Chapter 1

Introduction to the World of Retailing

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

Introduction to Retailing

Types of Retailers

Multi-Channel Retailing

Customer Buying Behavior

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Questions

■ What is retailing?
■ What do retailers do?
■ Why is retailing important in our society?
■ What career and entrepreneurial opportunities
does retailing offer?
■ What types of decisions do retail managers
make?

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What is Retailing?

Retailing – a set of business

activities that adds value to
the products and services
sold to consumers for their
personal or family use

A retailer is a business that

sells products and/or
services to consumers for
personal or family use.

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Examples of Retailers

 Retailers:
Kohl’s, Macy’s,
Wendy’s,
Amazon.com, Jiffy
Lube, AMC Theaters,
American Eagle
Outfitter, Avon, J.Crew

 Firms that are retailers and wholesalers - sell to

other business as well as consumers:
Office Depot, The Home Depot, United Airlines, Bank of
America, Costco
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Manufacturer’s Perspective

The Four P’s of Marketing

Retailers
Retailersare
are part
part of the
of the
distribution channel
distribution channel
Product

Distribution Price

Promotion

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Distribution Channel

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Typical Supply Chain Network

Customers

Suppliers Plants

retailers
Distribution
Centers

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A Retailer’s Role in a Supply Chain

 Retailers are the final business within a supply

chain which links manufacturers to consumers.

 A Supply Chain is a set of firms that make and

deliver a given set of goods and services to the
ultimate consumer.

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Manufacturing, Wholesaling and Retailing

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

the channel
Ex: retailer invests in wholesaling or manufacturing

Backward Integration – retailer performs some distribution and

manufacturing activities
Ex: JCPenney sells Arizona jeans (Private Label)
Forward Integration – manufacturers undertake retailing activities
Ex: Ralph Lauren (New York Jones, Liz Claiborne) operates its own
stores

Large retailers engage in both wholesaling and retailing

Ex: Wal-Mart, Lowe’s, Safeway, Brown Shoe Company
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Do Retailers Add Value?

a box of crackers at a grocery store

Example  costs $1 to manufacturer
 sells at a price of $2

Retailers add significantly to the prices consumers face

Why not buy directly from the manufacturer?

Does that mean that grocery stores are very profitable?

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Why Not Get Rid of the Middlemen?

Price to Price to Price to

Distributor Retailer Consumer
$1.00 $1.20 $2.00

$.85 $.15 $.70

Manufacturer Distributor Retailer Consumer

Vendor Wholesaler
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Why Not Get Rid of the Middlemen?

Better services to
customers
More efficient

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Music Industry Channel

Composer Record
Publisher Music Retailer
Lyricist Company

Artist Distributor

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Cost for CD

Retailer $5.00
Record Company
• 4 out of 5 CDs fail to
Manufacturing .75 make a profit
Distribution 1.50
Marketing 2.00 • $300,000 cost to
Coop advertising 1.00 prepare a CD for
Artist/Repertoire 1.00 release
Artist royalty 1.25
Lyricist .75 • 30,000 recording
Overhead/Profit 2.00
artists
Total 15.25

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How Retailers Add Value

■ Provide Assortment
Buy other products
at the same time
■ Break Bulk
Buy it in quantities
customers want
■ Hold Inventory
Buy it at a
convenient place
when you want it
■ Offer Services
See it before you
buy; get credit;
layaway
Ryan McVay/Getty Images

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 How Retailers Add Value

The value of the product and service

increases as the retailer performs functions.
Bicycle can be
bought on credit or
put on layaway

Bicycle is featured
on floor display

Bicycle is offered in
convenient locations
in quantities of one
Bicycle is
developed in
several styles
Bicycle is developed
at manufacturer
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Examples: How Retailers Add Values

 BagBorrowerSteal.com
 jewelry and bag rental; Get (not buy, but borrow) exactly what you
want
 Home Depot
 DIYer (Do-it-yourselfer); Learn how to do it yourself with in-store
clinics and online workshops

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Social and Economic Significance of Retailing

 Retail Sales:
 Over $4.1 trillion in annual

U.S. sales in 2005

 Employment:
 Employs over 24 million

people in 2005
 One of the largest sectors

for job growth in US

 Social responsibility
 Global player

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Social responsibility

 Corporate social responsibility

 The voluntary actions taken by a
company to address the ethical,
social, and environmental impacts
of its business operations, in
addition to the concerns of its
stakeholders

 Examples: Edun - a fair-trade fashion

brand by the U2 lead singer Bono
 Starbucks: pays its farmers 42%
more than the commodity price of
Arabica coffee beans
 Target: community giving programs
(5% of income, $3 million a week)

 Retail companies give away 1.7% of

their profits, compared with about 0.9%
for companies in other industries

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World’s 20 Largest Retailers in 2005

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

The United States CHINA

The nature of retailing and

distribution channels in the U.S.
is unique.
 Has the greatest retail density
 Has the greatest concentration of
large retail firms
 Large enough to operate their
own warehouses, eliminating the
need for wholesaling.
 The combination of large stores
and large firms result in a very
efficient distribution system.

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Comparison of Distribution Channels
around the World

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What have created these differences
in distribution systems?

Social &  China, India: To reduce unemployment by

Political protecting small businesses
Objectives  EU: To protect small retailers
To preserve green spaces/town centers
Geography Much lower population density in the US than in India,
China, and EU (where less low-cost real estate are
available for building large stores)

Market size  Large retail markets in US, India, China

 Countries in EU – distribution channels and retail
chains operate in a single country (no economy of scales
to be achieved; trade barriers still exist)

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Opportunities in Retailing:
Management opportunities

■ People with a wide range of skills and interests needed

because retailers’ functions include
 Finance

 Purchase

 Accounting

 Management information system (MIS)

 Supply management including warehouse and

distribution management
 Design and new product development

■ Financially rewarding
 5-year salary of buyers: $50,000 - $60,000

 5-year salary of store managers: $120,000 - $160,000

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Nature of Retail Industry is Changing

To Today’s Retailer

Mom and Pop Store

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Retailers are a Business Like
Manufacturers

Real Estate Finance

Store Design
Promotion/Advertising

MIS
Loss Prevention

Operations
Human Resources

The McGraw-Hill Companies,

Inc./Andrew Resek, photographer

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Retailing is a High Tech Industry

 Selling Merchandise through the Internet

 Using Internet to manage supply chains

 Analyze POS data to tailor assortments to stores

 Computer systems for merchandise planning and

tracking

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Opportunities in Retailing:
Entrepreneurial opportunities
Wal-Mart: Sam Walton
■ Retailing provides opportunities for
people who want to start their own
business
■ Some of the world’s richest people
are retailing entrepreneurs

■ Examples of retailing IKEA: Ingvar Kamprad

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

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Career Opportunities in Retailing
Start Your Own Business

List of Retail Entrepreneurs on Forbes 400 Richest Americans

 Walton Family (Wal-Mart)

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

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Retail Management Decision Process

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Strategic Vs Tactical Decisions

■ Doing the Right Thing (direction) vs.

Doing Things Right (execution)
■ Strategic Decisions Are:
 Made Infrequently
 Long-term
 Require significant investment
 Not easily reversed

■ Location, Organization Design, Information and

Distribution Systems, Customer Service

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Retail Strategy

■ Need to identify the competition

 intratype competition
(e.g., Dillard’s vs. JCPenney)
 intertype competition
(e.g., Dillard’s vs. Wal-Mart)

■ Identifying customers
 What are the significant
demographic and life-style
trends
 Who are your target
customers

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Retail Strategy

■ A retail strategy should identify

 the target market

 the product and service mix

 a long-term comparative advantage

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JC Penney’s Strategic Evolution(1)

 Main Street (small town) private

label, soft goods (apparel, home
furnishings), decentralized retailer
 Changes in environment --
increased disposable income,
growth of suburbs, interstate
highway program
 Emulate Sears in moving to
enclosed suburban malls
 Add hard goods (appliances,
automotive)
 Diversify – drug stores,
insurance, specialty stores
 Develop catalog channel

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JC Penney’s Strategic Evolution(2)

 Focus on department store format

and soft goods develop electronic
retail channel
 Mid-market, mall based department
store, between Wal-Mart/Target and
Macy’s/Dillards
 Competition from Target, Kohl’s
 Centralization to reduce cost,
increase responsiveness -
centralized buying, warehouse
delivery
 Off the mall stores to increase
customer convenience
 Improving store atmospherics
 Upgrading merchandise offering
(e.g., Sephora, American Living by
Polo Ralph Lauren)

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Wal-Mart’s Strategic Evolution

 Small Town - Discount Store selling hard goods

and soft goods
 limited service, efficient distribution

 Enter suburban markets

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

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Sears’ Strategic Evolution

 Large number of merchandise categories --

appliances, hardware, apparel
 Malls evolved into places for buying soft goods,
hard goods sold at category killers
 The Softer Side of Sears
 Refocused on value -- Testing carts in stores
 Acquired Lands’ End
 Acquired by Kmart

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Whole Foods Implementation

Strategy - organic and natural foods supermarket chain

Assortment beyond organic/natural foods
Private labels - Whole Food™, 360 Day Value™
Love, trust, and employee empowerment
Equality in compensation

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Decision Variables for Retailers

Customer Service

Store Design Merchandise

and Display Assortment
Retail
Strategy
Pricing Location

Communication
Mix
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Wal-Mart’s Retail Mix

Customer Location
Service

Store Design Merchandise

And Display Retail Strategy Assortment

Communication Pricing
Mix

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Wal-Mart’s Retail Mix

Location Strategy

Free-standing Stores

Customer
Service

Store Display Merchandise

And Design Assortment

Communication
Mix Pricing

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Wal-Mart’s Retail Mix

Assortment Strategy

Customer
Service Location

Large Number
Store Design
and Display
of Categories
Few Items
Communication
Mix Pricing
in Each Category

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Wal-Mart’s Retail Mix

Location
Pricing Strategy
Customer
Merchandise
Service
Assortment

Store Design
and Display

Communication
Mix Low, EDLP

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Wal-Mart’s Retail Mix

Customer
Service Location

Communication Mix
Store Design Merchandise
and Display Assortment

Pricing

TV and Newspaper
Insert Ads

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Wal-Mart’s Retail Mix

Store Design and Display

Customer
Service Location

Basic, Special
Merchandise
Displays Assortments
for Products
Communication
Mix Pricing

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Wal-Mart’s Retail Mix

Customer Service

Limited

Location

Merchandise
Assortment

Store Design
and Display Pricing

Communication
Mix

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Claire’s Retail Mix

Customer Service Location

Store Design Merchandise

Retail Strategy Assortment
and Display

Communication Mix Pricing

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Claire’s Retail Mix

Location Strategy

Enclosed malls

Customer Service

Store Display
And Design Merchandise
Assortment

Communication Mix
Pricing

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Claire’s Retail Mix

Assortment Strategy

Customer Service
Location

Store Design Jewelry, accessories and

and Display
cosmetics for tweens and

teens
Communication Mix
Pricing

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Claire’s Retail Mix

Location
Pricing Strategy
Customer Service
Merchandise Assortment

Store Design
and Display

Communication Mix

Modest with Sales

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Claire’s Retail Mix

Customer Service
Location

Communication Mix Store Design

And Display Merchandise Assortment

Pricing

TV and Magazine Ads

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Claire’s Retail Mix

Store Design and Display

Customer Service Location

Bright, fashionable and fun Merchandise Assortments

boutique layout

Communication Mix Pricing

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Claire’s Retail Mix

Customer Service

Modest

Location

Merchandise Assortment

Store Design and Display

Pricing

Communication Mix

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Macy’s Retail Mix

Customer Service Location

Store Design Merchandise

Retail Strategy Assortment
and Display

Pricing
Communication Mix

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Macy’s Retail Mix

Location Strategy

Enclosed Malls

Customer Service

Store Display
And Design Merchandise
Assortment

Communication Mix
Pricing

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Macy’s Retail Mix

Assortment Strategy

Customer Service
Location

Store Design Many Items in Apparel

and Display

and Soft Home

Communication Mix
Pricing

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Macy’s Retail Mix

Location
Pricing Strategy
Customer Service
Merchandise Assortment

Store Design
and Display

Communication Mix
Moderate with
Frequent Sales

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Macy’s Retail Mix

Customer Service
Location

Communication Mix Store Design

And Display Merchandise Assortment

Pricing

TV, Newspaper Ads and

Special Events

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Macy’s Retail Mix

Store Design and Display

Customer Service Location

Racetrack with Displays Merchandise Assortments

Communication Mix Pricing

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Macy’s Retail Mix

Customer Service

Modest

Location

Merchandise Assortment

Store Design and Display

Pricing

Communication Mix

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Target’s Retail Mix

Customer Service Location

Store Design Merchandise

Retail Strategy Assortment
and Display

Communication Mix Pricing

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Target’s Retail Mix

Location Strategy

Free-standing Stores

Customer Service

Store Display
And Design Merchandise
Assortment

Communication Mix
Pricing

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Target’s Retail Mix

Assortment Strategy

Customer Service
Location

Store Design
Large Number of Categories
and Display
Private Labels
Few Items in Each Category
Communication Mix
Pricing

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Target’s Retail Mix

Location
Pricing Strategy
Customer Service
Merchandise Assortment

Store Design
and Display

Communication Mix

Low to Modest

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Target’s Retail Mix

Communication Mix

TV and Newspaper
Insert Ads

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Target’s Retail Mix

Store Design and Display

Customer Service Location

Colorful, wide aisles displays

Merchandise Assortments
for products with a grid layout

Communication Mix Pricing

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Target’s Retail Mix

Customer Service

Limited

Location

Merchandise Assortment

Store Design and Display

Pricing

Communication Mix

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Ethical Situations for a Retail Manager

 Should a retailer sell merchandise that they suspect utilized

child labor?
 Should it advertise that its prices are the lowest in an area
even though some items are not?
 Should a buyer accept an expensive gift from a vendor?
 Should salespeople use high-pressure sales when they know
the product is not the best for the customer’s needs?
 Should a retailer give preference to minorities when making a
promotion decision?
 Should a retailer treat some customers better than others?

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Checklist for Making Ethical Decisions

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

 Ignore your personal values and do what your

company asks you to do – you will probably feel
dissatisfied with your job .

 Take a stand and tell your employer what you

think. Work to change the policies.

 Refuse to compromise your principles – you

could lose your job!

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Careers in Retailing

 Career Opportunities
 Store Management

 Merchandise Management

 Corporate Staff

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Misconceptions About Careers in Retailing

■ College not needed

■ Low pay
■ Long hours
■ Boring
■ Dead-end job
■ No benefits
■
The McGraw-Hill Companies, Inc./Andrew Resek, photographer
Everyone is part-time
■ Unstable environment
■ No opportunity for women and minorities
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Why You Should Consider Retailing

■ Entry level management positions:

Department manager or assistant buyer/planner
■ Manage and have P&L responsibility on your first job
■ Starting pay average with great benefits
■ Some retailers pay graduate school
■ No two days are alike
■ Buying and planning for financially analytically oriented
■ Management for people-people

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Types of Jobs in Retailing

Most entry level jobs are in

store management or buying, but there’s…
-accounting and finance
-real estate
-human resource management
-supply chain management
-advertising
-public affairs
-information systems
-loss prevention
-visual merchandising
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