the ability to originate action rather than wait to be told what to do. This ability is called initiative. To be a success, the modern retail manager must monitor the numbers of the business (sales volumes, profits, inventory levels) and seize opportunities for action.

Leadership

Working in retailing is really working on a team. The ability to inspire the team members to trust and respect your judgment and the ability to delegate, guide, and persuade this team calls for leadership. Successfully conducting a retail operation means depending on the team to get the work done; in any large-scale retailing enterprise, one person cannot do it all. A manager succeeds when his or her sub- ordinates do their jobs. In fact, the concept of the team approach is one of the most important hiring criteria for many retailers.

Organization

Another important quality is the ability to establish priorities and plans and follow through to achieve these results. This prerequisite is organization. Retail managers are often forced to deal with many issues, functions, and projects at the same time. To achieve goals, the successful retailer must be a good time manager and set priorities when organizing personnel and resources.

Risk Taking

Retail managers should be willing to take calculated risks based on thorough analysis and sound judgment; they should also be willing to accept responsibility for the results. Success in retailing often comes from taking calculated risks and having the confidence to try something new before someone else does. For example, no one can say that Jeff Bezos’s decision to start Amazon.com and Sam Walton’s decision to start Walmart were not without risk. All successful buyers have at one time or another purchased merchandise that could be labeled as losers. After all, if buyers never made errors, that would mean they were afraid to take ‘‘risks’’ and probably passed up many winners. However, they must have the ability to recognize when they make a mistake.

Stress Tolerance

As the other prerequisites to retailing success suggest, retailing is a fast-paced and demanding career in a changing environment. The retailing leaders of the 21st century must be able to perform consistently under pressure and to thrive on constant change and challenge.

Perseverance

Because of the difficult challenges that a retail career presents, it is important to have perseverance. All too often, retailers may become frustrated due to the many things they can’t control. For example, a blizzard may occur just before Christmas and wipe out the most important shopping days of the year. Others may become exasperated with fellow employees, the long hours (especially the weekends), or the inability to satisfy some customers. The person who has the ability to persevere and take all of this in stride will find an increasing number of career-advancement opportunities.

Chapter 1: Persp ectives on Retailing 31

Enthusiasm

Successful retailers must have a strong feeling of warmth for their job; otherwise they will convey the wrong image to their customers and department associates. Retailers today are training their sales forces to smile even when talking to cus- tomers on the telephone ‘‘because it shows through in your voice.’’38 Without enthusiasm, success in any field will elude you.

The Study and Practice of RetailingLO 4

What are the different methods for the study and practice of retailing?

As we have seen, two of the prerequisites to success as a retail manager are analytical skills and creativity. These attributes also represent two methods for the study and practice of retailing.

Analytical Method

The analytical retail manager is a finder and investigator of facts. These facts are summarized and synthesized so a manager can make decisions systematically. In doing so, the manager uses models and theories of retail phenomena that enable him or her to structure all dimensions of retailing. An analytical perspective can result in a standardized set of procedures, success formulas, and guidelines.

Consider, for example, a manager operating a Starbucks shop where everything is preprogrammed, including the menu, decor, location, hours of operation, cleanliness standards, customer-service policies, and advertising. This store man- ager needs only to gather and analyze facts to determine if the preestablished guidelines are being met and to take appropriate corrective action if necessary.

We mentioned earlier in this chapter how Walmart has made use of the sophistication of its computer system when hurricanes, tornados, or other emer- gencies occur. For example, when a hurricane is approaching a coast, the area’s stores are stocked up with bottled water, flashlights, generators, and tarps. The retailer also will have chain saws, mops, and Pop-Tarts (which stay preserved until opened, taste good, and can be eaten by the whole family) in reserve for after the storm. This is the result of analyzing the data from previous storms.

One thing for a small retailer to consider is watching the Russell 2000 Index. This index, which measures the performance of the small-cap segment of the U.S. equity universe, is a great forecasting tool for future business conditions. Thus, even if they don’t trade stocks, small retailers should keep their eye on this stock market index. And since most small retailers operate in one or a few cities, they should be aware of the major employers in the area and how they are faring. Although the Russell 2000 Index captures small-cap firms, it is possible that if a large Fortune 1000 firm in your local community fails or has a downturn and closes a local manufacturing plant, distribution center, or administrative office, then that will impact what members of the local community can spend at your store.

Creative Method

Conversely, the creative retail manager is an idea person. This retail manager tends to be a conceptualizer and has a very imaginative and fertile mind capable of creating a highly successful retail chain. In addition to the discussion earlier of James Moore and his creativity, Costco’s CEO James D. Sinegal is another creative genius. Because he insists on capping margins at 14 percent of sales, he once even considered taking the unusual step of having Costco grow its own pumpkins in order to continue to offer customers a pumpkin pie for its long-standing price of

32 Part 1: Introduction to Retailing

$5.99. After all, the retailer sells more than a million of the store-baked pies in the three days before Thanksgiving.39

A Two-Pronged Approach

As shown through the examples of our Starbucks manager and Costco’s James Sinegal, retailing can indeed be practiced from both perspectives. The retailer that employs both approaches is most successful in the long run. Aren’t stores like Starbucks successful using only the analytical method? No. The Starbucks manager can operate analytically quite successfully. However, behind the franchisee is a franchisor that is creative as well as analytical. On the creative side was the devel- opment of the company name and logo. On the analytical side was the development of standardized layouts, fixtures, equipment, and employee training. It is the com- bination of the creative with the analytical that has made Starbucks what it is today.

The synthesis of creativity and analysis is necessary in all fields of retailing. One retail expert noted that ‘‘many successful merchandisers are fast duplicators rather than originators.’’40 To decide who or what to duplicate requires not only creativity but also an analysis of the strategies that retailers are pursuing. This is an exercise in weighing potential returns against risks. Thus, according to this expert, ‘‘creativity in retailing is for the sake of increasing the sales and profits of the firm.’’41 If creativity is tied to sales and profits, then one cannot avoid analysis; profit and sales statistics require analysis.

Retailers can’t do without either creativity or analytical skills. We will attempt to develop your skills in both of these areas. At the outset, however, you should note that the analytical and creative methods for studying retailing are not that different. Whether you use creativity or analytical skills, they will be directed at solving problems.

A Proposed Orientation

The approach to the study and practice of retailing that is reflected in this book is an outgrowth of the previous discussion. This approach has four major orienta- tions: (1) environmental, (2) management planning, (3) profit, and (4) decision making.

Retailers should have an environmental orientation that will allow them to anticipate and adapt continuously to external forces in the environment. Retailing is not static. With social, legal, technological, economic, and other external forces always in flux, the modern retailer finds it necessary both to assess these changes from an analytical perspective and to respond with creative actions.

Retailers should have a planning orientation that will help them to adapt sys- tematically to a changing environment. A retailer that wants to have the competitive edge must plan today for the future. Exhibit 1.5 illustrates the problems facing a retailer that is reactive rather than proactive in planning. Exhibit 1.5a shows the standard performance for a retailer’s plan: The plan is introduced, sales peak as competitors react to the plan, and finally the plan becomes obsolete. Exhibit 1.5b shows the old method of reacting to a competitor’s attack: The retailer tries to extend the sales peak by matching the competitor’s plan until another competitor makes both of their plans obsolete. Exhibit 1.5c shows why this text places special emphasis on the development of creative retail strategies. Here the retailer is pro- active and already has another plan ready before either the market changes or the competition attacks its original plan.

Retailers also need a profit orientation, since all retail decisions will have an effect on the firm’s financial performance. The profit orientation will therefore

Chapter 1: Persp ectives on Retailing 33

focus on the fundamental management of assets, revenues, and expenses. Man- agement tools that show how to evaluate the profit impact of retail decisions will be discussed.

Retailers should have a decision-making orientation that will allow them to focus on the need to collect and analyze data for making intelligent retail decisions. To aid in this process, executives need a retail information system to help program their operations for desired results.

The Book Outline This book is composed of 14 chapters, each with its own study guide and appli- cation section. The chapters are intended to reinforce each other. The end- of-chapter materials provide a way to bring the real world into your studies by launching you into the kinds of situations you might face as a retail manager. Through careful analysis of this material and discussion with fellow students, you will discover retailing concepts that can be vividly retained because of the concrete context. Furthermore, this material will require you to think of yourself as a retail decision maker who must sometimes make decisions with less-than-perfect information.

Introduction to Retailing This book is divided into four parts. The first part, ‘‘Introduction to Retailing,’’ has two chapters. In Chapter 2, ‘‘Retail Strategic Planning and Operations Manage- ment,’’ you will be exposed to the basic concepts of strategy, administration, and operations planning and management in retailing that will be used in the remaining chapters.

The Retailing Environment The second part, ‘‘The Retailing Environment,’’ will focus on the external factors that the retailer faces in making everyday business decisions. The four chapters examine, in detail, the factors shown in Exhibit 1.1. Chapter 3, ‘‘Retail Customers,’’ will look at the behavior of the retail consumer and the socioeconomic environ- ment. Chapter 4, ‘‘Evaluating the Competition in Retailing,’’ examines the behavior of competitors as well as the technological advances taking place in the market. Chapter 5, ‘‘Managing the Supply Chain,’’ focuses on the behavior of the various members of the supply chain and their effect on the retailer. Chapter 6,

Exhibit 1.5 The Importance of Proactive Planning

Time

A. Standard Performance

Pr o

fi t

Introduction of Retail Plan

Original Plan

Introduction of Retail Plan

Time

B. Reacting to Competitor’s Attack (Old Method)

Pr o

fi t

Trying to Extend the Plan

Time

C. Proactive Planning

Pr o

fi t

New Plan (A)

New Plan (B)

34 Part 1: Introduction to Retailing

‘‘Legal and Ethical Behavior,’’ analyzes the effect of the legal and ethical constraints on today’s retailer.

Market Selection and Location Analysis It has often been said that the three keys to success in retailing are: location, location, and location. In Chapter 7, ‘‘Market Selection and Retail Location Analysis,’’ we discuss the various elements to consider in determining the feasibility of targeting a given market segment and entering a given retail market, and then we look at site selection.

Managing Retail Operations In the fourth part, ‘‘Managing Retail Operations,’’ we discuss the merchandising operations of a retail firm. This part deals with the day-to-day decisions facing retailers. Chapter 8, ‘‘Managing a Retailer’s Finances,’’ discusses various financial statements, the key methods of valuing inventory, and the development of mer- chandise planning budgets by retailers. Chapter 9, ‘‘Merchandise Buying and Handling,’’ looks at how a retailer determines what to buy for its market and how these purchases are made. The appendix following Chapter 9 discusses the mer- chandising of apparel goods. Chapter 10, ‘‘Retail Pricing,’’ discusses the impor- tance to the retailer of setting the correct price. In addition to the various markup methods used by retailers, the chapter also looks at markdowns. Chapter 11, ‘‘Advertising and Promotion,’’ provides a complete discussion (with the exception of personal selling, which is covered along with services offered by retailers in Chapter 12, ‘‘Customer Services and Retail Selling’’) of how a retailer can and should promote itself. Chapter 13, ‘‘Store Layout and Design,’’ discusses the impact of proper layout and design on retail performance. Chapter 14, ‘‘Managing People,’’ examines the role of the two most important people (customers and employees) in the success of a retail firm.

The text concludes with a glossary of all major terms used in this text, as well as an index of the retailers mentioned.

SUMMARY

This chapter seeks to acquaint the reader with the nature and scope of retailing by discussing its impact on the economy, the types of retailers, and its prerequisites for success.

What is retailing, and why is it undergoing so much change today? LO 1 Retailing consists of the final activities and steps needed to place a product in the hands of the ultimate consumer or to provide a service to the consumer. Retailing is not staid and stable; rather, it is an exciting business sector that effectively combines an individual’s skills to make a profit in an ever-changing market environment. That is why some retailers are successful and others, which are either unwilling or unable to adapt to this changing environment, fail.

What are the five various methods used to categorize retailers? LO 2 Retailers can be classified in a variety of ways. Five of the more popular schemes are NAICS code, number of outlets, margins versus turnover, location, and size. None, however, sheds adequate light on competition in retailing.

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What is involved in a retailing career?LO 3 In the long run, a retailing career can offer salary comparable to other careers, definite career advancement, and geographic mobility. In addition, a career in retailing incorporates the knowledge and use of all the business activities or dis- ciplines (accounting, marketing, finance, personnel, economics, and even fashion). In retailing, no two days are alike; each offers its own set of opportunities and problems. The prerequisites for success in retailing besides hard work include analytical skills, creativity, decisiveness, flexibility, initiative, leadership, organization, risk taking, stress tolerance, perseverance, and enthusiasm. These are all important, but it is especially vital for the retail manager to develop an attitude of openness to new ideas and a willingness to learn. After all, the market is always changing.

What are the different methods for the study and practice of retailing?LO 4 To be successful in retailing, an individual must use both analytical and creative methods of operation. The four orientations to the study and practice of retailing proposed in this text are an environmental orientation, which allows the retailer to focus on the continuously changing external forces affecting retailing; a planning orientation, which helps the retailer to adapt systematically to this changing envi- ronment; a profit orientation, which enables the retailer to examine the profit implications of any decision; and a decision-making orientation, which allows the retailer to focus on the need to collect and analyze data for making intelligent creative retail decisions.

TERMS TO REMEMBER

retailing brick-and-mortar retailers same-store sales market share scrambled merchandising category killer standard stock list optional stock list approach channel advisor private-label branding gross-margin percentage

gross margin operating expenses inventory turnover high-performance retailers low-margin, low-turnover retailer high-margin, low-turnover retailers clicks-and-mortar retailers low-margin, high-turnover retailer high-margin, high-turnover retailers store-management buying

REVIEW AND DISCUSSION QUESTIONS

What is retailing, and why is it undergoing so much change today?LO 1 1. Wouldn’t a country be better off with fewer retail outlets? After all, with

fewer stores, consumers would not waste money making impulsive purchases, and they would save more.

2. Is scrambled merchandising really a good idea? Does it make sense that if you are good in one area of merchandising that you will be good in all areas? Talbots, after all, is excellent in merchandising fashionable women’s clothing but failed in selling men’s and kids’ clothing.

3. What factors are contributing to the recent trend of decreasing store size? 4. Currently, there is a great deal of debate about the future impact of the

Internet on retailing. Which of the following items—a vacation package for

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spring break, a wedding gift for a friend, a pair of jeans for yourself, or an end table for your apartment—would you be least likely to purchase online? Why?

Describe the five methods used to categorize retailers. LO 2 5. How can a retailer operate with a high-margin, high-turnover strategy?

Won’t customers avoid this type of store and shop at a low-margin store? 6. Isn’t it better for a retail chain to always use a standard stock list? After all,

it would confuse a customer if a JCPenney’s in Chicago is different than one in Miami.

What is involved in a retailing career? LO 3 7. What concepts or techniques from economics, fashion, accounting, or

information systems do you believe would be most useful in retail decision making?

8. What kind of leadership skills does it take to be successful in retailing? Isn’t leadership the most important prerequisite for success in retailing?

Explain the different methods for the study and practice of retailing. LO 4 9. To be successful in retailing, which skill is most important: being creative

or being analytical? Why? 10. Visit a local retailer that you would describe as creative and seek to

determine which analytical skills that retailer also possesses.

SAMPLE TEST QUESTIONS

Retailing LO 1 a. may be defined as any cash purchase for merchandise. b. is the same the world over. c. is the final move in the flow of merchandise from producer to consumer. d. is the sale of an item by the manufacturer to a wholesaler. e. is not necessary to produce economic growth.

Which of the following is not one of the ways by which retailers are categorized? LO 2 a. number of outlets b. size c. margin versus turnover d. location e. gender of the manager

Due to increased corporate responsibilities, the manager of a bike shop has asked the assistant manager to take responsibility for screening and hiring new sales associates. The manager is allowing the assistant to make the decisions independently but has scheduled weekly meetings for the two to discuss any issues of concern and to provide any needed insight. The manager is demonstrating which desirable retailing attribute?

LO 3

a. prioritizing b. leadership c. creativity d. laziness e. enthusiasm

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In attempting to determine whether a branch of a sandwich shop should be opened in a small town outside the original trading area, a retailer gathered information on demographics, competitors’ sales, and available real estate in that area. The retailer was employing the _______________________________________________________________________________________________________________ method of retail decision making.

LO 4

a. tactical b. strategic c. analytical d. creative e. intuitive

WRITING AND SPEAKING EXERCISE

Halfway between your apartment and the campus is a small convenience store where you regularly purchase a cup of coffee to get you ready for those early morning classes. Over the last two years, you have become friends with the owner. Late last night when you filled up your gas tank, you noticed that he was still there working on his books. While visiting with you, he states that the store has been profitable, but he feels it could do better if he could lower the high rate of employee turnover. He asks you for advice on this problem.

Prepare a short presentation for the owner listing what you think he should look for in hiring part-time employees. Also, list what employee traits he should seek to avoid.

RETAIL PROJECT

How would you use the Internet to purchase your next car? Using the search engine on your computer, select two or three different auto websites. List their web addresses, such as www.autobytel.com, and make a report describing what they have on their websites. Which one do you like best? Why? Can you purchase online from each website? What is the buying process? Can competitors gain anything from looking at these websites? Finally, what is missing from these websites that you feel should be on them?

PLANNING YOUR OWN RETAIL BUSINESS

If you think you might want to be a retail entrepreneur, you can use the ‘‘Planning Your Own Retail Business’’ computer exercises at the end of each chapter to assist you in this process. In addition, this text’s website (www.cengage.com/marketing/ dunne) has an exercise called ‘‘The House: Understanding A Retail Enterprise Using Spreadsheet Analysis’’ that can be used to help you understand the dollars and cents of retailing.

This first exercise is intended to acquaint you with how sensitive your retail business will be to changes in sales volume. Let’s assume that you plan that your retail business will generate $350,000 per year in annual sales and that it will operate at a gross-margin percentage of 40 percent. If your fixed operating expenses are $80,000 annually and variable operating costs are 10 percent of sales, then how much profit will you make?

(Hint: Sales � gross-margin percentage ¼ gross margin; gross margin – fixed operating expenses – sales � variable operating expenses as % of sales ¼ net profit.)

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Use a spreadsheet program on your computer to compute your firm’s net profits; next, analyze what happens (1) if sales drop 10 percent and (2) if sales rise 10 percent. Why are bottom line results (net profits) so sensitive to changes in sales volume?

C A S E The Changing Role of Funeral Homes42

Mike Fallon had looked forward to going home for Christmas. He was about to

graduate from a large state university with a degree in accounting and a minor in

information Technology. Since he wanted to work in a CPA firm’s tax division, he had

even taken a retailing class. After all, he would be dealing with retail customers with his

tax work. Still, the last thing he wanted to do at Christmas was discuss school subjects.

However, that is just what happened when the family got together for Christmas dinner

at his uncle’s home.

Mike’s mother’s youngest brother was a church deacon, and somehow he changed

the subject to the fact that so many nonparishioners wanted to use his church for

weddings. Most of these requests were declined because of the demand by his current

members. Somebody mentioned that with the number of people without church

affiliation increasing across the county, she had seen a number of wedding chapels

being built in middle- to larger-sized cities. That’s when Uncle Bob took you back to

your school work, especially that retailing class.

Uncle Bob was the family’s funeral director. He and his two sons owned and

operated the only locally owned mortuary in a city of 75,000. Over the past decade, he

pointed out, his business had been radically changed. No longer do folks want a

traditional funeral, complete with casket and burial at the local cemetery. Now, a third

of all funerals involved a no-frills cremation and maybe a social ‘‘event’’ instead of a

religious service. Since he is planning to remodel, he wants to know what you think

about his ‘‘scrambled merchandising’’ idea.

Bob then explains that he is thinking of eliminating the chapel with its stained glass

and pews and using the space for a multipurpose ‘‘family center’’ complete with a

catering kitchen in the back where the flower room used to be and adding a 12-foot

screen for multimedia memorial presentations. In addition, he wants to partner with a

law firm to assist families with estate planning and making wills. Finally, he questions

whether he should just remodel the chapel with its current drab entranceway into

something brighter and cheerful, complete with an entryway removed from the funeral

home. By doing so, he could use the chapel for weddings for the couples who were

unable to locate a church.

Questions

1. Do you think couples would mind being married in a chapel located near a funeral home, even if it had a separate entrance and was beautifully decorated?

2. What would happen to those families who want a traditional funeral in a chapel? Would your uncle lose their business?

3. What other creative ideas would you suggest to your uncle?

4. What other data would you suggest that your uncle consider before making any decision?

5. What should your uncle do?

Chapter 1: Persp ectives on Retailing 39