Merchandise Buying and Management, 4th Edition, by John Donnellan by Bloomsbury Publishing

4th edition

merchandise buying and management John donnellan

Fairchild Books / New York

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Fairchild Books An imprint of Bloomsbury Publishing Inc 175 Fifth Avenue New York NY 10010 USA

50 Bedford Square London WC1B 3DP UK

www.fairchildbooks.com First edition published 1996 Second edition published 2002 Third edition published 2007 This edition first published 2014 ÂŠ Bloomsbury Publishing Inc, 2014 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. No responsibility for loss caused to any individual or organization acting on or refraining from action as a result of the material in this publication can be accepted by Bloomsbury Publishing Inc or the author.

Library of Congress Cataloging-in-Publication Data Donnellan, John Merchandise Buying and Management 2013936279 ISBN: 978-1-60901-490-2

Typeset by Precision Graphics Cover Design by Carly Grafstein Cover Art Credit ÂŠ Veer Images/PixelEmbargo Printed and bound in the United States of America

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Contents Extended Contents................................................................................................................................................ vi Preface....................................................................................................................................................................... x Part One The Structure of the Retail Industry ........................................................ 1 1. Retail Merchandising....................................................................................................................................... 1 2. Retailing Formats........................................................................................................................................... 27 3. Retail Locations............................................................................................................................................. 53 4. Retail Growth and Expansion......................................................................................................................69 5. Communicating with Consumers.............................................................................................................. 93 Part Two The Development and Distribution of Consumer Products.................................................................................................................. 117 6. Fashion Merchandising............................................................................................................................... 117 7. Brands and Private Labels......................................................................................................................... 139 8. Merchandise Resources............................................................................................................................. 159 Part Three The Financial Aspects of Merchandising...................................... 179 9. Measures of Productivity.......................................................................................................................... 179 10. Merchandising Accounting...................................................................................................................... 205 11. Inventory Valuation.................................................................................................................................... 225 Part Four Pricing, Planning, and Purchasing Retail Inventories.............................................................................................................................. 241 12. Retail Pricing................................................................................................................................................. 241 13. Planning Sales and Inventory.................................................................................................................... 275

Case Study: Dolanâ&#x20AC;&#x2122;s Department Store....................................................................................................................309

14. Purchase Terms........................................................................................................................................... 323 Part Five Merchandise Control and Presentation........................................... 353 15. Merchandising Controls and Report Analysis...................................................................................... 353 16. Store Layout and Merchandise Presentation........................................................................................ 377 Glossary................................................................................................................................................................ 397 Endnotes............................................................................................................................................................... 417 Company Index....................................................................................................................................................427 Subject Index........................................................................................................................................................433

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Extended Contents Preface..................................................................................... x

Part One The Structure of the Retail Industry 1 Retail Merchandising ..............................1 The Marketing Channel...............................................1 Streamlining Distribution...................................... 3 Vertical Integration................................................4 Retail Organizational Structures..............................6 The Separation of Buying and Selling.................8 Line and Staff Functions...................................... 10 Retail Merchandising................................................. 11 Corporate and Field Functions........................... 13 Corporate-Level Merchandising Functions..... 13 Store-Level Merchandising Functions.............. 18 Qualifications for Merchandising Positions..... 20 Summary Points.........................................................23 Key Terms and Concepts......................................... 24 Thinking About It...................................................... 24 Teaming Up..................................................................25 Searching the Net...................................................... 26 2 Retailing Formats .....................................27 Department and Specialty Stores..........................27 The Status of Department Stores.................... 29 Hard-to-Classify Stores.......................................32 Discounting.................................................................33 Types of Discounters.......................................... 34 Other Retailing Formats.......................................... 38 Franchises and Lease Departments................. 40 Nonstore Retailers.................................................... 43 Direct Selling........................................................ 43 Catalog Retailing.................................................. 45 Electronic Retailing.............................................. 45 Online Retailing.................................................... 48

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Summary Points........................................................ 49 Key Terms and Concepts......................................... 49 Thinking About It................................................. 50 Teaming Up........................................................... 50 Searching the Net.................................................. 51

3 Retail Locations ..........................................53 Unplanned Shopping Districts................................53 Planned Shopping Centers...................................... 56 Strips and Malls....................................................57 Other Types of Shopping Centers.................... 59 Survival of the Fittest.......................................... 64 The Mix of Stores in a Shopping Center......... 65 Summary Points........................................................ 66 Key Terms and Concepts......................................... 66 Thinking About It.......................................................67 Teaming Up..................................................................67 Searching the Net...................................................... 68 4 Retail Growth and Expansion .... 69 Centralization............................................................. 69 The Advantages of Centralization................... 70 Retail Ownership........................................................73 Chains and Conglomerates................................74 Retail Growth and Expansion..................................76 Acquisitions...........................................................77 Diversification...................................................... 82 Opportunities for Small Stores......................... 82 Bankruptcy.................................................................. 84 International Retailing............................................. 86 Foreign Growth Opportunities.......................... 86 Foreign Expansion Strategies............................ 87 Summary Points........................................................ 89 Key Terms and Concepts......................................... 90 Thinking About It...................................................... 90 Teaming Up................................................................. 90 Searching the Net....................................................... 91

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5 Communicating with Consumers .........................................................93 Retailers and Their Customers...............................93 Market Segmentation......................................... 94 Micromerchandising.......................................... 101 Other Types of Segmentation..........................102 Communicating with Customers..........................103 Sales Promotion................................................. 106 Types of Retail Advertising.................................111 Loyalty Programs and Database Retailing.................................................................113 Summary Points....................................................... 114 Key Terms and Concepts.........................................115 Thinking About It......................................................115 Teaming Up.................................................................116 Searching the Net......................................................116

Part Two The Development and Distribution of Consumer Products 6 Fashion Merchandising ....................117 Fashion and Trends...................................................117 Trend.......................................................................118 The Fashion Life Cycle..............................................121 Fads and Classics................................................124 The Trickle Theories................................................126 The Basicâ&#x20AC;&#x201C;Fashion Continuum.............................. 127 Transforming Basics into Fashion....................128 Fashion Influence......................................................131 The Fashion Industry...............................................134 Summary Points.......................................................134 Key Terms and Concepts........................................136 Thinking About It.....................................................136 Teaming Up................................................................ 137 Searching the Net..................................................... 137 7 Brands and Private Labels ............139 Branded Merchandise.............................................139 Brand Positioning............................................... 144 Brand-Driven Purchases....................................146 Brands and Retail Stores...................................146 Brand Extension and Licensing.............................148

Private Labels............................................................ 153 Positioning Private Labels.................................154 The Pros and Cons of Private Labels..............156 Summary Points....................................................... 157 Key Terms and Concepts........................................ 157 Thinking About It..................................................... 157 Teaming Up................................................................158 Searching the Net.....................................................158

8 Merchandise Resources ...................159 Manufacturers..........................................................159 Direct Sales Forces............................................ 160 Manufacturersâ&#x20AC;&#x2122; Sales Representatives.......... 160 Wholesalers...............................................................161 Imports.......................................................................163 The Downside of Imports.................................164 Markets......................................................................165 Trade Shows..............................................................170 Trade Show Sponsors......................................... 172 Resident Buying Offices......................................... 173 Types of Buying Offices..................................... 175 Summary Points....................................................... 177 Key Terms and Concepts........................................ 177 Thinking About It..................................................... 177 Teaming Up................................................................178 Searching the Net.....................................................178

Part Three The Financial Aspects of Merchandising 9 Measures of Productivity .............179 Productivity...............................................................179 Turnover.................................................................... 180 Computing Turnover..........................................182 High versus Low Turnover................................182 Why High Turnover Is More Desirable Than Low Turnover.............................................185 Turnover by Category of Merchandise..........187 Stock-to-Sales Ratios..............................................188 Stock-to-Sales Ratio Variations........................191 Sales per Square Foot..............................................192 Space Allocation.................................................195 Space Management.................................................197

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Summary Points.......................................................199 Key Terms and Concepts........................................199 Thinking About It................................................... 200 Teaming Up................................................................201 Searching the Net....................................................202 Solving Problems.....................................................202

10 Merchandising Accounting .......205 Cash Flow..................................................................205 Balance Sheets......................................................... 207 Financial Ratios.......................................................209 Income Statements..................................................210 Income Statement Components......................211 Component Percentages...................................214 Gross Margin Return on Investment................... 217 Summary Points....................................................... 221 Key Terms and Concepts........................................ 221 Thinking About It..................................................... 221 Teaming Up............................................................... 222 Searching the Net.................................................... 222 Solving Problems..................................................... 223 Using Excel................................................................ 224 11 Inventory Valuation .......................... 225 Inventory Values..................................................... 225 Overage and Shortage........................................... 226 Physical Inventory................................................... 228 The Fiscal Impact of Shortage............................. 229 Shortage Control................................................. 231 Point-of-Sale Systems........................................ 231 LIFO and FIFO........................................................... 234 Summary Points...................................................... 237 Key Terms and Concepts....................................... 238 Thinking About It.................................................... 238 Teaming Up............................................................... 238 Searching the Net.................................................... 239 Solving Problems..................................................... 239 Using Excel................................................................240

Part Four Pricing, Planning, and Purchasing Retail Inventories 12 Retail Pricing ................................................ 241 Markup....................................................................... 241 Types of Markup................................................244

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Markdowns...............................................................246 Types of Markdowns.........................................248 Clearance Merchandise................................... 249 Slow Sellers.........................................................250 Maintained Markup................................................ 252 Tactical Price Changes...................................... 255 Managing Markdowns...................................... 256 Establishing an Initial Markup............................. 256 Factors That Drive Initial Markup.................. 257 Calculating an Initial Markup Percentage........................................................... 258 Computing an Initial Retail Price....................260 Promotional Pricing................................................260 Everyday Low Pricing........................................ 262 Deceptive Pricing.................................................... 263 Resale Price Maintenance.....................................266 Pricing: A Science and an Art............................... 267 Summary Points...................................................... 270 Key Terms and Concepts....................................... 270 Thinking About It..................................................... 271 Teaming Up................................................................ 271 Searching the Net.................................................... 272 Solving Problems..................................................... 272 Using Excel................................................................ 274

13 Planning Sales and Inventory ........................................................ 275 Types of Plans.......................................................... 275 The 4â&#x20AC;&#x201C;5â&#x20AC;&#x201C;4 Planning Calendar.............................. 276 Planning Structures................................................ 277 Planning Sales.......................................................... 279 Planning Inventory...................................................281 Open to Buy...............................................................291 Assortment Planning............................................. 293 Trends in Planning.............................................298 Planning Information..............................................299 Other Information Sources...............................301 Summary Points...................................................... 303 Key Terms and Concepts....................................... 303 Thinking About It....................................................304 Teaming Up...............................................................305 Searching the Net....................................................305 Solving Problems.....................................................306 Using Excel................................................................308

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CASE STUDY: DOLAN’S DEPARMENT STORE ......................309 A History of Dolan’s Department Store............309 The Dolan’s Project...................................................311 Dolan’s Appendix A................................................. 317 Dolan’s Appendix B.................................................319 Dolan’s Appendix C................................................320 14 Purchase Terms ......................................... 323 Purchase Orders...................................................... 323 Discounts.................................................................. 326 Dating......................................................................... 328 Computing Discounts............................................330 The Long-Term Impact of Discounts............. 333 Transportation......................................................... 333 Transportation Terms........................................ 334 Transportation Arrangements........................ 335 Distribution Centers............................................... 338 Vendor Partnerships............................................... 338 Floor-Ready Merchandise................................ 339 Markdown Allowances.....................................340 Promotional Support.........................................340 Electronic Data Interchange............................ 342 The Vendor Matrix............................................ 345 Vendor Relations................................................ 345 Summary Points......................................................348 Key Terms and Concepts.......................................349 Thinking About It....................................................349 Teaming Up...............................................................350 Searching the Net....................................................350 Solving Problems.....................................................350 Using Excel................................................................. 351

Part Five Merchandise Control and Presentation 15 Merchandising Controls and Report Analysis ............................ 353 Control Standards................................................... 353 Deviations........................................................... 355 Control Objectivity............................................ 355 Control Intervals................................................ 357 Control Levels..................................................... 357

Reports...................................................................... 358 Exception Reports.............................................. 359 Report Formats and Analysis............................... 359 Turnover Report.................................................360 Annual Review of Merchandising Statistics.362 Stock-to-Sales Ratio Report............................364 Inventory Position and Sales...........................366 Sales and Stock-to-Sales Ratios..................... 367 Vendor Sales Report.......................................... 369 Sales by Category.............................................. 370 Style Status Report............................................ 372 Summary Points...................................................... 374 Key Terms and Concepts....................................... 374 Thinking About It.................................................... 375 Teaming Up............................................................... 375 Searching the Net.................................................... 375 Solving Problems..................................................... 376 Using Excel................................................................ 376

16 Store Layout and Merchandise Presentation .......... 377 Store Planning and Design.................................... 377 Visual Merchandising....................................... 379 Layout................................................................... 379 Manny’s Men’s Shop.........................................384 Fixtures......................................................................386 Vendor Fixtures..................................................389 Merchandise Presentation....................................389 Signs........................................................................... 393 Summary Points......................................................394 Key Terms and Concepts....................................... 395 Thinking About It.................................................... 395 Teaming Up...............................................................396 Searching the Net....................................................396

Glossary.................................................................... 397 Endnotes....................................................................417 Company Index...................................................... 427 Subject Index.......................................................... 433

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Preface The fourth edition of Merchandise Buying and Management builds upon the first three editions with helpful suggestions for improvement from reviewers and adopters. Written for college-level courses dealing with retail buying and the management of retail inventories, the text covers topics that are important to those aspiring to careers as buyers within retail organizations or as store managers with responsibilities for retail sales and inventories. The material is presented within the context of a contemporary retail environment in which buyers often act as fiscal managers as well as product developers, and store managers play important roles in sales productivity and assortment planning. Retail technology is a theme that runs throughout the book, tied to topics such as space management, electronic data interchange, point-of-sale systems, and floor-ready merchandise. Revised images and supporting examples ensure that the fourth edition of Merchandise Buying and Management stays current with the times. Sixteen chapters are organized into five parts. Part One is composed of five chapters that explain the structure of the retail industry. Retail Merchandising covers the retailerâ&#x20AC;&#x2122;s role in bringing products from their point of production to their point of consumption and the merchandising functions of a retail enterprise. Retailing Formats categorizes retail stores by their merchandising strategies, while Retail Locations discusses the various settings in which retail stores operate. Retail Growth and Expansion examines the strategies that retailers use to grow and remain competitive in the marketplace. Communicating with Consumers looks at the various groups of consumers that retailers cater to and some of techniques that retailers use to attract customers to their stores. Part Two contains three product-oriented chapters. Fashion Merchandising contrasts the merchandising of fashion goods with basic goods, while Brands and Private Labels contrasts the merchandising of nationally distributed products with goods developed for exclusive distribution by a single retailer. Merchandise Resources describes the wholesale marketplace and the various types of suppliers from which retailers buy their merchandise.

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Part Three includes three chapters that deal with inventory performance and the fiscal aspects of retail merchandising. Measures of Productivity covers the critically important concepts of turnover and sales per square foot. Merchandising Accounting interprets fundamental accounting concepts from a retail perspective, while determining the value of retail inventories as organizational assets is the topic of Inventory Valuation. The three chapters in Part Four involve planning, purchasing, and pricing retail inventories. Pricing develops the concepts of markup and markdowns, as well as promotional pricing strategies. Planning discusses several mathematical procedures for determining the amount of inventory needed to achieve an organization’s sales goals. Price, delivery, and payment negotiations between retail buyers and their suppliers are covered in Purchase Terms. Part Five comprises two sections. Merchandising Controls and Report Analysis provides explanations of various reports that are used to evaluate sales and inventory performance. Store Layout and Merchandise Presentation deals with some fundamental store design and merchandise presentation concepts with which both buyers and store managers should be familiar. Many chapters include sidebars with pertinent information supplemental to the chapter’s core content. Company profiles with “real-world” examples of concepts introduced in the text are a feature of most chapters. Each chapter concludes with summary points and a list of key terms and concepts. Key terms are introduced in bold type within each chapter and defined in the glossary at the end of the book. As with previous editions, every chapter has extensive end-of-chapter student activities. All chapters have the following three activities: ■■

■■

Thinking About It—Thought-provoking questions and exercises designed to hone critical thinking with generative thought beyond the textbook. Teaming Up—Activities that foster group interaction and the cultivation of the people skills that employers often look for in today’s college grads. Searching the Net—Exercises designed to promote information literacy, another skill very much in demand in today’s business environment.

In addition, the quantitative chapters (9, 10, 11, 12, 13, 14, and 15) include two additional end-of-chapter sections:

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■■

Solving Problems—Problem-solving exercises to cultivate numeric reasoning and quantitative decision making. Using Excel—Spreadsheet software exercises to link chapter content with informational report design.

The Instructor’s Guide for Merchandise Buying and Management is another highlight of the fourth edition. The guide includes teaching tips, references, case studies, enrichment activities, suggestions for conducting group activities, helpful hints for teaching information literacy and spreadsheet software, and answers to end-of-chapter discussion questions and problems. The Instructor’s Guide also includes chapter examination questions in the form of multiple choice, true and false, and essay questions, and a set of PowerPoint slides to aid instructors in classroom presentation. Acknowledgments

I extend sincere thanks to members of the editorial staff at Fairchild Books for their support in preparing this fourth edition: to Olga Kontzias, executive editor, for her sage advice over the many years this book has been in print; and to Jon Preimesberger, development editor, who besides being a master of diction, syntax, usage and style, is among the most diligent and organized people with whom I have ever worked. This book is dedicated to Richard P. Finn with sincere gratitude for unending support in whatever I do.

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Part One

The Structure of the Retail Industry

Chapter One

Retail Merchandising After reading this chapter, you will be able to discuss the following: ✚✚ ✚✚ ✚✚

The role of retailing in the marketing channel. The merchandising functions within a retail organization. The skills needed for success in merchandising careers.

The task of assembling an assortment of merchandise that appeals to a store’s customers is a challenging proposition. Meeting this challenge requires knowledge of consumer products, consumer behavior, and the store’s strategy for growth and profit. Fundamental to this knowledge is an understanding of the role that retail stores play in channeling products from producers to consumers and the ways in which retail enterprises are structured to perform this function. This chapter covers these two topics, as well as the personal qualifications necessary for individuals who wish to pursue careers in the exciting field of retail merchandising.

The Marketing Channel The marketing channel represents the flow of goods from point of production to point of consumption. The model traces the distribution of a product from the manufacturer, or producer, to the final consumer, or ultimate user of the product. The marketing channel is sometimes referred to as the distribution channel, distribution pipeline, or supply chain.

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Figure 1.1: The marketing channel represents the flow of goods from producers to consumers.

producer

wholesaler

retailer

consumer

The marketing channel comprises channel members who are classified according to the function they perform. A producer converts materials (such as fabric) and/or component parts (such as zippers) into products (such as jackets). A wholesaler facilitates the distribution process by buying large quantities of goods from producers and reselling smaller quantities to other channel members, a process called breaking bulk. A retailer sells products and/or services to final consumers who actually use the product, or derive personal benefit from the service. It is important to note that retailers sell services as well as products. Hairstylists and residential interior decorators are service retailers. A bank that offers financial services to consumers, such as home mortgages, car loans, and checking accounts, performs a retail banking function. The same bank may provide similar services to businesses but, in so doing, performs a commercial banking function. Wholesalers and retailers do not physically change the products that they buy and sell. Because they link producers and consumers, wholesalers and retailers are often called channel intermediaries. This textbook focuses on the channel interactions that occur between retailers of nonfood products, such as apparel and home furnishings, and other channel members. Retailers perform an indispensable function in the distribution of goods to final consumers. A consumer who pays $85 for a blouse is getting far more than fabric, buttons, and workmanship for her money. Inherent in the retail price are the costs associated with assembling a selection of blouses in an assortment of fabrications, styles, colors, brands, and prices at a single location. A retail price also covers the cost of amenities, such as attractive facilities, salesperson assistance, and third-party payment options such as Visa and MasterCard. Without retailers as points of distribution,

Figure 1.2: Retailers bypass wholesalers in the marketing channel to streamline the distribution process.

producer

retailer

consumer

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consumers would need to travel to production sources all over the world to purchase goods. Streamlining Distribution

Channel members are sometimes bypassed in the distribution process for the sake of expediency. Because of less handling, goods purchased by a retailer directly from a producer spend less time in the distribution pipeline than goods distributed through a wholesaler. Time is a critical factor in perishable goods, such as food, or in goods with short selling cycles, such as fashion apparel. Cost is another reason retailers bypass wholesalers. The selling price of a product increases as it passes from one marketing channel member to another in that each channel member’s selling price must cover the channel member’s operating costs and profit. A retailer can circumvent wholesalers’ operating costs and profits by buying directly from producers. The retailer then has the option of selling the products more profitably or passing the savings on to consumers in the form of low competitive prices. Walmart, the world’s largest retailer, is a model of streamlined distribution. By bypassing intermediaries, Walmart is able to price its offerings lower than many of its competitors.1 Though buying directly from producers is advantageous for many retailers, wholesalers play an important role in the distribution of certain categories of merchandise to certain types of retailers, a topic covered in Chapter 8.

Figure 1.3: Walmart is a model of streamlined distribution. © Chris Howes/ Wild Places Photography/Alamy

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Vertical Integration

Performing more than one channel function is called vertical integration. Companies vertically integrate for increased channel control and for the fiscal advantages associated with performing multiple channel functions. A producer that sells its product lines directly to consumers through manufacturer-sponsored specialty stores, or signature stores, is vertically integrated. These stores facilitate direct contact between producers and consumers and permit producers to retain control over the presentation and sale of their product lines. Some producers also use signature stores as laboratories to test new items. Coach is a producer of a line of fine handbags and small leather goods distributed through prestige department and specialty stores. Coach also operates an international retail division of more than 200 signature stores. DKNY and Godiva are other examples of vertically integrated producers that operate signature stores. Retailers vertically integrate when they develop their own product lines for exclusive distribution in their stores, a merchandising concept called private labeling, covered in Chapter 7. Limited Brands, Inc., is a vertically integrated retailing organization. Through an independent operating

Coac h a n d V e rt i ca l I n t e g r at i o n

Coach is a producer and retailer of high-quality handbags, luggage, and accessories known for classic styling. The company’s roots go back to 1941 and a Manhattan loft on the fringe of New York’s garment district, where six leather workers began hand-making wallets and billfolds. Innnovation has been an integral part of Coach’s history. The company was the first to use sturdy cowhide in the production of handbags, and to include built-in side pockets and coin purses as product features. Coach products are distributed through 1,400 retail stores including those operated by Bloomingdale’s, Macy’s, and Nordstrom. As a vertically integrated producer/retailer, Coach operates nearly 200 retail stores bearing the Coach name in the United States. Two-thirds of the products that Coach produces are distributed through these stores. Since 1988, Coach has been gaining international prominence with an additional 175 store locations in 18 countries outside the United States. Source: Funding Universe. (2012). About Coach. www.fundinguniverse.com/company-histories/coach-inc-history/.

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Figure 1.4: Some marketing channel members, such as Costco, perform multiple channel functions. Photo by Carly Grafstein

Figure 1.5: DKNY is a vertically integrated producer that acts like a retailer by operating its own specialty stores. © Maurice Savage/Alamy

division called Mast Industries, Limited Brands develops and sources many of the products sold at Limited Brands stores, including Bath & Body Works, Pink, and Victoria’s Secret. Gymboree is distinctive among childrenswear retailers because of its fashionable private label lines developed by the company’s designers who work directly with factories in the Far East to produce goods for more than 600 Gymboree stores.2

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Figure 1.6: American Eagle is a vertically integrated retailer that acts like a producer by developing its own product lines. ÂŠ Per Andersen/Alamy

Companies that vertically integrate risk alienating other channel members. Producers that operate manufacturer-sponsored specialty stores compete directly with the retailers that sell their products through conventional distribution channels. Similarly, producers resent retailers that develop private label goods, which are often imitations of products that producers have painstakingly developed.

Retail Organizational Structures A table of organization, or organizational chart, is a diagram that depicts a companyâ&#x20AC;&#x2122;s corporate structure. This chart reflects the various functions performed by an organization and the way in which organizational activities are departmentalized, or grouped into organizational units. A table of

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President

V.P.

Figure 1.7: A table of organization depicts a company’s corporate structure and chain of command.

organization defines the hierarchy, or chain of command, in an organization, as well as lines of communication and responsibility. Chairman of the board, president, chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), and vice president are some of the top management titles that appear at the top of a table of organization. These functions have a broader scope of authority and responsibility and a higher salary than lower-level functions. Because the number of functions decreases as one proceeds from the top of a table to the bottom, tables of organization are often called organizational pyramids. As organizations grow, organizational functions with a broad range of responsibility are often split into more specialized functions. An apparel retailer may split the function of buyer of junior sportswear into two more specialized functions, buyer of tops and buyer of bottoms, when business reaches the point that it requires and can support two distinct functions. In general, the tables of organization of large retail organizations have many specialized functions, while the tables of organization of small retail organizations have fewer functions that are more general in scope. In 1927, Paul Mazur, an investment banker, was commissioned by the National Retail Dry Goods Association, now the National Retail Federation, to develop a model organizational structure for retail stores. Mazur proposed a table of organization with four major functions: ■■

■■

Merchandising—Responsible for procuring merchandise to be resold to customers. These duties were primarily performed by buyers. Publicity—Responsible for stimulating sales through advertising, display, and other promotional vehicles.

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■■

Control—Responsible for the fiscal functions typical of most organizations, such as accounts payable, accounts receivable, and payroll. Store management—Responsible for sales support functions, facilities management, and the warehouse functions of receiving, checking, and marking goods.3

Mazur’s proposed structure is still the core of most contemporary retail tables of organization. The organizational growth and the need for a higher degree of specialization, however, have required several enhancements to Mazur’s plan: ■■

■■

The territorial expanse of multi-unit retail operations spurred the creation of geographically defined pyramids of regions and districts, an organizational concept discussed later in this chapter. As retailers began to recognize the importance of people as an organizational resource, personnel, originally a store management function, evolved into a separate organizational function called human resources. Because the first computer applications in retail stores were fiscal in nature, most retailers relegated computer operations to the finance division. As computer applications spread throughout the entire organization, most retail companies spun off information systems (IS) as a freestanding organizational function.

The Separation of Buying and Selling

In Mazur’s day, most retail organizations were single-store operations in which buying and selling occurred under one roof. Because Mazur identified buying and selling as related activities, he proposed a merchandising function that included responsibility for both merchandise procurement and sales floor activities, such as customer service and stock keeping. As single-unit retail operations evolved into multi-unit chains, buying became a centralized corporate-level function performed independently from the operation of stores. The store-level merchandising activities once orchestrated by buyers became store management functions. Today, the store operations, or store administration, function in a retail organization is a descendant of Mazur’s store management function, but a far cry from the facilities management function that Mazur originally proposed. The contemporary store operations function is likely to include merchandising responsibilities, such as assortment planning, merchandise presentation, and inventory management.

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Recording

Figure 1.8: The table of organization developed for retail stores by Paul Mazur in 1927.

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Stock People

Division Manager

Buyer

Division Manager

Stock People

Division Manager

Stock People

Buyer

Display

Publicity Manager

Stock People

Comparison

Assistant to General Manager

Division Manager

Advertising

Division Manager

Basement Manager

Board of Managers

Assistant General Manager

Division Manager

Buying Offices

Main Store

Credit

Control

Merchandise Manager

Controller

Research Department

General Manager

Service

Purchasing

Personnel

Maintenance

Protection

Traffic

Store Manager

Line and Staff Functions

Organizational functions can be grouped into two categories based on the type of activities performed. A line function performs mainstream activities fundamental to an organization’s mission. Buying and selling merchandise are a retailer’s mainstream activities, thus merchandising and store operations are a retailer’s line functions. These functions are sometimes referred to as the store line and the buying line. A staff function supports or advises line functions and/or other staff functions but is not directly involved in an organization’s mainstream activities. A retail organization’s legal department is an example of a staff function that supports both line and staff functions by performing activities such as negotiating leases and interpreting statutes that govern truth in advertising. However, the legal department is not directly involved in a retail organization’s mainstream activities of buying and selling. Authority is clearly defined through a chain of command in a line function. Within store operations, an assistant store manager reports to a store manager, who reports to a district manager, who reports to a regional manager, who reports to a director of stores. Staff authority is not as clearly defined. Though the managers of staff functions have authority within their departments, staff managers merely “advise” the managers of other functions without having formal decision-making authority over them. Staff managers sometimes have functional authority over other managers in matters that involve their areas of expertise. Different managerial perspectives are often the source of organizational conflict between staff and line managers. Though the ultimate goal of every retail organization is to make a profit, line and staff managers sometimes adopt divergent strategies for attaining this common goal. For instance, a store manager maximizes profit by employing a competent selling staff. A corporate-level human resource department maximizes profit by establishing salary ranges for various organizational functions. Thus, a store manager’s ability to hire top-notch salespeople may be constrained by the human resource department’s salary structures. This is not to say that organizational conflict between line functions in retail organizations is nonexistent. The following is an example of a common dispute between a store manager and buyer. The dress department of a store within a chain of department stores fell short of its monthly sales goal. When asked to explain the shortfall, the store manager listed the following reasons:

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■■

The styles were too dressy. The store caters to career women, yet social-occasion looks dominated the assortment. The prices were too high. The store serves a middle-income market where good value is the primary purchase criterion. Size assortments were skewed. The assortment included an overabundance of larger sizes (12s and 14s) and too few smaller sizes (4s and 6s).

Based on observations made during periodic store visits, the buyer retorted with the following reasons for the sales shortfall: ■■

■■

The merchandise was poorly presented. Looks were not pulled together in any cohesive fashion by color, fabric, or vendor, and customers were likely frustrated by racks of sale goods that were not sized. Furthermore, the store’s alterations department should be steaming goods wrinkled in shipment. Staffing was inadequate. To conserve expenses, the store manager reduced the selling staff, thereby hampering customer service. Also, newly hired sales associates were poorly trained and unmotivated.

In essence, the store manager blamed the buyer for the sales shortfall, and the buyer blamed the store manager. Conflict between buyers and store managers has become legendary in retail organizations. Some companies promote empathy between the store line and the buying line by including training stints in both the buying office and stores in their executive training programs.

Retail Merchandising The term merchandising has many connotations. In the apparel industry, merchandising involves the planning, development, and presentation of a product line suitable for a firm’s intended customers. Mazur cited a classic definition of retail merchandising: “to have the right goods, at the right time, in the right quantities, and at the right prices.”4 In a broad context, “retail merchandising” includes all of the activities directly or indirectly associated with procuring and reselling merchandise. In a narrow context, retail merchandising embraces only the merchandise procurement function. In this textbook, retail merchandising will be

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Buyer Planning Manager Associate Buyer Assistant Planner

Senior Allocation Analyst

Allocation Analyst

Allocation Analyst: This is your first opportunity to impact our stores across the country by analyzing sales trends, making crucial distribution decisions, and acting as a liason between our Distribution Centers and our Buyers. Every step of the way you’ll apply and develop your analytical, strategic, and creative problem-solving skills. Senior Allocation Analyst: Handle a greater volume of merchandise allocation, and develop your leadership skills as you train and supervise Allocation Analysts, ensure that work flow within the department is evenly balanced, and see that timely decisions are being made. Assistant Planner: Enhance your management skills as you work closely with the Planning Manager to create and implement seasonal merchandising plans, assess developmental needs, and train Analysts and Senior Analysts in the development of distribution strategies. Planning Manager: As a Planning Manager, you’ll enjoy full empowerment to build, in essence, your own business worth approximately $150 million. You will work with a Divisional Merchandise Manager and Buyers to determine short and long-term strategies, create seasonal merchandising plans, and partner with other Merchandising executives to ensure that objectives are being met. You will also manage a staff of five to eight Associates and participate in the development of our future Planning Managers and Buyers. Associate Buyer: Team up with an experienced Buyer as you become increasingly involved in buying decisions. You’ll get a first-hand view of our operations, identify strategies for buying trips, and after acquring the necessary experience, travel to vendor sites and develop negotiating skills. Buyer: Enjoy full autonomy to handle a sales volume averaging $55–$75 million annually. Traveling frequently to New York City and other domestic and international centers, you’ll maintain vendor relationships and purchase merchandise for T.J. Maxx and Marshalls stores nationwide.

Figure 1.9: Corporate-level merchandising responsibilities at TJX Companies include distribution, planning, and buying functions. Courtesy TJX Companies, Inc.

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defined in the broader context to include all of the activities associated with buying, pricing, presenting, and promoting merchandise. Corporate and Field Functions

Organizational functions can be classified by where the function is performed. A corporate function is performed within a company’s central organization or corporate office. In a retail organization, buying, sales promotion, and finance are all corporate functions performed in a corporate office. A field function is performed in a remote or satellite operation away from the corporate office. In a retail organization, the store operations function is a field function performed in stores. Within the broad context of retail merchandising, merchandising functions are performed both corporately and in the field. Though some merchandising functions are common to all retailers, the job titles associated with these functions often differ from one organization to another. The titles and responsibilities described in the following sections are common to most retailers. Corporate-Level Merchandising Functions

Buying is the main function of a corporate merchandising division. Traditionally buyers were responsible for a diverse group of activities that included inventory planning, selection, and allocation. However, the growth of large retail chains has fostered greater specialization in executing the buying function. Many retailers have split buying into four specialized functions: buying, planning, distribution, and product development. A buyer buys and prices merchandise for resale. A buyer’s challenge is to compose assortments that will appeal to the organization’s intended customers, obtaining the best possible goods at the lowest possible prices. Buyers explore the offerings of the wholesale marketplace by visiting domestic and foreign markets and through frequent interaction with producers’ sales agents. Buyers are also responsible for pricing goods low enough to be competitive with other retailers, yet high enough to meet an organization’s profit objectives. The magnitude of a buyer’s responsibility is defined by annual sales volume; thus, as might be expected, the buyer of a department with an annual sales volume of $100 million is paid a higher salary than the buyer of a department with $1 million in annual sales. The importance of a buying position may also be linked to the complexity of the wholesale market or the risk associated with purchase decisions. A purchase decision for fashion

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A Day i n t h e L i f e o f a B u y e r

Being a professional buyer is a glamorous, powerful job in many respects. But the glitter and glitz cloud the hard work and keen intellect required to make it in this competitive field. Professional buyers examine goods and work within reasonable budgets to make competitive bids for products to resell. They have to be able to not underestimate the amount and the scale of negotiations necessary. “People eat you alive if they think they can get away with it,” wrote one buyer. Those comfortable with negotiating reported a higher-than-average satisfaction with their job. The decisions a buyer makes—color, size, quantity, and price—are some of the most important in determining whether a company makes a profit in a given year. The power to influence sales, beat competition, and earn high profits through their decision making gives many buyers satisfaction in a high-pressure position. The bottom line in this job is “how am I selling and what is my margin.” “It’s the closest thing to gambling, including picking stocks. You don’t really have a lot of research—you have to go with your taste and your gut feeling,” mentioned one long-term buyer, “It’s addictive.” Some buyers said that it is important to stick with what you know and not think about commercial profitability, because “you’re just as likely to pick a winner or a dog either way. Consumer taste is fickle.” Buyers must have confidence in their choices and be able to assert their preferences and defend their selections. Buyers work long and sometimes unusual hours, traveling to fashion shows, industry conferences, seminars, and trade shows. They investigate producers’ lines, then place orders, usually with a limited amount of discussion. Professional buyers work with retail sales people to get feedback on how choices they have made responded to the market. This back-and-forth dialogue is important to a buyer’s understanding of any problems the sales force has moving the product. A significant number of respondents mentioned the support the other members of the field provided. While many times buyers will come into conflict over purchases and sales, the profession is so grueling that many find themselves sympathetic with one another in spite of that conflict. Paying Your Dues Almost any major can prepare you to become a buyer; it depends on what you want to buy. A book buyer might have been an English major;

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(continued) someone who buys hospital supplies might have majored in biology. Any college major with a business or managerial skills background will prepare you for the career. All employers require new employees to learn the specifics of their own business. Large companies usually have internal buyer training programs lasting from one to five years that expose the new employee to all aspects of the business. Many trainees begin as salespeople and learn about inventory policy, stock maintenance, and shipment checking. Aspiring buyers receive extensive training on proprietary computer and inventory tracking systems. The abilities to plan ahead, predict consumer habits and make difficult decisions mark those who emerge successfully from training programs. Those who continue in the profession find it helpful to achieve the professional designations recognized in each state, such as Certified Purchasing Manager (CMP) and Certified Purchasing Executive (CPE). To become an official purchasing agent for the government, applicants must pass a two- or three-part exam to attain federal certification. Associated Careers Professional buyers are usually in touch with a taste or a sensibility in a given field, and many use their knowledge in other careers. Some become fashion consultants for celebrities, others become internal managers for production firms, and still others move into retail and open their own stores. A significant number enter advertising, where their guesses as to consumer preference and experience working with salespeople prove invaluable. Source: Princeton Review. (2012). Career: Buyer. www.princetonreview.com/careers.aspx?cid=26. ÂŠ Princeton Review/ Random House

goods, such as dresses, involves higher risk than a purchase decision for basic goods, such as hosiery. Buying decisions for fashion goods are based on uncertain predictions of consumer acceptance of new styles. An inaccurate prediction will result in poor sales and the need to sell off the inventory at profit-threatening prices. Buying decisions for basics are often just reorders of historically best-selling brands, styles, colors, and sizes.

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A planner projects sales and inventories based on an analysis of sales history, current market trends, and the organization’s performance objectives. Planning is a statistical function that requires astute analytical aptitude and the ability to make multidimensional decisions. A distributor allocates arriving shipments of merchandise to individual stores based on each store’s capacity, current sales trends, and inventory levels. Often called allocators, distributors correct stock imbalances in stores and are a critical link between stores and the corporate merchandising division. A product developer determines which products to develop internally with the store’s private label. Product developers establish specifications for the design, production, and packaging of these goods. They are also responsible for contracting producers to manufacture the goods according to the specifications. The interdependence of the activities of buyers, planners, distributors, and product developers requires harmonious interaction among all four functions. In some retail organizations, the planning and distribution functions are combined. In small, conventionally structured organizations, the buyer is responsible for planning and distribution, as well as buying. The product development function exists only in stores that engage in private labeling. Many organizations use titles such as senior planner or lead analyst to indicate seniority or level of responsibility. An assistant buyer, as the title suggests, assists a buyer with various day-to-day activities and is often being groomed for a buying position. An associate buyer is one step closer to being a buyer and often assumes responsibility for buying a category of goods within the buyer’s total area of responsibility. Buying, planning, allocation, and product development responsibilities typically are assigned by merchandise department. A department is a group of related merchandise. A division is a group of related departments. Divisions and departments are identified by product line. A men’s division comprises several men’s departments, such as men’s outerwear, men’s suits and sport coats, men’s designer collections, and men’s accessories. A divisional merchandise manager (DMM) is responsible for a merchandise division. The DMM monitors the sales, inventories, and assortments of the departments within the division to ensure consistency with the organization’s merchandising and profit objectives. Divisional merchandise managers report to a general merchandise manager (GMM), who manages a group of related merchandise divisions. A GMM typically is at the senior management level of an organization, often with “vice president” in his or

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Figure 1.10: A merchantâ&#x20AC;&#x2122;s career path at Bloomingdales. Courtesy bloomingdales.com

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her title. Organizational hierarchies for planning and distribution often parallel organizational hierarchies for buying. Visual merchandising is a corporate-level merchandising function responsible for store decor, signage, display, fixturing, and standards for presenting merchandise. Visual merchandisers work with buyers to develop planograms, or floor layouts, and with store planning to design new stores or renovate existing ones. A storeâ&#x20AC;&#x2122;s fashion director is responsible for researching dominant color, style, and design trends in apparel, accessories, and home furnishings markets. The fashion director communicates this information to buyers, so that they can strategically select assortments consistent with current trends, and to other departments where fashion trend information is critical, such as advertising and visual merchandising. Store-Level Merchandising Functions

In general, store-level merchandising functions ensure that merchandise is presented on the selling floor in a manner consistent with a companyâ&#x20AC;&#x2122;s visual standards and that inventory levels and assortments are appropriate for the storeâ&#x20AC;&#x2122;s sales objectives. Store merchandising functions sometimes include responsibility for operational activities as well. Considerable communication occurs between store and corporate merchandising functions. A general manager, or store manager, ultimately is responsible for the merchandising and operations of a store. A general manager sometimes is assisted by an operations manager, a human resource manager, and/or a store merchandise manager. Large stores may have more than one store merchandise manager, each responsible for specific merchandise divisions. There is little consistency among the titles for this function. Titles synonymous with store merchandise manager include divisional sales manager and assistant store manager of merchandising. A department manager, or sales manager, usually reports to a store merchandise manager and is responsible for an area defined by department or division. This position usually includes both merchandising and operational responsibilities. The store merchandising hierarchy just described is typical of large department stores, such as Macyâ&#x20AC;&#x2122;s, and full-line discounters, such as Target. The management structure of a specialty store, such as Banana Republic, is much simpler, usually comprising a store manager and one or more assistant managers. The responsibilities associated with these positions are very general in nature, encompassing both merchandising and operational duties. Multistore retailers have a geographically defined organizational hierarchy that links the stores to the corporate office. A district manager is

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Figure 1.11: A store management career path at Macyâ&#x20AC;&#x2122;s. Courtesy macys.com

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Figure 1.12: Stein Mart is an example of a geographically dispersed retailer whose store management structure is linked with district and regional managers. Courtesy www.steinmart.com

responsible for a group of stores located within a defined geographic area. The number of stores in a district varies from one retail organization to another, and even within the same organization depending on the distance between stores. In the densely stored areas of the Northeast, a district may include 12 stores within a 50-mile radius. A district in the Southwest may have eight stores within a 100-mile radius. The amount of time required to travel to the stores in the Southwest is compensated for by responsibility for fewer stores. A regional manager supervises a group of district managers and reports to a corporate-level person, such as a vice president or director of stores. Some organizations link stores to the corporate office with only one managerial level, typically the regional level. Because merchandising activities occur at both store and corporate levels, the topics covered in this textbook are relevant to students wishing to pursue either corporate merchandising or store administration careers. Though industry restructuring has diminished the number of corporate merchandising career opportunities, considerable opportunities remain for store management executives with merchandising savvy. Knowledge of retail merchandising is also important for students interested in retail sales promotion, shopping center administration, or any phase of the distribution of consumer goods. Qualifications for Merchandising Positions

There is rigorous competition for the highest paid and most gratifying retail merchandising positions. Merchandising functions at all levels of an organization require dynamic, productive individuals, challenged by aggressive goals and committed to standards of excellence. Specific qualifications for merchandising positions differ from one retail organization to another, depending on factors such as a companyâ&#x20AC;&#x2122;s size, culture, merchandise mix, and operational strategy. Although there is no set of qualifications universally required by all retailers, the following summarizes a few skills that major retailers have cited as fundamental to success in their organizations.5

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Decision-Making Skills

Buyers must make decisions frequently and quickly. Retail merchandising requires the ability to evaluate information from multiple sources as a basis for making decisions with far-reaching implications. Planners determine the weighted importance and interaction of market trends, the economy, competition, and consumer behavior to project the amount of inventory that a buyer should purchase. An understated projection will yield inventories that are too low to meet the organizationâ&#x20AC;&#x2122;s sales potential. An overstated projection will result in excessive inventories, a poor investment of the companyâ&#x20AC;&#x2122;s fiscal resources. Communication Skills

The ability to communicate effectively, both orally and in writing, with people inside and outside the organization is fundamental to the success of a merchandising executive. Conveying ideas to superiors, directives to subordinates, and negotiating price, payment arrangements, and advertising allowances with suppliers are just a few of the instances in which carefully honed communication skills are a necessity.

V.P. Planning

Sr. V.P. General Merchandise Manager

V.P. Director of Stores

Divisional Director Planning

Divisional Merchandise Manager

General Manager

Manager Planning

Buyer

Planner/ Distributer

Senior Associate Buyer

Divisional Sales Manager Liaison Operations

Associate Buyer

Sales Manager

Human Resources

Network

Network College Recruit

Sales Associate

College Recruit

Figure 1.13: The store line and buying line at one department store chain.

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Analytical and Problem-Solving Skills

Computers have reduced the amount of computational and clerical activities associated with merchandising functions, allowing merchandising executives to devote more time to analyzing reports of sales, inventory, and profit. Physical remoteness from stores has increased reliance on these reports. A single store merchant can “eyeball” inventory and see that “mediums are low” and that it is time to reorder. In large multi-unit operations, this type of stock replenishment decision is based on reports that define inventory status quantitatively. Organizational Skills

Merchandising positions require careful orchestration of the human and fiscal resources of the organization. The administrative skills necessary to manage time, develop procedures, and prioritize tasks are critical to the success of a merchandising executive. Mobility Figure 1.14: A store management career path at Abercrombie & Fitch. Courtesy abercrombie.com

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Mobility is a requirement for some merchandising positions. Large multistore organizations sometimes require store executives to relocate, and buyers must be willing to travel to domestic and foreign markets. Though company-paid travel adds to the attractiveness of a buying position, the travel is often not as glamorous as it seems. Buying trips allow little time for sightseeing and other recreational activities, because typically there is much to accomplish in a short time. Good taste is sometimes considered a qualification for merchandising positions, especially in the area of fashion goods. However, the ability to translate customers’ tastes into merchandise assortments is more important than personal taste. Upon reviewing a fashion jewelry line, a buyer of impeccable taste once declared to the sales representative: “This is the ugliest, most ostentatious line that I’ve seen this season! I’ll take it. My customers will love it!”

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Many organizations have structured training programs to groom aspiring merchandising executives to fill projected employment needs. Trainees are promoted from entry-level positions to more advanced levels of responsibility upon successful completion of specified levels of training. Because of the desirability of these programs, competition for entrance into them is intense, and the result of an intense screening process. Large retail organizations are more likely than smaller companies to have structured training programs. Colleges and universities have responded to students’ growing interest in retailing careers. Funded in part by a grant from a major retail organization, Indiana University developed the Retail Studies Organization. The center’s goal is to forge alliances between the retail industry and the university by involving retail executives in curriculum planning and development, and by sponsoring conferences on topics of interest to retailers nationwide. Retail organizations have been highly supportive of higher education’s outreach endeavors. Founded in 1983, the Center for Retailing Studies at Texas A&M University is sponsored by more than 50 prominent retail organizations.

Summary Points ■■

■■

The marketing channel represents the flow of goods from point of production to point of consumption. Marketing channel members are sometimes bypassed in the distribution process in the interest of time or cost. Performing more than one function in the marketing channel is called vertical integration. A table of organization depicts a company’s corporate structure and defines an organization’s lines of communication and responsibility. Paul Mazur proposed a table of organization for retailers that included four major functions: merchandising, publicity, control, and store management. Line functions are fundamental to an organization’s mission. Staff functions are support functions. Merchandising and store operations are a retailer’s line functions. Retail merchandising includes all of the activities associated with buying, pricing, presenting, and promoting merchandise at both store and corporate level.

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■■

Merchandise procurement responsibilities are defined by four functions: planning, buying, distribution, and product development. The responsibilities associated with these functions are typically defined by department. Store-level merchandising ensures that merchandise is presented in a manner consistent with a company’s visual merchandising standards and that inventory levels and assortments are appropriate for the store’s customers and sales objectives. Decision-making skills, communication skills, analytical skills, and organizational skills are necessary for those pursuing merchandising careers.

Key Terms and Concepts buyer

general manager

retailer

consumer

general merchandise

retail merchandising

corporate function

manager

deparment

line function

deparment manager

manufacturer-

distributor district manager

staff function store merchandise manager