INSTRUCTOR SOLUTION MANUAL FOR RETAILING MANAGEMENT, 11TH EDITION BY MICHAEL LEVY, BARTON WEITZ AND by StudyGuide

Chapter 02 - Types of Retailers

INSTRUCTOR SOLUTION MANUAL FOR RETAILING MANAGEMENT, 11TH EDITION BY MICHAEL LEVY, BARTON WEITZ AND DHRUV GREWAL Chapter 1-18

CHAPTER 1 INTRODUCTION TO THE WORLD OF RETAILING ANNOTATED OUTLINE

INSTRUCTOR’S NOTES

I. Introduction 

Retailing is a common part of our everyday lives. For most people, retailers simply are places to buy things.

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However, behind the stores, websites, sales associates, and cashiers are an army of managers responsible for making sure that the products and services that people want are available when they want them, where they want them, and at a fair price.

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Working in this highly competitive, rapidly changing retail environment is both challenging and exciting, and it offers significant financial rewards.

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Knowledge of retailing principles and practices will help you develop management skills for many business contexts LO 1-1 Identify retailing activities.

II. What Is Retailing? 

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Ask students about where they bought their school supplies. There will likely be a mix of responses, including the college bookstore, online, or even from another student. Question students on the pros and cons of each type of transaction.

Retailing is the set of business activities that adds value to the products and services sold to consumers for their personal or family use. Not all retailing is done in stores. Examples of nonstore retailing include ordering a T-shirt on your mobile phone app, buying cosmetics from an Avon salesperson, ordering hiking boots from an L.L.Bean catalog, and streaming a movie through Amazon Prime.

See PPT 1-3 Ask students to give examples of retailers. One ice-breaking activity is to ask each student to list as many retailers as they can think of in a specified period of time. Ask the student with the most listed retailers to read his or her

Chapter 02 - Types of Retailers list to the class. Generally, the student will think of traditional retailers that sell through stores. Be sure to discuss the many other examples such as HSN, Avon, Jiffy Lube, Pizza Hut, and airlines. Certainly students should be encouraged to consider digital, multichannel, and omnichannel retailers like Amazon.com or Delta. A. The Retailer's Role in a Supply Chain 

A retailer is a business that sells products and/or services to consumers for their personal or family use. Retailers are a key component in a supply chain that links manufacturers to consumers.

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A supply chain is a set of firms that make and deliver goods and services to consumers.

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Retailers typically buy products from wholesalers and/or manufacturers and resell them to consumers.

B. Retailers Create Value 

Retailers undertake business activities and perform functions that increase the value of the products and services they sell to consumers.

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The value-creating activities undertaken by retailers include (1) providing an assortment of products and services, (2) breaking bulk, (3) holding inventory, and (4) providing services.

1. Providing Assortments 

Offering an assortment enables customers to choose from a wide selection of brands, designs, sizes, colors, and prices in one location.

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Conventional supermarkets typically carry about 30,000 different items made by more than 500 companies.

A typical supply chain network is illustrated in PPT 1-4.

PPT 1-5, 1-6, 1-7 illustrate the value question for retailers.

Ask students to describe the difference in the assortments of bicycles provided by Walmart and the local bike shop. What is the difference in assortment of body lotions and creams provided by Bath and Body Works and CVS?

Chapter 02 - Types of Retailers

2. Breaking Bulk 

To reduce transportation costs, manufacturers and wholesalers typically ship cases/cartons of products to retailers.

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Retailers then offer the products in smaller quantities tailored to individual consumers’ and households’ consumption patterns—an activity called breaking bulk.

3. Holding Inventory 

A major value-providing activity performed by retailers is to keep inventory so that products will be available when consumers want them, reducing the consumer’s cost of storing products.

4. Providing Services 

Retailers provide services such as credit, product displays, salespeople, and websites to make it easier for customers to compare, buy, and use products.

How many students have made purchases at Sam’s Club/BJ’s/Costco? What items have the students or their family members purchased in bulk? Discuss the advantages of buying in bulk. For what purchases and what types of consumers does buying in bulk make sense? Discuss product categories for which holding inventory is particularly appealing (e.g., holiday decorations, seasonal gear). Ask the students what kind of services retailers provide. Some services are: acceptance of credit cards, alteration of merchandise, assembly of merchandise, bridal registry, check cashing, child-care facilities, credit, delivery to home, demonstrations of merchandise, displaying merchandise, dressing rooms, gift wrapping, lay-away plans, parking, personal assistance in selecting merchandise, personal shoppers, play areas for children, presentations on how to use merchandise, provisions for customers with special needs (wheelchairs, translators), repair services, rest rooms, special orders, and warranties. Which of these services do students believe offer the greatest value to the consumer? Do their opinions differ for different retailers?

C. Costs of Channel Activities 

While the value-creating activities undertaken by channel members provide benefits to customers, they also

Exhibit 1–2 illustrates the supply chain costs of getting a T-shirt from the manufacturer to the

Chapter 02 - Types of Retailers increase the cost of products and services. 

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consumer.

These costs include the design, raw materials, labor, production equipment, transportation to the wholesaler, and so on. Costs are justified by the considerable value added by the wholesaler and retailers to the product, including providing assortments, breaking bulk, holding inventory, and providing services,

D. Retailers Perform Wholesaling and Production Activities 

Wholesalers buy and store merchandise in large quantities from manufacturers and then resell the merchandise (usually in smaller quantities) to retailers or industrial or business users.

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Some retail chains are both retailers and wholesalers. They’re performing retailing activities when they sell to consumers and wholesaling activities when they sell to other businesses like building contractors or restaurant owners.

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See PPT 1-8 Discuss the advantages and disadvantages of being vertically integrated. Advantages:

In some supply chains, manufacturing, wholesaling, and retailing activities are performed by independent firms. Most supply chains have some vertical integration. Vertical integration means that a firm performs more than one level of activity in the channel. For example, most large retailers—such as Safeway, Walmart, and Office Depot—do both wholesaling and retailing activities Backward integration occurs when a retailer performs some distribution and manufacturing activities, such as operating warehouses and/or designing private-label merchandise. Forward integration occurs when a manufacturer undertakes its own retailing activities, such as Apple opening its own retail stores.

E. Differences in Distribution Channels around the World 

Discuss with students the various contributors of cost in each aspect of supply chain. Which retailers have the highest added costs?

Compared with distribution channels in the European Union, China, and India, the U.S. retail industry has the greatest retail density (retail stores per person), with the greatest concentration of large retail firms. The

Develop unique merchandise only sold in your stores Better coordination between manufacturing and retailing Faster speed to market Better control of product distribution Disadvantages: Higher costs because retailer might not be an efficient manufacturer More complex infrastructure required The cost of being vertically integrated is typically higher. PPT 1-9, 1-10, and 1-11, illustrate these different distribution channels. Ask students to consider several reasons for differences in

Chapter 02 - Types of Retailers combination of large stores and large firms results in a very efficient distribution system.

distribution systems in various nations.

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The Chinese and Indian distribution systems are characterized by small stores operated by relatively small firms and a large, independent wholesale industry. As a result, a larger percentage of labor is employed in distribution and retailing than in the United States.

How do differences in distribution systems lead to differences in retail experiences for consumers?

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Northern European retailing is most similar to the U.S. system. Southern European retailing is more fragmented across all sectors. Central European retailing has changed from a highly concentrated structure to one of extreme fragmentation (involving small family owned stores).

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Factors that have created differences in distribution systems include: (1) social and political objectives, (2) geography, and (3) market size.

III. Economic and Social Significance of Retailing 

Realize the importance of retailing in the U.S. and world economies.

LO 1-2 Realize the importance of retailing in the U.S. and world economies. See PPT 1-12

A. Role in Developed Economies 

Consumer spending plays a critical role in the economies of the United States and other developed countries. When consumers spend more money buying goods and services from retailers, a country’s economy flourishes.

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However, if consumers feel uncertain about their financial future and decide to refrain from buying new refrigerators or blue jeans, the economy slows down.

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More than 14 million people were employed in retailing in 2015—approximately 10 percent of the U.S. workforce— and an additional 15 percent work for companies that either provide services to and/or sell products through retailers.

B. Role in Developing Economies—The Bottom of the Pyramid 

Retailers need to also focus on opportunities available by serving the needs of the 3 billion people living at the lowest end of the income distribution.

Discuss technologies that are in abundant supply in developed markets and how those may impact retail at BoP markets. What can be done to lessen this

Chapter 02 - Types of Retailers 

Consumers in this low-income consumer segment (about 40 percent of the world’s population), referred to as the base of the pyramid or bottom of the pyramid (BoP), still have significant spending power.

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Undertaking retailing activities for BoP markets is challenging due to the lack of communication technologies and access. The markets are often in rural areas, limiting local demand and raising the costs of transporting goods.

C. Role in Society 

In addition to providing goods and services to their customers, some retailers are realizing that their responsibility includes considering the needs and objectives of all their stakeholders.

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Stakeholders are the broad set of people who might be affected by a firm’s actions, from current and prospective customers, to supply chain partners, to employees, to shareholders, to government agencies, to members of the communities in which the firm operates, to society in general.

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Retailers are socially responsible businesses. Corporate social responsibility (CSR) describes the voluntary actions taken by a company to address the ethical, social, and environmental impacts of its business operations and the concerns of its stakeholders.

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Conscious marketing entails a sense of purpose of the firm, beyond simply making profits by selling products and services. It encompasses four overriding principles:

gap?

Ask students which retailers are actively engaged in CSR.

1. Recognition of the retailing firm’s greater purpose. 

Retailers recognize that their purpose should be more than just making profits.

2. Consideration of stakeholders and their interdependence. 

Retailers that embrace the notion of conscious marketing consider how their actions will affect an expansive range of potential stakeholders.

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Retailers that consider the broad implications of their actions as a foundation for any decision achieve the most 2-6

Chapter 02 - Types of Retailers benefits for the largest number of stakeholders. 3. The presence of conscious leadership, creating a corporate culture. 

A conscious marketing approach implies that the firm’s leaders are dedicated to the proposition of being conscious at all levels of the business, throughout its entire culture.

4. The understanding that decisions are ethically based. 

Retailers that are engaged in conscious marketing make decisions that are based on sound business ethics.

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Business ethics is concerned with distinguishing between right and wrong actions and decisions that arise in a business setting, according to broad and well-established moral principles.

IV. The Growing Importance of Retailers and Retailing

LO 1-3 Analyze the changing retail industry. See PPT 1-17

A. Evolution of the Retail Industry 

Fifty years ago, the retail industry consisted of small, independent, local retailers competing against other small, independent retailers in the same community.

The largest retailers in the world are shown in Exhibit 1–3. Are students surprised by any companies on the list? Why or why not?

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Today, the retail industry is dominated by large, national, and even international retail firms.

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Five of the top 20 retailers are headquartered in the United States; France and Germany each host three.

Ask what companies will be in the top five in five years. Why?

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The development of information systems is one of the forces facilitating the growth of large retail firms—the shift from an industry dominated by small local retailers to large multinational chains.

Discuss how some companies are doing a good job of dealing with changing customer needs and others are not.

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Retailing is becoming a global industry as more retailers pursue growth by expanding their operations to other countries.

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Large retailers in particular are becoming increasingly international in geographic scope.

What global retailers have students experienced while traveling abroad? How do these experiences compare to the students’ experiences in the local

Chapter 02 - Types of Retailers 

Revenues for 250 of the world’s top retailers exceed $4.5 trillion, and an estimated $1.4 trillion went to just 10 massive retailers. About one-quarter of the retailers included in the top 250 list actually account for less than $5 billion in revenues total.

B. Role of Information Systems 

Retailers are inundated with data about the thousands of transactions that take place each day. The challenge f is to convert these raw data into information that managers can use to make better decisions.

V. Management and Entrepreneurial Opportunities 

Retailing provides personal opportunities to work for a company in an exciting, challenging environment or to start an entrepreneurial venture.

A. Management Opportunities 

Retailers employ people with expertise and interests in finance, accounting, human resource management, supply chain management, and computer systems, as well as management and marketing.

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Retail management is also financially rewarding. Starting salaries are typically between $35,000 and $65,000 for college graduates entering management trainee positions.

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Senior buyers and others in higher managerial positions and store managers make between $120,000 and $300,000.

B. Entrepreneurial Opportunities 

Retailing provides opportunities for people wishing to start their own business. Many retail entrepreneurs are among the wealthiest people in the United States.

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The successes of Jeff Bezos (Amazon.com), Sam Walton (Walmart), Emily Weiss (Glossier), Ingvar Kamprad (IKEA), and Howard Schultz (Starbucks) show how each capitalized on entrepreneurial opportunities.

VI. The Retail Management Decision Process 

The book is organized around the management decisions retailers make to provide value to their customers and

marketplace?

Ask students what type of information may be found on transactional data (receipts). How could retailers use this information to improve the customer experience? LO 1-4 Recognize the opportunities for you in retailing.

See PPT 1-21, and 1-22 for more information and examples of opportunities in the retailing field.

Ask students what they think of retailing as a career. If there are many opportunities and they seem to pay well, why do most students think that retailing is not a good job to get after graduation? Examples of entrepreneurs in retail are shown in PPT 1-22.

What are some ideas that a retail entrepreneur might consider now near the campus or in the students’ hometowns? LO 1-5 Understand the strategic retail management decision process.

Chapter 02 - Types of Retailers develop an advantage over their competitors.

A. Understanding the World of Retailing (Section I) 

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Retail managers need a good understanding of their environment, especially their customers and competition, before they can develop and implement effective strategies. The critical environmental factors in the world of retailing are the macroenvironment and the microenvironment. The macroenvironment includes technological, social, and ethical/legal/political impacts. The microenvironment includes the retailer’s competitors and customers.

Use this process to discuss the organization of the course and the book. See PPT 1-23 for the Retail Management Decision Process Ask students about some changes occurring in the environment now that will affect retailing in general and specific retailers. Corporate social responsibility may come up as an answer, and the impacts of CSR on the practice of retailing could be discussed in detail.

1. Competitors 

A retailer’s primary competitors are those with the same format. Thus, department stores compete against other department stores and supermarkets compete with other supermarkets. This competition between retailers with the same format is called intratype competition.

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To appeal to a broader group of consumers and provide one-stop shopping, many retailers are increasing their variety of merchandise. Variety is the number of different merchandise categories within a store or department. The offering of merchandise not typically associated with the store type, such as clothing in a drug store, is called scrambled merchandising.

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Competition between retailers that sell similar merchandise using different formats, such as discount and department stores, is called intertype competition.

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Increasing intertype competition has made it harder for retailers to identify and monitor their competition. In one sense, all retailers compete against each other for the dollars consumers spend buying goods and services.

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Since convenience of location is important in store choice, a store’s proximity to competitors is a critical factor in identifying competition.

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Management’s view of competition also can differ, depending on the manager’s position within the retail

See PPT 1-25 In going through this section, you might pick a specific local retailer. Ask students to identify the retailer’s customers, intratype competitors, intertype competitors, and environmental trends affecting the retailer.

Ask students to give an example of intratype competition—such as a local department store competing against another department store in the same mall.

Ask students to compare the different types of merchandise offered at Walmart to those offered at, say, Bath and Body Works or McDonald's. Ask students to give an example

Chapter 02 - Types of Retailers firm. 

The CEO of a retail chain may view competition from a much broader geographic perspective compared with a specific store's manager or a departmental sales manager within the store.

of intertype competition—such as a drug store and discount store that sell the same brand of cosmetics.

2. Customers 

Retailers are responding to broad demographic and lifestyle trends in our society, such as the growth in the elderly and minority segments of the U.S. population and the importance of shopping convenience to the rising number of two-income families.

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To develop and implement an effective strategy, retailers need to know why customers shop, how they select a store, and how they select among that store’s merchandise.

Query students on the specific impacts of an aging population or dual-income households on retailing, including retail location, store layout, etc. What needs for specific types of merchandise and services do these markets create?

B. Developing a Retail Strategy (Section II) 

Understanding of the macro- and microenvironments is needed to formulate and implement a retail strategy.

1. The retail strategy indicates how the firm plans to focus its resources to accomplish its objectives. 

The retail strategy identifies: (1) the target market, (2) the nature of merchandise and services to be offered, and (3) how the retailer will build a long-term advantage over competitors.

See PPT 1-26

How can one retailer gain longterm competitive advantages over competitors in the marketplace? Potential areas for discussion include: location, customer relationships, technology, or merchandising.

2. Strategic Decision Areas 

Key strategic decision areas include the determination of market strategy, financial strategy, location strategy, organizational structure and human resource strategy, information systems and supply chain strategies, and customer relationship management (CRM) strategies.

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When major environmental changes occur, the current strategy and the reasoning behind it are reexamined. The retailer then decides what, if any, strategy changes are needed to take advantage of new opportunities or avoid new threats in the environment.

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The retailer’s market strategy must be consistent with the 2-10

Chapter 02 - Types of Retailers firm’s financial objectives. Location decisions are important for both consumer and competitive reasons. A retailer’s organizational design and human resource management strategies are intimately related to its market strategy. Retail information and supply chain management systems will be significant opportunities for retailers to gain strategic advantages in the coming decade. 

Retailers, like most businesses, want to develop repeat purchases and loyalty in their best customers. Customer relationship management (CRM) is a business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty with the firm's most valued customers.

C. Implementing the Retail Strategy (Sections III and IV) 

To implement the retail strategy, management develops a retail mix that satisfies the needs of its target market better than its competitors.

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Elements in the retail mix include the types of merchandise and services offered, merchandise pricing, advertising and promotional programs, store design, merchandise display, assistance to customers provided by salespeople, and convenience of the store’s location.

See PPT 1-28 for Key Decision Variables for Retailers.

Ask students what McDonald’s needs to do to implement its strategy effectively. Have them discuss each of the elements of the retail mix used by McDonald’s. Compare the retail mix elements used by McDonald’s to the retail mix elements used by an upscale restaurant in town. Why are the retail mixes of these two types of restaurants different? [They have different target markets with different needs.]

VII. Summary 

Retailing provides considerable value to consumers while giving people opportunities for rewarding and challenging careers.

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The key to successful retailing is offering the right product, at the right price, in the right place, at the right time, and making a profit. To accomplish this, retailers must understand what customers want and what competitors are offering. 2-11

Chapter 02 - Types of Retailers 

Retailing plays an important role in the U.S. economy. One out of four workers in the United States works for a retailer or for a company selling products to a retailer.

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The retail industry has changed dramatically over the past 50 years.

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The retail management decision process involves developing a strategy for creating a competitive advantage in the marketplace and then developing a retail mix to implement that strategy.

VIII. Appendix 1A: Careers in Retailing 

Retailing offers exciting and challenging career opportunities. Few other industries grant as many responsibilities to young managers.

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Retailing offers a variety of career paths such as buying, store management, sales promotion and advertising, personnel, operations/distribution, loss prevention, and finance in several different corporate forms, such as department stores, specialty stores, food stores, and discount stores.

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In addition, retailing offers almost immediate accountability for talented people to reach key management positions within a decade. Starting salaries are competitive, and the compensation of top management ranks among the highest in any industry.

A. Career Opportunities 

Career opportunities in retail firms occur in merchandising/buying, store management, and corporate staff functions.

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Primary entry-level opportunities for a retailing career are in the areas of buying and store management. Buying positions are more numbers-oriented, whereas store management positions are more people-oriented.

Store Management

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Successful store managers must have the ability to lead and motivate employees. Store management involves all the disciplines necessary to run a successful business: sales planning and goal setting, overall store image and merchandise presentation, budgets and expense control, 2-12

Chapter 02 - Types of Retailers customer service and sales supervision, personnel administration and development, and community relations. 2. Merchandise Management 

Merchandise management attracts people with strong analytical capabilities, an ability to predict what merchandise will appeal to their target markets, and a skill for negotiating with vendors and store management to get things done. Many retailers break the merchandise/buying function into two career paths: buying and merchandise planning.

3. Corporate Staff 

Corporate staff opportunities include positions in information systems, operations/distribution, promotions/advertising, loss prevention, finance/control, real estate, store design, and human resource management.

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Career opportunities for corporate staff positions are more difficult to break into.

B. Attractiveness of Retailing Careers 1. Immediate Responsibility 

Management trainees in retailing are given more responsibility more quickly than their counterparts in other industries.

2. Financial Rewards 

Compensation varies according to the amount of responsibility.

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Because information systems enable retailers to assess the sales and profit performance of each manager, and even each sales associate, the compensation of retail managers is closely linked to objective measures of their performance.

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In retailing, the benefits package is often substantial and may include a profit-sharing plan, savings plan, stock options, medical and dental insurance, life insurance, longterm disability protection and income protection plans, paid vacations and holidays, and discounts on 2-13

Chapter 02 - Types of Retailers merchandise. 3. Opportunities for Advancement 

While the growth rate of retail parallels the growth rate of the overall economy, many opportunities for rapid advancement exist simply because of the sheer size of the retail industry.

Chapter 02 - Types of Retailers ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS 1. CONTINUING CASE ASSIGNMENT In most chapters of this textbook, there will be a GET OUT AND DO IT! assignment that gives students an opportunity to examine the strategy and tactics of one retailer. The first assignment is to select a retailer and prepare a report on its history, including when it was founded and how it has evolved over time. Instructors could assign this question as an individual, paired, or team assignment. It could focus on specific sections of the text or become a semester-long, comprehensive project. If Target were the retailer selected for example, the following sources provide information about its history and current operations: 1. Mergent Intellect Database (if available at your university library) 2. Target, Our History, https://corporate.target.com/about/purpose-history 2. GO SHOPPING Visit a local retail store or its website and describe each of the elements in its retail mix. Summarize the types of merchandise and services offered, pricing, communication programs, store design, merchandise display, and suitability of the store’s location. The following example is from a local bagel shop, The Bagel Bin & Deli is a specialty food restaurant that serves breakfast and lunch foods, including fresh bagels, with eat-in, carryout, and catering options. Merchandise 20+ types of bagels Sandwiches Coffee and other beverages Cookies and desserts

Deli food Healthy breakfast and lunch choices Other complementary foods

Service Service people in the restaurant are cooking and preparing food, taking orders from customers and keeping the line moving, cleaning tables, ringing up sales, and helping customers. The types of service include curbside pickup, carryout, delivery, and catering. The store manager is available to help employees and customers. Pricing $13.50 per baker’s dozen—similar to competitors. Occasionally coupons are offered for discounts, such as “free half dozen bagels” or “buy one sandwich, get the second half off,” to stimulate trials and increase store traffic. The store offers a frequent customer card, “buy 12 dozen and get the 13th dozen free,” to encourage store loyalty. Location

Chapter 02 - Types of Retailers In a neighborhood shopping center with a food store, hair salon, post office, card shop, other restaurants, dry cleaners, and other retail establishments, it is conveniently located in a suburban residential area with a growing population. The strip center has a large parking lot on a busy section of a heavily traveled road. Promotion The Bagel Bin puts a distinctive, bagel-shaped logo on all signs, printed materials, employee uniforms, and delivery trucks. The shop sends out advertisements and coupons through direct mail; it uses local cable television and its website to inform customers about hours, selection, and location. The menu is posted outside so customers can start making their choices before they enter the store. Takeout menus are located on a counter, near the cash register. The Bagel Bin also offers a Bagel of the Month to introduce new flavors. Layout Food cases and displays are on the right as people enter the store. The counter, staffed by service people, appears after the cases, also on the right. The back of the store is where the bagels are baked. Drinks are last in the food line, followed by the cashier. Tables and a few booths are on the left-hand side of the store, offering seating for 50 people. Chairs offer moderate comfort for reading the paper, using a laptop, and eating breakfast, but they also encourage frequent turnover. Restrooms are located in the back of the store. The store layout makes it easy for carryout customers to get in, make a purchase, and get out quickly. Merchandise display Refrigerated cases display perishable prepackaged items such as juices and cheeses. Bagels, bakery products, and deli meats are displayed through glass cases. The product variety thus is immediately on display as the customer enters the store. 3. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the Census Internet site at: www.census.gov/retail/index.html. Under the heading "Monthly Retail Trade Report" there is a file titled "Retail and Food Services Sales" that lists sales by type of retailer (view “Not Adjusted Sales”). In which months are sales the highest? Which kinds of businesses experience the greatest fluctuations in monthly sales? List reasons that help explain your findings. Students should notice the importance of the fourth quarter for retail sales, during the winter holiday season. Many types of U.S. retailers post their highest sales in the fourth quarter, including home furnishings, electronics and appliances, and jewelry stores. If students looked at the breakdown of retailer type and view the values for digital channels, jewelry earns a significant percentage of sales in November and December. 4. INTERNET EXERCISE Go to the homepages of Apple, Target, Walmart, TJX Companies, and the National Retail Federation Job Board (https://jobs.nrf.com/) to find information about retail careers with these organizations. Review the information about the different positions described. In which positions would you be interested? Which positions are not of interest to you? Why? What skills, education and experiences are needed for the positions you are interested in?

Chapter 02 - Types of Retailers Students’ answers will vary considerably here. Some students may take a more long-term view, looking to buyer or planner positions that call for a variety of skills including strong organizational and analytical skills, excellent verbal and written communication skills, and extensive computer experience. These positions also require several years of prior experience in lower level buying positions. Other students may find these positions to be more quantitative or analytical than their interests. Students looking at entry-level positions, as well as those seeking more creative positions or those with a broader focus, may be attracted to the entry-level fashion assistant or product assistant positions. These positions request a less comprehensive skill set, as well as less emphasis on prior job experience. On the Target Careers page, https://corporate.target.com/careers/corporate, in January 2021, the following categories of opportunities were posted:               

Assets Protection & Corporate Security Business Operations Call Centers & Financial Retail Services Finance & Accounting Food & Beverage Global Supply & Chain Logistics Human Resources Legal Affairs, Risk & Compliance Marketing, Media & Communications Merchandising & Global Sourcing Product Design & Development Project Management Real Estate, Design & Property Management Strategy & Innovation Technology & Data Sciences

5. INTERNET EXERCISE Choose one of the top 20 retailers (Exhibit 1-3). Go to the company’s website and find out how the company started and how it has changed over time. Among the top 20 retailers, students might select one that has grown massively over time (e.g., Amazon) or one that had undergone multiple mergers (Walgreens Boots Alliance). They also might note the presence of several direct competitors (e.g., Home Depot and Lowe’s), such that it might be insightful to compare the evolution of two such companies in parallel. 6. INTERNET EXERCISE Go to Nike’s, Patagonia’s, Lowe’s, and Walgreens’s websites and search for “corporate social responsibility.” In brief paragraphs, describe how each retailer is taking steps to contribute to social or ethical causes. Nike, https://purpose.nike.com/. “Our purpose is to unite the world through sport to create a healthy planet, active communities and an equal playing field for all.” The company focuses on equality, breaking down barriers, inspiring female athletes, making products responsibly, and protecting the environment.

Chapter 02 - Types of Retailers Patagonia https://www.patagonia.com/our-footprint/corporate-social-responsibility-history.html. This firm focuses on environmental action, wildlife protection, preserving protected lands, support for environmental nonprofit organizations, and social change through employees. Lowe’s https://corporate.lowes.com/our-responsibilities. “Corporate responsibility is a cornerstone of our company. Our environmental stewardship programs. strategic philanthropic giving and focus on workplace inclusivity fuels our ability to serve the communities around us.” Walgreens https://www.walgreensbootsalliance.com/corporate-responsibility. “As a health and wellbeing enterprise, our purpose is to inspire more joyful lives through better health through our contributions to healthy communities, a healthy planet, a sustainable marketplace and an inclusive workplace.”

Chapter 02 - Types of Retailers ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. How do retailers add value to the products bought by consumers? Retailers add value in several ways. First, retailers provide an assortment of products and services. Second, retailers break bulk to enable customers to buy smaller quantities. Third, retailers hold inventory so that products will be available when consumers want them. Fourth, retailers provide services like alterations, financing, and sales associate assistance. 2. What is your favorite retailer? Why do you like this retailer? What would a competitive retailer have to do to get your patronage? Students may choose an example from a wide variety of retailers. Answers will likely range from national chains including but not limited to Zara, Urban Outfitters, Bloomingdale's, McDonald's, CVS, Sephora, Starbucks, or Kohl’s, to online retailers like Amazon.com and eBay, to favorite local shops and hangouts. Whatever selection is made, ask students to concentrate on specific aspects of its retail strategy, such as (1) intended target market of the retailer; (2) nature of merchandise and services and the specific consumer needs sought to be satisfied; (3) product variety and assortments carried; (4) store location strategy; (5) pricing strategies; (6) specific service strategies; (7) strategies designed to attract and retain customers; and (8) strategies specifically designed for gaining a long-term advantage over competitors. 3. What are the benefits and limitations of purchasing a home entertainment system directly from a number of component manufacturers rather than from a retailer? Students may indicate benefits typically associated with “removing the middleman” such as reduced price and effort in completing the transaction. While these benefits will occur in specific cases, it must be noted that the average consumer engages in buying dozens of items on a regular basis. Even if all manufacturers were to offer their products directly to consumers, it can be readily noted that the consumer would now have to spend an extraordinary amount of time each day ordering directly from each manufacturer. This should lead to discussion of the limitations of purchasing directly from the manufacturer rather than a retailer. Here, the various functions performed by retailers, such as bulk-breaking, holding inventories, and providing information, service, and assortments can be brought to bear on overcoming the limitations discussed above for the consumer. Bulk-breaking enables consumers to buy only the specific amount they need. Retail inventory helps eliminate the need for consumers to hold their own inventory, because they can satisfy their needs for a specific and immediate time period, such as buying one unit of dishwashing detergent that will last the next two months. Retailers provide valuable information and services that save consumers time and effort, compared with when consumers attempt to obtain such information by themselves or serve themselves. By providing an assortment of products and brands in one location – in some cases of scrambled merchandising, a very wide assortment of products and brands – retailers help consumers engage in one-stop shopping, thereby saving them time and effort, which they can devote to other productive and leisure activities.

Chapter 02 - Types of Retailers Further, it would be uneconomical for most manufacturers, especially those selling low-priced items such as toothpaste, to sell directly to each consumer or household. In general, even if retailers are eliminated from the supply chain, their functions remain. Often these functions would be distributed between the manufacturer and consumers. For example, manufacturers would have to produce a wider variety of products (to offer an assortment), and consumers would have to carry greater amounts of inventory (to buy a case of toothpaste). The distribution of retail functions would increase manufacturer costs as well as consumer costs and efforts. The idea of buying cheaper from the manufacturer is, in a vast majority of cases, a myth. 4. What retailers would be considered intratype competitors for a convenience store chain such as 7-Eleven? What firms would be intertype competitors? Discussion should cite those convenience stores in the local market offering the traditional convenience store retail mix including gasoline, snacks, newspapers, coffee, and a limited variety of grocery items. Ask students to discover intertype competitors for 7-Eleven by focusing on a particular merchandise offerings, such as a gallon of milk, a fountain soda, or a candy bar. This discussion will illustrate that intertype competition for 7-Eleven may come from a number of retailers offering similar merchandise through different formats, such as supermarkets, fast-food restaurants, or discount stores. 5. Similar brands and styles of men’s suits are sold for different prices at department stores like Nordstrom versus specialty stores like Men’s Wearhouse. Why would a customer choose to buy a suit from one store rather than the other? Use the retail mix (Exhibit 1-5) to organize your response. There are many different reasons why customers choose one retailer over another. Some customers might choose a department store if they have other shopping needs besides the men’s suit. If a customer has never purchased a suit before, he might choose Suit Supply because of its expertise in the area and the hands-on attention he will get from the sales associate. Nordstrom, https://www.nordstrom.com/browse/men/clothing/suits?breadcrumb=Home%2FMen%2FClothing%2F Suits%20%26%20Separates&origin=topnav Men’s Wearhouse, https://www.menswearhouse.com/c/mens-suits

Merchandise

Services

Nordstrom Men’s Suits 188 items online 26 Brands Store Brand Six Fits Full Range of Sizes Alterations Nordy Club Stylists Spa

Men’s Warehouse 427 items online 24 Brands Six Fits Full Range of Sizes Alterations

Chapter 02 - Types of Retailers

Location Price Communication

Store Design

Restaurant Gift Cards Part of Department Store Super Regional Malls $350. to $4,600 Some on sale Web Site App Social Media Free Shipping

Section of the men’s clothing and accessories department

Freestanding store in a power center $150 to $730 EDLP Free Shipping Clearance Sales Website Mailing List Social Media Rewards Program Blog – Thread Worthy Entire store is men’s clothing and accessories

6. Compare and contrast the retail mixes of department stores and full-line discount stores. Use bullet points or a table to list the similarities and differences. A department store’s retail mix would include:  Customer service- Department stores provide a higher level of customer service with increased sales associate interactions and add-on services like alterations, shipping, and gift wrapping.  Store design and display- Department stores are organized by departments. For example, Macy’s might have a children’s department, women’s department, men’s department, shoe department, and cosmetics department. Each department is merchandised differently.  Communication mix- Department stores use advertising, social media, personal selling and loyalty programs to reach customers.  Locations- Department stores are typically in malls and act as anchor stores for the mall.  Merchandise management- Department stores offer customers a wide variety of merchandise.  Pricing- Department stores have higher prices than discount stores. Some department stores, like Saks Fifth Avenue and Neiman Marcus, have significantly higher prices, other department stores, like Macy’s and Dillard’s, are more moderately priced. A full-line discount store’s retail mix would include:  Customer service- Discount stores have less customer service than department stores as they are more focused on keeping the price point down.  Store design and display- Discount stores optimize display areas to showcase merchandise. The display may not be as organized as a department store.

Chapter 02 - Types of Retailers  Communication mix- Discount stores communicate with their customers through advertisements, social media and sales promotions.  Location- Full-line discount stores are usually in strip malls or free-standing locations.  Merchandise management- The merchandise offered by full-line discount stores is usually a wide variety that is constantly changing, depending on the inventory available.  Pricing- Full-line discount stores are less expensive than department stores. These stores compete primarily on price. 7. An entrepreneur approaches you about how to sell her new writing pens to consumers. The pens have a unique benefit-they are more comfortable to use than traditional pens. The entrepreneur is concerned the retailers she has approached want to buy the pens from her at $10 a piece and then sell the pens in their stores for $18 to consumers. The entrepreneur is dismayed at the extra $8 the retailers are getting and has decided to sell the product directly to consumers for $10. She wants to know your opinion. What do you think? Why? Students’ answers may vary on this question. Traditionally, the entrepreneur would be better off selling the pen through the retailer because the retailer already has a client base and can absorb the cost of promoting the pen. In addition, retailers add value by providing assortment to the customer and the pen might be a great purchase along with other items the retailer offers. However, with the increased use of the Internet, entrepreneurs are able to reach audiences more directly. She may be able to sell her pen to customers directly, but she has to build the client base on her own. She might not be guaranteed the sales if she sells directly, vs. selling in bulk to the retailer. 8. From a personal perspective how does retailing rate as a potential career compared to others you are considering? Why? After reading the chapter, some students may already be attracted to retailing as a career, since they would now have realized the wide variety of opportunities provided in the retail sector. At the same time, some may compare retailing less favorably to other potential career paths, such as advertising, or more immediately lucrative endeavors, such as the stock market. Ultimately, all students should have recognized that retailing is not simply being a store associate, greeting the customer and making a sale. Those students interested in the technology field should see a variety of opportunities to make a career in retailing, as should those with interests in finance, accounting, or human resource management. 9. In this chapter, some socially responsible activities engaged in by retailers are described. Take the perspective of a stockholder in one of these companies. What effect will these activities have on the value of its stock? Why might they have a positive or negative effect? Sometimes CSR initiatives are expensive for a company, making the value of the stock drop. However, some CSR initiatives, like building greener buildings and reducing the carbon footprint, have long-term implications that add value to a retailer. For example, engaging in CSR activities can attract new customers, as well as increase loyalty with current customers. Furthermore, some of these activities might be required of retailers in the future, so it might be best, and more cost-effective, to implement them now.

Chapter 02 - Types of Retailers CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective

The Supply Chain

Drag and Drop; Matching (accessible version)

Understanding supply chains

1-1 Identify retail activities.

Physical Retail

Case Analysis

The importance of retailing

1-3 Analyze the changing retail industry.

The Retail Industry

Video Case

Retailing as a career

1-4 Recognize the opportunities for you in retailing.

Top Global Retailers

Matching

The importance of retailing

1-3 Analyze the changing retail industry.

Chapter 02 - Types of Retailers

CHAPTER 2 TYPES OF RETAILERS ANNOTATED OUTLINE I. Retailer Characteristics The 1.1 million U.S. store-based retailers range from street vendors selling hot dogs to omnichannel retailers that offer thousands of products in their stores, through catalog and Internet channels. The retail industry is always evolving. As consumer needs and competition within the industry change, new retail formats are created to respond to those changes. The most basic characteristic of a retailer is its retail mix – the elements used to satisfy its customers’ needs. Four elements of the retail mix that are particularly useful for classifying retailers are: (1) the type of merchandise sold, (2) the variety and assortment of merchandise and/or services sold, (3) the level of customer service, and (4) the price of the merchandise.

INSTRUCTOR NOTES LO 2-1 List the different characteristics that define retailers. Ask students to compare the four elements of the retail mix -- the type of merchandise sold, the variety and assortment of merchandise and/or services sold, the level of service provided to customers, and price -- of two women's specialty stores. Now compare the retail mixes of one of the specialty stores and the local discount store (e.g., Walmart). Use this comparison to illustrate how the competition between the two specialty stores is stronger than the competition between the specialty store and the discount store. PPT 2-4 illustrates classification of retailers by merchandise offering and by variety and assortment.

A. Type of Merchandise The United States, Canada, and Mexico have developed a classification scheme, called the North American Industry Classification System (NAICS), to collect data on business activity in each country. See PPT 2-5

B. Variety and Assortment Variety is the number of merchandise categories a retailer offers. Assortment is the number of different items in a merchandise category. Each different item of merchandise is called a SKU (stock-keeping unit). Variety is often referred to as the breadth of merchandise and assortment is referred to as the depth of merchandise.

Ask students to give examples of local retailers with low variety and high assortment, and retailers with high variety and low assortment. What benefits does high variety

Chapter 02 - Types of Retailers offer to customers? What is the benefit of high assortment? Ask student to give an example of an SKU. See PPT 2-6

C. Services Offered Retailers also differ in the services they offer customers. Customers expect retailers to provide some services-accepting credit cards, displaying merchandise, providing parking, and being open long and convenient hours. Some retailers charge customers for other services, such as home delivery and gift wrapping, although upscale retailers offer customers these services at no charge.

Discuss the different customer service policies of a specialty store like Apple and a local department store or an Internet retailer.

Discuss how customers’ expectations differ at each type of store. D. Prices and the Cost of Offering Breadth and Depth of Merchandise and Services Stocking a deep and broad assortment is appealing to customers but costly for retailers. When a retailer offers many SKUs, inventory investment increases because the retailer must have back-up stock for each SKU. Similarly, services attract customers to the retailer, but they are also costly. To make a profit, retailers that offer broader and deeper assortments and services need to charge higher prices. A critical retail decision involves the trade-off between costs and benefits of maintaining additional inventory or providing additional services.

See PPT 2-7 Customers like wide variety, deep assortments, and a lot of service, though some customers appreciate having the retailer edit the assortment for them. Ask students why all retailers don’t have this type of offering. (Retailers have constraints of money, size of store, and limited number of employees.) Why don't discount stores offer more services? (They appeal to a target segment that does not want to pay the cost for more service options.)

Chapter 02 - Types of Retailers LO 2-2 Categorize the various types of food retailers.

II. Food Retailers Twenty years ago, consumers purchased food primarily at conventional supermarkets. Now conventional supermarkets account for less than 65 percent of food sales. Supercenters, warehouse clubs, convenience stores, and extreme-value food retailers are significantly changing consumers' food purchasing patterns because they too sell food. At the same time, traditional food retailers carry many nonfood items.

See PPT 2-8

Where do students make the majority of their off-campus food purchases? What are the pros and cons of these different food retailer formats?

The world's largest food retailer is Walmart with supermarkettype sales of more than $485 billion. Ask students where they see the direction of food retailers going in the next 20 years. Will customers use more online grocery food retailers? See PPT 2-10

A. Supermarkets A conventional supermarket is a self-service food store offering groceries, meat, produce, and limited nonfood items. A limited-assortment supermarket (also called an extremevalue food retailer) only stocks about 1,500 SKUs. The two largest US examples of these stores are Save-A-Lot and ALDI.

Ask students to consider the retail mixes of the major supermarkets in the area surrounding campus. Which compete on price? On merchandise? On service? A combination?

Limited-assortment supermarkets are designed to maximize efficiency and reduce costs through limited assortment and service offerings. These cost savings and efficiencies allow the stores to charge significantly lower (40% lower) prices than conventional supermarkets.

Do students have concerns about the quality of items at conventional supermarkets versus limited-assortment supermarkets?

1. Trends in Supermarket Retailing

See PPT 2-11

Today, conventional supermarkets are under substantial competitive pressure on multiple sides: from supercenters, online retailers, warehouse clubs, extreme-value retailers, convenience stores, and even drugstores. All these types of retailers have increased the amount of space (virtual or physical) that they devote to consumables.

Ask students about why they would continue to shop at conventional supermarkets. Alternatively, why would they shop for food at supercenters, warehouse clubs, or convenience stores? What types of needs are

Chapter 02 - Types of Retailers conventional supermarkets because of their superior operating efficiencies. To compete successfully with intrusions by other types of retailers, conventional supermarkets have taken steps to differentiate their offerings by (1) emphasizing fresh perishables; (2) targeting green, ethnic, and Millennial consumers; (3) providing better value with private-label merchandise; (4) adding new value-added services such as online ordering; and (5) providing a better shopping experience, such as by adding restaurant options or hosting social events.

fulfilled by conventional supermarkets that can’t be filled through other food retailing formats? Based on these discussions, will conventional supermarkets be driven out of business by competing formats?

2. Fresh Merchandise Fresh-merchandise categories are located in the areas around the outer walls of a supermarket, known as the power perimeter, and include the dairy, bakery, meat, florist, produce, deli, and coffee bar. Conventional supermarkets are building on their strength in fresh-merchandise categories and devoting more space and attention to them as they attract customers and are very profitable. 3. Green Merchandise Conventional supermarkets are offering more fair trade, natural, organic, and locally sourced foods for the growing segment of consumers who are health and environmentally conscious. Fair trade is the practice of purchasing from suppliers that pay workers a living wage, considerably more than the prevailing minimum wage, and offer other benefits such as onsite medical treatment.

Discuss if students would pay more for local produce, and if by doing so, it would improve the carbon footprint in the world. Does paying more for fair trade make students feel like they are contributing to the betterment of society? By marketing these efforts, does it make food retailers less genuine in their approach?

The locavore movement focuses on reducing the carbon footprint caused by the transportation of food throughout the world. Traditional supermarket chains are offering more locally grown products. 4. Ethnic Merchandise Retailers are adding more ethnic merchandise in conventional supermarkets, and opening supermarkets targeting certain ethnic markets. 2-27 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 02 - Types of Retailers

5. Private-Label Merchandise Conventional supermarket chains are leveraging their quality reputation to offer more private-label merchandise which helps build store loyalty, earn higher margins, and differentiate stores from their competitors.

Ask students to think about what products they purchase at food stores that are “private label.” Discuss if quality or price plays a greater role in their decision to purchase these products.

Benefits to customers include having more choices and finding the same ingredients and quality as in national brands at a lower price or higher quality at a similar price to the national brands. 6. Improving the Shopping Experience Creating an enjoyable shopping experience through better store ambience and customer service is used to differentiate supermarket chains from low-cost, low-price competitors.

Ask students to list what types of experiences they have seen in the food retailers they visit. Discuss if these experiences motivate them to continue to shop there.

Supermarkets are increasingly incorporating “food as theater” concepts, such as in-store restaurants, open-air market designs, cooking and nutrition classes, demonstrations, baby-sitting services, food and wine tasting, and selfservice kiosks. B. Supercenters Supercenters are the fastest growing retail category. At 160,000 to 20,000 square feet, these stores offer a wide variety of food and non-food merchandise. The largest supercenters are Walmart supercenters, Meijer, Super Kmart (Sears Holding), Fred Meyer (a division of Kroger), and SuperTarget. By offering broad assortments of grocery and general merchandise under one roof, supercenters provide a onestop shopping experience. General merchandise items are often purchased at supercenters. These items have higher margins, which allows supercenters to offer food items at a more aggressive price. However, since supercenters are very large, some customers find them inconvenient because it can take a long time to find the items they want. Hypermarkets are also large, about the same size as supercenters, and have a combination of food and general

See PPT 2-13 for an illustration of the characteristics of supercenters and warehouse clubs. The supercenter is one of the fastest growing retail formats. Why is the supercenter more attractive than a hypermarket in the U.S., but not in Europe? What are benefits to consumers shopping in supercenters versus conventional supermarkets? What are the disadvantages?

Ask students if they prefer the supercenter model to a traditional supermarket. How do students feel about the growth of Walmart? Do students prefer Walmart’s format over Target? Why?

Chapter 02 - Types of Retailers merchandise. Hypermarkets typically stock fewer SKUs than supercenters. Popular in both Europe and South America, hypermarkets are not common in the United States. Located in large, warehouse-type structures with large parking facilities, hypermarkets typically carry a larger selection of food items than supercenters and have a greater emphasis on perishables. Supercenters place greater emphasis on general merchandise and dry grocery items such as breakfast cereals and canned goods. Although supercenters and hypermarkets are the fastest growing categories in global retailing today, these retailers do face challenges in finding and acquiring appropriate land for building (particularly in Europe and Japan), along with backlash against these large stores, particularly in the U.S. See PPT 2-14 for an illustration of the characteristics of supercenters A warehouse club is a retailer that offers a limited and irregular and warehouse clubs. assortment of food and general merchandise with little service at low prices to ultimate consumers and small Ask students to give local businesses. examples of warehouse clubs. What is the target market for Stores are large (at least 100,000 to 150,000 square feet) and warehouse clubs? (Consumers located in low-rent districts. with larger families and small businesses.) Warehouse clubs reduce prices by using low-cost locations and inexpensive store designs, and offering little customer Are warehouse clubs wholesalers service. They reduce inventory holding costs by carrying a or retailers? (When they sell to limited assortment of fast-selling items and buying small businesses they are merchandise opportunistically. wholesalers. When they sell to

C. Warehouse Clubs

Warehouse clubs accordingly have had substantial influences on retailing and its structure. Between 1992 and 2013, warehouse club sales increased from $40 billion to $420 billion. Most warehouse clubs have two types of members: wholesale members who own small businesses and individual members who purchase for their own use. Typically, members must pay an annual fee.

individual members for personal or household use, they are retailers.) Ask students if they are members of a warehouse club. Do they prefer warehouse clubs to supercenters?

See PPT 2-15 for an overview of the characteristics of convenience

D. Convenience Stores 2-29

Chapter 02 - Types of Retailers

Convenience stores provide a limited variety and assortment of merchandise at a convenient location in a 3,000-to5,000-square-foot store with a speedy checkout, with higher prices than supermarkets. They are a modern version of the neighborhood mom-and-pop grocery/general store. Convenience stores enable consumers to make purchases quickly without having to search through a large store and wait in long checkout lines. Convenience stores generally charge a higher price than supermarkets for staple items like milk, eggs, and bread.

stores

Ask students to give examples of local convenience stores.

Which products do they tend to buy most often at convenience stores?

Convenience stores are facing increasing competition from other retail formats, especially from supercenters and supermarket chains who have added gasoline to their merchandise offerings, often tying gasoline sales to their frequent-shopper programs.

What do they like/dislike about them? In general, what is so "convenient" about convenience stores?

In response to these competitive threats, convenience stores are taking steps to decrease their dependency on gasoline sales by tailoring their merchandise assortments to local markets, making their stores even more convenient to shop, and adding new services.

What services do students believe would make a convenience store more “convenient”?

To increase convenience, some convenience stores are opening smaller stores close to where consumers shop and work. Others are exploring the use of technology to increase shopping convenience such as self-service kiosks. E. Online Grocery Retailers Time-poor customers are willing to pay more to access options for ordering groceries online and having them delivered. Consumers thus rely on online grocers for lower-profit-margin nonperishable items, rather than higher-margin fresh fruit or meats. Therefore, slim margins continue to be a problem for both retailers and delivery services. Delivery costs are also a factor that might reflect a barrier to the industry’s growth. LO 2-3 Identify the various types of general merchandise retailers.

III. General Merchandise Retailers The major types of general merchandise retailers are department stores, full-line discount stores, specialty stores, drugstores, category specialists, extreme-value

PPT 2-17 and 2-18 compare the various types of general

Chapter 02 - Types of Retailers retailers, off-price retailers, and outlet stores.

merchandise retailers along several characteristics. See PPT 2-19

A. Department Stores Department stores are retailers that carry a broad variety and deep assortment, offer some customer services, and are organized into separate departments for displaying merchandise. The largest department store chains in the U.S. are Macy’s, Sears, JCPenney, Kohl’s, and Nordstrom. Today, most department stores focus almost exclusively on soft goods. The major departments are women’s, men’s, and children’s clothing and accessories; home furnishings; cosmetics; and kitchenware and small appliances. Each department within the store has a specific selling space allocated to it as well as salespeople to assist customers, often resembling a collection of specialty shops. Department store chains can be categorized into three tiers: (1) upscale, high-fashion chains with exclusive designer merchandise and excellent customer service (Neiman Marcus, Nordstrom, Bloomingdale’s, Saks); (2) traditional chains with more moderately priced merchandise and less customer service (Macy’s and Dillard’s); and (2) valueoriented chains catering to price-conscious consumers (Sears, Kohl’s and JCPenney).

Ask students to give examples of local department stores. Why do customers go to department stores? What do they like/dislike about them?

Ask students to give local examples of specialty stores. What are the differences between specialty stores, department stores, and discount stores? Where do students buy business suits, dresses, jeans, computers, and electronics? Why do they go to that type of store?

Which department stores do students prefer? Which tier do they shop most often? Discuss differences in these responses.

Today many customers question the benefits of shopping at department stores due to: (1) lack of convenient locations, (2) decreases in customer service, and (3) relatively high prices. To deal with their eroding market share, department stores are (1) increasing the amount of exclusive merchandise they sell, (2) increasing their use of private-label merchandise, and (3) expanding their omnichannel presence. See PPT 2-20

B. Full-Line Discount Stores A full-line discount store is a retailer that offers a broad variety of merchandise, limited service, and low prices. They offer both private and national brands. The big three full-line discount store chains are Walmart,

Discuss the target markets of the three largest full-line discount store chains (Walmart, Target, and Kmart). How will the category specialists (Staples, Best Buy,

Chapter 02 - Types of Retailers Target, and Kmart (Sears Holding). A significant trend in this sector is Walmart’s conversion of discount stores to supercenters because of increased competition faced by the full-line discount stores, as well as the significant operating efficiencies realized by supercenters. Target is becoming one of the most successful retailers in terms of sales growth and profitability, succeeding because its stores offer fashionable merchandise at low prices in a pleasant shopping environment.

Home Depot) affect the retail strategy of full-line discount store chains? What about Internet only retailers? Are discount stores going to succeed in the “clicks” environment? In general, what are the factors that contribute to the success of discount stores despite increasing competition from other formats? See PPT 2-22

C. Category Specialist A category specialist is a big-box discount store that offers a narrow variety but deep assortment of merchandise. These retailers predominantly use a self-service approach, but they offer assistance to customers in some areas of the store.

Ask students to give local examples of category specialists. How are they similar to specialty stores? Discuss the differences and similarities with discount stores.

By offering a complete assortment in a category at low prices, category specialists can "kill" a category of merchandise for other retailers and thus are frequently called category killers. Because category specialists dominate a category of merchandise, they can use their buying power to negotiate low prices, and are ensured supply when items are scarce. One of the largest and most successful types of category specialist is the home improvement center. A home improvement center is a category specialist offering equipment and material used by do-it-yourselfers and contractors to make home improvements.

Ask students to describe an experience at a home improvement center such as Home Depot or Lowe’s in terms of merchandise, atmosphere, and customer service.

While merchandise in home-improvement centers is displayed in a warehouse atmosphere, salespeople are available to assist customers in selecting merchandise and to tell them how to use it. Competition between specialists in each category is very intense (Staples vs. Office Depot; Home Depot vs. Lowe’s) as firms expand into the regions originally dominated by another firm. Direct competition focuses on price, resulting in reduced profits because the competitors have difficulty differentiating themselves on other elements of the retail mix. 2-32 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 02 - Types of Retailers

In response to this increasing competitive intensity, the category killers continue to concentrate on reducing costs by increasing operating efficiency and acquiring smaller chains to gain scale economies, although some category killers, like Home Depot and Lowe’s, are attempting to differentiate themselves with service through licensed contractors or providing classes to home owners to give shoppers the confidence to tackle do-it-yourself (DIY) projects. D.

Specialty Stores

See PPT 2-23

A specialty store concentrates on a limited number of complementary merchandise categories and provides a high level of service in a relatively small store.

Why do customers go to specialty stores? What do they like/dislike about them?

Specialty stores tailor their retail strategy toward very specific market segments by offering deep but narrow assortments and sales associate expertise.

Specialty retailers have such great appeal that they rank among the most profitable and fastest-growing firms in the world. These stores earn an average of $1,675 per square foot, compared to the $200 per square foot averaged by department stores.

Manufacturers are also opening their own specialty stores (Levi’s, Godiva, Cole Haan, Coach, etc). What are the implications for other retailers like department stores who also sell these brands?

Many manufacturers have opened their own specialty stores. Consider, for instance, Levi’s (jeans and casual apparel), Godiva (chocolate), Cole Haan (shoes and accessories), Lacoste (apparel), Coach (purses and leather accessories), Tumi (luggage), Wolford (intimate apparel), Lucky Brand (jeans and casual apparel), Samsonite (luggage), and Polo/Ralph Lauren (apparel and home). Another growing specialty store sector is the resale store. Resale stores are retailers that sell secondhand or used merchandise and include thrift stores or consignment shops. The best-known and most widely expanded thrift shop is Goodwill Industries. See PPT 2-24

E. Drugstores Drugstores are specialty stores that concentrate on health and beauty care (HBC) products. Many drugstores have steadily increased the space devoted to cosmetics, but prescription

Ask students if they have shopped online for drugstore products. What has been their experience?

Chapter 02 - Types of Retailers pharmaceuticals still represent a substantial and growing portion of drugstore sales.

Do they think the Internet is a viable channel for drugstore merchandise?

The largest drugstore chains in the United States are CVS and Walgreens, Boots. Drugstores are also being squeezed by competition from pharmacies in discount stores and supermarkets, as well as prescription mail-order retailers. In response, drug store chains are building larger stand-alone stores offering a wider assortment of merchandise, more frequently purchased food items, drive-through windows for picking up prescriptions, in-store medical clinics, and even makeovers and spa treatments. Although drugstores thus offer major advantages, especially in terms of convenience, they suffer from a price comparison when it comes to their grocery merchandise F. Extreme-Value Retailers Extreme-value retailers, such as Dollar Tree (which purchased the Family Dollar chain) and Dollar General, are small discount stores that offer a broad variety but shallow assortment of household goods, health and beauty care (HBC) products, and groceries.. By offering limited assortments and operating in low-rent locations, extreme-value retailers can reduce costs and maintain very low prices.

See PPT 2-25 for a summary of issues facing extreme-value retailers. Ask students to name the extreme-value retailers in the local marketplace. How many have shopped at one of them? For what types of merchandise? What is the primary appeal of these retailers?

Despite some of these chains’ names, few just sell merchandise for $1. Rather, the names imply a good value but do not limit prices to the arbitrary dollar price point. The growing popularity of extreme-value retailers has led some vendors to agree to create special, smaller packages just for them. Once considered low-status retailers catering to low-income consumers, extreme-value retailers have broadened their appeal to higher-income consumers by offering exciting bargains and unique merchandise. G. Off-Price Retailers Off-price retailers, offer an inconsistent assortment of brandname merchandise at low prices.

Ask students to give examples of local off-price retailers. What do consumers like about off-price

Chapter 02 - Types of Retailers

America’s largest off-price retail chains are TJX Companies (which operates TJ Maxx, Marshalls, Winners [Canada], HomeGoods, HomeSense [Canada]), Ross Stores, Burlington Coat Factory, Big Lots, and Overstock.com.) Off-price retailers can sell brand name and even designer-label merchandise at low prices due to their unique buying and merchandising practices. Most merchandise is bought opportunistically from manufacturers or other retailers with excess inventory at the end of the season.

retailers? What don't they like?

See PPT 2-26 for a summary of the issues facing off-price retailers

End-of-season merchandise that will not be used in following seasons is called close-outs. The merchandise may be in odd sizes or unpopular colors or styles, or it may be irregulars, merchandise that has minor mistakes in construction. Typically, merchandise is sold at prices that are20 to 60 percent lower than the manufacturer’s suggested retail price. Off-price retailers can buy at low prices because they do not ask suppliers for advertising allowances, return privileges, markdown adjustments, or delayed payments. Due to this pattern of opportunistic buying, customers can't be confident that the same type of merchandise will be in stock each time they visit the store. Outlet stores are off-price retailers owned by manufacturers, or by department or specialty store chains. Outlet stores owned by manufacturers are frequently referred to as factory outlets.

Ask students which type of offprice retailer offers consumers truly the best value. Why?

Manufacturers view outlet stores as an opportunity to improve their revenues from irregulars, production overruns, and merchandise returned by retailers. Outlet stores also allow manufacturers some control over where their branded merchandise is sold at discount prices. An online twist to off-price retailing comes from flash sale sites such as Gilt, Rue La La, and HauteLook. IV. Service Retailing Service retailers, or firms that primarily sell services rather than merchandise, are a large and growing part of the retail industry.

LO 2-4 Explain the differences between service and merchandise retailers. PPT 2-27

Chapter 02 - Types of Retailers

A. Differences between Service and Merchandise Retailers Four important differences in the nature of the offerings provided by service and merchandise retailers are (1) intangibility, (2) simultaneous production and consumption, (3) perishability, and (4) inconsistency of the offering to customers. 1. Intangibility Services are generally intangible -- customers cannot see, touch, or feel them. Services are performances or actions rather than objects. Intangibility introduces several challenges for service retailers. It is difficult for customers to evaluate services before they buy them, or even after they buy and consume them. Service retailers often use tangible symbols to inform customers about the quality of their services. Service retailers also have difficulty in evaluating the quality of services they are providing. To evaluate the quality of their offering, service retailers place emphasis on soliciting customer evaluations and complaints.

Ask students how customers can evaluate the quality of an intangible service offering. What problems does intangibility cause for the services retailer?

Ask students how online reviews and ratings influence their decisions to use service retailers.

2. Simultaneous Production and Consumption Service providers create and deliver the service as the customer is consuming it. The simultaneity of production and consumption creates some special problems for services retailers.

What problems does simultaneous production cause for the service retailer?

First, the customers are present when the service is produced, may have an opportunity to see it produced, and in some cases, may be part of the production process. Other customers consuming the service at the same time can affect the quality of the service provided. Finally, the service retailer often does not get a second chance to satisfy the needs of their customers. While customers can return damaged merchandise to a store, customers that are dissatisfied with services have limited recourse. Thus, it is critical for service retailers to get it right the first time. Because services are produced and consumed at the same time, it is difficult to reduce costs through mass production. 2-36 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 02 - Types of Retailers

3. Perishability Because the creation and consumption of services is inseparable, services are perishable. They can't be saved, stored, or resold. This contrasts with merchandise, which can be held in inventory until a customer is ready to buy it. In addition, the demand for a service varies considerably over time. Thus, service retailers often have times when their services are underutilized and other times when they have to turn customers away because they cannot accommodate them. Service retailers use a variety of programs to match demand and supply. They also attempt to make customer waiting time more enjoyable. 4. Inconsistency Merchandise is often produced by machines with very tight quality control. Because services are performed by people, no two services will be identical.

Give examples of retailers for which perishability is a real problem. (movie theaters, airlines, cruise lines, public golf courses) What do these retailers do to minimize the problem?

What actions have students seen service retailers take to make waiting time more enjoyable for customers? What problems does inconsistency cause for the service retailer? Are there service retailers whose inconsistency is acceptable? (Custom designers, hair “artists”)

Thus, an important challenge for service retailers is providing consistently high-quality services. LO 2-5 Explain the types of ownership for retail firms.

V. Types of Ownership Another way to classify retailers is by their ownership. The major classifications of retail ownership are: (1) independent, single-store establishments, (2) corporate chains, and (3) franchising.

See PPT 2-30

. A. Independent, Single-Store Establishments Retailing is one of the few sectors in our economy in which entrepreneurial activity is extensive. Many of these retail start-ups are owner managed which means management has direct contact with their customers and can respond quickly to those customers’ needs. While single-store retailers can tailor their offering to their customers' needs, corporate chains can more effectively negotiate lower prices for merchandise and advertising due to their larger size.

Ask students to give examples of local independent, single-store retailers. Do they shop at independents? Why or why not?

Do students believe national chains will drive all independents out of business?

Chapter 02 - Types of Retailers

To better compete against corporate chains, some independent retailers join a wholesale-sponsored voluntary chain. A wholesale-sponsored voluntary cooperative group is an organization operated by a wholesaler offering a merchandising program to small, independent retailers on a voluntary basis. B. Corporate Retail Chains A retail chain is a company operating multiple retail units under common ownership and usually having some centralization of decision making in defining and implementing its strategy.

C. Franchising Franchising is a contractual agreement between a franchisor and a franchisee that allows the franchisee to operate a retail outlet using a name and format developed and supported by the franchisor. Approximately 40 percent of all U.S. retail sales are made by franchisees. In a franchise contract, the franchisee pays a lump sum plus a royalty on all sales for the right to operate a store in a specific location. The franchisee also agrees to operate the outlet as per the procedures prescribed by the franchisor. The franchisor provides assistance in locating and building the store, developing the products and/or services sold, management training, and advertising.

Walmart has pursued a strategy of opening stores on the outskirts of small rural towns with populations between 25,000 and 50,000. These stores offer broader selection of merchandise at much lower prices than previously available from local retailers. Discuss the pros and cons of this strategy in class. What ramifications may result? (Monopolizing market, demise of small stores, potential to become major employer in rural area). Ask students to give examples of local franchises. If they wanted to own a retail business, would they want a franchise or their own store? Why? What are the advantages of being a franchisee?

PPT 2-32 provides a brief introduction to the Franchising form of retail ownership.

The franchise ownership format attempts to combine the advantages of owner-managed businesses with efficiencies of centralized decision-making in chain store operations. VI. Summary Over the past 30 years, U.S. retail markets have been characterized by the emergence of many new retail institutions. Traditional institutions have been joined by category specialists, hypermarkets and superstores, 2-38 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 02 - Types of Retailers extreme-value retailers, and nonstore retailers among others.

Chapter 02 - Types of Retailers ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS 2. GO SHOPPING. Go to an athletic footwear specialty store/website such as Foot Locker, a department store, and a discount store. Analyze the variety and assortment of athletic footwear offered by each format by creating a table similar to that in Exhibit 2–2. Students should be able to fill in this type of table and explain their findings. Example responses are provided for Foot Locker.

Foot Locker

Variety of Athletic Footwear Breath of Merchandise Departments such as Men’s, Women’s, and Kids

Assortment of Athletic Footwear Depth of Merchandise Sizes 6 to 18 Many brands offered

Merchandise includes shoes (basketball, running, etc.) and clothing (shorts, hoodies, T-shirts, etc.) New arrivals are featured

Nike – over 500 styles Jordan adidas Champion Vans PUMA New Balance Timberland Converse Reebok ASICS

Department store Discount Store

3. GO SHOPPING Keep a diary for two weeks of where you shop, what you buy, and how much you spend. Ask a family member, roommate, or friend to do the same thing. Tabulate your results by type of retailer. Are your shopping habits significantly different from or are they similar to those of the other person? How do each per-son’s shopping habits coincide with the trends discussed in this chapter? Give an example of each. 2-40 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 02 - Types of Retailers Students should keep a list of places shopped. Results can be compared to a parent or another classmate. This assignment should give students insight into their own consumer buying behavior and how they select merchandise and retail formats. Ask students to discuss the managerial implications of their findings. How should retailers with differing target markets communicate with the different audiences based on the differences in buying behaviors? 4. INTERNET EXERCISE. Three companies, Costco Wholesale Corporation, BJ’s Wholesale Club, and Sam’s Club, have historically dominated the wholesale club segment. Go online to find the number of locations operated by each company. Use these data to create a pie graph to illustrate the market share for the top warehouse clubs based on the number of store locations. Explain the features and benefits of warehouse retail clubs for consumers. Companies in this industry operate membership (annual fee) retail stores that sell items in a larger size or bulk quantity. Members are consumers and small businesses. This retail format offers its members low prices on a limited selection of nationally branded and privatelabel products in a wide range of merchandise categories (e.g., groceries, hardware, household). 2019 Number of Locations 787

Retailer Name Costco Wholesale Corporation BJ's Wholesale Club

216

Sam's Club

599

Source:

Chapter 02 - Types of Retailers 5. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the Census Internet site at www.census.gov/retail. Look at the unadjusted Retail and Food services monthly sales by NAICS (found in the Monthly Retail Trade Report section). Which categories of retailers have the largest percentage of sales in November and December (the holiday season)? Do your findings make sense to you? Why or why not? Students will notice that many retail categories generate their largest percentage of sales in the fourth quarter. Some are: 

(443) Electronics and Appliance Stores



(44312) Computer and Software Stores



(4453) Beer, Wine and Liquor Stores



(44812) Women’s Clothing Stores



(45111) Sporting Goods Stores



(454) Nonstore Retailers

The higher level of sales in the last quarter of the year are likely due to holiday sales. Do these categories make sense to students? Are there other categories in which students would expect to see similar sales? 6. INTERNET EXERCISE Three large associations of retailers are the National Retail Federation (www.nrf.com), the Food Industry Association (www.fmi.org), and the National Association of Convenience and Petroleum Stores (www.convenience.org). Visit these sites and report on one recent retail development and issue confronting the industry from each association. Information on these sites will change daily. The National Retail Federation will likely have information on trends in retailing like how influencers support brand marketing . Similarly, the NRF will report on health and legal issues that impact retailing, such as the coronavirus retail restrictions by state. The Food Industry Association will provide information on trends in food retailing and manufacturing as well as legal and economic concerns. For example, the FIA may report on information about changes in regulations regarding the definition of “organic.” The NACS will report on regulations as well, such as debit card swipe fees, as well as information on oil prices and petroleum. 7. INTERNET EXERCISE Go to Entrepreneur franchise zone web page at www.entrepreneur.com/franchise500 and view the top 500 franchises for the current year. How many of the retailers in the top 10 have you patronized as a customer? Did you know that these retailers were operated as a franchise? If yes, how did you learn this information? If no, what type of ownership did you think was in place? Review the five-pillar system used to evaluate the Franchise 500. Explain which factors are most important for long-term success. Finally, what is the nature of the businesses that work well through franchising? The Top 10 Franchises for 2021 include many familiar names. Taco Bell

Dunkin' 2-42

Chapter 02 - Types of Retailers The UPS Store Popeyes Louisiana Kitchen Culver's Kumon Math & Reading Centers Jersey Mike's Subs Planet Fitness 7-Eleven Inc. Servpro

Chapter 18 - Customer Service The website notes that the list of the Top 500 franchises is based on five quantifiable measures. 1. Costs and fees, including the franchise fee, total investment, and royalty fees. 2. Size and growth. This measure counts open and operating units, growth rate, and closures. 3. Support. This pillar takes into consideration training times, marketing support, operational support, franchisor infrastructure, financing availability, and litigation. 4. Brand strength. This aspect refers to social media, system size, years in business, and years franchising. 5. Financial strength and stability, which considers the franchisor’s audited financial statements. Students will likely notice that service-based retailers tend to lend themselves best to the franchise system, particularly those services that allow for standardization of business practices and retail operating formats. 8. INTERNET EXERCISE Best Buy is a category specialist with more than 1,000 stores and approximately 125,000 employees in the United States, Canada, and Mexico.. It sells appliances (refrigerators, washers and dryers, small household appliances) and electronics (televisions, computers, cell phones, car electronics, wearable technology). What are the SIC and NAICS codes used by this retailer? What other retailers compete against Best Buy, and which store format is implemented by each competitor? PRIMARY SIC AND NAICS CODES Primary Industry Primary SIC Code Primary NAICS Code

Consumer Electronics & Appliances Stores 57310000: Radio, television, and electronic stores Electronics Stores 443142:

ASSOCIATED NAICS CODES 44314 1 44314 2

Household Appliance Stores Electronics Stores

ASSOCIATED SIC CODES 572 2 573 1 573 4 594 6

Household appliance stores Radio, TV, & electronic stores Computer and software stores Camera & photographic supply stores

Top Best Buy Competitors

Chapter 18 - Customer Service Company Best Buy Wal-Mart Apple Inc. Amazon.co m

Format Category Killer Discount Store Specialty Electronic Retailer

Other Best Buy Competitors Compan yCostco Target Sony Dell

Format Warehouse Discount Store Club Specialty Specialty

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. Distinguish between variety and assortment. Why are these important elements of retail market structure? The main difference between variety and assortment is that variety refers to the number of different merchandise categories a retailer sells, whereas assortment is the number of different items or SKUs in a merchandise category. In addition, variety is often referred to as the breadth of merchandise carried by the retailer, and assortment is referred to as the depth of merchandise. These elements form an integral part of the retail market structure, because it is the retail offering that ultimately distinguishes one retailer from another. 2. What sorts of competitive pressures are confronting traditional grocery stores? What options do these stores have to ease these pressures? Supermarkets are under competitive pressures from supercenters, warehouse clubs, extreme-value retailers, convenience stores, and even drug stores. These retailers have increased the amount of space that they provide for consumables. In addition, these competing retailers offer food merchandise to build the traffic in their stores and increase the sales of more profitable nonfood merchandise. To compete against these stores, supermarkets are offering more fresh merchandise, green merchandise, ethnic merchandise, and private-label merchandise. In addition, supermarkets are working on ways to enhance the store ambience and customer service to provide a more enjoyable shopping experience. 3. What do off-price retailers need to do to compete against other formats in the future? The main competitive weapon for the off-price retailers is their low price. While they may not directly compete with higher service formats, such as department and specialty stores, they do face increasing competition from discount stores. Here, the off-price stores may be at a relative disadvantage, because their merchandise is based upon opportunistic buying, while discount stores offer a relatively stable mix of merchandise at stable prices (everyday low pricing). The option of improving service may increase costs and weaken their only source of competitive advantage, so low price or off-price retailers should focus on strategies to keep their costs and prices low and explore low cost methods of attracting and retaining customers. In terms of keeping operational costs low, they can locate in lower cost urban and rural areas (note that outlet stores are more clustered within outlet malls located farther from the city but near major highways). They can also implement more efficient inventory and merchandise management systems (note that for a discount store, such as Walmart, operational efficiency and costs reductions are crucial to offering lower prices to customers). Also, they can expand their sourcing to include imports from low cost international markets. Another threat for off-price retailers may be from Internet stores. Often several stores publicize their low prices and also attempt to match consumer price preferences through reverse bidding and auctions (e.g., eBay). Off-price retailers can explore the possibility of using the Internet for relatively low-cost advertising about current merchandise (because their merchandise stocks fluctuate more rapidly due to opportunistic buying). Factory outlet stores instead can compete more directly over the Internet.

Chapter 18 - Customer Service 4. Compare and contrast the retail mixes of convenience stores, traditional supermarkets, superstores, and warehouse stores. Can all of these food retail institutions be successful over the long run? How? Why? Element of Retail Mix Location

Traditional Convenience Store Supermarket Typically Typically in strip freestanding, easily shopping centers accessible sites

Superstore Typically in strip shopping centers

Warehouse Store Typically in strip shopping centers

Merchandise

Limited variety and Average variety and Greater variety assortment assortment with deeper assortment than supermarket

Greater variety with about the same assortment as supermarket. Primary difference is that merchandise assortment varies because of opportunistic buying.

assortment

Pricing

Higher pricing than Average pricing. Lower pricing than Lower pricing than supermarkets Some chains have supermarkets. supermarkets. Pricing constant (every day) Typical everyday depends on cost of pricing and others pricing. merchandise bought have special sale on special buys. (high-low) pricing.

Advertising and Limited advertising, High-low pricing promotion frequent shopper chains advertise programs tied to weekly specials. gasoline sales. Minimal Personal selling Minimal

Limited advertising Minimal promotion since most have since all merchandise everyday pricing. is basically on sale. Minimal

Minimal

Store design and Designed for quick display and easy merchandise selection and checkout

Typically use a grid- Same as iron with cross-hatch supermarket. aisles, extensive signs.

Same as supermarket. A bit more disorganized to give the customers the feel of searching for a bargain.

Service

Some services for produce, bakery, meat, and fish categories.

Minimal

Some services for produce, bakery, meat, and fish areas.

Chapter 18 - Customer Service

All four types will persist because they appeal to different customer needs. The warehouse stores typically have larger pack sizes that are extremely attractive to customers with large families and to small business owners like local restaurants. However, due to the varying assortments, customers who are brand loyal might not want to shop in these stores. Convenience stores are located and designed to offer customers a snack, quick meal, or minimal grocery/general merchandise purchase along with their gasoline. These retailers offer easy in-and-out access and speedy transactions. In response to competitive pressures from other food retailers, as well as dependency on gasoline sales, many convenience stores are now offering consumers fresh food and healthy fast-food choices to reduce dependency on fuel sales while maintaining on-the-go ease and convenience. Superstores offer low prices but are more inconvenient to shop in because of their large size. Thus, they appeal to customers who are very price conscious and are willing to drive a longer distance and spend more time shopping in a larger store. Conventional supermarkets are the most convenient. In major metro areas, there is a conventional supermarket two to three miles from everyone’s home. They also provide more services for customers, such as cutting meat to order. Conventional supermarkets appeal to customers who value service and convenience and are not as price conscious. Note that the same consumer may shop at all four types of food retailers, depending on the nature of the shopping trip. For example, a consumer might stock up on basic necessities, such as toilet paper, soft drinks, and canned goods at a warehouse or superstore, then go to a supermarket to buy meat, produce, and gourmet food. 5. Review EXHIBIT 2-5, Category Specialists, pick a retailer from the list, and summarize the merchandise offered, pricing strategy, level of service, type of location, and communication mix. Here is a helpful article for this question, “Meatballs and DIY Bookcases: The Psychology Behind IKEA’s Iconic Success,” CNBC, https://www.cnbc.com/2019/10/05/psychology-behind-ikeas-huge-success.html Example for IKEA Merchandise offered – Furniture, pillows, and other home goods are staged in mock rooms, Scandinavian aesthetic, and food. Pricing strategy – Inexpensive, affordable, EDLP Level of service – Do-it-yourself assembly Location - 433 IKEA stores in 53 countries, large format, standalone Communication mix – Store, website, print, online, mobile, social, TV, etc. 6. Why are retailers in the limited-assortment supermarket and extreme-value discount store sectors growing so rapidly? From which retailers do these firms capture additional sales? 18-5 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Both limited-assortment supermarkets and extreme-value discount stores focus on relatively limited merchandise offerings at highly appealing (low!) prices. The retail formats are able to offer their extremely low prices through maximizing efficiency. By reducing extras and service offerings, as well as managing a relatively low merchandise assortment, these retailers are able to provide consumers with the “thrill of the hunt” for amazing deals. Extreme-value retailers are attracting customers away from supermarkets and supercenters. 7. The same brand and model of coffee maker is sold by specialty stores, discount stores, category specialists, online retailers, and warehouse stores. Why would a customer choose one retail format over the others? Each type of retail store provides a unique combination of price and services tailored to the needs of different types of customers. The specialty store typically will have higher prices but will offer more services. It will have salespeople with specific expertise available to provide information to customers and answer questions. This service is particularly valuable to customers who do not know much about coffee makers. On the other hand, discount stores, category specialists, and warehouse stores have lower prices and do not offer much personalized service. These stores are more attractive to customers who have more expertise and do not need personalized service. Due to the greater assortment in category specialists, customers are able to compare the prices and features of different brands in one store visit. Warehouse and discount stores have limited assortments, and thus customers can only see a limited set of brands and models. Customers can also buy merchandise in different product categories at the same time they are buying a coffee maker. Some customers will prefer the convenience and selection offered online. The Internet may also be used to collect information and compare features and prices prior to shopping in a store location. 8. Choose a product category that both you and your parents purchase (e.g., business clothing, casual clothing, music, electronic equipment, shampoo). In which type of store do you typically purchase this merchandise? What about your parents? Explain why there is, or is not, a difference in your store choices. Students may emphasize specialty stores such as H&M, Old Navy, or Best Buy for their purchases of clothing or electronic equipment, while mentioning that their parents favor traditional department stores such as Macy's or Dillard’s for the purchase of such product categories. If price is a major factor, there may be some similarities between the students and their parents; both may shop at discount stores. The merchandise, service, and prices for the various retail formats stocking different product categories are different. In general, stores deliberately targeting a younger population will be favored by students because these stores would better match their expectations of merchandise (such as fashion clothing), prices, and services (students may consider themselves savvy customers for certain products, such as music and electronic equipment, and may not need the type of service demanded by their parents, for instance in purchasing business clothing).

Chapter 18 - Customer Service 9. At many optical stores you can get your eyes checked and purchase glasses or contact lenses. How is the shopping experience different for the service as compared to the product? Design a strategy designed to get customers to purchase both the service and the product. In so doing, delineate specific actions that should be taken to acquire and retain optical customers. Optical stores present an interesting mix of service and related merchandise. On the one hand, the eye examination is usually done by a trained and licensed eye doctor and here the service experience is often very professional and like a visit to any physician or hospital. On the other hand, the glasses or contact lenses are displayed in a retail store setting with the service being mostly oriented toward helping the customer try out various options. The contrasts between the service and retail environments may be unnerving for some customers. One strategy to reduce the gap is to ensure that the retail setting is very professional and courteous. If the problem has been detected and identified by the eye doctor, the sales staff in the retail setting could engage and interact more directly with the customer with more of a problem-solving approach. This would involve educating consumers on various issues, including the benefits/costs of using glasses or contact lenses, the types of lenses and coatings, proper care of glasses and contact lenses, and so on. It must also be recognized that most customers who are prescribed glasses for the first time are likely to continue wearing glasses or contact lenses for the rest of their lives. Thus, it is important to start building consumer trust and confidence through professional service and expertise. One strategy would be to encourage customers to return for an eye examination every year and have their current prescription for the glasses or lenses checked. Another is to provide free repair service for the frames. 10. There are services and products involved when buying or renting a car, and in both cases, the customer drives away in a car. But buying a car focuses more on the product, whereas renting involves the service. Explain four ways in which marketing for a rental car company differs from marketing for an automobile dealership. The differences in offerings provided by service retailers include (1) intangibility, (2) simultaneous production and consumption, (3) perishability, and (4) inconsistency of the offering to customers. Although the automobile at the rental car company is tangible, the experience of renting is an intangible offering. The services surrounding the accessibility of the car rental are what is most important to the customer. Similarly, the service is consumed at the same time it is being produced. This differs from the experience of purchasing a car. The rental car service is also perishable. If a day goes by and a car is not rented, the revenue from renting the car for that day is gone forever, making the rental car service perishable. Finally, the experience with the rental car company may be inconsistent. As personalities and training programs might differ by location, the experience the consumer has with a rental car provider at different locations may vary significantly.

Chapter 18 - Customer Service ANCILLARY LECTURE LECTURE # 2-1: FRANCHISING Instructor’s Note: Franchising is one of the most popular and successful ways for individuals to start their own business. The growth in franchising as a retail format will probably continue in the near future. Many students who take a retailing course have intentions of someday starting their own business and this lecture may provide them with an interesting possibility to consider. Instructors might want to use this lecture as a stimulus to a class discussion on the topic. PowerPoint slides 2-59 to 2-67 can be used with this lecture. Introduction Franchising is the licensing of an ENTIRE business format by a parent company (FRANCHISOR) to a number of outlets (FRANCHISEES) to market a product or service and engage in a business developed by the FRANCHISOR using the FRANCHISOR’S trade names, trademarks, know-how, and methods of doing business. In 2016, sales of goods and services by all franchising companies exceeded $890 billion, approximately 50 percent of all U.S. retail sales. There are over 780,000 franchise businesses that directly employ over 8.8 million people. The growth of franchising Franchising has had a steady stream of growth. Some of the reasons include 1. Technological advances, 2. Profitable utilization of capital resources, 3. Attainment of the American dream, 4. Demographic expansion, and 5. Product/service consistency. Technological advances Equipment and systems--reduce product variability and more efficient marketing and distribution systems. For example: Electronic Data Interchange Profitable utilization of capital resources Can tap savings and credit capacity of individuals to realize national product/service saturation Attainment of the American dream Owning your own business. 18-8 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Demographic expansion Urban “sprawl” creates need for more small retail establishments. No longer just downtown locations. Product/service consistency Due to geographic mobility, franchises have provided a level of homogeneous (boring) quality in its product or service. For example: A Big Mac tastes the same everywhere. Types of franchise systems There are various types of franchise systems including 1. Territorial, 2. Operating, 3. Mobile, 4. Distributorship, 5. Co-ownership, 6. Co-management, 7. Leasing/Licensing, 8. Manufacturing, and 9. Service. Territorial franchise The franchise granted encompasses several counties or states. The holder of the franchise assumes the responsibility for setting up and training individual franchisees within his territory and obtains an ”override” on all sales in his territory. For example: McDonald’s and Burger King Regional franchises. Operating franchise The individual independent franchisee that runs his own franchise. He deals either directly with the parent organization or with the territorial franchise holder. For example: McDonald’s and Burger King individual locations. 18-9 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Mobile franchise A franchise that dispenses its product from a moving vehicle, which is either owned by the franchisee or leased from the franchisor. For example: Snap-On Tools and Chem-Dry Carpet Cleaning. Distributorship The franchisee takes title to various goods and further distributes them to sub-franchisees. The distributor has exclusive coverage of a wide geographical area and acts as a supply house for the franchisee that carries the product. For example: Texaco gasoline supply centers. Co-ownership The franchisor and franchisee share the investment and profits. For Example: Denny’s Restaurant. Co-management The franchisor controls the major part of the investment. The partner-manager shares profits proportionately. For example: Travelodge and Holiday Inn. Leasing/Licensing The franchisor leases/licenses the franchisee to use his trademarks and business techniques. The franchisor either supplies the product or provides franchisees with a list of approved suppliers. For example: Sheraton Hotels. Manufacturing The franchisor grants a franchise to manufacture its product through the use of specified materials and techniques. The franchisee distributes the product, utilizing the franchisor’s techniques. This method enables a national manufacturer to distribute regionally when distribution costs from central manufacturing facilities are prohibitive. For example: Sealy. Service 18-10 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service The franchisor describes patterns by which a franchisee supplies a professional service, as exemplified by employment agencies. For example: Personnel One. Why franchises fail Individuals who are interested in franchising need to recognize that there is risk despite the high potential for success. Franchises can fail for several reasons including 1. Inept management, 2. Fraudulent activities, and 3. Market saturation. Inept management Poor finances, product/service mix rejected, grew too quickly. Fraudulent activities The selling of unsound or unproven franchises to ignorant buyers, unfair contracts, etc. Market saturation Too many franchises of same type, e.g., chicken fast-food. Franchisors and the marketing channel A franchisor may occupy any position in the marketing channel. Manufacturer-retailer franchise Automobile dealers and service stations. Manufacturer-wholesaler franchise Coca-Cola, Pepsi, Seven-Up, etc. sell syrup they manufacture to franchised wholesalers who bottle and distribute to retailers. Wholesalers-retailer franchise Rexall Drugs and Sentry Drugs. Service Sponsor--Retailer franchise Avis, Hertz, and National, McDonald’s, Chicken Delight, KFC, Howard Johnson’s and Holiday Inn, Midas and AMCO, Kelly Girl and Manpower 18-11 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Franchisor benefits Franchisees (the store) provide benefits for the franchisor (the parent company). Continuous market Insured through consistent quantity and quality and strong promotion. Market information Information such as sales, local advertising, employee turnover, profits, etc. is usually provided. Money Principal sources of franchise company revenue. Royalty fees Royalties provide continuous income although often the rate may decrease as sales volume increase. Sometimes a flat rate is established regardless of level of sales. Sales of products Often the franchisor supplies raw materials and finished products to the franchisee at a profit. For example, Coke supplies syrup, Holiday Inn supplies furniture and carpeting. Rental and lease fees The franchisor may lease buildings, equipment, and fixtures. License fees There may be special fees that allow the franchisee to use and display the franchisor’s trademark. Management fees Franchisor can charge for consultant fees, management reports, training, etc. Franchisee benefits Franchisors provide benefits for the franchisee through initial and continuous services. . Initial services There are a number of initial services that franchisors provide for franchisees including 1. Market survey and site selection, 2. Facility design and layout, 3. Lease negotiation advice, 18-12 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 4. Financing advice, 5. Operating manuals, 6. Management training programs, and 7. Employee training. Continuous Services There are also a number of continuous services that franchisors offer to franchisees including 1. Field supervision, 2. Merchandising and promotional materials, 3. Management and employee retraining, 4. Quality inspection, 5. National advertising, 6. Centralized purchasing, 7. Market data and guidance, 8. Auditing and record keeping, 9. Management reports, and 10. Group insurance plans. Franchisor advantages/disadvantages Depending upon which viewpoint one takes (the franchisor or franchisee) there are many advantages and disadvantages of franchising. From the perspective of the franchisor, the advantages include 1. Rapid expansion, 2. Highly motivated franchisees do a good job, and 3. Additional profits by selling franchisees products and services. The disadvantages include 1. Company-owned units may be more profitable,

Chapter 18 - Customer Service 2. Less control than independent retailers over advertising, pricing, personnel practices, etc. (e.g., can’t fire franchisee). Franchisee advantages/disadvantages From the viewpoint of the franchisee the advantages include 4. Established/proven product/service, 5. Business and technical assistance, and 6. Reduction in risk. The disadvantages include 7. Loss of control -- are really only semi-independent business people, 8. Many franchisors own a number of their outlets which may compete with those owned by franchisees, and 9. High royalties, fees, costs of equipment, supplies, merchandise, rental or lease rates and mandatory participation in promo and support services. Franchising trends Most of the growth of franchising has occurred in the retailing of goods and services. However, there are two basic types of franchising that merit consideration. The first, product and trade franchising, a common form of retailing in the automobile and petroleum industry, focuses on what is sold. Examples include brands like Ford, Honda, and Texaco. The second, business format franchising, sells the right to operate the same business in different geographic locations. The emphasis here is on how the business is run. Examples include KFC, McDonald’s and Burger King. The major franchising trends are 10. Sustained growth, 11. Enduring plus unimagined applications, 12. International expansion, 13. Increased tensions, and 18-14 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 14. Greater emphasis on financial returns. Sustained Growth It is perceived that franchising will continue to grow steadily. One of the possible explanations for this growth is that franchising offers franchisors rapid expansion as well as highly motivated owner-managers. Also, annual growth in franchised sales volume will exceed the inflation rate by several percentage points. Enduring plus unimagined applications Today, such things like travel planning, pet-sitting services, and house calls by doctors may be owned by franchises. With the applications such as these, the possibilities are certainly diverse. For example, in the future, franchisees will come from three main sources, which include middle managers, women, and independent small-business owners. International expansion Franchisors are currently exploring foreign markets. In addition, this trend has also been reciprocated by foreign franchisors as well. However, non-U.S. franchisors have had a more difficult time in the U. S. due to stiff competition. Increasing tensions Despite the overwhelming of franchisors on the whole, there is still a major source of contention. That is, franchisor-franchisee relations have witnessed a rise in class-action suits and arbitration hearings. Dissatisfaction among franchisees could originate from various sources. First, perceived inequity among this group regarding mandated or proposed changes may be a major source of conflict. Also unsatisfactory financial performance may be another cause of discord. Greater emphasis on financial returns The main sources of financial returns include: dual operations in which a franchisee may be permitted to run two or more franchises from a common or adjacent area; reduced costs due to downsizing; and incentives for ownership.

Chapter 18 - Customer Service [Source: This lecture was adapted from Gerald Pintel and Jay Diamond, Retailing, 4th ed. (Englewood Cliffs, NJ.: Prentice-Hall, 1987), pp. 73-76. in El-Ansary and Stern’s book, Marketing Channels, PrenticeHall, 3rd. ed. , 1988, p. 333); Bruce J. Walker, “Retail Franchising in the 1990s,” Retailing Issues Letter, Published by Arthur Andersen & co, in conjunction with the Center for Retailing Studies, Texas A&M University, Vol.; 3, No.1, January 1991, pp. 1-. Additional information obtained from https://www.trade.gov/topmarkets/pdf/Franchising_Executive_Summary.pdf

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective(s)

Types of Retailers

Drag and Drop; Matching (accessible version)

Categories of food and general merchandise retailers

2-3 Identify the various types of general merchandise retailers.

Types of Ownership

Matching

Types of ownership for retail firms

2-5 Illustrate the types of ownership for retail firms.

Services Retailing versus Merchandise Retailing

Matching

Retailing

2-4 Explain the differences between service and merchandise retailers.

Retailer Characteristics

Matching

Characteristics of different types of retailers

2-1 List the different characteristics that define retailers.

Types of Food Retailers

Matching

Categories of food retailers

2-2 Categorize the various types of food retailers.

CHAPTER 3 DIGITAL RETAILING ANNOTATED OUTLINE

INSTRUCTOR NOTES



Digital retailers redefine many of the terms surrounding shopping, both literally and figuratively.



The conditions surrounding the sales interaction, store fronts, and delivery options all exhibit differences, compared with those for physical retailers.



The growth of digital retailing is also establishing new roles for what it means to be a retail employee, broadening the definition to include digital resources and influencers.1 LO 3-1 Describe the seven critical elements of digital retailing.

I. The 7C Framework of Digital Retailing 

Digital retailing is defined as the online business activities 18-17

Chapter 18 - Customer Service and digital assets used for creating, capturing, communicating, and delivering value to their customers. 

Retailers use websites for several relevant purposes, from informational websites that educate consumers to entertaining websites that excite them to engaging websites that build a sense of connection with consumers to, of course, transactional websites that allow people to purchase.

Retailers can pursue multiple core goals with interactive websites, including engaging visitors, encouraging them to spend time viewing and interacting with their content, and facilitating commerce. See PPT 3-7

B. Context Elements 

The next element of website design involves traditional context elements, such as design (e.g., color, font) and navigation. These elements must be in alignment with the target market(s).

The information content on the site (text, graphic, video, and audio) must be relevant to shoppers, to ensure they become interested in engaging more with the website and the retailer.

Retailers and the communities they seek to build online must feature clear, helpful, meaningful content, but those elements are only effective if they appear in communication that is not hindered by a lot of noise or confusion. See PPT 3-9

E. Community 

Ask students to provide examples of posts or digital marketing examples that resonates with them. See PPT 3-8

D. Communication 

Ask students to compare the design and color schemes of a website. Identify the design features that appeal to the website’s target audience. See PPT 3-7

C. Content 

PPT 3-16 Illustrates the 7C Framework of Digital Retailing.

See PPT 3-5

A. Core Goals 

See PPT 3-4

Retailers can actively leverage their online websites to help customers interact, socialize, share information, and create a sense of community by posting comments, reviews, responses, images, videos, and suggestions for new products or services. 18-18

Chapter 18 - Customer Service



Another way to build a community is by crowdsourcing, in which users submit ideas for a new product or service, and/or comment and vote on the ideas sub-mitted by others. See PPT 3-10

F. Commerce 

In its digital version, commerce, or e-commerce, means that consumers buy products that retailers are selling on some digital platform, and the “storefront” they visit is the retailer’s website or mobile app.

See PPT 3-11

G. Connection 

Ask students: Can you name other companies who successfully utilize multiple marketing channels?

Retailers use their websites and social media pages to help customers obtain a sense of connection. A good retail website allows customers to buy products and services, post reviews and comments, and share information with others. LO 3-2 Outline how mobile and social retailing work.

II. Mobile and Social Retailing 

Consumers demand that modern retailers offer them ways to engage across all digital domains, consistently and constantly, so that they can pick and choose the channel they want to use at any specific time.



Retailers have become more innovative in how they connect with consumers, such that in addition to a good website, these firms also establish a presence on mobile and social media channels.

See PPT 3-12,3-13

A. Mobile Retailing 

Because so many people turn to their mobile devices to address nearly all their needs, retailers have de-vised three main responses to ensure they are avail-able when and where consumers want them. See PPT 3-12

1. Mobile-Friendly Websites 

Mobile-friendly websites, which facilitate browsing, clicking, and purchasing when the users are visiting using their mobile devices.



The content generally appears in a single column, and the drop-down navigation options are more prominent. 18-19

Chapter 18 - Customer Service See PPT 3-13

2. Mobile Apps 

85 percent of mobile shoppers instead prefer to use mobile applications (apps).



Due to their appeal, as well as the likelihood that users who download an app already tend to be highly engaged customers, apps suffer the lowest shopping cart abandonment rate. See PPT 3-15

3. Location-Based Technologies 

When users download mobile apps, they often accept push notifications and also agree to share their locations.



With push notifications, retailers send messages and alerts to users in real time, usually as an embedded online ad that appears on users’ mobile devices. See PPT 3-16

B. Social Media–Based Retailing 

Social media include various forms of electronic communication, which users can employ to create online communities in which they share ideas and information, their interpersonal messages, and other content (e.g., videos).

1. Facebook 

As the largest social media platform, Facebook has more than 2.7 billion active users. It provides retailers with a forum for interacting with new consumers and fans alike.

2. Pinterest 

On Pinterest, a visual image–based social media network, users and businesses can promote and explore their interests by pinning images and videos on virtual bulletin boards.

3. Instagram 

For teens and young adults, this photo- and video-sharing site is particularly appealing, which in turn makes it invaluable to retailers targeting these consumer markets.

Chapter 18 - Customer Service



Through YouTube videos, retailers can clearly and effectively emphasize their core goals and identities, while giving consumers enjoyment and entertainment value that can create strong communities.

5. Twitter 

Twitter is a microblog—a short version of a blog—in which users were initially limited to 140-character messages. The character limit was raised to 280 characters in 2017, such that it is longer but still quite concise.

6. TikTok 

Users enjoy creating and sharing 15-second videos, often set to music, so TikTok has emerged as a rapidly growing social media platform.

II. Types of Media 



Historically, with the exception of one-on-one direct sales activities, a retailer’s major touchpoints with customers were largely one-way. It provided all the products, services, and content for advertising.

LO 3-3 Understand the differences among paid, owned, and earned media. PPT 3-17 Illustrates the Paid– Owned–Earned Digital Media (POEM) Framework

However, the introduction and widespread adoption of online, social, and mobile channels have ushered in a more contemporary paradigm. See PPT 3-19

A. Paid Media 

Paid media, including search engine marketing (SEM), are similar to conventional advertising in that the retailer pays a fee to appear in those media.



They include traditional, offline forms (e.g., print or television advertising), but the focus here is on the digital domain.



Prominent forms of digital paid media include search ads, display ads that pop up on websites, ads that exist as overlays or interruptions on videos, ads that are displayed on social media channels (in-feed, promoted, and sponsored), sponsored content across websites, banner advertisements, and pay-per-click SEM results.



Search engine ads are business links that appear at the top 18-21

Chapter 18 - Customer Service of search result See PPT 3-18

B. Owned Media 

Owned media consist of the content that retailers create and publish, such as their own e-commerce websites, blogs, social media pages, chat platforms, e-mail marketing, and mobile apps.



Retailers generally need to drive traffic to their owned media to facilitate purchases, so ensuring that all forms of owned media include relevant keywords. See PPT 3-19

C. Earned Media 

Earned media involve any content or discussion of a retailer, created by others, and published beyond its owned media channels, on some third-party site or page.



Search engine optimization (SEO) is another form of earned media.



Earned media can be particularly valuable, because they are external to the retailer itself, so messages communicated this way tend to appear more authentic, trustworthy, and credible. LO 3-4 Define the central factors for selecting an influencer partner.

IV. Influencer Marketing 

Influencer marketing is a paid media strategy that uses seeds (i.e., opinion leaders, often popular on social media) to deliver retailer messages to a targeted audience.



Seeds can be influencers in the traditional sense, but they can also be everyday consumers who have a larger audience or greater reach.

See PPT 3-22

See PPT 3-24

A. Assessing the Efficacy of Influencers 

Depending on the goal of a collaboration with an influencer, different measures define whether the effort has been successful or effective.



When brands decide how much to offer influencers to carry their messages, they need a method to predict the associated value.

Chapter 18 - Customer Service



The notion of relevance encompasses both the focal influencer and her or his followers (i.e., targeted audience) and how they link with the brand and its message.

2. Reach 

The general concept of reach refers to the per-centage of a target population exposed to a specific marketing communication at least once.

3. Response 

Once followers engage with the message, retailers also need them to go further and respond in desired ways.

4. Return 

Financial returns can be measured using different techniques; return on investment (ROI) is a popular one. See PPT 3-26

B. Types of Influencers 

Influencers are not all the same; they can be classified according to their role and expertise (e.g., celebrity or specialized influencers), number of followers (e.g., micro influencers), or preferred channel (e.g., blog or social media influencers), for example.

PPT 3-25 Illustrates the types of influencers.

C. Ethical Considerations for Influencer Marketing These concerns involve not only fraud committed by influencers seeking to falsely represent their reach and relevance, but also issues with whether posts are clearly labeled as advertising and whether the promotions are sincere. See PPT 3-27

1. Fraudulent Influence 

The incentive to boost follower numbers accordingly has led to various unethical behaviors.

2. Identifying Posts as Advertising 

If an influencer is being paid to promote a product, that information should be clear in the post.

Chapter 18 - Customer Service



Effective influence attempts require followers to believe that the influencer actually likes and appreciates the product. LO 3-5 Recognize and understand the components of a digital retailing strategy.

V. How Retailers Engage Their Customers

See PPT 3-28

A. Listen–Analyze–Do Framework 

This three-part framework reflects how retailers should interact with customers to move them through their purchase process, across various channels and media.

1. Listen 

It often is better to listen first, before offering your own insights or suggestions.



Customers appear willing to provide their opinions on just about anything, including their interests and purchases— both their own and their friends’.

PPT 3-29 Illustrates the Listen– Analyze–Do Framework.

Ask students: What do you think marketers can discover about your attitudes and preferences if they search your personal social media sites?

See PPT 3-32

2. Analyze 

In-depth retail analyses often require well-trained marketing managers, proven marketing analytic software, and help from consulting specialists (e.g., IBM, SAS).



A technique known as sentiment analysis, retailers can analyze the content gathered from sites such as Facebook, Twitter, and online blogs and reviews to assess how positive or negative the sentiments describing the companies and their products are.



It is important to analyze how consumers move through the e-commerce purchase funnel.



A bounce rate analysis also can reveal the percentage of times a visitor leaves the site almost immediately, such as after viewing only one page.



Following visitors’ click paths shows how users proceed through the information.



The data analysis can also reveal conversion rates, a measure of the percentage of visitors acting as the retailer 18-24

Chapter 18 - Customer Service intended, such as by clicking or buying. 

Customer attribution information refers to the various touchpoints that a consumer encounters, leading to a retailer’s e-commerce site/purchase.



A keyword analysis lets retailers determine whether the keywords that shoppers use to describe their needs and desires when they enter a request into a search engine match the keywords that the retail website features.

3. Do 

Even the most sophisticated analysis has little use if a retailer fails to implement what it has learned from scrutinizing its online, social, and mobile media.



Customers also are accustomed to immediate responses, so retailers must acknowledge each complaint or comment and deliver the response directly and in a timely fashion.

Discuss with students how the Facebook Targeting Choices could help in implementing a social media campaign.

Chapter 18 - Customer Service ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS 10. CONTINUING CASE ASSIGNMENT: GO SHOPPING Assume that you are shopping on the Internet for an item in the same merchandise category you analyzed for the comparison-shopping exercise in Chapter 2. Go to the retailer’s website and examine it on the basis of the 7Cs. What core goals does the website prioritize? How does it facilitate commerce? Does its context elements and content align with the retailer’s target market? Students should describe the following seven components of the Online Retailing Framework (Exhibit 3.1) Core Goals: Retailers can pursue multiple core goals with interactive websites. Often these goals include engaging visitors, encouraging them to spend time viewing and interacting with its content, and facilitating conversion and online commerce. Thus, student answers can mention any number of core goals though most will at least mention the conversion goal. Context Elements: Context refers to design elements in a website. So, the types of things students would indicate relate to the possibly distracting nature of the site, whether it is simple to navigate or not, aspects of the design like color, font, branding, size of visuals, placement of things for navigating based on the perceived core goal of the site, and so on. Content: Content should be aligned with the retailer’s core goal of the website. For example, if the core goal is facilitating conversion and commerce, then content should move the buyer closer to a purchase decision in some way, like providing product information, testimonials, or other materials designed to ease the purchasing decision. If the core goal is something related to spreading WOM and awareness, then content should be focused on providing easily remembered and shareable images, texts, or hashtags that can make the message simple to understand and make the sharing of content easier for consumers. Community: Retailers can utilize product ratings, provide links to their various social media platforms (e.g., blogs, Facebook, Twitter) where there is a community of fans who engage with them, and feature Q&A content, testimonials, or reviews from other shoppers to speed up the decision process. All of these elements work to create a sense of community, and other consumers are strong influencers of trust in retail. Communication: What channels of communication does the site utilize? Video, print content, links to blogs or article, customer testimonials, and customer feedback are common elements of a retailer’s communication strategy. Commerce: Does the retailer use common site conventions like shopping carts, accounts (for customer knowledge and relationship purposes), search and navigation, and other tools designed to speed up the conversion process? Retailers like Amazon use techniques like one-click ordering to reduce decision time. Does the retailer attempt to upsell? Something like Amazon’s “other people also bought…” provides an additional opportunity to increase the average ticket amount (and create a sense of connection or community). Connection: What sort of customer interaction elements are present on the site? For example, does it make use of chatbots, make human agents available, include customer Q&A, testimonials, ratings, or feedback? 18-26 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 11. INTERNET EXERCISE Visit Wendy’s Facebook (https://www.facebook.com/wendys/ ), Twitter (https://twitter.com/wendys?lang=en ), and Instagram (https://www.instagram.com/wendys/?hl=en) pages and evaluate its social media presence. How is its content similar and different across sites? Do its social media posts promote connection? Do you feel encouraged to make a purchase? This example is from 2/28/2021. Facebook – The most recent post features the Jalapeno Popper Chicken Sandwich, and 8,333,976 people like this page. Wendy’s uses Facebook primarily to share content, usually related to a featured product or offer. Instagram – Instagram is used identically to Facebook. The most recent post features the Baconator Sandwich. There are approximately 1,000,000 followers of this account Twitter – Wendy’s uses Twitter as its primary social monitoring tool, such that it reacts in nearly realtime to mentions and posts, engages in activities to engage with consumers, and discusses current events. When it comes to legendary Twitter responses, Wendy’s is the best. Students will describe different posts based on when they visit these social media sites. The example above refers to posts that inform and remind followers about a menu item. 12. INTERNET EXERCISE Explore the broader features and capabilities available in Google Analytics (https://marketingplatform.google.com/about/analytics/features/) and BuzzSumo (https://buzzsumo.com/). What do these digital tools have in common? How do they differ? Which service provides more value to retailers? Google Analytics Features

BuzzSumo Features

Analytics Intelligence

Content Discovery

Reporting

Content Research

Data Analysis and Visualization

Find Influencers

Data Collection and Management

Monitoring

Data Activation

API (application programming interfaces)

Integrations

Digital marketing technology has different purposes. As of 2020, there are over 7,000 digital marketing technology platforms in existence. The challenge for marketers is to understand the primary function of each, to which purposes each is best suited, and how they align with corporate objectives. Instructors could ask small teams, pairs, or individual students to explore the details of the features and benefits listed on each of the websites and share what they learned with the rest of the class. Then the class could discuss the similarities and differences and the value to retailers. 18-27 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 13. INTERNET EXERCISE Dwayne “The Rock” Johnson and Neymar are both celebrity influencers. Visit some of their social media pages. Which kinds of products do they tend to endorse? What similarities and differences are evident between their posts? Now review the social media influencer James Charles’s pages. Can you iden-tify differences in how he promotes brands, relative to the celebrities? Which would be more likely to convince you to purchase a product? Dwayne “The Rock” Johnson An American actor, producer, businessman, retired professional wrestler, and former American football and Canadian football player. He wrestled for the World Wrestling Federation (WWF, later WWE) for eight years prior to pursuing an acting career. His films have grossed over $3.5 billion in North America and over $10.5 billion worldwide. Article: Heidi Dean, 4 Things Dwayne Johnson Does on Social Media (That You Should, Too), Backstage, https://www.backstage.com/magazine/article/dwayne-the-rock-johnson-socialmedia-actors-should-do-68870/, July 7, 2020. Neymar Neymar da Silva Santos, a Brazilian professional footballer who plays as a forward for Ligue 1 club Paris Saint-Germain and the Brazil national team Article: Alan Feehely, Neymar explodes on social media, https://www.footballespana.net/2021/02/11/neymar-explodes-on-social-media-i-dont-know-how-much-longer-i-can-hold-out,

February 11, 2021. James Charles An American Internet personality, beauty YouTuber and make-up artist. In 2016, he became the first male ambassador for CoverGirl after a tweet featuring his makeup went viral online. Since starting his YouTube channel, Charles has amassed over 25 million subscribers as of January 2021. Article: Caitlyn Hitt, James Charles Speaks Out Amid Allegations He Groomed Underage Boy: These Claims Are ‘Completely False’, US Magazine, https://www.usmagazine.com/celebritynews/news/james-charles-denies-allegations-he-groomed-underage-boy-online/, February 27, 2021

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS Walmart and Macy’s both sell clothing, but each target different markets. How should each retailer design websites targeted for its shoppers? Consider the 7C framework. Students should describe the seven components of the Online Retailing Framework (Exhibit 3.1). See GET OUT AND DO IT! #1 above. 14. Why might retailers need to use the different types of digital retailing detailed in this chapter? Students can address any number of differences. For example, one way of providing unique value to consumers is being available across a number of platforms for communication. Another reason could be to foster customer loyalty through community online. In the pandemic and post-pandemic world, having online commerce allows consumers, regardless of their location or ability to leave the house, to purchase products. 15. Express is a clothing retailer targeting young professionals. Which social media sites does it use to reach its customers? Express is found across most major social media sites: Facebook, Instagram, Twitter, YouTube. Each site is used similarly, to feature the latest products and fashions, foster community engagement, and provide an outlet for communication and contact between the retailer and consumers.

https://www.express.com/ 16. How is Sephora using social and mobile media to ensure its continued relevance and status? Which of its innovative efforts seem most likely to succeed, in your view? Sephora’s YouTube strategy has drawn over 1.3 million subscribers to date. The YouTube channel tries to create community and a sense of belonging associated with the brand, and the subscriber volume indicates that it has been a successful strategy. Videos describe products and provide beauty and skin care tutorials that engage loyal customers and provide information that can educate and encourage new users to try the products by making them more accessible to everyone.

Chapter 18 - Customer Service

https://www.youtube.com/sephoraeditor/playlists 17. Define earned media. Why is it so important? How can a retailer increase its presence in earned media channels? Earned media is essentially word-of-mouth advertising from trusted referral sources, so it creates traffic to the site, and this traffic also has an added endorsement element. Some examples of earned media are: Mentions of the brand across any social media platforms. Word-of-mouth recommendations both in person and throughout various digital channels (e.g., online review websites like Yelp, customer testimonials on a webpage, social media posts). Shares/retweets of content or any content about the brand or business. Blog posts about the business or product that are not sponsored by the brand (i.e., not paid media or PR). An example might be an unsponsored Buzzfeed article about a product. Magazine and newspaper articles product that are not sponsored by the brand (i.e., not paid media or PR). 18. Distinguish between organic and paid search. When searching for products, which do you click on more often? Why? Organic search focuses on unpaid rankings in search results that are based on the perceived relevance of the search query to the retailer, whereas paid search focuses on ads that are listed among paid and sponsored search options. With organic search, companies use SEO to optimize the site's visibility or

Chapter 18 - Customer Service rankings in search results. In comparison, paid search allows retailers to pay for a prominent spot in search results. Students might make their click decisions according to the relevance of the results. The very top results of searches are paid, and after that they are organic, based on relevance. Consumers often choose the most relevant, closest to the top option, regardless of whether it is paid or organic. Other consumers may avoid paid search results and go to the topmost ranked organic listing, which they may consider more likely to be relevant. 19. What are the important factors to consider when partnering with an influencer? What are some pros and cons of working with influencers for retailers? Students should think through the 4Rs (relevance, reach, response, return). The relevant factors depend on the goal of the partnership as well. Pros: They can provide relevance to target customers. They can be effective means for referrals, getting information out, getting new customers through their followers who may not use the retailers’ products already, and so on. Cons: People may respond poorly to influencers doing overtly paid posts. Like celebrity endorsers, if they do something that is negative, it can reflect poorly on a retailer that has partnered with them. 20. Micro influencers are highly effective, with 82 percent of consumers saying they are highly likely to follow their recommendations. Why are these influencers so successful? Are you more likely to follow the advice of micro influencers or other types of influencers like traditional celebrities? Why is this the case? Micro influencers tend to be successful because consumers choose to follow them specifically for the particular expertise/knowledge they have. Micro influencers are also often more responsive to followers and active on social platforms. This combination of relatability, responsiveness, and a very targeted reach and relevance makes them appear more credible and, consequently, more influential to specific niche consumers. “Based on the various different types of digital avenues that retailers can use to reach current and potential customers, what type of trends (e.g., influencers, online reviews, etc.), do you think will continue to be successful, why or why not?” This is a broad, open-ended question. Students could mention how influencers may be more successful than brands at generating new customers, because they continue to have strong follower bases who choose to listen and support them. Students also might discuss the rise in online reviews or customer testimonials, reflecting consumers’ greater trust in other users compared with brands when it comes to information about products and services. Students could discuss new or rising social media like TikTok or other video streaming services as sources that younger generations prefer over other social platforms. 21. Review the future trends discussed in the chapter. Which do you think will be the most important for retailers? Explain your response. Student answers will vary according to what trend they select. 22. Discuss the difference between click paths and customer attribution. How can retailers use these analytic tools? 18-31 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Click paths indicate the most recent actions on the site that the customer took, prior to purchase. Attribution reveals the various digital and other marketing factors that contributed to the ultimate sale. Attribution requires significantly more data and data sources to analyze, whereas click paths can be easily determined through services such as Google or Adobe analytics. 23. Why is calculating ROI difficult for influencers and social media? In addition, why it is important to undertake this difficult effort? Direct attribution is not always possible through these channels, if a click on the site is not recorded. Cookies indicate what a customer was exposed to, but they cannot give retailers insight into the specific content that was consumed prior to sale or conversion.

Chapter 18 - Customer Service CONNECT ACTIVITIES FOR CHAPTER 3 Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

The 7C Framework of Digital Retailing

Matching

The 7C Framework of Digital Retailing

3-1 Describe the seven critical elements of digital retailing.

Dell: Successfully Using Social Media

Case Analysis

How Retailers Engage their Customers

3-5 Recognize and understand the components of a digital retailing strategy. 3-2 Outline how mobile and social retailing work.

Types of Social Media

Matching

Social Media–Based Retailing

3-2 Outline how mobile and social retailing work.

Social/Mobile/Online: SBC

Video Case

Social Media–Based Retailing

3-5 Recognize and understand the components of a digital retailing strategy.

Types Of Influencers

Matching

Influencer Marketing

3-4 Define the central factors for selecting an influencer partner.

CHAPTER 4 MULTICHANNEL AND OMNICHANNEL RETAILING



ANNOTATED OUTLINE Retailers are categorized by their offering (food, general merchandise, or services) and then by the channel(s) they use to reach their customers, whether store- or nonstorebased (Internet, mobile, catalog/direct mail, direct selling, TV home shopping, vending machine, etc.).



A retail channel is the way a retailer sells and delivers merchandise and services to its consumers.



Today, most retail firms are using more than one channel to reach their customers. Single-channel retailing is when retailers sell and deliver merchandise and services to their

INSTRUCTOR NOTES LO 4-1 Understand the channels used by retailers. See PPT 4-3 and 4-4 Ask students to provide examples of retailers who use multiple channels. What are the various channels used by each? Do the students giving these examples use all the channels used by the retailer? If so, how and when?

Chapter 18 - Customer Service customers through only one channel. 

Multichannel retailing is when retailers offer more than channel to sell and deliver merchandise and services to consumers. By using a combination of channels, retailers can exploit the unique benefits provided by each channel to attract and satisfy more customers. LO 4-2 Compare the relative strengths of the major retail channels: stores and Internet.

I. Relative Strengths of Retail Channels

A. In-Store Channel 

Retailers generally make most of their revenues through their brick-and-mortar or store channels.



Stores offer several benefits to customers that they cannot get when they shop through other, nonstore channels. These benefits include touch and smell of products, personal service, risk reduction, immediate gratification, entertainment and social experience and cash payment.

1. Touch and Smell of Products 

Exhibit 4-2 provides a summary of the unique benefits of stores and the Internet.

PPT 4-5 covers the unique benefits provided by the store channel.

Perhaps the greatest benefit offered by stores is to allow customers to use all of their senses when examining products—touching, smelling, tasting, seeing, and hearing.

Ask students if they consider any store to be their favorite for shopping. In other words, do they look forward to shopping at that store? If so, why?

2. Personal Service 

Store sales associates still have the capability of providing meaningful, personalized information.

3. Risk Reduction 

When customers purchase merchandise in stores, the physical presence of the store assures them that any problems with the merchandise will be corrected.

4. Immediate Gratification 

Stores have the advantage of allowing customers to get the merchandise immediately after they buy it.

Which types of merchandise do students feel require the immediate gratification factor? For which merchandise categories

Chapter 18 - Customer Service is immediate gratification not such a big deal? 5. Entertainment and Social Experience 

In-store shopping can be a stimulating experience for some people, providing a break in their daily routine and enabling consumers to interact with friends.

Ask students to describe their favorite entertainment elements of the store shopping experience. Which retailers do they believe incorporate these entertainment elements very well?

6. Cash Payment 

Stores are the only channel that accept cash payments. Many customers prefer to pay cash because it is easy, resolves the transaction immediately, and does not result in potential interest payments. Some customers also prefer to use their credit card or debit card in person rather than electronically sending payment information via the Internet. See PPT 4-6, 4-7

B. Internet Retailing 

Internet retailing involves retailers interacting with consumers via the Internet, whether they use a traditional computer or a laptop, a variety of sizes of tablets, or a smartphone.



The mobile channel (also called mobile retailing, mobile commerce, or m-commerce) implies accessing the Internet using a tablet or smartphone.

1. Deeper and Broader Selection 

In addition to the convenience and security of shopping from home or work at any time, the Internet channel has the potential for offering a greater selection of products and more personalized information about products and services.



A potential benefit of the Internet channel is the vast number of alternatives available to consumers through a broader selection.

2. More Information for Evaluating Merchandise 

An important service offered by retailers is the provision of information to help customers make better buying

Discuss the advantages shopping on the Internet has over shopping in a store.

Ask students about the products and purchase situations where the broader selection offered by the Internet may be particularly useful.

Discuss with students if the use of customer reviews is a deciding factor when making purchases online. How does this compare

Chapter 18 - Customer Service decisions. The retail channels differ in terms of how much information they provide and whether customers can format the information to compare different brands easily.

with a retailer’s ratings?

3. Personalization 



Ask students to compare “chatting” online with customer The most significant potential benefit of the Internet service representatives with being channel is its ability to personalize the information for each helped in a store by a sales customer economically. The Internet offers the associate. Discuss factors that opportunity to provide “personal” service at a low cost. may impact the experience. Which is more personalized? The retailer also can play a more proactive role in personalizing merchandise and information through Internet channels. To improve customer service from an Internet channel, many retailers are offering live, online chats. A live chat provides customers with the opportunity to click a button anytime and have an instant messaging e-mail or voice conversation with a customer service representative.

4. Expanded Market Presence 

By adding the Internet channel, retailers can expand their market without having to build new stores or incur the high cost of additional catalogs.



Adding an Internet channel is particularly attractive to retailers with strong brand names but limited locations and distribution.

5. Information to Improve Shopping Experience across Channels 

Information on the Internet channel database can be frequently updated and will always be available. The cost of adding information to an Internet channel is likely to be far less than the cost of continually training thousands of sales associates.



Internet retailers have the capability of providing as much information as each customer wants, more information than they can get through store and catalog channels. The Internet channel can respond to customers’ inquiries just like a sales associate would. The depth of information available at a retailer’s website can provide solutions to

Ask students about a new purchase context; for example, buying a good home theater system. If they do not know anything about the product, or how to evaluate it, where would they look for information first, the Internet or the local electronics store? What are the reasons behind this choice of channel?

Chapter 18 - Customer Service customer problems. 6. Perceived Risks in Internet Shopping 

Although many consumers remain concerned about credit card security, extensive security problems have been rare.



Consumers are concerned about the ability of retailers to collect information about their purchase history, personal information, and search behavior on the Internet without their knowledge.

C. Mobile Retailing 

Due to the rapid growth of domestic and international broadband access through handheld devices, such as tablets and mobile phones, retailers are very interested in developing this channel’s potential.



Benefits of mobile are easy portability, interactions can be location sensitive, in addition to offering the same benefits as computer-based Internet channels.



The major disadvantage of a mobile channel, compared with a computer-based Internet channel, is the mobile device’s smaller screen.



The use of tablets may provide the best trade-off between the portability of mobile phones and the navigation ease of websites accessed by computers.

Ask students to discuss the advantages and disadvantages of shopping on a mobile device. How does this compare with Internet shopping? Discuss with the students the comfort level in making purchases on a mobile device.

D. Social Retailing 

Social retailing, also known as s-retailing, involves conducting purchase transactions through a social media site.



Social retailing has grown from $3 billion in 2012 to an estimated $14 billion in 2015.



The largest number of social retailing orders comes from Facebook.

E. Catalog and Other Nonstore Channels 

The catalog channel is a nonstore retail channel in which the retail offering is communicated to customers through a catalog mailed to customers.

See PPT 4-10

Chapter 18 - Customer Service 

Convenience. Catalogs, like all nonstore formats, offer the convenience of looking at merchandise and placing an order any day at any time from almost anywhere, 24/7, without needing a computer, mobile device, or Internet connection.



Consumers can refer to the information in a catalog anytime and catalogs can be easier to browse through than websites.



Safety. Nonstore retail formats have an advantage over store-based retailers by enabling customers to review merchandise and place orders from a safe environment— their homes



Catalogs, however, may represent an unnecessary waste of natural resources.



Direct Selling is a retail channel in which salespeople interact with customers face-to-face in a convenient location, either at the customer’s home or at work.



Automated Retailing is a retail channel in which merchandise or services are stored in a machine and dispensed to customers when they deposit cash or use a credit card Automated retailing machines are also known as vending machines.

II. Opportunities Facing Multichannel and Omnichannel Retailers 

Consumers want a seamless experience: Whether they solicit a sales associate for help, seek out an in-store kiosk, call into a call center, or log onto a website, they want to be recognized. Retailers need to be consistent with the information they provide.



Retailers also benefit by using the various channels synergistically. Multichannel and omnichannel retailers can use one channel to promote the services offered by other channels.



Multichannel and omnichannel retailers can leverage their stores to lower the cost of fulfilling orders and processing returned merchandise.



They can use their stores as “warehouses” for gathering merchandise for delivery to customers.

LO 4-3 Describe the opportunities associated with a true omnichannel strategy.

Chapter 18 - Customer Service 

Customers also can be offered the opportunity to pick up and return merchandise at the retailer’s stores rather than pay shipping charges.

III. Challenges Facing Multichannel and Omnichannel Retailers 

Some of the challenges and trade-off decisions that confront multichannel and omnichannel retailers include multichannel and omnichannel supply chain and information system issues, a consistent brand image across channels, merchandise assortment trade-offs, pricing issues, and the challenge surrounding channel migration and showrooming.

LO 4-4 Analyze the challenges facing multichannel and omnichannel retailers.

A. Multichannel and Omnichannel Supply Chains and Information PPT 4-14 Systems 

Most retailers don’t have distribution systems set up to accommodate orders from multiple channels.



A multichannel system requires retailers to develop new packing techniques, intermediary relationships, as well as develop new transportation strategies. PPT-4-15

B. Consistent Brand Image across Channels 

Retailers need to provide a consistent brand image of themselves and their merchandise across all channels.

PPT 4-16

C. Merchandise Assortment 

Ask students to discuss a retailer that has a different online feel or image versus its in-store experience. What retailers provide a seamless experience well?

Different assortments are often appropriate for different channels. As previously mentioned, the Internet is usually able to offer a broader assortment than the in-store channel. Some channels are also more effective at generating sales for different types of merchandise.

Ask students how important touching and feeling merchandise is to them. Are there some product categories that they only buy online? Are there some they only buy in store?

D. Pricing 

Many customers expect prices to be the same across channels (excluding shipping prices).



Retailers with stores in multiple markets often set different 18-39

Chapter 18 - Customer Service prices to compete with local competition. Multichannel retailers may find it difficult to sustain this practice as customers can easily check prices on the Internet. E. Reduction of Channel Migration 

Channel migration is when customers gather information from one of its channels, then buy from a channel hosted by a competitor, a frustrating problem for retailers.



Showrooming occurs when a consumer goes into a store to learn about different brands and products and then searches the Internet for the same product sold at a lower price.



Three approaches that multichannel and omnichannel retailers can use to reduce showrooming are (1) providing better customer service, (2) offering uniquely relevant information based on proprietary data the retailer has collected about the customers, and (3) promoting privatelabel merchandise that can be purchased only from the retailer.

IV. SUMMARY 

Traditional store-based and catalog retailers are adding Internet channels and evolving into integrated, customercentric, multichannel retailers—an evolution driven by the increasing desire of customers to communicate with retailers any time, any place, and anywhere.



The most advanced type of selling channel, omnichannel retailing, is a coordinated multichannel retail offering that provides a seamless and synchronized customer experience, using all the retailer’s shopping channels.



There are many advantages and challenges across the various channels.



Multichannel retailers are still struggling to provide an integrated shopping experience across all their channels because of the unique skills and resources needed to manage each channel.

Do students use the Internet to comparison shop? How many students engage in showrooming?

See PPT 4-17

Discuss the advantages and disadvantages across the major channels. Have any of the disadvantages been lessened with an omnichannel approach?

Chapter 18 - Customer Service ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS 24. INTERNET EXERCISE Go to the websites of J.Crew (www.jcrew.com), Macy’s (https://www.macys.com), American Eagle Outfitters (www.ae.com), and Madewell (https://www.madewell.com/) to shop for a pair of jeans. Evaluate your shopping experience at each site. Compare and contrast the sites and your experiences based on the following characteristics: product search, selection, price, images, merchandise description, and delivery options. Students should consider the following: 

Product search – How easy is it to find the desired items? Does it help visitors find items on the site? Can comparisons be made?



Selection – What is the depth and breadth of merchandise? Is it consistent in store and online?



Price - Same price or cheaper online? Many offer free shipping with a set dollar purchase, also save on time, hurried shopper (temporal cost). People are looking for bargains. Are coupons and discounts available?



Images- Do website images help attract attention? Do images reflect merchandise? Do images engage shoppers?



Merchandise description – Is information provided on product features, benefits, and availability? Does the information give sufficient details? Does the information encourage a purchase?



Delivery options – Shoppers appreciate choices such as next day, two-day, ground, in-store and curbside pickup.

25. INTERNET EXERCISE Assume that you or a family member are getting married and planning a wedding. Compare and contrast the usefulness of https://www.theknot.com/, https://www.mywedding.com/, https://www.weddingwire.com/ or another wedding planning website. What features of the sites do you like and dislike? Indicate the specific services offered by these sites that you would use. Engaged couples can plan for their ceremony, reception, and honeymoon online with these sites. They can learn what other couples did for their weddings. Couples can register for gifts, set a budget, pick a venue, and select vendors (caterers, florists, photographers) all in one convenient place. They can also easily share their plans with relatives and friends. Students should review what features they like and dislike of each site and which one they would be more likely to use based on the services provided. The table below may help students organize the responses. Key features for The Knot are included as an example. Company

Positive Features

The Knot

Multiple themes and colors

Negative Features Custom domain name fee

Chapter 18 - Customer Service Registry options

Sales can feel pushy

Honeymoon planning

Access to customer service is difficult

Hotels discounts

Better for small weddings

Guest list manager Wedding checklist Budget tool Mywedding Weddingwire Other wedding site

26. INTERNET AND SHOPPING EXERCISE Pick a merchandise category like microwave ovens, power drills, digital cameras, blenders, or coffee makers. Compare a retailer’s offering in its local store and its Internet site. What are the differences in the assortments offered through its store, Internet, mobile, and social channels? Are the prices the same or different? What has the retailer done to exploit the synergies among the channels? Students will find that some retailers have a consistent pricing strategy and merchandise selection across channels and other do not. Reasons for the differences could include space for inventory, sales promotions, or shipping charges. 27. INTERNET AND SHOPPING EXERCISE Access the websites of Home Depot (https://www.homedepot.com/) and Macy’s (https://www.macys.com) using your mobile phone and computer. What are the differences in the ease of navigation when looking at the presentation of merchandising using the two methods of accessing the websites? Students will find that these retailers have mobile sites that have less information to facilitate easier downloading and information search. The navigation will likely be easier on the mobile site because there is less to navigate. In addition, the merchandise presentation will be more streamlined on the mobile site. Students will probably be able to find more product information accessing the traditional website.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS Why are store-based retailers aggressively pursuing sales through Internet channels? Stores have realized several distinct benefits of an Internet channel that overcome their traditional limitations. First, an Internet channel enables stores to expand nationally and globally at a relatively low cost. Consider, for example, a regional store with locations in four states in the Western U.S. This store can service customers in other parts of the country through an Internet channel. Even if the cost of setting up a fully functional state-of-the-art website may be high, the costs of locating several stores in each of the other 46 states would likely be prohibitively higher. Second, an Internet channel enables stores to gather more information about their customers, their preferences and shopping habits. In a physical store format, stores gain some limited information on the purchases made by customers only when the customers use a credit card for shopping. But the information systems used in Internet channels can track customer visits, monitor their movements through the website, and help create customer data that can be used for providing personalized attention as well as better service and merchandise. Third, by offering an additional Internet format, stores can now provide more options to customers who, depending on the product category or purchase occasion, may prefer such Internet channels as well from time-to-time. Thus, by giving alternatives to store formats to customers, stores have a better chance of retaining their customers and increasing their share of wallet. Finally, using their superior retailing expertise and well-known images, stores using an Internet format find themselves in a competitively advantageous position as compared with Internet-only retailers. The costs of acquiring customers are lower for established stores than for the relatively unknown Internet retailers and may contribute to enhanced profitability. 28. What are the differences between a multichannel, cross-channel, and omnichannel retailer? Provide an example of each. Multichannel retailing is when retailers offer more than one channel to sell and deliver merchandise and services to consumers. Channels operate without integrating operations between them. Almost all large retailers that operate stores are multichannel retailers, with physical stores, an Internet channel that offers customers an opportunity to buy merchandise or services by accessing their website, and perhaps catalog orders. Cross-channel retailing is when a multichannel retailer allows customers to use multiple channels to make purchases, such as when they receive an e-mailed coupon, download it onto their smartphone, and then go to a brick-and-mortar store to redeem the coupon and buy the product. Omnichannel retailing refers to a coordinated multichannel retail offering that provides a seamless and synchronized customer experience, using all of the retailer’s shopping channels. These various channels run in collaboration and effectively ensure that the customer (and customer data) is the center of the retail management processes. Student examples may vary by channel. 29. What aspects of omnichannel retailing would benefit you as a consumer? If retailers can devise an effective omnichannel strategy, they can achieve several benefits. In particular, consumers like the idea of a seamless experience, so an omnichannel approach appeals better to customers. Furthermore, omnichannel retailers can get their products to consumers more costefficiently and in the channel those consumers prefer. Good omnichannel retailers also use each 18-43 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service channel to promote the others, such as highlighting their web address on bags that customers carry from their stores. 30. Choose a retailer from whom you have purchased through multiple channels. Is it a multichannel, cross-channel, or omnichannel retailer? Justify your answer. Answers will vary by student, but the definitions of each term should be explained. 31. Using the same retailer that you chose in the previous question, how well have they integrated their operations across channels? How similar and different are their assortments and prices? Should they do these things differently? Why or why not? Answers will vary by student. 32. Do you participate in showrooming? Why or why not? Answers will vary by student; however, students should define the term showrooming (occurs when a consumer goes into a store to learn about different brands and products and then searches the Internet for the same product sold at a lower price) and articulate why they do or do not participate in showrooming. 33. From a customer's perspective, what are the benefits and limitations of stores? Internet? Mobile? Social? Catalogs and other nonstore channels? Stores allow customers the benefits of a high sensory experience when browsing and shopping. Customers can touch and feel products and seek information from qualified sales associates before purchase. Moreover, they can pay in cash and thus avoid both the need to give out personal information and the high interest rates charged by credit card companies. Customers can obtain immediate gratification in that they can take home the product immediately after purchase. Customers feel comfortable with the quality and service (including the possibility of post-sales returns) when they are buying from known and reputed stores. Returning a product is easier to a store compared to other formats. However, customers are constrained by the limited choices among the merchandise assortment available at the store. Customers also have to spend considerable time and effort in comparative shopping to ensure that they have obtained the best quality, price, and/or value. Also, customers often go through the added inconvenience of picking the merchandise themselves and waiting in long checkout lines. Internet channels offer the convenience of 24/7 retailing. Customers can order anytime and can easily comparison shop for products, brands, and prices. Customers are exposed to a very wide assortment of products and brands and can make choices not only across products and brands but also across the retailers that stock them. There is greater personalization, which benefits customers in selecting products and making purchase decisions. Detailed information, even on new product categories, can be obtained more easily. However, the consumer may be wary of unknown retailers over the Internet, fearing that the order may not be fulfilled or that the delivery promises may not be kept, or the product quality may not be as advertised. Also, customers find their risks to be high, especially when they have to provide personal and credit card information over the Internet. Consumers may find that less pre-sales information is 18-44 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service available for products that require touching and feeling before purchase. Also, the costs of making a bad decision are high, especially because Internet retailers vary in terms of their return policies (some charging a hefty restocking fee). Mobile channels offer the same benefits as computer-based Internet channels, plus customers can easily carry the devices in their purses or pockets, so they can access retail sites from anywhere. Additionally, the customer–retailer interactions can be location-sensitive. However, the major disadvantage of a mobile channel, compared with a computer-based Internet channel, is the mobile device’s smaller screen. Additionally, there may be connectivity issues or greater use of consumer mobile data plans. Social retailing involves conducting purchase transactions through a social media site, giving consumers yet another opportunity to buy. Social retailing can enable retailers to inform customers, using more personalized details about products and services. It also provides information that the retailer can use to improve the shopping experience across all channels. However, social retailing can also be a concern with consumers in terms of privacy and safety. Catalogs and other nonstore channels allow customers the convenience of any time, any place shopping. Consumer and credit information is better protected when shopping through a catalog. Also, many catalogs provide items that are not available in stores. Catalogs are particularly convenient when the product category selection is limited in local stores. For example, customers living in more rural areas may find catalog shopping to be a very convenient alternative. Since the customer does not have to travel to unknown and unsafe areas to make a purchase, catalogs, direct selling, and other nonstore retailers provide a safer alternative as compared to physical stores. A benefit of direct selling is that the salesperson typically communicates directly with the consumer and develops personal rapport. Direct salespeople demonstrate merchandise benefits and/or explain a service, take an order, and deliver the merchandise. Direct selling is a highly interactive retail channel in which considerable information is conveyed to customers through face-to-face discussions and demonstrations. However, catalogs and nonstore channels provide very little merchandise information that the customer may desire about the product. While some of this information may be obtained over the phone for catalog channels, in most cases, the customer may only encounter an order taker with limited knowledge at the other end of the phone line. For nonstore channels, like vending machines, there is a lack of product information that is readily available. Returns are cumbersome for catalog and nonstore retailers, because the customer would have to repackage the product and may have to drop it off at the post office or UPS delivery location. Moreover, catalogs and nonstore channels provide limited assortment. The highly personalized service from direct selling can be costly. 34. Which of the following categories of merchandise do you think could be sold most successfully through an Internet channel: jewelry; TV sets; computer software; high-fashion apparel; pharmaceuticals; health care products such as toothpaste, shampoo, and cold remedies? Why? Lower end costume jewelry can be and is sold effectively by nonstore retailers. This is because this merchandise can be presented well and accurately in a catalog and on television, or even over the Internet.

Chapter 18 - Customer Service Television sets could probably not be sold effectively simply because seeing is believing. Without actually seeing the picture quality on any given television it would be prohibitively difficult for most people to consider purchasing one without first seeing it in the store. Perhaps a nonstore retailer could be successful selling televisions if it could acquire high quality, popular models in sizable quantities. Then, if enough people find out about the retailer, customers might consider purchasing televisions from them after first seeing the televisions in the store. Computer software could be sold well over the Internet. Many software applications just require downloads, making the Internet the easiest place for purchase. However, if a consumer has a concern or question about a particular type of software, it is probably best to visit a store and seek expertise. High-fashion apparel would probably not sell well through nonstore retailers. The fit, feel, and detail of high-fashion merchandise would not come across without the customer actually seeing, feeling, and trying it on in a store. Commodity apparel merchandise, however, can and does sell well through nonstore retailers. Pharmaceuticals have experienced higher than average sales growth through nonstore retailers recently. It is, however, difficult to determine what the ultimate nonstore retailer sales potential will be for pharmaceuticals. The population is getting older, thereby increasing the demand for many pharmaceutical products. But many pharmaceutical products require a prescription. At the moment, the practices of some Internet retailers of prescription pharmaceuticals are being called into question because in some cases it is too easy for patients to get prescriptions from a physician to be filled online. Health care products such as toothpaste, shampoo, vitamins, and other staples might sell well through nonstore retailers. Some Internet retailers are currently using these products as loss leaders and to encourage customer loyalty. Unfortunately, these retailers cannot base their fortunes on the sale of these products due to low margins and relatively high shipping costs. Other health care products, such as cold remedies, would probably not sell well through nonstore retailers in the long term because they are generally purchased as needed and consumed almost immediately after purchase. For example, if someone catches a cold, they need to remedy the cold as soon as they catch it. They will not have the time to wait for the medicine to be delivered.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Dee Dee's Dishes Becomes a Multichannel Retailer

Case Analysis

Single-Channel vs. Multi-Channel Retailers

4-1 Understand the channels used by retailers.

Benefits of Different Retail Channels

Matching

Single-Channel vs. Multi-Channel Retailers

4-2 Compare the relative strengths of the major retail channels: stores; Internet, mobile, and social; and catalog and other nonstore channels.

Pizza Hut Goes MultiChannel

Video Case

Relative Benefits of Retail Channels

4-3 Describe the opportunities associated with a true omnichannel strategy. 4-4 Analyze the challenges facing multichannel and omnichannel retailers.

Soko Glam Disrupts the Beauty Industry

Video Case

Relative Benefits of Retail Channels; SingleChannel vs. MultiChannel Retailers

4-2 Compare the relative strengths of the major retail channels: stores; Internet, mobile, and social; and catalog and other nonstore channels. 4-3 Describe the opportunities associated with a true omnichannel strategy.

The Convergence of Online and Brick and Mortar

Case Analysis

Relative Benefits of Retail Channels; SingleChannel vs. MultiChannel

4-1 Understand the channels used by retailers. 4-2 Compare the relative strengths of the major retail channels: stores; Internet, mobile, and social; and catalog

Chapter 18 - Customer Service and other nonstore channels. 4-3 Describe the opportunities associated with a true omnichannel strategy.

CHAPTER 5 CONSUMER BEHAVIOR ANNOTATED OUTLINE

INSTRUCTOR NOTES

An effective retail strategy satisfies customer needs better than do competitors’ strategies. Thus, understanding customer needs and buying behavior is critical for effective retail decision making. Successful retailers are customer-centric—their strategic and tactical decisions revolve around the experiences achieved by their present and potential customers. I.

The Buying Process The buying process (the steps consumers go through when buying a product or service) begins when customers recognize an unsatisfied need. The process ends when customers make a purchase, use the product, and then decide whether the product satisfies their needs during the postpurchase evaluation stage. Retailers attempt to influence consumers as they go through the buying process to encourage them to buy the retailer’s merchandise and services. Each stage of the buying process is addressed in the following sections. Customers may not go through the stages in the same order as presented. The amount of time spent at each stage may differ depending on the type of decision being made.

LO 5-1 Describe the process that consumers go through when making retail patronage and buying decisions. Exhibit 5-1 lists each stage of the buying decision process. Ask students to describe the steps they went through to purchase high-price merchandise such as a suit for job interviews, or a laptop. List the steps and relate each step to the steps in the store selection and merchandise selection process. Ask students to describe the steps they went through to purchase low-price merchandise such as cereal, shampoo, etc. List the steps and compare them with the buying process for high-price merchandise.

Chapter 18 - Customer Service

Need Recognition The buying process is triggered when people recognize they have an unsatisfied need. An unsatisfied need arises when customers’ desired level of satisfaction differs from their present level of satisfaction. Visiting stores, surfing the Internet, and purchasing products are approaches to satisfying different types of needs.

Ask students how and when they recognized the need for a product they had never purchased before. Ask them how they analyzed how important that need was to them at that time.

See PPT 5-5

Types of Needs The needs motivating customers to go shopping and purchase merchandise can be classified as utilitarian or hedonic. Utilitarian needs are focused on accomplishing a specific task. Hedonic needs are needs for an entertaining, emotional, and recreational experience.

Ask students to provide examples of utilitarian and hedonic needs. Are utilitarian needs more important than hedonic needs? Why or why not?

Successful retailers attempt to satisfy both the utilitarian and hedonic needs of their customers. For utilitarian shoppers, retailers make the shopping experience easy and effortless. For hedonic shoppers, retailers attempt to provide a more stimulating and social experience. Some hedonic needs that retailers can satisfy include: Stimulation. Retailers use background music, visual displays, scents, and demonstrations in stores and malls to create a carnival-like, stimulating experience for their customers. Status and Power. Some customers have a need for status and power that is satisfied through shopping. Adventure. Some consumers go shopping because they enjoy finding bargains, looking for sales, and finding discounts or low prices. They treat shopping as a “game” to be won.

Ask students to indicate what benefits they got from their last shopping trip. Do their parents seek different benefits than they seek? Relate these benefits to stimulation, social experience, learning new trends, self-reward, and status and power.

1. Conflicting Needs

See PPT 5-7

Most customers have multiple needs. Moreover, these needs often conflict. Typically, customers make tradeoffs between their conflicting needs.

Ask students to describe a situation in which they had conflicting needs.

Because needs cannot be satisfied in one store or by one product, consumers may appear inconsistent in their shopping behavior.

Ask students if they ever engage in cross-shopping. Some examples of cross-shopping for products could be: (1) buying a stereo

Chapter 18 - Customer Service

The pattern of buying both premium and low-priced merchandise or patronizing expensive, status-oriented retailers and price-oriented retailers is called crossshopping.

system or a printer from a specialty store but buying the cables from a lower status retailer either at a store or through the Internet; (2) buying an expensive pair of shoes at a department store, but buying socks at a discount store; or (3) buying a mattress at a value-priced retailer but buying bed sheets from a department store.

2. Stimulating Need Recognition

Discuss with students how visual merchandising can impact a customer’s decision to purchase (either by buying more items than planned or buying complementary products or buying unplanned items on impulse).

Customers must first recognize unsatisfied needs before they are motivated to visit a store or go online to buy merchandise. Retailers use a variety of approaches to stimulate unmet needs. Advertising, e-mails, direct mail, publicity, and special events communicate the availability of new merchandise or special prices. Within stores, visual merchandising and salespeople can stimulate need recognition.

See PPT 5-9

Information Search Once customers identify a need, they may seek information about retailers, channels, or products to help them satisfy that need. 1. Sources of Information Customers have two sources of information: internal and external. Internal sources are information in a customer’s memory such as the names, images, and past experiences with different stores. External sources consist of information provided by a host of sources including search engines, such as Google; websites maintained by manufacturers and retailers; traditional media (e.g., advertising); blogs; product demonstrations on YouTube; friends; and social media.

Ask students to indicate various sources of information they use to locate an apartment to rent. What sources can apartment owners influence? What sources do they use when trying to decide which course or instructor to take?

The Internet has had a profound impact on consumers’ ability to gather external information. Consumers can gather this technology-aided information through specialized search 18-50 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service engines, mobile devices like cell phones, and online customer reviews. 2. Amount of Information Searched

See PPT 5-9

In general, the amount of information sought depends on the value customers feel they'll gain from searching versus the cost of searching.

Give examples of purchase decisions for which consumers need a lot of information (durables, medical treatment, etc.) and purchase decisions made with limited information (nondurables).

The value of the search is how it improves the customer's purchase decision. The costs of the search include both time and money. Today, technology can dramatically reduce the cost of information search. The amount of information search is affected by (1) characteristics of the individual customer and (2) aspects of the market and buying situation in which the purchase is made. Marketplace and situational factors affecting information search include (1) the number of competing brands and retail outlets and (2) the time pressure under which the purchase must be made. When competition is greater and there are more alternatives to consider, the amount of information searched for may increase. The amount decreases as time pressure increases.

Ask students if they have searched the Internet or a mobile device for information about a product, brand, or price. Did they feel that obtaining information from the digital sources was better than if they had engaged in physical visits to the stores? Why or why not? Which product categories do they most frequently engage in information search?

3. Reducing Information Search

See PPT 5-11

The retailer’s objective for customers in the information search stage is to limit the customer’s search to its store or website.

Ask students how retailers provide enough information so customers will not need to visit other outlets before making a purchase decision.

One measure of a retailer’s performance on this objective is the conversion rate, the percentage of customers who enter a store or access a website and then buy a product from that same store or website. Retailers must provide a good selection of merchandise so customers can find something to satisfy their needs within the store.

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Services provided by retailers can also limit the search. Everyday low pricing (EDLP) strategy is another way retailers increase the chance that customers will buy in their store and not search for a better price elsewhere. 4. Internet/Social Media/Mobile: Information Search and Price Competition The Internet in general, social media, and the increasing applications for mobile devices have had a profound impact on consumers’ ability to gather external information. Consumer reviews are emerging as a prime information source for shoppers as they collect information during the buying process. The Internet, social media, and mobile apps not only help online consumers collect price information but also give them information about the quality and performance of products, all at a low search cost which may mitigate the importance of price as customers may be willing to pay more for high-quality product. Evaluation of Alternatives: The Multiattribute Model

See PPT 5-13

The multiattribute attitude model provides a useful way for summarizing how customers use the information they have about alternative products, evaluate the alternatives, and select the one that best satisfies their needs.

See Ancillary Lecture # 5-1 and Ancillary Exercises 5-1 and 5-2.

The multiattribute attitude model is based on the notion that customers see a retailer, a product, or a channel as a collection of attributes or characteristics.

Have students use a multiattribute model to make a choice between buying fashionable clothing from a catalog and from a specialty store. Then make the comparison for basic jeans.

The model is designed to predict a customer's evaluation of a product, retailer, or channel based on (1) its performance on relevant attributes and (2) the importance of those attributes to the customer. Retail buyers can also use the multiattribute model to evaluate merchandise and vendors. 1. Beliefs about Performance

See PPT 5-16

The customer mentally processes the “objective” information about each retailer and forms an impression of the benefits each store provides.

Ask students what factors they consider in making a retailer choice to purchase groceries, get

Chapter 18 - Customer Service

Some benefits combine several objective characteristics.

a haircut, buy jeans, eat a meal, etc.

The degree to which each retailer provides benefits is represented on a 10-point scale, where 10 means the retailer performs very well in providing the benefit; 1 means it performs poorly. 2. Importance Weights The customer forms an overall evaluation of each retailer based on the importance he/she places on each benefit the retailer provides. The importance a customer places on a benefit can also be represented using a 10-point rating scale, with 10 indicating that the benefit is very important and 1 indicating that the benefit is very unimportant. The importance of a retailer’s benefits differs for each customer and may also differ for each shopping trip. In general, customers can differ on their beliefs about the retailer’s performance as well as their importance weights.

After listing the factors considered for a specific retailer choice, demonstrate how the importance weights differ across people by having students vote on what is most important in their decision. Show how weights can vary depending on the purchase situation. For example, ask students what are the most important characteristics of a restaurant when they want a quick bite between classes, when they want to take their parents to dinner during a campus visit, and when they want to impress a date?

3. Evaluating Retailers

See PPT 5-16

Research has shown that the customer’s overall evaluation of an alternative (retailer) is closely related to the sum of the performance beliefs multiplied by the importance weights.

Exhibit 5-3 provides an example of the evaluation of retailers.

The multiattribute attitude model doesn’t reflect customers’ actual decision processes, but it does predict their evaluation of alternatives and their choice. In addition, the model provides useful information for designing a retail offering. The same model can also be used to describe how a customer evaluates and selects merchandise in a store. In general, customers don’t thoroughly evaluate each alternative as suggested in the multiattribute model. They simply buy merchandise that’s good enough or very good on one particular attribute. They often don’t spend the time necessary to find the very best product.

Ask students for several examples of how they determine the “good enough” level in a retailer or product choice situation.

4. Implications for Retailers Retailers can use the multiattribute attitude model to improve 18-53 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service customers’ experience and encourage them to shop at the retailer more frequently. 5. Getting into the Consideration Set

See PPT 5-20

The retailer must make sure that it is included in the customer's consideration set. The consideration set is the set of alternatives the customer evaluates when making a choice of a retailer to patronize.

Ask students for their consideration sets for grocery purchases. What could a grocery retailer do to get into the students' consideration sets?

To be included in the consideration set, the retailer must develop programs to increase the likelihood that customers will remember it when they’re about to go shopping. After ensuring that it is in the consideration set, the retailer can use four methods to increase the chances that it will be selected for a visit. The retailer can (1) increase the belief about its performance, (2) change customers’ importance weights, (3) add a new benefit.

6. Changing Performance Beliefs The first approach involves altering customers’ beliefs about the retailer’s performance—increasing the retailer's performance rating on a characteristic. It is costly for a retailer to improve its performance on all benefits. Thus, a retailer should focus efforts on improving performance on benefits that are important to customers in its target market.

7. Changing Importance Weights Altering customers’ importance weights is another approach to influencing retailer choice. A retailer would want to increase the importance customers

The choice rule described in the text is a linear compensatory rule-good performance on one characteristic can overcome poor performance on other characteristics. Other choice rules involve using a cutoff--minimum acceptable performance. Ask students if they can think of a situation in which they use cutoffs to represent minimum acceptable performance. Ask students to indicate when their beliefs about a retailer's performance changed. Why did the belief change? What can retailers do to change beliefs? Why is it harder to change beliefs about a competing retailer than about yourself? Use automobiles to illustrate how importance weights change over time. Horsepower and size were very important 20 years ago. Now reliability, environmental impact, and gas mileage are important. Ask students if it is easier to change performance beliefs or importance weights. Why? Ask students to give an example of a retailer that has tried to change an importance weight on an attribute–either to make it more important because they are doing really well on that

Chapter 18 - Customer Service place on benefits for which the retailer has superior performance and decrease the importance of benefits for which it has inferior performance.

dimension or less important to customers because they are doing a poor job.

Typically, changing importance weights is harder than changing performance beliefs because importance weights reflect the customers' values. 8. Adding a New Benefit Retailers might try to add a new benefit to the set of benefits that customers consider when selecting a retailer. The approach of adding a new benefit is often effective because it’s easier to change customer evaluations of new benefits than old benefits.

Ask students to think of a retailer that has offered a new benefit--a benefit that customers previously did not consider when selecting a retailer.

Some retailers offer merchandise that is fair trade, meaning it is made by workers who are paid a fair wage, not just a minimum way. Offering fair trade merchandise is a benefit that is important to consumers who are concerned about the welfare of people in less developed countries. See PPT 5-22

Purchasing the Merchandise or Service Customers don't always purchase a brand or item of merchandise with the highest overall evaluation. The item offering the greatest benefits may not be available from the retailer or the customer may feel that the risks outweigh the potential benefits. One measure of a retailer’s success at converting positive evaluations to purchase is the number of real or virtual abandoned shopping carts in the retailer’s store or on its website.

Ask students to describe a situation in which they have abandoned a shopping cart online or in a store. What led to this choice? What could the retailer have done to prevent the abandoned cart in each instance?

Retailers can reduce the number of abandoned carts in several ways including: making it easier to purchase merchandise by making it readily available on mobile devices, reducing actual or perceived waiting time to purchase, providing sufficient information that reinforces the customer’s positive evaluation, and reducing perceived risks of the purchase through liberal return and refund policies. Finally, retailers often create a sense of urgency or scarcity to encourage customers to make a purchase decision. See PPT 5-23

Postpurchase Evaluation The buying process does not end when a customer purchases a product. After making a purchase, the customer consumes 18-55

Chapter 18 - Customer Service or uses the product and then evaluates the experience to determine whether it was satisfactory or unsatisfactory. Satisfaction is a postconsumption evaluation of how well a retailer or product meets or exceeds customer expectations. The postpurchase evaluation becomes part of the customer’s internal information that affects future retailer and product decisions.

Ask students to describe a situation in which they were dissatisfied after visiting a retailer. What could the retailer have done to satisfy them? Ask students to describe a satisfying experience. What did the retailer do to create this satisfying experience?

Consistently high levels of satisfaction build store and brand loyalty—important sources of competitive advantage for retailers. LO 5-2 Identify the different types of buying processes.

II. Types of Buying Decisions Three types of customer decision-making processes are extended problem solving, limited problem solving, and habitual decision making.

Ask students how they went about collecting information, deciding on a purchase, and making the purchase once they realized that they needed any of the following: (1) new music for their MP3 player (or smartphone) (2) jeans (3) sneakers (4) laptop (5) apartment to rent. If various product categories are used to generate discussion, the instructor may wish to use one side of the blackboard to list the comments generated about each product purchase decision. Later, as the lecture proceeds, different types of problem solving, different types of information search and evaluation, different influences on purchase, and different purchase contexts and postpurchase satisfactions could be elaborated for each of the products on which a discussion was generated at the outset.

Extended Problem Solving Extended problem solving is a purchase decision process in which customers devote considerable time and effort to

See PPT 5-24

Chapter 18 - Customer Service analyzing alternatives. Customers typically engage in extended problem solving when the purchase decision involves a lot of risk and uncertainty. There are many types of risks, which include financial risk, physical risks, or social risks. Consumers engage in extended problem solving when they are making buying decisions to satisfy an important need or when they have little knowledge about the product or service.

Ask students to provide an example of when they engaged in extended problem solving. When did they evaluate several retailers? Why did they evaluate several? Ask students for examples of financial, physical, and social risks.

Limited Problem Solving Limited problem solving is a purchase decision process involving a moderate amount of effort and time. Customers engage in this type of buying process when they have had some prior experience with the product or service and their risk is moderate. In these situations, customers tend to rely more on personal knowledge than on external information. They usually choose a retailer they have shopped with before and select merchandise they have bought in the past. The majority of customer decision making involves limited problem solving. One common type of limited problem solving is impulse buying, or unplanned purchasing, which is a buying decision made by customers on the spot after seeing the merchandise. Retailers encourage impulse buying behavior by using prominent displays to attract customer attention and stimulate a purchase decision based on little analysis.

See PPT 5-25 Ask students to provide an example of when they engaged in limited problem solving.

REFACT: Seventy percent of all supermarket purchases are unplanned, impulse purchases. By a show of hands, ask the class who shops with a "list" and who does not. Then ask each group about their purchases, impulse or planned.

See PPT 5-26 See PPT 5-25

Habitual Decision Making Habitual decision making is a purchase decision process involving little or no conscious effort. This decision process is used when decisions aren’t very important to customers and involve familiar merchandise they have bought in the past. Brand loyalty and store loyalty are examples of habitual decision making. Brand loyalty occurs when customers like and consistently buy a specific brand in a product category. Retailer loyalty means that customers like and habitually visit

Ask students to provide an example of when they engaged in habitual decision making (you might focus on the store choice decision, not the merchandise selection decision). Have students describe a situation when they switched from habitual decision

Chapter 18 - Customer Service the same retailer to purchase a type of merchandise.

making to limited or extended problem solving. Why did they switch? What can retailers do to get students who are not presently patronizing their stores to do so? Ask students to give examples of 1 or 2 items for which they are brand loyal. Compare the selections the students identified. What are the similarities and differences? What features of the product make the individual so brand loyal? Ask students their favorite store to buy jeans. Group the students together who answered with the name of the same store. Ask what makes them so brand loyal to that specific store. Compare their answers to the alternative answers offered. Compare and contrast the similarities and differences.

III. Social Factors Influencing the Buying Process Buying decisions are influenced by four influential social factors: the economy, family, reference groups, and culture.

LO 5-3 Summarize how the economy and social factors affect customer purchase decisions. See PPT 5-31 for an overview of the factors influencing customers’ buying decisions. See PPT 5-27

The Economy The state of the national and global economy has significant effects on the way people buy. When the global or national economies struggle or undergo recessions, consumers respond to the wider sense of uncertainty and risk by reducing their purchases or seeking more affordable options. When the economy is flourishing, people often are willing to spend more on luxury or hedonic products, and retailers have less need to offer price discounts to move their merchandise. 18-58

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On an international level, the economy also is critical. National economies ebb and flow in their strength relative to one another. See PPT 5-28

Family Many purchase decisions are made for products that the entire family will consume or use. Retailers must understand how families make purchase decisions and how various family members influence these decisions. When families make purchase decisions, they often consider the needs of all family members. In some situations, all family members may participate in the decision-making process. In others, one member of the family may assume the role of making the purchase decision.

Ask students to give an example of a purchase decision they made that was influenced by members of their family. One decision might be the choice of college to attend. How did the family influence the decision?

Children play an important role in family buying decisions. Retailers can attract consumers who shop with other family members by satisfying the needs of all family members.

If any students have children, ask them how their purchase decisions have changed since having kids.

Reference Groups A reference group is one or more people that a person uses as a basis of comparison for their beliefs, feelings, and behaviors. A consumer might have a number of different reference groups, although the most important reference group is the family. These reference groups affect the buying decision process by (1) offering information, (2) providing rewards for specific purchasing behaviors, and (3) enhancing a consumer’s selfimage.

See PPT 5-29

Ask students to give examples of their purchase decisions that are influenced by their reference groups. What are the different reference groups that influence their decisions?

Reference groups provide information to consumers directly through conversation or indirectly through observation. Some reference groups influence purchase behaviors by rewarding behavior that meets with their approval. By identifying and affiliating with reference groups, customers create, enhance, and maintain their self-image. Retailers are particularly interested in identifying and reaching out to those in a reference group who act as store advocates and actively influence others in the group. Store advocates are consumers who like a store so much they

Does any student consider him- or

Chapter 18 - Customer Service actively share their experiences with friends and family.

herself to be an advocate for a particular retailer? Why? Which retailer?

Culture Culture is the meaning, beliefs, morals, and values shared by most members of a society.

See PPT 5-30

As retailers expand beyond their domestic markets, they need to be sensitive to how cultural values affect customer needs and shopping behavior. IV. Market Segmentation To increase their efficiency, retailers identify groups of customers (market segments) and target their offerings to meet the needs of typical customers in that segment rather than the needs of a specific customer. A retail market segment is a group of customers who are attracted to the same retail mix because they have similar needs. The Internet enables retailers to efficiently target individual customers and market products to them on a one-to-one basis.

LO 5-4 Determine how and why retailers group customers into market segments. Ask students why retailers segment markets. What are examples of retailers who clearly appeal to a specific segment of customers? Describe the segment or segments of customers that buy Red Bull, shop at Baby Gap, buy hybrid cars, and eat at McDonald’s. See PPT 5-33

Criteria for Evaluating Market Segments Four criteria for evaluating whether a retail segment is a viable target market are (1) actionable, (2) identifiable, (3) substantial, and (4) reachable.

Having described the segments in the above question, evaluate each of the segments on the criteria listed.

1. Actionable

Ask students if this segment is actionable. Can a product or retail offering be developed that will appeal to this segment and not to other types of customers? Would you use unique advertising and media to influence this segment?

The fundamental criteria for evaluating a retail market segment are (1) customers in the segment must have similar needs, seek similar benefits, and be satisfied by a similar retail offering; and (2) those customers’ needs must differ from the needs of customers in other segments. Actionable means that the retailer should know what to do to satisfy needs for the consumers in the segment. 2. Identifiable Retailers must be able to identify the customers in a target

Ask students how they would identify people in this segment. Sometimes retailers do not need to specifically identify customers

Chapter 18 - Customer Service segment. Identifiability is important because this way the retailer can determine (1) the segment’s size and (2) the consumers to whom the retailer should target its communications and promotions.

in their target segment. They promote their stores to everyone and interested customers choose to visit the store. What are the advantages and disadvantages of using self-selection versus targeted promotions?

3. Substantial A target segment must have enough buying power to support a unique retailing mix. 4. Reachable Reachable means that the retailer can target promotions and other elements of the retail mix to consumers in the segment.

Ask students how they would reach people in this segment to tell them about a product or retail store. Which media could they use to reach them? See PPT 5-34

Approaches for Segmenting Markets 1. Geographic Segmentation Geographic segmentation groups customers according to where they live. A retail market can be segmented by countries or by areas within a country such as states, cities, and neighborhoods. Segments based on geography are identifiable, reachable, and substantial. However, when customers in different geographic segments have similar needs, it is inappropriate to develop unique retail offerings by geographic markets. 2. Demographic Segmentation. Demographic segmentation groups consumers based on easily measured, objective characteristics such as age, gender, income, and education. Demographic variables are the most common means to define segments because consumers in these segments can be easily identified and reached.

Ask students for examples of retailers who use geographic segmentation.

Discuss differences in merchandise students may expect to see at a sporting goods store in Florida versus a sporting goods store in Vermont.

Examples of retailers focusing on demographic segments are Home Depot (homeowners), Urban Outfitters (younger customers), McDonald's (families with young children). Ask students for other examples.

Demographics may not be useful for defining segments for some retailers.

Chapter 18 - Customer Service

3. Geodemographic Segmentation Geodemographic segmentation uses both geographic and demographic characteristics to classify consumers. This segmentation is based on the principle that “birds of a feather flock together.” One widely used tool for geodemographic market segmentation is the Tapestry Segmentation system developed and marketed by Environmental Systems Research Institute (ESRI) Geodemographic segmentation is particularly appealing to store-based retailers because customers typically patronize stores close to their neighborhood. Retailers can use geodemographic segmentation to select locations for their stores and tailor the assortment in the stores to the preferences of the local community.

Ask students if they can identify the different groups of people in their neighborhood based on demographics and behaviors.

Visit the ESRI website under Industries, Retail. After reviewing the various segments within retail, what areas would be most useful for stores? What segments were most interesting or would have the largest impact on today’s retailers?

4. Psychographic Segmentation Psychographic segmentation refers to how people live, how they spend their time and money, what activities they pursue, and their attitudes and opinions about the world in which they live.

Ask students to classify themselves, their parents, and their grandparents in terms of lifestyle segmentation.

Determining psychographics involves knowing and understanding three components: self-values, self-concept, and lifestyles. Self-values are goals for life; the overriding desires that drive how a person lives his or her life. Ask students to describe the People’s self-image, or self-concept, is the image people lifestyle of a couch potato. What ideally have of themselves. Lifestyles are the way we live. retailers focus on this segment? One of the most widely used consumer segmentation tools is What can retailers do to appeal to VALS (values of lifestyle survey), from Strategic Business this segment? Insights. The segments are described by two dimensions: (1) the consumers’ resources including their income, education, health, and energy level, and (2) personal orientation or what motivates them – principles, status, or actions. Lifestyle is useful because it identifies what motivates buying behavior. On the other hand, it is difficult to identify and access consumers in specific lifestyle segments and identify potential customers. See PPT 5-35

5. Buying Situation Segmentation 18-62

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Buying behavior of customers with the same demographics or lifestyle can differ depending on their buying situation, such as fill-in versus weekly shopping.

Contrast the differences in the buying situation target segments for convenience stores and supermarkets.

6. Benefit Segmentation

Relate benefit segments back to the multiattribute model. A benefit segment is composed of customers who attach a high importance weight to a specific characteristic or benefit.

Another approach for defining a target segment is to group customers seeking similar benefits; this method is called benefit segmentation. In the multiattribute attitude model, customers in the same benefit segment would have a similar set of importance weights on the attributes of a store or a product. Benefit segments are very actionable. But customers in benefit segments aren’t easily identified or reached.

See PPT 5-36

Composite Segmentation Approaches No one approach meets all the criteria for useful customer segmentation. Composite segmentation plans use multiple variables to identify customers in the target segment. They define target customers by benefits sought, lifestyles, and demographics.

Ask students to describe different groups of women (or men) shopping for moderate to good quality leisure clothing, based on their lifestyles, demographics, and benefit sought. What retailers target each segment more so than others?

V. Summary Consumers go through several stages when making a purchase decision: need recognition, information search, evaluation of alternatives, purchase, and postpurchase evaluation. The importance of the buying process stages depends on the nature of the customer’s decision (important-risky versus less important). The buying process of consumers is influenced by their personal beliefs, attitudes, and values, as well as by their social environment. To develop cost-effective retail programs, retailers group customers into segments with similar needs, characteristics, and lifestyles.

Chapter 18 - Customer Service ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS 11. GO SHOPPING Go to a supermarket and watch people selecting products to put in their shopping carts. How much time do they spend selecting products? Do some people spend more time than others? Why is this the case? Does consumer behavior vary in the store perimeter versus in the aisles? Explain your observations. Students may find a variety of shopping styles from this observational research trip. Some shoppers will have a list, some will go up and down each aisle, and others will go through the store in a more random pattern. Some consumers will shop alone, and others will shop with family members including young children. A great deal of time goes into planning the store layout. The store perimeter usually has heavy traffic with departments such as bakery, deli, meats, and dairy. The dry goods aisles have the lowest margins in the store and contain canned and packaged food and nonfood items. 12. INTERNET EXERCISE To better understand the segmentation classification of consumers, Strategic Business Insights has developed the VALS tool, which uses psychology to segment people according to their distinct personality traits. Go to the firm’s home page at http://www.strategicbusinessinsights.com/vals/presurvey.shtml, and take the survey to identify your VALS profile according to your values, attitudes, and lifestyle. According to the results, what is are your primary and secondary VALS profile types? Do you agree with your consumer profiles? Why or why not? How can retailers effectively use the results of this survey when planning and implementing their business strategies? “The purpose of the VALS™ survey is to identify the VALS type of the person taking the survey. That's it. To find out about a person's product ownership, media preferences, hobbies, additional demographics, or attitudes (for example, about global warming), the questions in the VALS survey integrate into larger questionnaires that ask about these topics. For example, the VALS questions integrate into MRI's nationally syndicated Survey of the American Consumer, which enables us to see the media preferences of each of the eight VALS types. The VALS questions also integrate into our own Consumer Financial Decisions' MacroMonitor survey, giving us in-depth information about how each VALS type uses, invests, and saves money.” Source: http://www.strategicbusinessinsights.com/vals/presurvey.shtml. Some students will strongly agree with their VALS profile, others will not. This is a good opportunity to discuss how retailers will use this tool to understand customers and plan business strategies in small groups. 13. INTERNET EXERCISE Retailers want to segment the market on the basis of the geographic classification of customers to select the best sites for business locations. Go to Claritas ZIP Code Look-up at https://claritas360.claritas.com/mybestsegments/, and type in the zip code for your hometown or your campus, and read the results. How would a retailer, such as a local restaurant, use the information in this report when deciding about whether to open a location in this zip code?

Chapter 18 - Customer Service “Claritas’ lifestyle segmentation systems define every household in the U.S. by distinct lifestyle types, called “segments”, to provide you with a comprehensive picture of who lives where and what they are like. Marketers use these insights to create more effective and efficient marketing strategies.” Source: https://claritas360.claritas.com/mybestsegments/#zipLookup “MyBestSegments ZIP Code Look-up lets you view your neighborhood’s household segments within any ZIP Code. Typically, a ZIP Code has over a dozen segments present, but to view your neighborhood’s top five segments, along with a descriptive snapshot about each segment’s characteristics for any Claritas segmentation system, simply enter your 5-digit ZIP Code.” Source: https://claritas360.claritas.com/mybestsegments/#zipLookup Results from this online tool will summarize household income and composition by age, race, and ethnicity in the selected zip code. Students should determine if they agree with these assessments or not. Retailers can use this information to determine the preferences and lifestyle characteristics of individuals in a certain area. Having this information can help a retailer determine if a certain location is populated with people from its target market. 14. INTERNET EXERCISE Go to one of the following Internet sites offering information about the latest fashions: Elle, Harper's Bazaar, Vogue, Allure, InStyle, Cosmopolitan, GQ, Esquire, etc. Write a brief description of the latest apparel fashions that are being shown by designers. Which of these fashion trends do you think will be popular with college students? Why? Students interested in fashion and apparel merchandising will really like this exercise. This is a chance to see the latest fashions and discuss where each is in the product life cycle. Responses to what will be popular with college students will vary by the trends and seasons. A great time to assign this question is during or immediately following New York City Fashion Week, https://nyfw.com/home/.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS Does the customer buying process end when a customer buys some merchandise? Explain your answer. No, the customer buying process does not end when a customer buys some merchandise. One of the most important stages of the buying process is the post purchase evaluation. This stage happens after the purchase takes place. Customers consume or use the merchandise and then evaluate their experience to determine whether it was satisfactory or unsatisfactory. The post purchase evaluation becomes part of the customer’s internal information that affects future store and product decisions. A satisfied customer may make repeat purchases, whereas an unsatisfactory experience can motivate customers to complain to the retailer and decide to patronize other stores. 15. What sources of information would consumers consult if they were buying a subscription box (food, cosmetics, clothes, etc.) for the first time? What subjective and objective criteria would be used to weigh alternatives? Many consumers will do a Google search to find the top-rated subscription boxes. One hit that may help a consumer new to this type of purchase would be, “The Best Subscription Boxes of 2021 Are Here!” at: https://www.mysubscriptionaddiction.com/best-subscription-boxes. Other consumers will ask friends and family about their experiences with this type of purchase. Others will read online reviews and feedback from similar shoppers. Some consumers will use the company website to collect needed information. Objective

Subjective

Price

Theme of the box

Number of merchandise/brand choices

Match to hobbies and lifestyle

Days and fees for shipping

Aesthetic of web page, box, and merchandise

Contents of box

Fit (if clothes), taste (if food), results (if personal care)

Inclusive sizes and colors Brands offered Services offered Trends Is a subscription required? Quality of services offered Are returns free? Are returns easy?

16. Considering the steps in the consumer buying process (Exhibit 5-1), describe how you (and your family) used this process to select your college or university. How many schools did you consider? How much time did you invest in this purchase decision? Who was involved in the decision? How satisfied are you with your decision? 18-66 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service To answer this question, students need to consider the following steps in the decision- making process: Need recognition—What stimulates the student to first think about going to college? What types of needs was the student attempting to satisfy by going to college? Information search—What information did the student collect about college and the different colleges? Who provided the information—the colleges through the mail or online, school counselors, friends, family, visits to the colleges? Evaluation of alternatives—What were the characteristics on which the students compared the various colleges? Did the student use something like a multiattribute model to compare the strengths and weaknesses of various alternatives? Choosing a college—What were the key factors influencing the final choice and what was the final choice? Post-choice evaluation—How satisfied is the student with the choice? Would the student recommend the college to a friend? 17. In this chapter, we discuss three CVS personalities: “Caroline,” a 18- to 24-year-old new mom with lower income; “Vanessa,” a 35- to 54-year-old women with children, at the peak of her income; and “Sophie,” a 55-plus empty nester with a median income and a health focus. How would a car dealer target each of these composite segments? A car dealer could use different positioning messages for each CVS personalities. For example, for “Caroline,” a small entry level car could be positioned as a safe and affordable alternative to public transportation. For “Vanessa,” a mid-priced minivan could be positioned as a safe choice with lots of storage space and cupholders. Finally, for “Sophie,” an expensive convertible car could be positioned as a reward for a successful life. 18. Any retailer's goal is to get customers in its store so that they can find the merchandise that they are looking for and make a purchase at this location. How could a sporting goods retailer ensure that the customer buys athletic equipment at its outlet? A sporting goods retailer can ensure that a customer buys athletic equipment in its store by helping customers decrease their information search. In general, retailers want to reduce the information search of customers when they are in the store. To do this, the retailer should first provide a good selection of merchandise so customers can find something to satisfy their needs within the store. Second, retailers should hire an educated staff to provide the needed information to customers when deciding on their equipment. Third, retailers should provide special services to reduce the decision process. This could include the availability of credit and delivery. Fourth, retailers could provide everyday low pricing to increase the chance that customers will buy in their store and not search for a better price elsewhere. 19. A family-owned used bookstore across the street from a major university campus wants to identify the various segments in its market. What approaches might the store owner use to segment its market? List two potential target market segments based on this segmentation

Chapter 18 - Customer Service approach. Then contrast the retail mix that would be most appropriate for the two potential target segments. Target segments defined on the basis of demographics might be: Students (younger segment) Faculty, Staff, and Administrators (older segment) Local residents with different demographic profiles such as gender, age, and education. Target segments based on lifestyles might be: 

Interest in outdoor recreation (travel, camping, fishing)



Interest in indoor hobbies and activities (leisure, entertainment, cooking, sewing, home repairs)



Adventuresome

Target segments based on the benefits sought and usage situation might be: 

Eclectic tastes in reading material



Interest in non-fiction or local authors



Textbooks vs. pleasure reading

Note that the target segment determines the nature of the merchandise offered. For example, a target segment of students for used books means that the store has to get information about tastes of the current batch of students at the university, what types of books they would be looking for (used versus new), and their price preferences. Also, the store needs to offer services like buying back books from students. This will serve at least two purposes: (1) replenishing stock of used books and (2) getting people back into the store. The store will be designed so that the books are well categorized according to type (textbooks, non-fiction, mysteries) and author(s). Not much personalized service needs to be provided, but the store could have facilities where the students and other customers can relax to browse the selection. 20. How does the buying decision process differ when consumers are shopping on the Internet or mobile device compared with shopping in a store in terms of locations or sites visited, time spent, and brands examined? When shopping online, customers might spend more time searching for information and evaluating alternatives. It is easier to visit more websites than it is to visit multiple stores unless customers are shopping in a mall. However, for time spent, customers might spend more time shopping in store than they do online, because they are engaged in the activity and are present in the location, whereas they might get distracted when shopping online. 21. Using the multiattribute attitude model, identify the probable choice of a local care dealer for a young, single woman and for a retired couple with limited income (see the accompanying table). 18-68 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service What can the national retail chain do to increase the chances of the retired couple patronizing its dealership? Importance Weights Performance Attributes

Performance Beliefs

Young,

Retired

Local Gas

National

Local Car

Single Woman

couple

Station

Service Chain

Dealer

Price

Time to complete repair

Reliability

Convenience

Using the multiattribute model (importance weights multiplied by price and summed over all the characteristics), we get the following overall evaluation scores for each outlet by each segment:

Segment

Local Gas Station

National Service Chain

Local Car Dealer

Young, Single Woman

154

122

Retired Couple

142

226

170

The probable choice of an automobile repair outlet for a single woman would be the local car dealer. The probable choice for a retired couple with limited income would be a national service chain. 22. Think of a recent purchase that you made and describe how economic and social environmental factors (e.g., reference group, family, and culture) influenced your buying decision. How are retailers using social media to impact your buying decisions? Economy- based on the changes in the national and global economy, consumers have changed their buying habits. Many consumers are now searching for more discounts and bargains and are placing more emphasis on products with higher quality and more value. Culture – values and behaviors in a society. Different cultures put importance on different values. Subculture – distinctive groups within a culture such as nationality, racial, ethnic, religious groups Reference groups – membership groups, professional associations, and religious group. By identifying with a reference group, consumers create or maintain their self-image. Example: Outdoorsy lifestyle, L.L. Bean. 18-69 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Family – parents, spouse, and children. Many purchases are made for products that the entire family will use. Example: vacation with or without children. All can result in different retailers and brands being selected. Students may have experience with Facebook or other social media sites. These sites can influence consumer buying behavior depending on how much people value the information posted. Some consumers value the information from a trusted friend or expert in the field and therefore trust their opinions, reviews, and recommendations when making a purchase decision. 23. Think about the merchandise sold at Office Depot/OfficeMax and Staples, and list three to four types of merchandise that fall into extended problem solving, limited problem solving, and habitual decision making for college students. Explain how the categories of merchandise would change for each type of buying decision if the customer was the owner of a medium-sized business. As marketers we examine the level of involvement and amount of time a consumer spends in the buying process. Depending on the significance of the purchase, consumers will be more or less involved in the purchase process with varying amounts of time and research. Extended Problem Solving – considerable time, complex, unfamiliar, and significant, less frequently purchased, considerable risk, and uncertainty. Customers will spend more time and effort to collect information and thoroughly evaluate alternatives. Consumers may visit several retailers before making a purchase decision. Examples: computers, printers, and office furniture. Limited Problem Solving – involves a moderate amount of effort and time. Customers may have some prior experience in buying this type of product. They may consider a new brand. If the product is unfamiliar, they will gather more information. Retailers can aid customers by offering the information required. Examples: software, electronics, and storage items. Habitual/Routine Decision Making – low involvement, simple, inexpensive, familiar, buy frequently. Can lead to brand loyalty. If the consumer need was satisfied in the past, the buyer will likely buy the same brand again. Store loyalty can also be created when the consumer routinely visits the same store to purchase merchandise. Many retailers implement programs such as bonus cards and private-label brands to increase store loyalty. Examples: paper, ink, file folders. A medium-sized business would likely use a more rational approach to buying with specific criteria. Individuals would consider rational and emotional criteria. The medium-sized business would also likely buy in bulk and reorder when supplies drop to a designated level.

Chapter 18 - Customer Service APPENDIX 5A I. Customer Buying Behavior and Fashion 

To sell fashion merchandise profitably, retailers need to (1) understand how fashions develop and diffuse throughout the marketplace and (2) use operating systems that enable them to match supply and demand for this seasonal merchandise.



Fashion is a type of product or a way of behaving that is temporarily adopted by a large number of consumers because the product, service, or behavior is considered socially appropriate for the time and place

Ask students to discuss the latest trends they see other students wearing. Compare these trends to what their parents or older siblings are wearing.

II. Customer Needs Satisfied by Fashion People use fashions to both develop their own identity and gain acceptance from others; however, these can be opposing forces. To satisfy these conflicting needs, manufacturers and retailers offer customers designs that are fashionable but that still enable consumers to express their individuality. Consumers also adopt fashions to overcome boredom.

Fast Fashion has been a tremendous success in supplying consumers with “fresh trend-right fashions at an affordable price.” What is the price that is paid by the environment to have a constant flow of fashion products to meet the needs of a bored consumer?

III. How Do Fashions Develop and Spread? Fashions are not universal. A fashion might be accepted in one geographic region, country, or age group and not in another. The time span of a fashion life cycle varies depending on the type of product and the market.

Ask students from different backgrounds to discuss the current “fashions” in their own cultures. What are some similarities and differences?

The stages of the fashion cycle include creation, adoption by fashion leaders, spread to larger consumer groups, saturation, decline in acceptance, and obsolescence. A. Creation New fashions arise from several sources including fashion designers, creative consumers, celebrities, and even retailers.

Chapter 18 - Customer Service

B. Adoption by Fashion Leaders Initial adopters of a new fashion are called fashion leaders, innovators, or trendsetters, and they are the first people to display the new fashion in their social group or write about them in social media. Three theories have been proposed to explain how fashion spreads within a society including trickle-down, massmarket, and subculture.

Discuss with students the impact of fashion that comes from celebrities in film, sports, and social media. What impact do influencers and bloggers have on fashion trends?

These theories of fashion development indicate that fashion leaders can come from many different places and social groups. C. Spread to Large Consumer Groups The fashion becomes increasingly visible, receives greater publicity and media attention, and is readily available in retail stores. Compatibility is the degree to which the fashion is consistent with existing norms, values, and behaviors. Complexity refers to how easy it is to understand and use the new fashion.

Ask students what fashions they would most likely find in a luxury store, discount store, and off-price retailer. Compare fashions in Neiman Marcus and Macy’s. Compare fashions in Urban Outfitters and J. Crew.

Trialability refers to the costs and commitment required to adopt the fashion initially. Observability is the degree to which the new fashion is visible and easily communicated to others in the social group. D. Saturation All consumers in the target market are aware of the fashion and have decided to either accept or reject it, which makes the fashion become old and boring to many people. E. Decline in Acceptance and Obsolescence When fashions reach saturation, they have become less appealing to consumers. The introduction of a new fashion speeds the decline of the preceding fashion.

Chapter 18 - Customer Service ANCILLARY LECTURES AND EXERCISES Lecture # 5-1

THE MULTIATTRIBUTE MODEL

Instructors’ Note: This lecture can be used to demonstrate a model designed to predict a customer’s evaluation of a product or retailer based on their performance on several attributes and the importance of those attributes to the customer. PowerPoint slides are available to accompany this lecture. Introduction 

The multiattribute model is based on the notion that customers see a retailer or a product as a collection of attributes or characteristics.



Customers collect and review information about alternative products or retailers, evaluate the alternatives, and select one that best satisfied their needs.



A multiattribute attitude model provides a useful way to look at the customer's evaluation process.



The model is designed to predict a customer's evaluation of a product, or a retailer based on their performance on several attributes and the importance of those attributes to the customer. Buyers can also use the multiattribute model to evaluate merchandise and vendors.

Beliefs about performances 

A customer considering shopping at three retailers mentally processes the “objective” information about each of the retailers and forms an impression of the benefits the retailer provides.



His or her beliefs about these benefits may be a combination of several objective characteristics. For example, the convenience benefit is a combination of travel time, checkout time, and check-cashing privileges. Price of the groceries and double coupons affect the perception of the economy of shopping at the stores.



The degree to which the retailer provides the benefits is represented on a 10-point scale. 10 means that the retailer performs well in providing the benefits; 1 means that the retailer performs poorly.

Importance weights 

A customer may develop an overall evaluation of each retailer based on the importance he/she places on each of the benefits provided by the retailers. For example, the importance a customer places on a benefit can also be represented using a 10-point rating scale, with 10 indicating that the benefit is very important and 1 indicating that the benefit is very unimportant.



Using this rating scale, the importance of the retailer benefits for a young woman and a parent with four children are shown in the accompanying exhibit, along with the performance beliefs previously discussed. 18-73

Chapter 18 - Customer Service Choice of Alternatives 

For the young woman, the Internet grocer has the highest score, and thus the most favorable evaluation. However, the Supercenter has the highest score for the parent, who would probably buy the family's weekly groceries there.



Note that even though the multiattribute model does not reflect the customer’s actual decision process, it does predict their evaluation of alternatives and their choice



The model provides useful information for designing a retail offering.



The same model can also be used to describe how a customer evaluates and selects merchandise. This demonstrates that, generally, once customers find a product that will satisfy their needs, they will stop searching.

Implications for retailers 

First, the model indicates what information customers use to make their decision about which retailer to patronize. Thus, to develop a program for attracting customers, the retailer needs to do market research to collect the information listed below.

1. Getting into the consideration set The retailer must make sure that it is included in the customer's consideration set. The consideration set is the set of alternatives the customer evaluates when making a selection. To be included in the consideration set, the retailer must develop programs to increase the likelihood it will be remembered and thought about when customers are about to shop. After ensuring that it is in the consideration set, the retailer can use four methods to increase the chances that it will be selected for a visit. 1) Increase the belief about its retailer's performance, 2) Decrease the performance belief for competing retailers in the consideration set, 3) Increase customers' importance weights, or 4) Add a new benefit. 2. Changing performance beliefs The first approach involves altering customer's beliefs about the performance of the retailer--increasing the retailer's performance rating on a characteristic. For example, the supermarket would want to increase its overall rating evaluation by improving its ratings on all four benefits. The supermarket could improve its rating on economy by lowering prices and improve its rating on store environment by modernizing the store, making sure the store is clean and neat. It is very costly for a retailer to improve its performance on all benefits. Thus, a retailer typically needs to focus efforts on improving performance on benefits that are important to customers in its target market. A change in performance belief on an important benefit results in a large change in customers’ overall evaluation. Another approach is to try to decrease customers' performance ratings of a competing retailer. This approach may be illegal and usually isn't very effective because customers typically don't believe a firm’s negative comments about its competitors. 3. Changing importance weights

Chapter 18 - Customer Service Altering customers’ importance weights is another approach to influencing retailer choice. A retailer would want to increase the importance customers place on benefits on which the retailer has superior performance or decrease the importance on benefits on which it has inferior performance. Typically, changing importance weights is more difficult than changing performance beliefs because the importance weights reflect the customers' values. 4. Adding a new benefit The retailer might try to add a new benefit to the set of benefits that customers consider when selecting a retailer. For example, since JCPenney is a national department store, customers can purchase a gift at their local store and send it to a person in another part of the country knowing that the recipient can exchange it at their local store if desired. This approach of adding a new benefit is often effective because it's easier to change customer evaluation of new benefits than old benefits.

Chapter 18 - Customer Service ANCILLARY EXERCISE # 5-1: USING THE MULTIATTRIBUTE MODEL FOR CHOOSING A STORE ------------------------------------------------Instructor’s Note: This exercise is intended to give students the opportunity to use the multiattribute model found in the text. Instructors might want to use this lecture as a stimulus to a class discussion on the topic. ------------------------------------------------Instructions 

Pick a student who has recently made a store choice decision -- such as choosing a retailer to buy jeans, get a haircut, buy groceries, or eat a meal.



Then go through the following steps:



Have the student indicate the two or three retailers he/she considered and write these names on the top of the two columns.



Have the student indicate factors he/she considered in choosing the retailers.



Typical factors are convenience (location), price of merchandise, availability of specific items, offering credit, service, etc.



List these benefits offered on the row in the left-hand column.



Ask the student which characteristics or benefit is the most important to him/her and give that benefit a 10 in the importance weight column.



Then have the student indicate the importance of the other characteristics using a 10-point scale where 10 means very important and 1 means not very important.



Now have the student rate each retailer on each characteristic using a 10-point scale where 10 means excellent performance and 1 means poor performance.



Now multiple the importance weights times the performance beliefs for each characteristic and calculate a total score for each retailer.



Ask the student which store he/she went to.



The student typically will have gone to the retailer with the highest score.

Chapter 18 - Customer Service ANCILLARY EXERCISE # 5-2 Using the multiattribute attitude model and the following information, identify the probable choice of a retail store for a young single businesswoman and for a retired couple with limited income buying a TV set. IMPORTANCE WEIGHTS CHARACTERISTIC

YOUNG SINGLE

PERFORMANCE BELIEFS RETIRED COUPLE

DISCOUNT STORE

DEPART-

CATEGORY SPECIALIST

MENT STORE Price

Services

Assortment

Shopping environment

young single

177

164

retired couple

140

122

208

The young single person would get more benefits from the department store and thus choose it over the discount store and the category specialist. The retired couple would choose the category specialist.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective

Consumer Buying Process

Timeline; Matching (accessible version)

Buying Process

5-1 Describe the process that consumers go through when making retail patronage and buying decisions.

Scott's Cook SpotMarket Segmentation

Case Analysis

Market Segmentation

5-4 Determine why and how retailers group customers into market segments.

The Camp Car in the U.S. Market

Case Analysis

Buying Process

5-1 Describe the process that consumers go through when making retail patronage and buying decisions.

Market Segmentation Tool

Case Analysis

Market Segmentation

5-1 Describe the process that consumers go through when making retail patronage and buying decisions.

Types of Buying Decisions

Click and Drag; Matching (accessible version)

Consumer Decision Process

5-2 Identify the different types of buying processes.

Approaches for Segmenting Markets

Click and Drag; Matching (accessible version)

Market Segmentation

5-4 Determine why and how retailers group customers into market segments.

CHAPTER 6 RETAIL MARKET STRATEGY



ANNOTATED OUTLINE Retail strategy contains three important elements: (1) the target market segment, (2) the retail format, and (3) the

INSTRUCTOR NOTES

Chapter 18 - Customer Service retailer’s bases of sustainable competitive advantage. LO 6-1 Define retail strategy.

I. What Is a Retail Strategy? 

The term strategy is frequently used in retailing. For example, retailers talk about their merchandise strategy, promotion strategy, location strategy, and private-brand strategy.



Retail strategy isn’t just another synonym of retail management.

Ask students to list all the decisions a retailer makes. Now determine which are strategic and which are tactical. Why?

A. Definition of Retail Market Strategy 

A retail strategy is a statement identifying (1) the retailer's target market, (2) the format and resources the retailer plans to use to satisfy the target market's needs, and (3) the bases on which the retailer plans to build a sustainable competitive advantage.



The target market is the market segments(s) toward which the retailer plans to focus its resources and retail mix.



A retail format describes the nature of the retailer’s operations—its retail mix (type of merchandise and services offered, pricing policy, advertising and promotion programs, approach to store design and visual merchandising, typical locations, and customer services) — that it will use to satisfy the needs of its target market.



A sustainable competitive advantage is an advantage the retailer maintains over its competition that is not easily copied by competitors and thus can last over a long period of time.

II. Central Concepts in a Retail Market Strategy 

The retail market strategy involves (1) the selection of target market segment(s), (2) the selection of a retail format (the elements in the retailer’s retail mix), and (3) the development of a sustainable competitive advantage that enables the retailer to reduce the level of competition it faces.

LO 6-2 Illustrate how retailers build a sustainable competitive advantage.

See PPT 6-5, 6-6

A. Target Market and Retail Format 

See PPT 6-3

A retail market segment is a group of consumers with similar needs and a group of retailers that satisfy those

Ask students for local retailers that compete directly against each other. What is the target market

Chapter 18 - Customer Service needs using similar retail channels and format

of the retailers? What is the retail format used?

Review different ways that markets can be segmented -target market segments can be defined (see Chapter 4) as: geographic, demographic, psychographic, buying situation, etc. Review Exhibit 6-1 for retail formats and market segments. See PPT 6-7, 6-8

B. Building a Sustainable Competitive Advantage 

The final element in a retail strategy is the retailer's approach to building sustainable competitive advantage.



Some advantages are sustainable over a long period of time while others can be duplicated by competitors almost immediately. Establishing a competitive advantage means that a retailer, in effect, builds a wall around its position in the retail market.



Over time, all advantages will be eroded due to these competitive forces.



Three approaches for developing a sustainable competitive advantage are (1) building strong relationships with customers, (2) building strong relationships with suppliers, and (3) achieving efficient internal operations.

What is the effect of cutting prices in the long term? What will competitors do? What happens if they also cut prices?

Ask students to list the number of ways a retailer can get customers to buy from them rather than their competitors. Now, indicate which methods are sustainable -difficult for competitors to match easily. Why?

C. Relationships with Customers—Customer Loyalty 



Customer loyalty means that customers are committed to buying merchandise and services from a particular retailer. Loyalty is more than simply liking one retailer over another. Loyalty means that customers will be reluctant to switch and patronize competitive retailers.

See PPT 6-9 Ask students if they are loyal to any retail outlet. Why are they loyal to that outlet? What can a retailer do to build loyalty?

Some ways that retailers build customer loyalty include building a strong brand image, creating a unique positioning in the target market, offering unique merchandise, providing excellent customer service, implementing a customer relationship management 18-80

Chapter 18 - Customer Service program, and building a retail community. See PPT 6-10

1. Brand Image 

Retailers build customer loyalty by developing a wellknown, attractive image of their brands and of the name over their doors.



Strong brand images facilitate customer loyalty because they reduce the risk associated with purchases.



Retail brands also facilitate store loyalty because they can create an emotional tie wth a customer that leads the customer to trust the retailer.

2. Positioning. 



Positioning is the design and implementation of a retail mix to create an image of the retailer in the customer's mind relative to its competitors. A perceptual map is frequently used to represent the customer's image and preference for retailers.

Which retail brands are students familiar with? Which do they prefer over manufacturers’ brands? Why?

PPT 6-11 shows a hypothetical perceptual map of the women's apparel market. Describe the positions of the retailers and segment ideal points. Ask students what retailer customers in segment 5 prefer most. What store is seen as most similar to Neiman Marcus? Most similar to Target?

3. Unique Merchandise 

Private-label brands (also called store brands or own brands) are marketed by and available only from that retailer to keep customers loyal.



Loyalty is created through unique merchandise provided by a retailer, offering specific items that customers cannot find anywhere else; they also reinforce that appeal by providing dedicated in-store experiences that match the unique products.

4. Customer Service 

Retailers also can develop customer loyalty by offering excellent customer service. Consistently offering good service is difficult because retail employees will always be less consistent than machines.

5. Customer Relationship Management Programs 

Customer relationship management (CRM) programs, also 18-81

Chapter 18 - Customer Service called loyalty or frequent-shopper programs, are activities that focus on identifying and building loyalty with a retailer’s most valued customers.

See PPT 6-13

6. Building a Retail Community Using Social Media 

Some retailers use their websites and social media to develop retail communities. A retail community is a group of consumers who have shared involvement with a retailer.

D. Relationships with Suppliers 

A second approach for gaining a competitive advantage is to develop strong relationships with companies that provide merchandise and services to the retailer, such as real estate developers, advertising agencies, and transportation companies. Of these relationships with suppliers, the most important are relationships with vendors. Relationships with vendors, like relationships with customers, are developed over a long time and may not be easily offset by a competitor.

See PPT 6-14 Discuss the example of Proctor and Gamble’s relationship with Walmart. How does this relationship benefit both Walmart and P&G?

E. Efficiency of Internal Operations 

Efficient internal operations enable retailers to have a cost advantage over competitors or offer customers more benefits than competitors at the same cost, which gives retailers a competitive advantage.

35. Human Resource Management

See PPT 6-15



Retailing is a labor-intensive business in which employees play a major role providing services to customers and building customer loyalty.



Knowledgeable and skilled employees committed to the retailer's objectives are critical assets that support the success of the company.

Discuss how employee commitment to the retailer appears to be varied at different stores frequented by students, as evident by employee turnover, interactions with employees, etc. In tight labor markets, and since retailing offers relatively lowpaying jobs, at least at the lower levels, what can management do to maintain effective, committed employees? How does effective HR help develop a competitive advantage?

Chapter 18 - Customer Service 36. Distribution and Information Systems 



See PPT 6-15

All retailers strive to reduce operating costs. They want to get their customers the merchandise they want, when they want it, in the quantities that are required, at a lower delivered cost than their competitors. Retailers can achieve these efficiencies by developing sophisticated distribution and information systems. Purchase data collected by information systems provide an opportunity for retailers to tailor store merchandise assortments to the market served by each of its stores and to tailor promotions to the specific needs of individual customers.

See PPT 6-16

F. Location 

Ask students to describe their experience at a store where they could not find the product/brand they wanted. If they contacted a store employee, how did this employee respond? Evaluate and discuss.

Location is the critical factor in consumer selection of a store. It is also a competitive advantage that is not easily duplicated.

Ask the class to identify the locations of the nearest McDonald’s, Wendy’s, and Burger King. Who was in the location first? Describe that specific locale in terms of traffic patterns, etc. Why can location provide a sustainable advantage? Which local retailers have a good location? A poor location? Why? Ask students if the importance of a location differs based on the product category or shopping experience.

G. Multiple Sources of Advantage 

To build an advantage that is sustainable for a long period of time, multiple approaches are required by retailers to build as high a wall around their position as possible. LO 6-3 Classify the different strategic growth opportunities retailers pursue.

III. Growth Strategies A. Growth Opportunities 

Four types of growth opportunities that retailers may pursue are market penetration, market expansion, retail

See PPT 6-18

Chapter 18 - Customer Service format development, and diversification. McDonald's original market was families with young children, and its format was selling hamburgers and french fries in stand alone stores at lunch and dinner time. How would you classify these opportunities McDonald's pursued: breakfasts; locations in office buildings; locations in schools; adding salads to the menu; adding pizza to the menu; opening up seafood restaurants to compete against Red Lobster? 1. Market Penetration 

A market penetration growth opportunity involves directing investments toward existing customers using the present retailing format. Approaches for increasing market penetration include attracting new customers by opening more stores in the target market or opening the stores for longer hours.

Consider the Gap, Lands’ End, and Target. What would be examples of market penetration opportunities they could pursue?



Cross-selling means that sales associates in one department attempt to sell complementary merchandise from other departments to their customers. More crossselling increases sales from existing customers.

See PPT 6-20

See PPT 6-21

2. Market Expansion 

A market expansion growth opportunity employs the existing retailing format in new market segments. Consider the Gap, Lands’ End, and Target. What would be examples of market expansion opportunities they could pursue? Examples of market expansion are Target opening stores in urban city centers and the Gap starting Gap Kids. See PPT 6-22

3. Retail Format Development 

A retail format development growth opportunity involves developing a new retail format—a format with a different 18-84

Chapter 18 - Customer Service retail mix—for the same target market. 

Adjusting the type of merchandise or services offered typically involves a small investment, while providing an entirely different format, such as a store-based retailer going into electronic retailing, requires a much larger and riskier investment.

Have the class discuss examples of a retailer adding additional merchandise categories or altering the breadth and depth of the assortment in its stores. Then discuss the pros and cons of this strategy. What type of financial investment would it take? What retailers would benefit from this? Describe their target markets. Consider the Gap, Lands’ End, and Target. What would be examples of format development opportunities they could pursue? Examples of format development are Targett starting a discount home improvement center and Lands’ End opening retail stores.

4. Diversification 

A diversification growth opportunity involves a new retail format directed toward a market segment that is not currently served by the retailer.

Consider the Gap, Lands’ End, and Target. What would be examples of diversification opportunities they could pursue?

a. Related versus Unrelated diversification 

Diversification opportunities are either related or unrelated.



In a related diversification opportunity, the retailer’s present target market and retail format share something in common with the new opportunity. This commonality might entail purchasing from the same vendors, operating in the same location, using the same distribution or management information system, or advertising in the same newspapers to similar target markets.



In contrast, an unrelated diversification opportunity has little commonalty between the retailer’s present business and the new growth opportunity.



Vertical integration is diversification by retailers into wholesaling or manufacturing.



Note that designing private-label merchandise is a related diversification because it builds on the retailer’s knowledge

Discuss the example of Home Depot’s building supply business called HD Supply. This is an example of related diversification because the targeted customers (contractors) would be similar to the customers that shop using Home Depot’s existing retail mix.

For the Gap, Lands’ End, and Target, what would be examples of related versus unrelated diversification opportunities? What about Sears buying a

Chapter 18 - Customer Service of its customers, but making the merchandise is considered manufacturer of home an unrelated diversification. appliances? IV. Global Growth Opportunities 



International expansion is one form of a market expansion strategy. By expanding internationally, retailers can increase their sales, leverage their knowledge and systems across a greater sales base, and gain more bargaining power with vendors. However, each country has unique challenges for expansion. International expansion is risky because retailers using this growth strategy must deal with differences in government regulations, cultural traditions, different supply chain considerations, and languages.

LO 6-4 Identify issues that arise as domestic retailers become global retailers. See PPT 6-24 Ask students to generate international growth opportunities for The Gap, Under Armour, Walmart, and a regional grocery store chain. Discuss why different opportunities might be attractive to each of these retail chains.

A. Attractiveness of International Markets 



Three factors that are often used to determine the attractiveness of international opportunities are (1) the potential size of the retail market in the country, (2) the degree to which the country does and can support the entry of foreign retailers engaged in modern retail practices, and (3) the risks or uncertainties in sales and profits. Factors that positively or negatively impact the decision to expand globally include country potential, country support, and country risk.

Which U.S.-based retailers have been successful going global? Which non-U.S. based retailers have been successful in the U.S.? Discuss Exhibit 6-5, Indicators of the Potential, Support, and Risk in International Markets for countries like China, India, and Brazil.

1. India 

The unorganized retailing sector includes small independent retailers. Less than 5 percent of India’s retail sales are through organized retail channels.



World’s largest democracy, with myriad cultures and 22 official languages.



Government regulations are a barrier to entry for retailers.

2. China 

Government restrictions are much less onerous in China than in India, and direct foreign investment is encouraged.



Doing business is still a challenge due to operating costs, the difficulty of finding managerial talent, and an 18-86

Chapter 18 - Customer Service undeveloped and inefficient supply chain. 3. Brazil 

Brazil has the largest population and strongest economy in Latin America.



A country of many poor people and a few very wealthy families. Wealthy Brazilian are approximately 10 percent of the population, this equates to 20 million people, a market just a little smaller than all of Australia.

4. Russia 

Impediments to market entry are less visible but more problematic: corruption, logistical challenges, international sanctions.



However the market simply is too big for most retail firms to ignore. See PPTs 6-28

B. Keys to Success in Global Retailing 

Four characteristics of retailers that have successfully exploited international growth opportunities are (1) a globally sustainable competitive advantage, (2) adaptability, (3) a global culture, and (4) financial resources.

37. Globally Sustainable Competitive Advantage 

Entry into nondomestic markets is most successful when the expansion opportunity builds on the retailer’s core bases of competitive advantage.

38. Adaptability 

Successful global retailers recognize cultural differences and adapt their core strategy to the needs of local markets.

39. Global Culture 

Global retailers must think globally. It is not sufficient to transplant a home-country culture and infrastructure to another country.

40. Financial Resources 

Expansion into international markets requires a long-term

Ask students why expanding into a new market might require more financial resources than

Chapter 18 - Customer Service commitment and considerable up-front planning. 

Retailers find it very difficult to generate short-term profits when they make the transition to global retailing. See PPT 6-30

C. Entry Strategies 

expanding into an existing market.

Four approaches that retailers take when entering nondomestic markets are direct investment, joint venture, strategic alliance, and franchising.

Have the students choose a retailer who has or could go global. Ask them to choose and justify an entry strategy.

1. Direct Investment 

Direct investment involves a retail firm investing in and owning a division or subsidiary that builds and operates stores in a foreign country.



This entry strategy requires the highest level of investment and exposes the retailer to significant risks, but has the highest potential returns.

Identify the products/services/conditions for which the retailer would prefer the direct control over global operations offered by a direct investment strategy.

2. Joint Venture 

A joint venture is formed when the entering retailer pools its resources with a local retailer to form a new company in which ownership, control, and profits are shared.



A joint venture reduces the entrant’s risks. The local partner understands the market and access to resources – vendors and real estate.



Problems with this entry approach can arise if the partners disagree or the government places restrictions on the repatriation of profits.

Would a retailer be more likely to use a joint venture when entering Canada or when entering China? Discuss.

3. Strategic Alliance 

A strategic alliance is a collaborative relationship between independent firms. For example, a foreign retailer might enter an international market through direct investment but develop an alliance with a local firm to perform logistical and warehousing activities.

Strategic alliances are often used for learning about a country's unique environment and other business conditions.

4. Franchising 

Franchising offers the lowest risk and requires the least investment. However, the entrant has limited control over 18-88

Chapter 18 - Customer Service the retail operations in the foreign country, profit potential is reduced, and the risk of assisting in the creation of a local domestic competitor is increased. V. The Strategic Retail Planning Process 

The strategic retail planning process is the set of steps that a retailer goes through to develop a strategy and plan.



It describes how retailers select target market segments, determine the appropriate retail format, and build sustainable competitive advantages.



The planning process can be used to formulate strategic plans at different levels within a retail corporation.

LO 6-5 Know the steps retailers go through to develop a strategic plan. PPT 6-32 charts the steps in the strategic planning process. Go through the various stages of the planning process for a local retailer or pick an idea for a new retail business and develop a strategic plan for the business.

A. Step 1: Define the Business Mission 

The mission statement is a broad description of a retailer's objectives and the scope of activities it plans to undertake. It should define the general nature of the target segments and retail formats that the firm will consider.



In developing the mission statement, managers must answer five questions: (1) What business are we in? (2) What should be our business in the future? (3) Who are our customers? (4) What are our capabilities? (5) What do we want to accomplish?

Why does a retailer need to have a formal mission statement? Define a mission for Walmart.

Have students find mission statements for some of their favorite retailers. Are the mission statements aligned with the positioning of the retailer? Define a mission for your college or university.

See PPT 6-35

B. Step 2: Conduct a SWOT Analysis 

A SWOT Analysis involves an analysis of the retailer’s internal environment (strengths and weaknesses) and external environment (opportunities and threats),

Conduct SWOT analysis for any department store most familiar to students.

Internal Environment 

The internal analysis identifies the retailer’s strengths and weaknesses—the retailer’s unique strategic capabilities 18-89

Chapter 18 - Customer Service relative to its competition. 

These unique capabilities are the assets, knowledge, and skills that the retailer possesses, such as the loyalty of its customers and the quality of its relationships with its vendors.

41. External Environment 

The external analysis identifies the retailer’s opportunities and threats—the aspects of the environment that might positively or negatively affect the retailer’s performance.



These factors associated with the market, competition, and environment dynamics are typically beyond the retailer’s control.



Market factors: The attractiveness of a target market in which a retailer is involved or considering is affected by the size of the market, market growth, cyclicality of sales, and seasonality.

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Competitive factors: The nature of the competition in retail markets is affected by barriers to entry, the bargaining power of vendors, and competitive rivalry. Retail markets are more attractive when barriers to entry are high.

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Barriers to entry are conditions in a retail market that make it difficult for firms to enter the market. These conditions include scale economies, customer loyalty, and the availability of great locations.



Scale economies are cost advantages due to a retailer's size. Markets dominated by large competitors with scale economies are typically unattractive.

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Retail markets dominated by a well-established retailer that has developed a loyal group of customers offer limited profit potential.



The availability of locations may impede competitive entry.



A retail market with high entry barriers is very attractive for retailers presently competing in that market, but unattractive for retailers not already in that market.



Another competitive factor is the bargaining power of

What are examples of retail markets that have high entry barriers? Low entry barriers? Are there entry barriers for a new fastfood franchise in the local community? A new department store? A new discount store specializing in toys?

Take a set of local competitors and evaluate how intense the rivalry is. Compare competitive issues for a brick-and-mortar retailer versus a multichannel and an Internet-only retailer.

Chapter 18 - Customer Service vendors. Markets are less attractive when only a few vendors control the merchandise sold in the market. In these situations, the vendors have an opportunity to dictate prices and other terms, such as delivery dates, and thus reduce the retailer's profits. 

The final industry factor is the level of competitive rivalry in the retail market, which is the frequency and intensity of reactions to actions undertaken by competitors. Conditions that may lead to intense rivalry include (1) a large number of competitors that are all about the same size, (2) slow growth, (3) high fixed costs, and (4) the lack of perceived differences between competing retailers.



Environmental dynamics that affect market attractiveness are technological, economic, regulatory, and social changes.



Paying attention to economic, consumer, and social dynamics in the external environment is also important when determining the attractiveness of a retail market.



When a retail market is going through significant changes in technology, present competitors are vulnerable to new entrants that are skilled at using the new technology.



Government regulations can reduce the attractiveness of a retail market.

Government regulations reduce the attractiveness of a retail market by making it costly to build stores (zoning laws) and hire employees (wage regulations).

See PPT 6-38

C. Step 3: Identify Strategic Opportunities 

Analyze some potential changes in the environment such as people becoming more health conscious about the food they eat, more concerned about the environment, more interested in having experiences rather than buying products. Review some of the changes discussed in Chapter 4. Ask students how these changes will affect specific retailers.

After completing the SWOT analysis, the next step is to identify opportunities for increasing retail sales. The strategic alternatives are defined in terms of the squares in the retail market matrix.

D. Step 4: Evaluate Strategic Opportunities 

The evaluation of strategic opportunities identified in the SWOT analysis determines the retailer's potential to establish a sustainable competitive advantage and reap long-term profits from the opportunities under evaluation.



Thus, a retailer must focus on opportunities that utilize its strengths and its area of competitive advantage.



Both the market attractiveness and the strengths and weaknesses of the retailer need to be considered in

Have students evaluate the market attractiveness and competitive position of some opportunities the local college bookstore is presently pursuing and is considering: a. college textbooks, b. clothing with the college name

Chapter 18 - Customer Service



evaluating strategic opportunities.

on it,

The greatest investments should be made in market opportunities where the retailer has a strong competitive position.

c. fashionable brand-name clothing, d. fast food, e. renting DVDs.

Have students list the factors and go through the ratings. E. Step 5: Establish Specific Objectives and Allocate Resources 

The retailer's overall objective is included in the mission statement. The specific objectives are goals against which progress toward the overall objective can be measured.



Specific objectives have three components: (1) the performance sought, including a numerical index against which progress may be measured, (2) a time frame within which the goal is to be achieved, and (3) the level of investment needed to achieve the objective.



Typically, the performance levels are financial criteria such as return on investment, sales, or profits.

F. Step 6: Develop a Retail Mix to Implement the Strategy 

Ask students which opportunities the bookstore should pursue. Relate these opportunities to the competitive advantages the bookstore has.

See PPT 6-39

The next step is to develop a retail mix for each opportunity in which investment will be made and to control and evaluate performance.

G. Step 7: Evaluate Performance and Make Adjustments 

The final step in the planning process is evaluating the results of the strategy and implementation program.



If the retailer fails to meet its objectives, reanalysis is needed. This reanalysis starts with reviewing the implementation programs; but it may indicate that the strategy (or even the mission statement) needs to be reconsidered. This conclusion would result in starting a new planning process, including a new SWOT analysis.

Chapter 18 - Customer Service 

As described here, the strategic decisions in the planning process seem to be made in a sequential manner. After the business mission is defined, the SWOT analysis is performed, strategic opportunities are identified, alternatives are evaluated, objectives are set, resources are allocated, the implementation plan is developed, and finally, performance is evaluated and adjustments are made.



But actual planning processes have interactions among the steps. For example, the SWOT analysis may uncover some logical alternative for the firm to consider, even though this alternative is not included in the mission statement.

Ask students to relate the strategic decision-making process to the strategy they will use for seeking a job after graduation. Will they go through all the steps? Why or why not? Will their strategy change as they look? Why or why not?

VI. Summary 

A retailer’s long-term performance is largely determined by its strategy. A strategy coordinates employees’ activities and communicates the direction the retailer plans to take.



Retail market strategy describes both the strategic direction and the process by which the strategy is to be developed.

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A retail strategy is a statement that identifies (1) the retailer’s target market, (2) the format and resources the retailer plans to use to satisfy the target market’s needs, and (3) the bases on which the retailer plans to build a sustainable competitive advantage.



Four types of growth opportunities that retailers may pursue are market penetration, market expansion, retail format development, and diversification.



By expanding internationally, retailers can increase their sales, leverage their knowledge and systems across a greater sales base, and gain more bargaining power with vendors.



The strategic planning process consists of a sequence of steps: (1) define the business mission, (2) conduct a SWOT analysis, (3) identify strategic opportunities, (4) evaluate strategic opportunities, (5) establish specific objectives and 18-93

Chapter 18 - Customer Service allocate resources, (6) develop a retail mix to implement the strategy, and (7) evaluate performance and make adjustments.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS INTERNET EXERCISE Visit the websites for IKEA (www.ikea.com) and Starbucks (www.starbucks.com). Are the look and feel of these Internet sites consistent with the in-store experience of these retailers? IKEA’s in-store experience is a little bit more utilitarian and less hedonic than other retailers’. Its website has a similar feel. Students should also notice similarities between Starbucks’ website and in-store experience. The color scheme is similar, and the same music is available on the website as is in the store. Additional resources: 

Meatballs and DIY bookcases: The psychology behind Ikea’s iconic success, CNBC, 10/5/2019, https://www.cnbc.com/2019/10/05/psychology-behind-ikeas-huge-success.html.



How Ikea's shop layout influences what you buy, BBC, 1/31/2018, https://www.bbc.com/worklife/article/20180201-how-ikea-has-changed-the-way-weshop.

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I love you IKEA, but why is your website so…? A case study on the re-imagination of IKEA Australia’s website, UX Collective, 8/16/2018, https://uxdesign.cc/i-love-you-ikea-but-why-isyour-website-so-abae4ce8658.

42. INTERNET EXERCISE Go to the websites for Walmart (www.walmart.com), Carrefour (https://www.carrefour.com/en), Royal Ahold (https://www.aholddelhaize.com/en/home/) and Metro AG (https://www.metro.de/. Which chain has the most pervasive global strategy? Justify your answer. International growth can be accomplished by means of new start-ups, expansion of existing affiliates, partial or complete acquisitions, mergers with other companies, or joint ventures. Different strategies are selected based on resources, competition, legal requirements, and past experience and results. Students’ answers will vary. 43. GO SHOPPING Visit two stores or websites that sell similar merchandise categories and cater to the same target segment(s). How are the retail formats (the elements in the retail mix) similar? Dissimilar? On what bases does each retailer have a sustainable competitive advantage? Explain which you believe has a stronger position. Students’ answers will vary. Most retailers that target similar audiences and sell similar merchandise categories will have comparable retail formats. Students should be able to identify the similarities, likely including product assortment, store atmospherics, location choice (e.g., mall versus stand alone), and services. Differences between the two stores might include exclusive merchandise or sales associate knowledge and assistance. Students should articulate which one they believe has a stronger position and why. Is the difference noticeable to other consumers as well?

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS For each of the four retailers discussed at the beginning of the chapter (Sephora, Patagonia, and Apple), describe its strategy and the basis of its competitive advantage. Sephora has a broad selection of products from around the world and specializes in the beauty market. The company is a globally recognized brand and has trained staff in the stores to help with product selection. One of the most significant competitive advantages is the loyalty program that Sephora offers its customers. The program includes tiered levels, rewards every transaction, and allows customers to pick their rewards. Patagonia is a clothing company that markets and sells upscale outdoor clothing. In addition to clothing, they offer other products such as athletic equipment, backpacks, sleeping bags, and camping food. Patagonia considers itself an "activist company" and has been recognized for its innovative family/maternity leave policies. The company continues to grow by offering products that are designed to last. Apple is a technology company that specializes in consumer electronics, computer software and online services. It is the world's largest technology company by revenue, fourth-largest PC vendor by unit sales, and fourth-largest smartphone manufacturer. According to the company: "Apple strives to bring the best personal computing experience to students, educators, creative professionals, and consumers around the world through its innovative hardware, software, and internet offerings." 44. Choose a retailer and describe how it has developed a competitive strategic advantage. Students should examine how their chosen retailer has developed a strategic competitive advantage. This assessment should include at least one of the following components: Customer Loyalty: To keep customers committed to shopping at their store(s) and/or websites, retailers can build customer loyalty by (1) emphasizing a unique positioning and (2) developing loyalty programs. For example, retailers can try to design a retail mix that creates an image in the customer’s mind, which will keep them committed to the retailer. Or, by implementing customer loyalty programs, as part of a broader customer relationship management (CRM) program, and maintaining and analyzing customer purchasing data, retailers can develop strategies to create and maintain a loyal customer base. Location: Location is one of the most important factors in retailing. For example, if a retailer is the only one of its kind in a certain area or is set in a high traffic area with a visible store front, the retailer has a competitive advantage. Human Resource Management: Because retailing is a labor-intensive business and requires high levels of contact between employees and customers, retailers need to develop programs to motivate and coordinate employee efforts. These usually involve providing appropriate incentives for employees, fostering a strong and positive organizational culture, and managing diversity. Distribution and Information Systems: Retailers can achieve significant operational efficiencies by developing sophisticated distribution and information systems. Efficient operations reduce retailer costs and thus enable retailers to provide the same or similar merchandise at lower prices than their competitors. 18-96 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Unique Merchandise: Retailers can develop sustainable competitive advantage by offering private-label brands. Vendor Relations: Retailers may gain exclusive rights to sell merchandise in a region, to buy merchandise at lower prices, or to receive popular merchandise in short supply through strong vendor relationships. Customer Service: Retailers can build competitive advantage by offering excellent customer service. It involves instilling the importance of good customer service in employee training and performance and consciously developing a reputation for good service. Retailers should not rely on a single approach to gain a sustainable competitive advantage but instead should use multiple approaches. 45. Give an example of a market penetration, a retail format development, a market expansion, and a diversification growth strategy that a store called Performance Bicycle might use. Market Penetration: Performance Bicycle could offer a loyalty program to customers, which would increase sales among existing customers using its present format. It could also open additional locations with the same format, targeting the same market. Retail Format Development: Performance Bicycle already offers a new format to the same target market online at www.performancebike.com. However, it could offer additional merchandise on a mobile app or through social commerce. Market Expansion: Performance Bicycle, with its existing retail format, could geographically expand (internationally) or target promotions to specific market segments that it may not currently be targeting (senior citizens, student discounts). Diversification: Backward integration into bicycle manufacturing would represent a related diversification strategy for Performance Bicycle, while opening retail stores for bicycle service and repair would represent an unrelated diversification strategy. 46. Choose your favorite retailer. Draw and explain a positioning map, like that shown in Exhibit 6-3, that includes your retailer, retailers that sell the same types of merchandise, and the target customer segments (ideal points). Students’ answers will depend on the market in which they live and their preference of retailer. For a bicycle retailer, the dimensions could be: high price/service and low price/service for one dimension and broad assortment (mountain bikes, road bikes, tandems, kids, lots of accessories) and narrow assortment (road bikes only) on the other dimension. 47. Do a SWOT analysis for McDonald’s (https://corporate.mcdonalds.com/corpmcd/home.html). What is its mission? What are its strengths and weaknesses? What opportunities and environmental threats might it face over the next 10 years? How could it prepare for these threats? Students should perform a SWOT analysis for McDonald’s. 18-97 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service The mission statement for McDonald’s is: “Our mission is to make delicious feel-good moments easy for everyone. This is how we uniquely feed and foster communities. We serve delicious food people feel good about eating, with convenient locations and hours and affordable prices, and by working hard to offer the speed, choice, and personalization our customers expect. At our best, we don’t just serve food, we serve moments of feel-good, all with the lighthearted, unpretentious, welcoming, dependable personality consumers know and love.” Source: McDonald’s Corporate Website, “Our Mission and Values”, 2/19/2021, https://corporate.mcdonalds.com/corpmcd/our-company/who-we-are/our-values.html McDonald’s strengths include its global brand equity, customer loyalty, vendor relationships and buying power, a successful franchise model, and a wide distribution network. McDonald’s weaknesses include high employee turnover, employee dissatisfaction, and a population that opposes McDonald’s. Opportunities for McDonald’s include global growth and expansion, as well as introducing new products to adapt to changing consumers’ tastes. The political and regulatory environment might create threats for McDonald’s by forcing it to include calorie information on its menu board. Similarly, many consumers are changing their dietary habits to focus on healthier, organic foods. This trend could also be a threat for McDonald’s over the next ten years. McDonald’s is already responding to this threat by developing relationships with new farmers and investing in sustainable farming practices. 48. What are Neiman Marcus’s (https://www.neimanmarcus.com/) and PetSmart’s (https://www.petsmart.com/) bases for sustainable competitive advantage? Are these attributes sustainable, or easily copied? Neiman Marcus offers extensive service and stocks fashion merchandise that could be called “fashion forward,” because they often are offered first or exclusively in its stores. Its prices are higher than those charged by other retailers for similar product categories, but it caters to a wealthier-than-average target market of customers for whom fashion and service may be more important than low price. The multiple bases for competitive advantage used by Neiman Marcus are unique positioning, location in upscale malls or neighborhoods so as to be closer to target market segments, unique merchandise, and a heavy emphasis on customer service. The combination of these sources of competitive advantage makes its strategy quite sustainable. Alternatively, PetSmart offers a deep selection of pet-related merchandise at everyday low prices. Although very different in approach than Neiman Marcus, PetSmart uses multiple bases for competitive advantage, including unique merchandise and services for pet owners. The combination of these sources of competitive advantage makes its strategy sustainable.

Chapter 18 - Customer Service 49. Assume you are interested in opening a casual or fine dining restaurant in your town. Go through the steps in the strategic planning process shown in Exhibit 6–7. Focus on conducting a SWOT analysis of the local restaurant market, identifying, and evaluating alternatives, and selecting a target market and a retail mix for the restaurant. (1) Define the Business Mission: Looking to be in the Italian restaurant business, my target market would be those customers in my local town and surrounding towns interested in paying money for an authentic Italian meal in a romantic setting. The mission of this restaurant would be to have high quality food, in a romantic setting, while avoiding being too expensive for those interested in a special meal. (2) Conduct a SWOT analysis: Market factors include the size of the market interested in Italian food and the growth potential of this market. Competitive factors include how hard it is to enter the Italian restaurant market, including the start-up costs and the number of other Italian restaurants in the area, along with alternatives. The environmental factors would include the social and economic environments. The restaurant business focuses on the social aspect of dining out. Is there a growing trend in people eating out? What impact does the economy have on consumers’ decisions to spend their dollars on dining out? The analysis of strengths and weaknesses allows a retailer to judge its potential success. The strengths and weaknesses in this situation could include financial resources, the availability of a good location, my restaurant management experience, my need to build customer loyalty, and my prospects of good operations. (3) Identify Strategic Opportunities: 

Market Penetration: Can I increase the variation on my menu or open another restaurant in another neighborhood?



Market Expansion: Open a to-go style restaurant, open a restaurant in another geographic area.



Retail Format Development: Sell candles with the restaurant name on them or develop an online ordering format for to-go style meals.



Diversification: Manufacture spaghetti sauce under the restaurant name or open an Italian food grocery store.

(4) Evaluate Strategic Opportunities: In evaluating the alternatives, we must look at both the market attractiveness and the competitive position. Retailers can maximize their growth opportunities by investing in areas that have high market attractiveness and a low competitive position. In the restaurant business, the strategic opportunities might include opening additional restaurants, opening a to-go restaurant, and manufacturing food products, like spaghetti sauce. (5) Establish Specific Objectives and Allocate Resources: After finding growth opportunities, resources must be allocated to each opportunity, by looking at the performance sought, the time frame needed, and the level of investment needed to accomplish the objective. (6) Develop a Retail Mix to Implement Strategy (merchandise and services offered, merchandise pricing, advertising and promotional programs, store design, and convenience of the store’s location): The restaurant will offer a large variety of Italian dishes with a large experienced wait staff, the pricing will be medium to high to attract the upscale customer and show the value of the food, the advertising will 18-99 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service start with publicity on the opening of the business and then focus on word of mouth, promotional programs may be implemented to frequent eaters, store design will be small, elegant, and romantic with many tables for two and private tables, and the location would be in a downtown area. After this strategy is implemented, a retail mix can be developed for the growth opportunities. (7) Evaluate Performance and Make Adjustments: The final step of the planning process is evaluating the results of the strategy and implementation program. 50. The Gap Inc. (https://www.gapinc.com/en-us) owns several chains, including Old Navy, Banana Republic, INTERMIX, Janie and Jack,, and Athleta. What type of growth opportunity was the Gap pursuing when it opened each of these retail concepts? Which is most synergistic with the original Gap chain? Developing retail concepts to target specific markets implies that Gap uses several market expansion strategies. Each of the concepts described here is similar to the others. Merchandise categories are the same, basic store layouts are the same (yet with image and fixture differences appropriate to the target markets), and even the brands’ websites follow a similar format, though emphasizing models and fashion styling appropriate to their respective target markets. Students could also consider the market penetration strategy as appropriate here. The multiple Gap brands/formats are closely related enough that one could argue expected overlap in consumers. 51. Identify a store or service provider that you believe has an effective loyalty program. Explain how the program works and why it is effective. An example that would readily come to mind to most students would be frequent flyer programs of various airlines. Many airlines not only award frequent flyer miles on airline travel but also carry out these programs in partnership with credit card companies and retailers. The effectiveness of such programs depends on the extent to which there are various levels of rewards and bonuses and the availability of multiple opportunities to earn points toward a reward. 52. Choose a retailer that you believe could be, but is not yet, successful in other countries. Explain why you think it could be successful. A nonstore retailer such as Amazon.com is poised to be successful globally with the increasing spread and prevalence of the Internet and World Wide Web. The costs associated with entry and set up are less than in conventional retailing, and most products carried by Amazon.com are quite standardized, so Amazon.com could pursue a cost-efficient and effective global expansion strategy. However, such an expansion strategy would have to await infrastructure development in various countries. The success of Amazon.com's global strategy would come from utilizing technological and global efficiencies of scale, lower costs of operations, enhanced customer service at lower costs due to better customer information and relationship management, and better adaptability to local tastes and preferences due to superior information collection and analysis. 53. Amazon.com started as an Internet retailer selling books. Then it pursued a variety of growth opportunities, including expanding to groceries, DVDs, apparel, software, and travel services; introducing e-readers (Kindle); operating the Internet channel for other retailers; and hosting virtual stores for small, independent retailers. Evaluate these growth opportunities in terms of 18-100 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service the probability that each will be profitable businesses for Amazon.com. What competitive advantages does Amazon.com bring to each of these businesses? Groceries and Apparel: These categories will most likely be profitable for Amazon.com. Amazon has developed a business model specifically around providing the grocery merchandise and services that customers in the channel expect. Amazon.com already competes well on price on non-perishable food items in small size that can be shipped easily, as books can, and with the acquisition of Whole Foods Grocery they are better prepared to compete on other types of grocery purchases. In terms of apparel retailing online, there are many players in this market and the prices may not be much lower on Amazon's site as compared to those offered by other players in these markets. Apparel shopping on Amazon.com is most likely to succeed with those consumers who want a one stop shop for clothing, books, entertainment, small appliances, etc. Software: Since software is an information product, even the distribution of the product could be over the Internet. Thus, instead of costly packaging and stocking at retail stores, Amazon could simply offer the product for immediate download, thereby also providing the immediate gratification that is typically lacking for most products purchased over the Internet. The lower costs of distribution coupled with the already lower costs of operations, could render this category quite profitable for Amazon. However, larger software manufacturers, such as Microsoft, Adobe, Real Networks, Broderbund, etc. already have their own retail and distribution site and may use Amazon only for expansion to market segments that they are not currently serving. Internet Travel Site: This market expansion to a new service has its strengths and weaknesses. Amazon may attract a larger customer base by offering this new service. However, most travel, including airline travel is now viewed as a commodity, with consumers often deciding more on price than on brand name. There is more intense competition, and the prices may not be much lower on Amazon's site as compared to those offered directly by the service providers. e-Readers: Amazon has dominated the e-Reader market with its Kindle. Amazon typically offers lower prices on books and e-books than other retailers, making it an affordable option for many consumers. Amazon often takes a loss on books to attract more customers and encourage them to buy other products from Amazon as well. Hosting virtual stores- Hosting virtual stores is almost a win-win for Amazon and the small retailer. Amazon can expand its merchandise assortment and offer more unique merchandise by partnering with smaller retailers. Conversely, smaller retailers can expand their reach and capitalize on Amazon’s network by hosting a virtual store through Amazon.com.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective

Brad's Bike ShopMarket Growth Opportunities

Decision Generator

Strategic Growth Opportunities for Retailers

6-3 Classify the different strategic growth opportunities retailers pursue.

Retail Planning Process-Quilts to the Hilt

Click and Drag; Matching (accessible version)

Retail Strategic Planning and Operations

6-5 Know the steps retailers go through to develop a strategic plan.

iSeeit! Video Case: Global Entry Strategies

Video Case

Global Growth Strategies

6-4 Identify issues that arise as domestic retailers become global retailers.

Growth Strategies

Matching

Strategic Growth Opportunities for Retailers

6-3 Classify the different strategic growth opportunities retailers pursue.

CHAPTER 7 FINANCIAL STRATEGY ANNOTATED OUTLINE

INSTRUCTOR NOTES



Financial objectives and goals are an integral component in every aspect of a retailer's strategy. Retailers can use financial tools to measure and evaluate their performance.



Financial analysis can be used to monitor the retailer’s performance, assess the reasons its performance is above or below expectations, and provide insights into appropriate actions that can be taken if performance falls short of those expectations.

I. Objectives and Goals 

The first step in the strategic planning process involves articulating the retailer’s objectives and the scope of

LO 7-1 Review the strategic objectives of a retail firm.

Chapter 18 - Customer Service activities it plans to undertake. 

See PPT 7-3

Three types of objectives that a retailer might have are (1) financial, (2) societal, and (3) personal.

A. Financial Objectives 

A commonly used measure of the return on investment is return on assets (ROA), or the profit generated by the assets possessed by the firm.

B. Societal Objectives 

Societal issues are related to broader issues about providing benefits to society – making the world a better place to live, such as providing employment opportunities for people in a particular area, offering people unique merchandise, providing an innovative service to improve personal health, or sponsoring events.



Regardless of the form the objective takes, performance with respect to societal objectives is more difficult to measure than financial objectives.

Ask students to provide specific examples of retailers meeting societal objectives (merchandise, services, events, etc.) that they have seen in the current marketplace.

C. Personal Objectives 

Many retailers, particularly owners of small, independent businesses, have important personal objectives such as self-gratification, status, and respect.



Whereas societal and personal objectives are important to some retailers, all retailers need to be concerned about financial objectives or they will fail.

II. Strategic Profit Model 

The strategic profit model, illustrated in Exhibit 7-1, is a method for summarizing the factors that affect a firm’s financial performance, as measured by ROA.



The model decomposes ROA into two components: (1) net profit margin and (2) asset turnover.



The net profit margin is simply how much profit (after taxes, interest income, and extraordinary gains and losses) a firm makes divided by its net sales. It reflects the profits generated from each dollar of sales.



Asset turnover is the retailer’s net sales divided by its

LO 7-2 Contrast the two paths to financial performance using the strategic profit model. See PPT 7-4

Chapter 18 - Customer Service assets. This measure assesses the productivity of a firm’s investment in its assets and indicates how many sales dollars are generated by each dollar of assets. 

These two components of the strategic profit model illustrate that ROA is determined by two sets of activities, profit margin management and asset turnover management, and that a high ROA can be achieved by various combinations of net profit margin and asset turnover levels.



In fact, two different retailers with wide discrepancies in net profit margin and asset turnover could have exactly the same return on assets. See Exhibit 7-2.

A. Profit Margin Management Path 

The information used to analyze a firm’s profit margin management path comes from the income statement, also called the statement of operations or profit and loss (P&L) statement.



The income statement summarizes a firm’s financial performance over a period of time.

1. Components in the Profit Margin Management Path 

The components in the profit margin management path are net sales, cost of goods sold (COGS), gross margin, operating expenses, interest and taxes, and net profit margin.



The term net sales refers to the total revenue received by a retailer after refunds have been paid to customers for returned merchandise and payments have been collected from vendors for promotions:



Net Sales = Gross amount of sales + Promotional allowances - Customer returns



Cost of Goods Sold (COGS) is the amount a retailer pays to vendors for the merchandise it sells plus transportation costs.



Gross margin, also called gross profit, gives a retailer a measure of how much profit it’s making on merchandise sales without considering the expenses associated with operating the store and corporate overhead expenses.

See PPT 7-8

See PPT 7-11, 7-12, and 7-14

Discuss the difference in gross margin percentage between Costco and Macy’s. Why is the

Chapter 18 - Customer Service 

Gross margin = Net sales - Cost of goods sold.



Operating expenses, also called selling, general, and administrative expenses (SG &A), are the overhead costs associated with normal business operations. The SG&A includes costs, other than the cost of merchandise, incurred in the normal course of doing business such as salaries, advertising, and rent.



The operating expense category includes salaries for sales associates and managers, advertising, utilities, office supplies and rent.



Operating profit margin is the gross margin minus the operating expenses and reflects the performance of retailers’ fundamental operations



Operating profit margin = Gross margin − Operating expenses



Net profit margin, or net income, is the operating profit margin minus other income or expenses not associated with the retailers' fundamental operation, such as the cost of opening or closing stores, acquisitions, and credit card programs. Interest and taxes are also subtracted from the operating profit to get the net profit margin. The net profit margin is used to calculate ROA.



Net profit margin = Operating profit margin − Other income or expenses − Interest − Taxes

difference to be expected?

2. Analyzing Performance in the Profit Margin Management Path 

Retailers use ratios with net sales in the denominator when evaluating a retailer’s performance and comparing it with other retailers’.



Three useful ratios in the profit margin management path are gross margin percentage, operating expenses as a percentage of sales, and operating profit margin percentage of sales.



Gross margin (in%), like other performance measures, is also expressed as a percentage of net sales so retailers can compare (1) performances of various types of merchandise and (2) their own performance with other

Chapter 18 - Customer Service retailers. 

Gross margin / Net sales = Gross margin %



Operating expenses (in%), are expressed as a percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms.



Operating expenses / Net sales = Operating expense %



Operating profit margin (in%), expressed as a percentage of net sales, facilitates comparisons across firms and is calculated as operating profit margin divided by net sales.



Operating profit margin/ Net sales = Operating profit margin %



Net profit margin (in%) facilitates comparisons across firms and is often expressed as a percentage of sales.



Net profit / Net sales = Net profit %

Discuss the difference in expense to sales ratio between Costco and Macy’s. Why is the difference to be expected?

B. Asset Turnover Management Path 

The information used to analyze a firm’s asset management path primarily comes from the retailer’s balance sheet.



The income statement summarizes the financial performance over a period of time, while the balance sheet summarizes a retailer’s financial position at a given point in time, such as the last day of the year.



The balance sheet shows the following relationship:



Assets = Liabilities + Owner’s equity

See PPT 7-15

1. Components in the Asset Turnover Management Path 

Assets are economic resources (such as inventory or store fixtures) owned or controlled by an enterprise as a result of past transactions or events.



By accounting definition, current assets are those that can normally be converted to cash within one year.



Cash and cash equivalents include currency, checks, shortterm bank accounts, and investments that mature within 18-106

Chapter 18 - Customer Service three months or less 

Merchandise inventory is a retailer’s lifeblood. Exceptions to this generalization are service retailers, who carry little or no inventory.

Average inventory is always considered at retail because sales are in terms of retail as well.



Inventory turnover is used to evaluate how effectively managers utilize their investment in inventory:



Inventory turnover = COGS / Average inventory at cost

Ask students what a turnover of 1.61 means. (Answer: For every dollar in inventory the firm generates $1.61 in sales.)



Think of inventory as a measure of the productivity of inventory--how many sales dollars can be generated from $1 invested in inventory.



We can think of inventory turnover as how many times, on average, the inventory cycles through the store during a specific period of time (usually a year).



Assets that are not likely to be converted to cash within one year represent noncurrent assets.



Fixed assets are assets that require more than a year to convert to cash.



Intangible assets include nonphysical assets such as patents and goodwill



Notice that the balance sheet does not include most of the critical assets used by retailers to develop a sustainable competitive advantage (discussed in Chapter 5) such as brand image, customer loyalty, customer service, information and supply chain systems, human resources, and a database of customer buying behaviors and preferences. These factors are critical assets, but because they cannot be valued by accountants, they are not included on the balance sheet.

2. Analyzing the Performance of the Asset Turnover Management Path  

Asset turnover is an overall performance measure from the asset side of the balance sheet. Asset turnover = Net sales / Total assets

Ask students which firm has the highest inventory turnover and why they would expect this to be the case. Whose inventory turnover would be higher: a discount store or a specialty retailer? Why?

Ask students to think about the impact that the non-balance sheet factors have on sales, profit, and gross margin. While not measured in the balance sheet, how do these factors impact the metrics?

See PPT 7-19 Ask students which firm has the highest asset turnover and why they would expect this to be the case.

Chapter 18 - Customer Service

C. Combining the Profit Margin and Asset Turnover Management Paths 

Overall performance, as measured by ROA, is determined by considering the effects of both paths by multiplying the net profit margin by asset turnover:



Net profit margin x Asset turnover =Return on assets



Return on assets is a very important performance measure, because it shows how much money the retailer is making on its investments in assets and how good that return is relative to other investments.

See PPT 7-19

D. Implications for Improving Financial Performance 

The strategic profit model assumes two important issues:



First, retailers and investors need to consider both net profit margin and asset turnover when evaluating the retailer’s financial performance.



Second, retailers need to consider the implications of strategic decisions on both components of the strategic profit model.

III. Evaluating Growth Opportunities 

To illustrate the use of strategic profit model for evaluating a growth opportunity, consider Gifts To Go, a two-store chain in the Chicago area. Gifts To Go is considering an internet channel called www.Gifts-ToGo.com.

See PPT 7-21

LO 7-3 Illustrate the use of the strategic profit model for analyzing growth opportunities.

A. Profit Margin Management Path 

Review Exhibit 7-7 and Exhibit 7-8. The gross margin percentage will be the same in both channels (50%), but the net profit % will be higher in the Internet channel (15.9% vs 14.3% in stores).



Inventory turnover will also be higher at Gifts-to-Go.com (3.1 versus in-store at 2.0).

See PPT 7-22

B. Asset Turnover Management Path 

Asset turnover for Gifts-to-Go.com will be 2.09 instead of 18-108

Chapter 18 - Customer Service 1.84 in stores. 

The ROA for Gifts-to-Go.com will be 33.25% versus 26.29% in stores.

C. Using the Strategic Profit Model to Analyze Other Decisions 

Another investment that Kelly might consider is installing a computerized inventory control system that would help her make better decisions about which merchandise to order, when to reorder merchandise, and when to lower prices on merchandise that is not being bought.



The asset turnover will probably increase because sales will increase at a greater percentage than will total assets. Total assets may actually decrease if the additional cost of the inventory system is less than the reduction in inventory.

IV. Setting and Measuring Performance Objectives 

There are measures used to assess the performance of specific assets possessed by a retailer—its employees, real estate, and merchandise inventory. Retailers use these measures to evaluate their firm’s performance and set objectives.

LO 7-4 Review the measures retailers use to assess their performance.

A. Top-Down versus Bottom-Up Process 

Top-down planning means that goals are set at the top of the organization and filter down through the operating levels.



In a retailing organization, top-down planning involves corporate officers developing an overall retail strategy and assessing broad economic, competitive, and consumer trends.



The overall strategy determines the merchandise variety, assortment, and product availability plus store size, location, and level of customer service.



This top-down planning is complemented by a bottom-up planning approach. Buyers and store managers are also estimating what they can achieve. Their estimates are transmitted up the organization to the corporate planners.



Differences between bottom-up and top-down plans must be resolved through a negotiation process involving

Describe a situation where management has set a higher sales goal for a particular period but has also cut employee hours and eliminated overtime for that same period. Ask students to explain how they would resolve this difference.

For a comparison of top-down and bottom-up planning, refer to PPTs 7-29.

Chapter 18 - Customer Service corporate planners and operating managers. B. Who Is Accountable for Performance? 

At each level of the retail organization, the business unit and its manager should be held accountable only for the revenues, expenses, cash flow, and contribution to ROA that they can control.



Performance objectives and measures can be used to pinpoint problem areas. The reasons that performance may be above or below planned levels must be examined.

C. Performance Objectives and Measures 

The measures used to evaluate retail operations vary depending on (1) the level of the organization where the decision is made and (2) the resources the manager controls.



For example, the principal resources controlled by store managers are space and money for operating expenses (such as wages for sales associates and utility payments to light and heat the store). Thus, store managers focus on performance measures like sales per square foot, employee costs, and energy costs as percentage of sales.

D. Types of Measures 

Retailers' performance measures are broken into three types: input measures, output measures, and productivity measures.



Input measures assess the amount of resources or money allocated by the retailer to achieve outputs, or results.



Output measures assess the results of retailers' investment decisions. For example, sales revenue results from decisions on how many stores to build, how much inventory to have in the stores, and how much to spend on advertising.



A productivity measure (the ratio of an output to an input) determines how effectively a retailer uses a resource.



In general, since productivity measures are a ratio of outputs to inputs, they can be used to compare different business units.

See PPT 7-32 Productivity measures are a ratio of outputs to inputs. Ask students to demonstrate how productivity measures can be used to compare different business units.

Chapter 18 - Customer Service

1. Corporate Performance 

At a corporate level, retail executives have three critical resources (inputs)—merchandise inventory, store space, and employees—that they can manage to generate sales and profits (outputs).



Effective productivity measures of the utilization of these assets include asset and inventory turnover, sales per square foot of selling space, and sales per employee.



Another commonly used measure of overall performance is comparable-store sales growth (also called same-store sales growth), which compares sales growth in stores that have been open for at least one year.

2. Merchandise Management Measures 

The critical resource (input) controlled by merchandise managers is merchandise inventory.



Merchandise managers also have the authority to set initial prices and lower prices when merchandise is not selling (i.e., take a markdown).



Finally, they negotiate with vendors over the price paid for merchandise.

3. Store Operations Measures 

The critical assets controlled by store managers are the use of the store space and the management of the store’s employees.



Measures of store operations productivity include sales per square foot of selling space, sales per employee working hour, inventory shrinkage, and energy costs

E. Assessing Performance: The Role of Benchmarks 

The financial measures used to assess performance reflect the retailer’s market strategy.



In other words, the performance of a retailer cannot be accurately assessed by simply looking at isolated measures because they are affected by the retailer’s strategy.



To get a better assessment of a retailer’s performance,

See PPT 7-36

Chapter 18 - Customer Service you need to compare it to a benchmark. 

One useful approach for assessing a retailer’s performance is to compare its recent performance with its performance in preceding months, quarters, or years.



A second approach for assessing a retailer’s performance is to compare it with its competitors.

V. Summary 

Basic elements of the retailing financial strategy and examines how retailing strategy affects the financial performance of a firm. The strategy undertaken by retailers is designed to achieve financial, societal, and personal objectives.



The strategic profit model is used as a vehicle for understanding the complex interrelationships between financial ratios and retailing strategy.



The chapter also presents some financial performance measures used to evaluate different aspects of a retailing organization.



This chapter illustrates the use of the strategic profit model for analyzing growth opportunities.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 2. INTERNET EXERCISE Go to the latest annual reports and use the financial information to update the numbers in the net profit margin management model and the asset turnover management model for Target (https://investors. target.com/annual-reports) and Walmart (https://stock. walmart.com/investors/financial-information/annual- reports-and-proxies/default.aspx). Have there been any significant changes in either retailer’s financial performance? Why are the key financial ratios for these two re-tailers different?? Depending on the time of year, this information might not be different from what is already in the text. Once new information is available, students will obviously observe differences in sales and revenue. Students should explain why the gross margin percentage is different for Target than it is for Walmart, even though Walmart has greater sales. Students should also look for any noticeable differences in the financial information for the two firms from the previous years. 3. GO SHOPPING Go to your favorite store and interview the manager. Determine how the retailer sets its performance objectives. Evaluate its procedures relative to the procedures presented in the text. After the interview, students should be able to articulate whether or not the store uses a top-down or bottom-up approach in setting objectives. A top-down approach involves planning at the corporate level. Yet, if the store where the student is interviewing is an independent retailer, there may not be a corporate level, and the manager or owner may set the objectives. In this case, that is still top-down planning. Bottom-up planning involves collecting information and objectives at the individual store level and from buyers and store managers. It is often more common in a large firm than in a smaller or independent retail firm. Students should compare the methods the manager explains and apply the concepts from the text to determine if the approach is top-down or bottom-up.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. What are the key productivity ratios for measuring the retailer as a whole, its merchandise management activities, and its store operation activities? Why are these ratios appropriate for one area of the retailer’s operation and inappropriate for others? One key measure for assessing the productivity of the retailer as a whole is the return on assets (ROA). ROA is the profit generated by the assets possessed by the firm and is a comprehensive picture of firm performance. Another general measure is the net profit margin. For buyers, gross margin is one of the most important performance measures; it reflects how merchandise performed in relation to sales while excluding other operating costs. For store managers, gross margin might be less important. Many factors contribute to the overall performance of a retailer. Thus it is difficult to find one measure that adequately evaluates performance. For instance, sales is a global measure of how much activity is going on in the store. However, a store manager could easily increase sales and inventory turnover by lowering prices, but gross margin would suffer as a result. Clearly, an attempt to maximize one measure may lower another. Managers must therefore understand how their actions affect multiple performance measures. It is usually unwise to use one measure, which rarely tells the whole story. The measures used to evaluate retail operations are different depending on the level of the organization where the decision is being made and the resources that the manager controls. For example, the principle resources controlled by store managers are space and operating expenses such as the wages paid to sales associates and the electricity used to light and heat the store. Thus, store managers focus on performance measures like sales per square foot and employee costs. 2. What are examples of the types of objectives that entrepreneurs might have for a retail business they are launching? Retailers can have three types of objectives: 1) financial, 2) societal, and 3) personal. Examples of financial objectives for an entrepreneur might include sales or profit. In the first year, an entrepreneur might just hope to break even. Societal objectives for an entrepreneur might include offering a unique product or meeting the needs of an underrepresented audience. Finally, many entrepreneurs start a retail organization to achieve personal objectives like self-gratification, status, respect, or autonomy. 3. Buyers' performance is often measured by their gross margin percentage. Why is this figure more appropriate than the operating or net profit percentage? Gross margin percentage indicates the performance of merchandise managers in negotiating with vendors and buying merchandise that can generate a profit. It is a measure of the quality of the merchandise buying decisions. 4. A supermarket retailer is considering the installation of self-checkout point of sale (POS) terminals. How would the replacement of cashiers with these self-checkouts affect the elements in the retailer’s strategic profit model? The machinery involved in self-checkout POS terminals would be counted as a long-term asset for the retailer. When adding additional assets, retailers have to maintain higher sales and margin numbers to 18-114 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service achieve a higher return on assets. However, the overall operating expenses for the retailer may go down as a result of having fewer cashiers, thus actually saving the retailer money over time. 5. Macy's and Costco have targeted different customer segments. Which retailer would you expect to have a higher gross margin? Higher operating expenses as a percentage of sales? Higher operating profit margin percentage? Higher inventory turnover and asset turnover? Higher ROA? Why? Gross margin gives a retailer a measure of how much profit it is making on merchandise sales without considering the expenses associated with operating the store and covering corporate overhead. Macy’s should have a significantly higher gross margin than Costco. Because Macy’s is a department store, providing a better image through better merchandise and services to customers, operating expenses are significantly higher than Costco, which is renowned for its low cost, highly efficient operation. Macy’s relies on its higher gross margin to cover its significantly higher expenses. Like the gross margin, operating expenses can be expressed as a percentage of net sales to facilitate comparisons. Again, Macy’s may be expected to show a significantly higher percentage here than Costco due to its higher selling and operating expenses. Costco has built its global reputation on keeping expenses throughout its organization under tight control. Because Costco deals with low margins, it is imperative to have high inventory turnover and high asset turnover to yield a profit. These figures should be much higher than those of Macy’s. In contrast, Macy’s will have a much higher net profit margin percentage because it sells higher ticket, higher markup items such as brand name clothing and furnishings. Department stores don’t typically have high turnover and rely on margins to succeed. Conversely, Costco focuses on high turnover to succeed. 6. Why do investors place more weight on comparable-store sales than growth in sales? Comparable-store sales growth compares sales growth in stores that have been open for at least one year. Growth in sales can result from increasing the sales generated per store or by increasing the number of stores. New stores don’t represent growth from the previous year’s sales but rather new sales that didn’t exist before. Growth in same-store sales assesses true sales growth and indicates how well the retailer is doing with its core business concept. 7. Blue Nile is a jewelry retailer that only uses an Internet channel for interacting with its customers. What differences would you expect in the strategic profit model and key productivity ratios for Blue Nile and Zales, a multichannel jewelry retailer? On the profit margin path, Blue Nile and Zales might have very different sales numbers, as Zales is a much larger company than Blue Nile. Also, we would expect lower operating expenses for Blue Nile, as it has less overhead and labor costs than Zales. Perhaps the biggest difference between the two would be on the asset management path. Zales likely has more current and fixed assets, because it has physical store locations and Blue Nile does not. For Zales to compete on ROA with Blue Nile, it needs to sell more merchandise than Blue Nile to offset its more costly assets.

Chapter 18 - Customer Service 8. Using the following information taken from the 2020 balance sheet and income statement for Urban Outfitters, develop a strategic profit model. (Figures are in thousands of dollars.) 2020 Annual Review (Source: http://investor.urbn.com/financial-information/annual-review) Thousands Total Revenue

$ 3,983,789,000

Cost of Revenue

$ 2,743,963,000

Gross Profit

$ 1,239,826,000

Operating Expenses

$ 1,071,750,000

Inventory

$ 409,534,000

Accounts Receivable

$ 88,288,000

Other Current Assets

$ 122,282,000

Fixed Assets

$ 2,262,237,000

Cash on Hand

$ 433,292,000

Revenue $ 3,983,789,000

Gross Margin

$ 1,239,826,000

COGS

Net Operating Profit

$ 2,743,963,000

Operating Expenses

$ 168,076,000

$ 1,071,750,000

Revenue

= Net Profit Margin Percent

$ 3,983,789,000

4.22%

Chapter 18 - Customer Service /

Return on Assets 3.51%

Accounts Receivable $ 88,288,000

Revenue

$ 3,983,789,000

Inventory

= Total Current Assets

$ 409,534,000

$ 1,053,396,000

Cash

Fixed Assets

$ 433,292,000

$ 2,262,237,000

/ =

Total Assets

Asset Turnover 1.20

$ 3,315,633,000

+ Other Current Assets $ 122,282,000

A friend of yours is considering buying some stock in retail companies. Your friend knows that you are taking a course in retailing and asks for your opinion about Costco. Your friend is concerned that Costco is not a good firm to invest in because it has such a low net operating profit. Costco’s net profit margin as of November 30, 2020, was 2.5 percent. Walmart’s net profit margin during the same year was 3.6 percent, and Target saw 4.31 percent net profit margin. What advice would you give your friend? Why?

When compared with Walmart and Target, Costco has a lower net operating profit. Students should conclude that an investment in Costco should be carefully examined on more than one financial metric. Additional resource: Is Costco Stock A Buy Right Now? Here's What Earnings Say, Investor’s Business Daily, 12/22/2020, https://www.investors.com/research/costco-stock-buy-now/.

Chapter 18 - Customer Service ANCILLARY LECTURES AND EXERCISES LECTURE # 7-1: THE STRATEGIC PROFIT MODEL (SPM) Instructor’s Note: Instructors may wish to use this ancillary lecture in lieu of the annotated outline. This is fairly complex material for students to grasp. This lecture is presented with a simple example. Instructors might want to use this exercise as a stimulus to a class discussion on the topic. The Chapter 6 Power Point slides can be used with this lecture. Background 

Also known as the DuPont model, it was developed by the DuPont family around 1920.



The DuPonts developed the model because they needed to find a basis for evaluating the financial performance of complex organizations.

Purpose of the SPM 

The SPM serves two managerial purposes:



Specifies that a firm’s financial objective is to earn adequate or target return on owner’s equity—also known as return on net worth.



This does not mean that a retailer wants to necessarily maximize return on Owner’s Equity (O.E.).

This method is only one of many financial objectives. For example, maximizing shareholder wealth is another very important objective. 

Identifies three profit paths a firm can take to increase O.E. by increasing: 1. profit margin 2. rate of asset turnover 3. financial leverage



The preceding performance ratios are related to the following three areas of decision-making: 1. margin management 2. asset management 3. financial management



Let us take each of the three categories and break them down.

Margin management 

This information is taken from the income statement: 18-118

Chapter 18 - Customer Service 

Net sales means after adjusting for returns and allowances



Gross sales - Returns = Net sales



Cost of goods sold



Invoice cost + freight in + work room costs - vendor’s cash discounts



Cost of goods sold:



Invoice costs



Freight in (transportation cost of bringing in merchandise)



Workroom costs (alterations, set up)



Vendors—cash discounts. For example, 2/10 n 30 provides incentives to get retailers to pay quickly for the vendors’ accounts receivable reasons.



Why are these adjustments made to cost of goods sold?



Directly affect landed cost of merchandise



Gross margin:



Gross margin = Net sales - Cost of goods sold



Can be expressed as a percentage of sales:



Gross margin = Gross margin percent



Sales



Gross margin, gross margin percent, and inventory turnover are extremely important in the world of retailing. They represent aspects of the business with which buyer has direct control.



Total expenses (two types—variable and fixed): 1. Variable—(varies with sales) -- the cost of doing business; e.g., sales commission and is thus variable with sales). 2. Fixed—cost of being in business. We have fixed expenses whether or not we sell anything. For example, rent, electricity, administrative salaries, etc.



Net profit (after tax):



Treat tax as a variable expense—a retailer always needs after tax profit for decision-making. Net profit margin is net profit as a percentage of sales, just like gross margin is a percentage of 18-119

Chapter 18 - Customer Service sales. So, if a retailer has $10,000 net profit before tax, and the tax = 40%, the net profit after tax will = $6,000. 

The key in understanding net profit lies in the kind of retail establishment in which one operates. For example, a grocery store having a 1 % net profit after tax would be considered normal. The key is knowing what is good or bad for a retailer compared to competition.



How to evaluate profit margin 1. Firm’s past history 2. Compare with similar stores or departments. Should be really much better than average for industry considering there are many bad stores.

Asset Management 

To obtain a better idea of what asset management is about, examine the Asset Management Model.



All of these elements come from the balance sheet except for sales.



The balance sheet is a snapshot of a retailer’s financial position on a particular day, usually the end of the year.



The income statement represents the performance over a period of time, generally a year.



Objective: The objective in asset management is to turn inventory into accounts receivable or cash by making sales rapidly.



Current assets—“cycle” 1. cash to inventory 2. inventory to cash or 3. inventory to accounts receivable 4. want to minimize assets relative to sales



Inventory—strive for best selection which 1. minimize inventory investment 2. maximize sales through 3. selection (depth + breadth) 4. minimize stock-outs (service level)

Chapter 18 - Customer Service 

Accounts receivable = Merchandise sold on credit. Want to minimize accounts receivable because may be an unproductive asset. Most retailers offer credit because: 1. tradition 2. part of services mix 3. may be important in making people buy 4. can make some money if charge interest but usually sold to a factor (will define below) -most retailers aren’t in business to be a financial institution, so they would rather sell their accounts receivable to a factor.



Bankcard—Visa, MasterCard, or American Express (T&E—travel and entertainment card); can be converted to cash immediately, but card company charges retailer a percentage of sales.



Factor—accounts receivables are sold to private-label credit card companies known as “factors.” When a retailer’s accounts receivable is sold to another firm, it allows the retailer to get money up-front and retain its own store identity. Also, information from the credit cards can be used to target customers. Factoring is very popular now because an intermediary company takes care of accounts receivable hassles for the retailer.



Proprietary—when a retailer keeps its own accounts receivable (private credit card, like “Sears” card). The most common reason for doing this is to collect interest from customers.



The first two types of credit cards are the most popular with retailers because they generally prefer to stay away from accounts receivable. Naturally, their main interest is converting inventory into sales and profits.



Cash: keep to a minimum

Fixed assets: 1. fixture 2. store (if owned, not rented) 3. delivery trucks 4. much slower to change than current assets Asset turnover: 

Net sales/ total assets = Asset turnover.



Similar to inventory turnover in that it is like a cycle of assets to cash to assets to cash ...



Asset turnover rate always has to be less than inventory turnover if there are any fixed assets. 18-121

Chapter 18 - Customer Service 

Inventory turnover = Net Sales / Average Inventory

Return on assets 

ROA uses both asset management and margin management.



Used for evaluating and programming performance of profit centers (like stores), used to evaluate managers, not owners because owners also have control over financial leverage—to be discussed below.



Firms can get their return on assets in many ways. For example:

1. discount stores have low margin and high turnover 2. boutiques have high margin and low turnover 

Return on assets (ROA) = Net profit



Total assets



The question here is, how much profit are you able to generate from retailer’s assets?



Return on assets is an extremely important measure of how a retailer is performing.



The instructor may want to slow down here and give examples all the way through the model like those in the text of high margin/low turnover operations versus low margin high turnover operations.

Financial leverage management 

Leverage ratio = Total assets/O.E. or (Total liabilities +O.E.)/O.E.



How to manage leverage: 1. Too leveraged (too much debt) means financial instability, i.e., too much risk. 2. If not leveraged, then return on owner’s equity suffers



To illustrate financial leverage, take the case of leveraged buyouts.



Leveraged buyouts (LBOs) occur when a firm takes on extra debt to finance a buyout.



More debt means higher leverage.

Conclusion 

Depending where one is in the firm, different managers will use different performance ratios.



Top management will use leverage to get return on O.E. 18-122

Chapter 18 - Customer Service 

Lower executives will use margin and assets management to get return on assets.



During the rest of the course we will be concentrating on these ratios, and others that will help the retailers control the financial side of their business.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective(s)

Financial Growth for Hooper's Outdoor Adventure

Case Analysis

Profit Planning and Paths to Financial Performance

7-1 Review the strategic objectives of a retail firm.

Asset Management and the Strategic Profit Model

7-2 Contrast the two paths to financial performance using the strategic profit model.

Strategic Profit Model

Matching

Asset Management and the Strategic Profit Model

7-2 Contrast the two paths to financial performance using the strategic profit model.

Objectives and Goals

Matching

Profit Planning and Paths to Financial Performance

7-1 Review the strategic objectives of a retail firm.

Assessing Retailers Performance

Matching

Measures for Assessing Retailers Performance

7-4 Review the measures retailers use to assess their performance.

CHAPTER 8 RETAIL LOCATIONS ANNOTATED OUTLINE

INSTRUCTOR NOTES



Store location is often the most important decision made by a retailer.



“What are the three most important things in retailing?” “Location, location, location.”



Store location is an important decision for a retailer because (1) location is typically one of the most influential considerations in a customer’s store choice, (2) location decisions have strategic importance because they can be used to develop a sustainable competitive advantage, and

Chapter 18 - Customer Service (3) location decisions are risky. 

Locations are hard to change because retailers frequently have to either make substantial investments to buy and develop real estate or commit to long-term leases with developers. LO 8-1 Describe the types of retail locations.

I. Types of Locations 



The two basic types of location are unplanned (freestanding and urban sites) and planned (shopping See PPT 8-4 centers). Discuss the importance of store Unplanned locations do not have any centralized location based on students' management that determines what stores will be in a shopping preferences. For the development, where the specific stores will be located, or following types of products, how how they will be operated. far would they travel to reach a store? In planned locations, a shopping center developer and/or manager makes and enforces policies that govern store 1. Eggs and milk operations, such as the hours that a store must be open. 2. Socks In the United States, about 47 percent of the gross leasable square feet of retail space is in planned locations, 3. Running shoes with the remainder in unplanned locations. Gross leasable area (GLA) is the real estate industry’s term for the total 4. Home theater system floor area designed for the retailer’s occupancy and exclusive use.



Many types of locations are available for retail stores – each with their own strengths and weaknesses. Choosing a particular location type involves evaluating a series of trade-offs.



These trade-offs generally concern the cost of the location versus its value to customers.



Trade area is the geographic area encompassing most of the customers who would patronize a specific site.

II. Unplanned Retail Locations 

Some retailers put their stores in unplanned locations. In an unplanned location, there is no centralized management to determine where specific stores are and how they are operated.

Ask students to evaluate the best location in the area around the university. What are the characteristics of the location that make it so attractive?

LO 8-2 Review the types of unplanned locations.

Chapter 18 - Customer Service 



A freestanding site is a retail location that's not connected See PPT 8-7 to other retailers, although many are located near other freestanding stores or near a shopping center. Retailers with large space requirements, such as warehouse clubs Have the students visited a and hypermarkets, are often freestanding. retailer in a freestanding site? Outparcels, which are stores that are not connected to What made them travel to such a other stores in a shopping center but are located on the retailer? What retailers are best premises, typically in a parking area, are freestanding suited for a freestanding site? locations that are popular for fast-food restaurants or banks.



These locations enable retailers to have a drive-through window, dedicated parking, and clear visibility from the street.



Advantages of freestanding locations are greater visibility, lower rents, ample parking, no direct competition, greater convenience for customers, fewer restrictions on signs, hours, or merchandise, and ease of expansion.



The most serious disadvantage is the lack of synergy with other stores. A retailer in a freestanding location must be a primary destination point for customers. It must offer customers something special in terms of merchandise, price, promotion, or services to get them into the store. See PPT 8-9

B. Urban Locations 

Some retailers are finding urban locations attractive, particularly in cities that are redeveloping their downtowns and surrounding urban areas.



Urban areas offer three main types of locations: the central business district, inner city, and gentrified residential areas.



In general, urban areas have low occupancy costs, and locations in the central business districts often have high pedestrian traffic.



Many urban areas are going through a process of gentrification – the renewal and rebuilding of offices, housing, and retailers in deteriorating areas – coupled with an influx of more affluent people that displaces the former poorer residents.



Redevelopment opportunities for retailers are also 18-126

Chapter 18 - Customer Service emerging in so-called brownfields – former industrial locations with a history of chemical pollutants, as developers and investors give these areas serious consideration for clean-up. 1. Central Business Districts  

 

The central business district (CBD) is the traditional See PPT 8-9 downtown financial and business area in a city or town. Ask students whether they shop in Although CBD locations in the United States declined in the CBD of the town/city in which popularity among retailers and their customers for years, they live. Ask them in which many are experiencing revival as they become gentrified, city(s) they like to shop in the CBD. drawing in new residents and retailers. Why? If they were going to open a shop, would they consider a CBD Because shoplifting can be common, and parking is often location? Why or why not? limited, CBDs generally require retailers to hire security. We would expect cities like San Shopping flow in the CBD may be slow on evenings and Francisco, New York, London, and weekends when area businesses are closed as parking Paris to be mentioned as great problems and driving time discourage customers from “shopping cities.” driving in from the suburbs. What are the various ethical issues in retailers charging higher During the 1970s and 1980s, many U.S. and some margins in inner cities? What are European cities experienced urban decay. Urban decay is the reasons retailers remain the process of a previously functioning city, or part of a successful even though their prices city, falling into disrepair. may be higher in inner cities?

2. Inner City 



The inner city in the United States refers to high-density urban areas that have higher unemployment and lower median incomes than the surrounding metropolitan area. Some retailers have avoided opening stores in the inner city because they believe it is riskier and achieves lower returns than other areas. As a result, inner city consumers often have to travel to the suburbs to shop, even for food items. Many inner-city consumers face food deserts, defined as areas that lack ready access to affordable fresh fruits, vegetables, dairy, whole grains, and other healthful foods, as might be provided by grocery stores or farmers’ markets.



Retailing can play an important role in inner city redevelopment activities by bringing needed services and jobs to inner city residents, as well as property taxes to support redevelopment efforts.

Chapter 18 - Customer Service

3. Gentrified Residential Areas 

The renewal and rebuilding of offices, housing, and retailers in deteriorating areas—coupled with an influx of more affluent people that displaces the former, lowerincome residents is known as the process of gentrification.

C. Main Street 

Main Street is the traditional shopping area in smaller towns, or a secondary business district in a suburb or within a larger city. Their occupancy costs are lower than those of the primary CBD. They do not draw as many people and offer smaller overall selection through fewer stores. Main Streets typically don't offer the entertainment and recreational activities available in the more successful primary CBDs.

Ask students if national retailers have started to invade the “Main Street” in their neighborhoods. See PPT 8-11

LO 8-3 Analyze the characteristics of the different types of shopping A shopping center is a group of retail and other centers. commercial establishments that is planned, developed, owned, and managed as a single property.

III. Shopping Centers and Planned Retail Locations 



By combining many stores at one location, the developer See PPT 8-13 attracts more consumers to the shopping center than if the stores were at separate locations.



Shopping center management maintains common facilities (common area maintenance, or CAM) such as the parking area and restrooms, and is responsible for security, outdoor signage, and advertising for the center. Shopping centers are generally managed by a shopping center property management firm.



Most shopping centers have at least one or two major retailers, referred to as anchors.



In strip shopping centers, supermarkets are typically the anchors, whereas department stores traditionally anchor enclosed shopping malls. Lifestyle centers may not have anchors, while power centers are often made of “anchors” exclusively.

A. Convenience, Neighborhood, and Community Shopping Centers 

See PPT 8-15 Convenience, neighborhood, and community shopping centers (also called strip shopping centers) are attached Ask students for examples of 18-128

Chapter 18 - Customer Service



rows of open-air stores, with onsite parking usually located neighborhood and community at the front of the stores. shopping centers in the campus area and discuss. What are the The primary advantages of these centers are that they pros and cons of these locations? offer customers convenient locations and easy parking. They also offer relatively low rents for retailers. The primary disadvantages are that there is no protection from the weather. Strip centers also offer less assortment and entertainment options for customers than malls.

B. Power Centers 



 

A power center is a shopping center that is dominated by See PPT 8-16 several large anchors, including full-line discount stores, off-price stores, warehouse clubs, and category specialists. Why would a smaller retailer locate in a power center anchored Unlike traditional strip centers, power centers often by full-line discount stores and offinclude several freestanding (unconnected) anchors and price stores? What types of only a minimum number of specialty tenants. merchandise would likely be carried by the smaller retailer? Now many power centers are larger than regional malls and have trade areas as large as regional malls. Power centers offer low occupancy costs and modest levels of consumer convenience and vehicular and pedestrian traffic.

C. Enclosed Shopping Malls  

 



Shopping malls have several advantages over alternative See PPT 8-17 locations. Ask students if they spend First, because of the many different types of stores, the more/less time in shopping malls merchandise assortments available within those stores, than they did 5 years ago. [ It will and the opportunity to combine shopping with probably be less. Ask them why.] entertainment, shopping malls attract many shoppers and have a large trade area. Second, retailers and their customers don’t have to worry Do students notice some about the weather. significant differences between one shopping mall and another? Third, malls offer retailers a strong level of homogeneous If so, what are these? [Prompt operations with the other stores, such as uniform hours of students on differences in types of operation. stores, overall ambience and environment of the shopping mall, Although shopping centers are an excellent site option for general levels of service through many retailers, they have some disadvantages. the various stores in the shopping 18-129

Chapter 18 - Customer Service 

First, mall occupancy costs are higher than those of strip mall, etc.] centers, freestanding sites, and most central business districts.



Second, some tenants may not like mall management’s control of their operations. Managers can, for instance, dictate store hours and window displays.



Third, competition within shopping centers can be intense.



Fourth, freestanding locations, strip centers, and power centers are more convenient because customers can park in front of a store, go in, buy what they want, and go about their other errands.



Many malls were built over 50 years ago and appear rundown and unappealing to shoppers.



The consolidation in the department store sector has decreased the number of potential anchor tenants and diminished the drawing power of enclosed malls.



Finally, the growing sales through the Internet channel is cannibalizing sales in the store channel.



One approach for dealing with aging malls is to tailor their offerings to the markets that do exist today, for example, immigrant populations.

 See PPTs 8-18

D. Lifestyle Centers 

Lifestyle centers are shopping centers with an open-air configuration of specialty stores, entertainment, and restaurants, with design ambience and amenities such as fountains and street furniture.



Lifestyle centers resemble the main streets in small towns, where people stroll from store to store, have lunch, sit for a while on a park bench talking to friends. Thus, they cater to the “lifestyles” of consumers in their trade areas.



Due to the ease of parking, lifestyle centers are very convenient for shoppers. But they typically have less retail space than enclosed malls and thus smaller trade areas, attracting fewer customers than enclosed malls. Many are located near higher income areas so the higher purchases 18-130

Chapter 18 - Customer Service per visit compensate for the fewer number of shoppers. See PPT 8-20

E. Outlet Centers 

Outlet centers are shopping centers that contain mostly manufacturers’ and retailers’ outlets.



Outlet centers have progressed from no-frills warehouses to well-designed buildings with landscaping, gardens, and food courts that make them hard to distinguish from more traditional shopping and lifestyle centers.



Outlet centers are larger in size today than they were a decade ago, with some outlets having more the one million square feet.



In the U.S. only two or three new outlet centers open each year, yet outlet centers are becoming very popular outside the U.S.



Tourism is an important factor in generating traffic for many outlet centers. Thus, many are in locations with convenient interstate access and close to popular tourist attractions.

Ask students if they have been to an outlet center. What types of products have they purchased from such centers? Was the visit an everyday shopping trip or part of a vacation?

F. Theme/Festival Centers 

Theme/festival centers are shopping centers that typically See PPT 8-21 employ a unifying theme that is carried out by the individual shops in their architectural design, and to an extent, in their merchandise. The biggest appeal of these centers is to tourists.



These centers typically contain tenants similar to specialty centers, except there usually are no large specialty stores or department stores.

G. Mixed-Use Developments 

Mixed-use developments (MXDs) combine several See PPT 8- 23 different uses in one complex, including retail, office, hotels, residential, and other functions. They are pedestrian-oriented and therefore facilitate a live-workplay environment.

H. Larger, Multiformat Developments 

New shopping center developments are combining See PPT 8-24 enclosed malls, lifestyle centers, and power centers. 18-131

Chapter 18 - Customer Service Although centers of this type do not have an official name, they may be referred to as omnicenters. 

Omnicenters represent a response to several trends in retailing, including the desire of tenants to lower common area maintenance charges by spreading the costs among more tenants and function inside larger developments that generate more pedestrian traffic and longer shopping trips.



In addition these centers reflect the growing tendency of consumers to cross-shop, as well as the desire for timescarce consumers to participate in one-stop shopping.

IV. Nontraditonal Locations 

Pop-up stores, stores within a store, and kiosks are other location alternatives for many retailers.

LO 8-4 Discuss nontraditional retail locations.

See PPT 8-25

A. Pop-Up Stores and Other Temporary Stores 

Pop-up stores are stores in temporary locations that focus on new products or a limited group of products.



. Retailers and manufacturers are opening pop-up stores in vacant shopping centers. Pop-up stores are particularly attractive to retailers with highly seasonal sales. See PPT 8-26

B. Store-within-a-Store 

Another nontraditional location for retailers is within other, larger stores, known as store-within-a-store. Retailers, particularly department stores, have traditionally leased space to other retailers such as sellers of fine jewelry or furs.



Grocery stores have been experimenting with the storewithin-a-store concept for years with service providers like banks, film processors, coffee bars, and medical clinics.

C. Merchandise Kiosks 

 

Merchandise kiosks are small, temporary selling spaces Ask students which categories of typically located in the walkways of enclosed malls, merchandise are best suited for airports, college campuses, or office building lobbies. sale in merchandise kiosks. Discuss some of the merchandise They usually have short-term leases and are often kiosks that students most operated seasonally. frequently see in the mall. Some are staffed and represent a miniature store or cart 18-132

Chapter 18 - Customer Service that could be easily moved. Others are twenty-first century versions of a vending machine. 

For mall operators, kiosks are an opportunity to generate rental income in otherwise vacant space and to offer a broad assortment of merchandise for visitors. They also can generate excitement leading to additional sales for the entire mall.

V. Location and Retail Strategy 

Location type decisions need to be consistent with the shopping behavior and size of the retailer’s target market and its positioning.

A. Shopping Behavior of Consumers in Retailer’s Target Market  

LO 8-5 Match the locations to the retailer’s strategy.

See PPT 8-27

A critical factor affecting the location consumers select to visit is the shopping situation in which they are involved. Ask students how the nature of Three shopping situations are (1) convenience shopping, the consumer’s shopping behavior (2) comparison shopping, and (3) specialty shopping. will affect their preferred store location.

1. Convenience Shopping 



When consumers are engaged in convenience shopping Ask students where they are most situations, they are primarily concerned with minimizing likely to purchase convenience their effort to get the product or service they want. items such as soda, gum, and milk. Why do they select those Stores selling primarily convenience goods usually locate particular locations? their stores close to where their customers are and make it easy for them to park, find what they want, and go about their other business.

2. Comparison Shopping 

Consumers involved in comparison shopping situations have a general idea about the type of product or service they want, but they do not have a well-developed preference for a brand, model, or specific retailer to patronize.



Enclosed malls or shopping districts devoted to one type of merchandise attract consumers by facilitating their comparison shopping activities.



Category specialists offer the same benefit of comparison shopping as a collection of co-located specialty stores

Ask students to discuss product categories they often comparison shop for. Where do they go to compare? Describe the types of retailers they patronize for comparison shopping situations.

Chapter 18 - Customer Service because consumers can see almost all of the brands and models in a particular product category. 

This comparison shopping makes category specialists destination stores, places where consumers will go even if it is inconvenient.

3. Specialty Shopping  

When consumers go specialty shopping, they know what Discuss specialty stores students they want and will not accept a substitute. have been to. Would those stores improve their business by being The retailer becomes a destination store. Thus, consumers more conveniently located? Why are willing to travel to an inconvenient location. or why not? See PPT 8-28

B. Density of Target Market 

A factor that affects the retailer’s choice of location type is the density of the retailer’s target market in relation to the location. A good location has many people in the target market who are drawn to it.

C. Uniqueness of Retail Offering 

Convenience of location is less important for retailers with unique, differentiated offerings than for retailers with an offering similar to other retailers.



Customers will travel to wherever the store is located, and its location will become a destination. LO 8-6 Review the societal and legal considerations in selecting Societal and legal considerations often restrict where locations. retailers can locate and operate their stores.

VI. Societal and Legal Considerations  

Some restrictions reflect the general concern that many communities have with urban sprawl, and more specifically with the opening of big-box retail stores in their communities.



The legal issues that affect site decision include environmental issues, zoning, building codes, signs, and licensing requirements. See PPT 8-29

A. Urban Sprawl 

Urban sprawl is the increased expansion of residential and shopping center development in suburban and rural areas 18-134

Chapter 18 - Customer Service outside of their respective urban centers. See PPT 8-29

B. Opposition to Big-Box Retailers 

Retailers that operate big-box stores like Walmart, Target, Costco, and Home Depot often meet with a great deal of resistance when they plan to build a store in a community.



The opponents of the store openings argue that these retailers sell merchandise at lower prices that drive local retailers out of business; do not provide a living wage for employees; hire part-time workers to avoid providing health insurance benefits; and achieve their low prices by manufacturing merchandise outside the United States, thus contributing to the decline of U.S. jobs. See PPT 8-31

C. Zoning 

Local governments in the United States use zoning to regulate land uses in specific areas to prevent any interference with existing uses by residents or businesses, as well as encourage the preservation of a community’s sense of identity. See PPT 8-33

D. Building Codes 

Building codes are legal restrictions that specify the type of building, signs, size and type of parking lot, etc. that can be used at a particular location.

1. Signs 

Restrictions on the use of signs can impact a particular site's desirability. Size and style may be restricted by building codes, zoning ordinances, or even the shopping center management.

2. Licensing Requirements 

Licensing requirements may vary in different parts of a region. For instance, some Dallas neighborhoods are dry, meaning no alcoholic beverages can be sold; in other areas, only wine and beer can be sold.

VI. Summary 

Location decisions are particularly important because of their high-cost, long-term commitment and impact on customer patronage. 18-135

Chapter 18 - Customer Service 

Choosing a particular location type involves evaluating a series of trade-offs including the occupancy costs of the location, the pedestrian and vehicle traffic associated with the location, the restrictions placed on store operations by the property management, and the convenience of the location for customers.



Societal and legal considerations often restrict the locations and operations of stand-alone stores and shopping centers.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 54. 2. INTERNET EXERCISE Go to the web page for Faneuil Hall Marketplace at: www.faneuilhallmarketplace.com and the online site for CocoWalk at https://cocowalk.com/ What kinds of centers are these? List how these locations are similar and different. Who is the target market for each of these retail locations? Faneuil Hall Marketplace – “It's the seat of American history and the site of one of America's most famous shopping and dining experiences, Faneuil Hall Marketplace. For over 250 years, the marketplace has played an integral role in the life of Boston's residents.” It features restaurants, shopping, history (close to the Freedom Trail) events, and entertainment. This urban marketplace is located in Boston, Massachusetts, and it attracts both locals and tourist of all ages. CocoWalk – “Miami’s ultimate destination for shopping, dining & entertainment. As the first lifestyle center in Florida, CocoWalks’ unique grounds and buildings were carefully designed to blend seamlessly into the surroundings of Coconut Grove, a bayside boating village known for being eclectic, sometimes eccentric and always exciting.” It features shops, boutiques, a movie theater, restaurants, cafes, bars, and live entertainment. This center caters to Miami residents and international visitors with upscale shops and sophisticated restaurants. 55. 3. GO SHOPPING Go to your favorite shopping center, and analyze the tenant mix. Do the tenants appear to complement one another? What changes would you make in the tenant mix to increase the overall performance of the center? Students’ answers will vary. Typically, in most shopping centers, the tenant mix is complementary. Many retailers want to open locations close to their competitors, especially for comparison shopping purposes. Ask students if there is a retailer that they would like to see in their favorite shopping center that isn’t currently there now. What stores would they remove from the shopping center to improve the overall quality of the shopping experience at the shopping center? 56. 4. GO SHOPPING Visit a lifestyle center. What tenants are found in this location? Describe the population characteristics around this center. How far would people drive to shop at this lifestyle center? What other types of retail locations does this lifestyle center compete with? Students’ answers will vary. In most lifestyle centers, the tenants are going to be a mix of higher-end specialty stores with a few smaller format department stores. Stores like Williams-Sonoma and Restoration Hardware tend to locate in lifestyle centers. When describing the population surrounding the center, it will likely be in a more affluent part of town versus other shopping centers. Lifestyle centers typically compete with other lifestyle centers or regional shopping malls and, in some instances, power centers. 57. 5. INTERNET EXERCISE Go to the homepage of your favorite enclosed mall and describe the mall in terms of the following characteristics: number of anchor stores, number and categories of specialty stores, number of sit-down and quick service restaurants, and types of entertainment

Chapter 18 - Customer Service offered. What are the strengths and weaknesses of this assortment of retailers? What are the unique features of this particular mall? Students’ answers will vary depending on the mall selected. Students should be able to categorize the different retailers (anchor stores versus specialty stores, etc.). How much entertainment does the mall provide? Does that appeal to students? Do students visit the malls because of the stores or because of the supplementary services like dining and entertainment? 58. 6. GO SHOPPING Visit a power center that contains a Target, Staples, Dick’s Sporting Goods, Home Depot, or other category specialists. What other retailers are in the same location? How is this mix of stores beneficial to both shoppers and retailers? Other retailers in this type of shopping center may include a food store, clothing stores such as Old Navy, a bookstore, craft store, and possibly some quick service and family restaurants. Students should acknowledge that the retailers prefer low occupancy costs and high traffic levels, and they are trying to reach the same target customers. Shoppers enjoy the convenience of easy parking and many retailers located together. 59. 7. INTERNET EXERCISE Review the research summarized in the MarketWatch article, “One year in, has Whole Foods helped fix one of Chicago’s toughest neighborhoods?” at https://www.marketwatch.com/story/one-year-in-has-whole-foods-helped-fix-one-of-chicagostoughest-neighborhoods-2017-09-28 . How did Whole Foods opening a store in the Englewood area of Chicago, Illinois, affect the neighborhood? Summarize the positive and negative impact. Are you surprised by the study’s findings? Why or why not? Introduced a large food store. Whole Foods hired about 40 of its 100 employees directly from Englewood. High prices, upscale store. “During our first year of serving the Englewood community, we’ve been able to increase access to fresh foods and offer healthy eating education to residents and families,” according to a Whole Foods spokesperson. The company approached the Englewood store less from a purely profit perspective and more from a “mission-based perspective.” Company-wide, a presence in impoverished neighborhoods is clearly still experimental. Of the grocery chain’s more than 460 U.S. locations, just 3 more can be found in neighborhoods resembling the demographics of Englewood, one each in Detroit, New Orleans, and Newark, New Jersey. Executives said they’ve trimmed prices for the neighborhood because of a smaller footprint and lower negotiated wholesale costs. The median household income in Englewood is under $20,000, according to Census data. A local teacher told the Tribune that he sees teachers, cops, social workers, and people aimed at “gentrifying” the neighborhood shopping when he shops there but doesn’t feel it’s yet the go-to for locals. 18-138 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Competition comes from Aldi, with its no-frills format, which now operates a store a few blocks from the new Englewood development. Some residents told local media they like having Whole Foods around but remain willing to travel the longer distance for Aldi’s pricing. Analysts also think that Amazon’s scope could help Whole Foods contain costs, including in Englewood, and help it shake off its “Whole Paycheck” mocking, ideally while preserving its unique cache. With Whole Foods as the anchor, the Englewood Square shopping complex, which also includes a Starbucks and a Chipotle Mexican Grill, was a $20 million project financed with a combination of city land subsidies, crowdfunding, and federal tax credits. The center had leased all of its retail space except for one storefront as of this month. A microbrewery called Englewood Brews plans to open just across the street from Whole Foods. There’s a growing sense of hope in promoting other local businesses and entrepreneurs. Some 35 Englewood-made products, which include baked goods, beauty items targeted at African American women, and more, have been stocked since opening. Police have responded to fewer calls for assistance at the Englewood store than almost every other Whole Foods location in the city, according to Chicago Police Department data, cited by the Tribune. Store events serve as a social hub. Every week, more than 100 people show up for the wine and food pairing promotion — one of the unexpected successes for the store in its first year of operation. ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 60. 1. Why is store location such an important decision for retailers? Location decisions are particularly important because of their high-cost, long-term commitment, and impact on customer patronage. Location is typically one of the most influential considerations in a consumer’s store choice decision. Further, location decisions have strategic importance because they can be used to develop a sustainable competitive advantage. 61. 2. Pick your favorite store. Describe the advantages and disadvantages of its current location, given its store type and target market. Students store choices will likely vary considerably. The store’s store type and target market must be clearly defined. And then the location should give the store a competitive advantage with the target market they have defined. Store: Urban Outfitters The target market for this store can be defined as young men and women from ages 16 to 25 years who live in the city or want the urban look. The best location for this store would be in a central business district. This is a traditional downtown business area in a city or a town. The store will draw from the business activity of the downtown area. There is an inflow of people from public transportation and a high level of pedestrian traffic. Store: Gap 18-139 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service The primary target market segments for this store are men and women ranging from as young as 15 to 40 years old looking for value in basic clothing. The best location for this store would be in a shopping center, particularly a mall. A shopping center consists of a group of retail and other commercial establishments that is planned, developed, owned, and managed as a single property. A mall focuses on pedestrians and gains its advantage because it can have a set of stores that carry similar merchandise assortments. The target market looking for basics, can shop at the Gap and also shop at complementary stores nearby. This allows the target market to have a one-stop shopping experience. Store: Verizon The target market segments of Verizon are men and women ages 18 years and up looking for a cellular phone for convenience and safety. A great location for Verizon would be a kiosk. A kiosk is located in mall common areas, is stationary, and has many conveniences of a store such as telephones, electricity, and moveable shelves. Advantages of these selling spaces are the prime mall locations, the relative inexpensiveness, and the short-term leases available, which reduce the owner’s risk. This is a perfect location for a Verizon store because the items are very small and require little shelf space. A customer looking to get a phone does not need a lot of frills, but instead wants the information and the phone at a convenient location. Also this location will appeal to their target market. As they walk through the mall, they may be induced to purchase without previous planning. 62. 3. Home Depot typically locates in either a power center or a freestanding site. What are the strengths of each location for this home improvement retailer? The tenant mix of a power center lends itself to attracting customers who would want to shop at Home Depot. Home Depot will also benefit from this location due to increased traffic flow of customers who will shop at a power center. Home Depot will benefit from a freestanding location due to probable lower rent, abundant parking, lack of direct competition, and the ability to design and operate the store with few or no restrictions. 63. 4. As a consultant to 7-Eleven convenience stores, American Eagle Outfitters, and Porsche of America, what would you say is the single most important factor in choosing a site for these three very different types of stores? The most important criterion that is common to all types of stores is a location that attracts the right segment of consumers. Both the segments targeted and the merchandise/services offered differ across these retailers, which in turn affect their location decisions. For 7-Eleven, consumers who are shopping for convenience products – food as well as nonfood items – are the primary target. These consumers do not wish to travel far and are willing to pay a slightly higher price, compared with grocery stores, so the best locations for 7-Eleven stores are smaller, neighborhood strip centers. For American Eagle Outfitters, the CBDs, Main Street, or enclosed malls may attract its target consumers, while for Porsche of America, upscale commercial neighborhoods – typically a commercial avenue further away from downtown – will likely appeal to its target customers. 64. 5. Retailers are locating in urban areas that have suffered decay. As a result, these areas are rejuvenating, a process known as gentrification. Some people have questioned the ethical and social ramifications of this process. Discuss the benefits and detriments of gentrification.

Chapter 18 - Customer Service The benefits of gentrification include the redevelopment of urban areas that are in a state of decay. Usually, these areas would continue to decay if it weren’t for the interested retailers. Some retail developers argue that gentrification projects have positive effects on fighting crime and drugs. Gentrification also allows retailers to develop buildings that would be financially impossible to duplicate in today’s market. These structures often have significant historical value. Finally, retail gentrification promotes the development of projects such as housing and offices. This allows whole neighborhoods to make a comeback. Gentrification may negatively impact the historical and/or cultural makeup of an area. In addition, gentrification may be so successful that neighboring properties may increase in value to the point that existing tenants may not be able to afford the higher rents and/or taxes. This is especially controversial in terms of displacement of lower income individuals and families. Gentrification projects are often highly speculative due to the expensive financing and high risks usually associated with projects of this kind. When financing is a problem, a project may have to be temporarily stopped or abandoned before completion, which results in further accelerating decay of empty buildings and an uncertain future for existing businesses and people. 65. 6. Staples and Office Depot/OfficeMax all have strong multichannel strategies. How do competition and the Internet affect their strategies for locating stores? Since these stores sell mostly standardized and easily specified office supplies, the products stocked can be conveniently and easily sold through the Internet. The primary target markets for this type of retail outlets are small office/home office businesses. The Internet enables these firms to target medium and large firms as well. At the same time, the Internet is an opportunity to target customers far removed from the primary concentration areas (Southeast U.S. for Office Depot and Northeast U.S. for Staples) without incurring the additional costs of each store location in markets where consumers may be sparse. While it does cost a tremendous amount of capital to set up and successfully operate an Internet site, the costs of the site are spread to a wider target market and trading area compared with the costs of setting up individual stores in multiple locations. So the Internet enables these firms to optimize marketing efforts to various target markets as well as the costs of setting up new stores in locations that may not generate sufficient traffic. Since these competitors offer similar merchandise, it is important to offer some type of rewards program to build store loyalty. Another way to differentiate in this industry is to offer unique customer services such as shipping, delivery, printing, and computer support. 66. 7. In many malls, quick-service food retailers are located together in an area known as a food court. What are the advantages and disadvantages of this location for the food retailers? Mall food courts allow customers to find the quick-service food retailers in the center of the shopping mall. food courts usually have public seating in one area within the food court, so each quick-service food retailer does not have to provide a separate seating room for customers. The common area charges associated with these kinds of arrangements are significantly less than if each retailer provided a separate seating area. This arrangement enables the retailers to lease a smaller amount of expensive space. Finally, food courts provide a variety of alternatives, therefore creating a synergy that attracts a larger group of potential customers. Groups of potential customers, such as families, can patronize a variety of quick-service food retailers at one time.

Chapter 18 - Customer Service In terms of disadvantages, food courts require the quick-service food retailers to be located next to one another, thus making the immediate environment extremely competitive. In addition, malls with food courts usually insist that the retailers locate within the food court, so there is no opportunity to try to locate to a better position within the mall. Also, food courts tend to have limited space, creating less flexibility in store design and expansion. 67. 8. Why would The Container Store locate in a neighborhood shopping center instead of a regional shopping mall? Store in Rockville, Maryland

Source: https://www.containerstore.com/locations/showState.htm?state=MD The Container Store might locate in a neighborhood shopping center because these centers offer customers convenient locations and easy parking, and they offer retailers relatively lower rents than regional shopping centers. This location often is on a busy road with high visibility and good egress. This location enables The Container Store to have a larger footprint with greater merchandise selection. This location may also allow this retailer to offer lower prices than a store offering comparable merchandise at the mall. 68. 9. How does the mall near you home or university combine the shopping and entertainment experience? Answers here will vary widely. Students may describe efforts at traditional shopping centers, such as special promotions, food courts, holiday events, or music/video offerings. Others may respond with entertainment features typically found at lifestyle centers, including concerts and events, movie theaters, more restaurants and clubs, and recreation centers. Additional Sources: Shopping malls were struggling before COVID-19 and now have more empty stores: What's next after the pandemic?, USA Today, 12/29/2020, https://www.usatoday.com/story/money/shopping/2020/12/29/shopping-mall-closures-aftercoronavirus/3862931001/

Chapter 18 - Customer Service Malls Are Struggling Now, But There’s Hope For A Retail Renaissance Post-COVID, Forbes, 8/27/2020, https://www.forbes.com/sites/pamdanziger/2020/08/27/prospects-for-malls-are-bright-post-covidget-ready-for-a-mall-renaissance/?sh=60ff3bbf14fa 69. 10. Consider a big city that has invested in an urban renaissance. What components of the gentrification project attract both local residents and visiting tourists to spend time shopping, eating, and sightseeing in this location? Local residents will likely be attracted to the convenience of retailers located in or nearby their neighborhoods, along with the needed services, jobs, enhanced safety, visibility, and choices among retailers that would accompany the gentrification project. Visiting tourists may be more attracted to the historical significance and unique entertainment elements built into the project.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective(s)

Retail Locations

Drag and Drop; Matching (accessible version)

Types of Retail Locations

8-1 Describe the types of retail locations available to retailers. 8-4 Discuss nontraditional retail locations.

Ted's Taqueria Evaluating Retail Locations

Decision Generator

Types of Retail Locations

8-1 Describe the types of retail locations available to retailers. 8-4 Discuss nontraditional retail locations.

Legal Restrictions for Retailers

Click and Drag; Matching (accessible version)

Types of Retail Locations

8-6 Review the societal and legal considerations in selecting locations.

Consumer Shopping Behavior

Click and Drag; Matching (accessible version)

What Is a Retail Strategy?

8-5 Match the locations to the retailer’s strategy.

CHAPTER 9 RETAIL SITE LOCATION ANNOTATED OUTLINE

INSTRUCTOR NOTES

Selecting retail locations involves the analysis of a large amount of data and the use of sophisticated statistical models. Different approaches are used to evaluate specific sites and estimate the expected sales if and when a store is located at that site. Various terms are negotiated when a retailer commits to leasing space for its store. I. Evaluating Areas for Locations and Determining the Number of Stores in an Area

LO 9-1 Summarize the factors considered in locating a number of

Chapter 18 - Customer Service

Retail site selection is a very strategic decision. Once a location is chosen, a retailer must live with it for many years. Even if a retailer finds the “right” neighborhood, the wrong site can spell disaster.

stores.

Areas that retailers consider for locating stores might be countries, areas within a country such as a province or state, particular cities, or areas within a city. A. Metropolitan Statistical Area In the United States, retailers often focus their analysis on a Metropolitan Statistical Area (MSA) because consumers tend to shop within an MSA.

See PPT 9-3

An MSA is a core urban area containing a population of more than 50,000 inhabitants, together with adjacent communities that have a high degree of economic and social integration with the core community. An MSA can consist of one or several counties and is usually named after the major urban area in the MSA. A micropolitan statistical area (µSA) is a smaller unit of analysis with only 10,000 inhabitants in its core urban area. B. Considerations in Evaluating Store Locations The best areas for locating stores are those that generate the highest long-term profits for a retailer.

Exhibit 9-1 Factors Affecting the Attractiveness of an Area for Locating Stores

Some factors affecting the long-term profit generated by stores that should be considered when evaluating an area and include (1) the economic conditions, (2) competition, (3) the strategic fit of the area’s population with the retailer’s target market, and (4) the costs of operating stores. 1. Economic Conditions It is important to examine an area’s level and growth of population and employment because locations involve a commitment of resources over a long time horizon.

See PPT 9-5

A large, fully employed population means high purchasing power and high levels of retail sales.

Under what circumstances is it desirable for retailers to establish stores in sparsely populated areas? Is it ever a good idea?

Retail location analysis must also consider how long growth will take place and how it will affect demand for merchandise sold in the area’s stores.

Consider Subway restaurants— typically these stores go into

Chapter 18 - Customer Service

Most retailers prefer to locate in areas where the population is large and growing. However, other retailers adopt the strategy of moving into newly developing areas, counting on developing suburbs to bring future growth.

underdeveloped areas hoping the area surrounding the store grows. Is this a good strategy?

2. Competition The level of competition in an area also affects demand for a retailer’s merchandise. Walmart’s early success was based on a location strategy of opening stores in small towns with little competition. It offered consumers in small towns quality merchandise at low prices.

Ask students if they think Walmart’s early location strategy could work for another type of retailer. If so, which one(s)? If not, why not?

3. Strategic Fit In addition to population level, growth, and competition, the area needs to have consumers who are in the retailer’s target market, those who are attracted to the retailer’s offering and interested in patronizing its stores. The area must have the right demographic and lifestyle profiles. 4. Operating Costs Costs of operating stores can vary dramatically across areas. Operating costs may be affected by the population of the area, the proximity of the area to other areas in which the retailer operates stores or distribution centers, and the local and state regulatory environments. See PPT 9-7

C. Number of Stores in an Area Retailers must consider the trade-offs between lower operating costs and potential sales cannibalization from having multiple stores in an area. 1. Economies of Scale from Multiple Stores Since retail chains plan to go into an area with a network of stores, they attempt to achieve promotion and distribution economies of scale for all the multiple locations.

Ask students for examples of retail chains with multiple locations within, say, a 20-mile radius.

Multiple stores in an area are needed to justify the cost of building a new distribution center. 2. Cannibalization While there are scale economies gained from opening multiple 18-146 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service locations in an area, there also are diminishing returns associated with locating too many additional stores in an area due to cannibalization (one store taking sales away from another). Because a primary retailing objective is to maximize profits for the entire chain, retailers should continue to open stores only as long as profits continue to increase. In this case, the retailer would continue to open stores as long as the marginal revenues achieved by opening a new store are greater than the marginal costs. For franchise operations, the objectives of the franchisor and the franchisee differ, and thus, disputes can arise over the number of locations in an area. The franchisor is interested in maximizing total store sales, while the franchisee is interested in just the sales and profits from its store(s). To reduce the level of conflict, most franchise agreements grant franchisees an exclusive territory to protect them from another franchisee cannibalizing their sales. LO 9-2 Review the characteristics of a particular site.

II. Evaluating Specific Sites Having decided to locate stores in an area, the retailer’s next step is to evaluate and select the specific site. In making this decision, retailers consider three factors: (1) the characteristics of the site, (2) the characteristics of the trading area for a store at the site, and (3) the estimated potential sales that can be generated by a store at the site.

See PPT 9-9

A. Site Characteristics Considerations in selecting a site are (1) the traffic flow past the site and accessibility to the site, (2) parking, (3) visibility, (4) adjacent tenants, and (5) restrictions and costs. 1. Traffic Flow and Accessibility One of the most important factors affecting store sales is the number of vehicles and pedestrians that pass by the site, or the traffic flow. When the traffic is greater, more consumers are likely to stop in and shop at the store.

Ask students to describe two local retail sites with high levels of attractiveness. Then, ask for two sites with very low levels of attractiveness. Contrast these retailers on their site

Chapter 18 - Customer Service

Traffic counts are particularly important for retailers offering merchandise and services bought on impulse, but less important for destination retailers.

characteristics.

The accessibility of a site is the ease with which a customer can get into and out of it.

Ask students how much traffic impacts their decision to visit a retailer.

Natural barriers, such as rivers or mountains, and artificial barriers, such as railroad tracks, divided or limited-access highways, or parks may also affect accessibility. 2. Parking The amount and quality of parking facilities are critical to a site’s overall accessibility. It’s hard to assess how many parking spaces are enough, although location analysts use parking ratios as a starting point. Congestion is an excess level of traffic that can result in customer delays.

3. Visibility Visibilityrefers to customers' ability to see the store from the street. Good visibility is less important for stores with a wellestablished and loyal customer base. 4. Adjacent Tenants Locations with complementary, as well as competing, adjacent retailers have the potential to build traffic. Complementary retailers target the same market but with non-competing merchandise. The principle of cumulative attraction states that a cluster of similar and complementary retailing activities will generally have greater drawing power than isolated stores that engage in the same retailing activities. See PPT 9-11

5. Restrictions and Costs Some locations may place restrictions on the type of retail tenants that are allowed in a shopping center in their lease agreements. These restrictions may work in favor of the retailer by restricting competing retailers from the location. The restrictions may also work to the disadvantage of the 18-148

Chapter 18 - Customer Service retailer by limiting their efforts to create visibility with signs and other external features. B. Locations Within a Shopping Center Since the better locations cost more, retailers must consider their importance. In a strip shopping center, the more expensive locations are closest to the supermarket. Thus, these locations are most desirable to retailers that rely on impulse shopping from the supermarket’s customers. The same issues apply to evaluating locations within a multilevel, enclosed shopping mall. Stores that cater to consumers engaging in comparison shopping (e.g., buyers of fashionable apparel) benefit from being in more expensive locations near the department store anchors, which are destinations for comparison apparel shoppers. Another consideration is to locate stores that appeal to similar target markets close together. This is based on the principle of cumulative attraction which states that a cluster of similar and complementary retailing activities will generally have greater drawing power than isolated stores that engage in the same retailing activities. This principle applies to both stores that sell complementary merchandise and those that compete directly with one another.

Ask students, given cost considerations, where would you locate a florist or a shoe repair shop in a neighborhood shopping center.

Ask students why stores in antique malls seem to be more successful than antique stores surrounded by other types of stores.

LO 9-3 Understand how retailers analyze the trade area for a site.

III. Defining Trade Areas Retailers estimate the demand for a new location by defining its trade area and then estimating how much people within the trade area will spend. A. Trade Area Definition A trade area is a contiguous geographic area which accounts for the majority of a store’s sales and customers. Trade areas can be divided into three zones.

See PPT 9-13

The primary trading area is the geographic area from which the store or shopping center derives 50 to 70 percent of its customers.

Pick a store or shopping center and have students define the trade area. Point out all the factors that shape the trade area. Why isn’t it round? After they’ve defined the general boundaries, then get them to explain how they would determine the primary and

The secondary trading area is the geographic area of secondary importance in terms of customer sales, generating about 20 to30 percent of a store’s sales. The tertiary trading area, or fringe trading area (the outermost 18-149

Chapter 18 - Customer Service area), includes customers who occasionally shop at the store or shopping center but come from widely dispersed areas.

secondary zones.

The best way to define the three zones is based on driving time rather than distance. However, it is much easier to collect information about the number of people and their characteristics in the different zones by geographical distance than driving time. Thus, retailers often define the zones by distance. B. Factors Affecting the Size of the Trade Area The actual boundaries of a trade area are determined by the store’s accessibility, natural and physical barriers, level of competition, nature of the merchandise sold, the assortment offered, and the location of alternative sources for the merchandise.

See PPT 9-15

C. Measuring the Trade Area for a Retail Site The purpose of the customer spotting technique is to spot, or locate, the residences of the customers for a store or shopping center.

See PPT 9-16

This can be accomplished in a number of ways —recording the information from a check or Internet channel purchase, collecting the information from customer loyalty programs, or gathering mobile data from dedicated app users. It is more challenging to estimate the trade area for a new store location than for existing locations. However, retailers typically use information about the trade areas for existing stores to estimate that trade areas for new stores. See PPT 9-17

D. Sources of Information about Trade Areas Two widely used sources of information about the nature of consumers in a trade area are (1) data published by the U.S. Census Bureau, based on the Decennial Census of the United States; and (2) data from geographic information systems, provided by several commercial firms. 1. Demographic Data from the U.S. Census Bureau A census gathers demographic information from every household in the United States every 10 years. Census information includes: number of persons per household, household relationships, sex, race, age, and marital status. 18-150

Chapter 18 - Customer Service Additionally, a report on each building identifies the number of housing units at the address, the status of plumbing facilities, the number of rooms, whether the dwelling is owner-occupied, the housing value, the rent, and the vacancy status. The U.S. Census Bureau prepares periodic reports summarizing the data from two sources: the census demographics for each person and additional data collected from a sample of the population. There are 8 million census blocks in the United States, each containing the residences of about 40 people. The smallest unit of analysis is the block group, a collection of adjacent blocks that contain between 600 and 3,000 people. Since the Census is taken only once every 10 years, it's often out of date, though the projections are reasonably accurate. Another limitation is that the data are not particularly userfriendly. 2. Geographic Information System Suppliers A geographic Information Systems (GIS) is a system of hardware and software used to store, retrieve, map, and analyze geographic data, along with the operating personnel and the data that go into the system. This computerized system enables analysts to visualize information about their customers’ demographics, buying behavior, and other data in a map format. Using GIS, analysts can identify the boundaries of a trade area and isolate target customer groups.

See PPT 9-18 and 9-19

Ask students why they would use a demographic data or GIS vendor when the Census information is free.

They provide a user-friendly interface so the data can be accessed and analyzed easily. Frequently, the outputs from the system are maps that enable retailers to visualize the implications of the data quickly. Major GIS firms, such as ESRI, Nielsen (which purchased Claritas), and Pitney Bowes (which purchased MapInfo), offer a wide range of tools that are useful for assessing consumer demand in an area. See PPT 9-20

3. Tapestry Segmentation ESRI and other GIS suppliers have developed schemes for 18-151

Chapter 18 - Customer Service classifying geographical areas in the United States by combining census and survey data about people’s lifestyles and purchasing behavior with the mapping capabilities of GIS.

Students can visit the website and see (generally) what Tapestry Segment they are in.

The analysis is based on the premise that “birds of a feather flock together.” Specifically, people that live in the same neighborhoods tend to have similar lifestyle and consumer behavior patterns. 4. Spending Potential Index The Spending Potential Index (SPI) compares the local average expenditure by product to the national average amount spent.

See PPT 9-23

E. Competition in the Trade Area One of the powerful methods of measuring competition is over the Internet, for example on retailer websites or on Yelp using its map function. Other sources of competitive information are directories published by trade associations, chambers of commerce, Chain Store Guide (published by CSG Information Services), and municipal and county governments.

LO 9-4 Determine the forecasted sales for a new store location.

IV. Estimating Potential Sales for a Store Site Methods for estimating potential sales for a store site include regression analysis and the analog method.

See PPT 9-24

A. Regression Analysis The regression analysis approach is based on the assumption that factors that affect the sales of existing stores in a chain will have the same impact on stores located at new sites being considered.

See PPT 9-25 through 9-26 for a regression analysis application

Here, the retailer employs a technique called multiple regression to estimate a statistical model that predicts sales at existing store locations. The technique can consider the effects of the wide range of factors discussed in this chapter.

Chapter 18 - Customer Service

B. Analog Approach Using the analog approach, the retailer simply describes the site and trade area characteristics for its most successful stores and attempts to find a site with similar characteristics. Steps of the analog method may include competitive analysis, defining present trade area, analyzing the trade characteristics, then matching current trade characteristics with potential site. The analog method is best when for retailers with smaller number of outlets. As the number of stores increases, it becomes more difficult for the analyst to organize the data in a meaningful way. More analytical approaches, such as regression analysis, then are necessary. V. Illustration of Site Selection: Edward Beiner Purveyor of Fine Eyewear This takes students through the steps of site selection using the example of Edward Beiner Purveyor of Fine Eyewear, a 12store Florida retailer specializing in upper-end, high-fashion eyewear.

LO 9-5 Illustrate the site selection process. See PPT 9-27 through 9-34

LO 9-6 Explain the different types and terms of leases.

VI. Negotiating a Lease Once a particular site is chosen, retailers still face a multitude of decisions, including the types and terms of the lease.

Ask students why is it important to understand lease terms when choosing a site?

A. Types of Leases Most retailers lease store sites. There are two basic types of leases: percentage and fixed rate.

See PPT 9-35

1. Percentage lease The most common form of lease is a percentage lease. Rent is based on a percentage of sales. Rents go up and down with sales and inflation. Percentage lease with specified maximum/minimum Maximum: Retailer pays percentage of sales up to a maximum point. Minimum: Retailer pays minimum amount no matter how low 18-153 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service sales are. Sliding scale Percentage/sale amount decreases in specified dollar amount intervals as sales go up (e.g., 4% for first $200,000 in sales, then 3% for sales greater than$200,000, etc.) 2. Fixed-Rate Lease The second basic type of lease is a fixed-rate lease. Commonly used by community and neighborhood centers. Retailer pays fixed monthly rent for the life of the lease. A variation of the fixed-rate lease is the graduated lease, in which rent increases by a fixed amount over a specified period of time (i.e., first 3 years-$1,000 per month, next 5 years-$1,250 per month). B. Terms of the Lease Leases can be changed to reflect the relative power of the retailer and shopping center management and specific needs of the retailer. In addition to the rent, some other negotiable aspects of the lease are cotenancy, prohibiteduse, and exclusive-use clauses.

See PPT 9-36. 9-37

1. Cotenancy Clause Contenancy clauses may require that a certain percentage of a shopping center be leased or that specified stores be in the center. 2. Prohibited-Use Clause A prohibited-use clause limits the landlord from leasing to certain kinds of tenants. For example, tenants that take up parking but do not bring shoppers, such as a bowling alley. Also, restricts against leasing to certain kinds of tenants such as bars, pornography retailers, etc. 3. Exclusive-Use Clause An exclusive-use clause prohibits the landlord from leasing to retailers selling competing products. A discount store, for example, may not want another discounter leasing in the same center. Some retailers specify that a landlord cannot place any outparcels in the parking lot. An outparcel is a building (such as a bank or McDonald’s) or kiosk (such as an automated 18-154 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service teller machine) that sits in the parking lot of a shopping center but is not physically attached to the center. 4. Common Area Maintenance Costs In retail leases, common area maintenance (CAM) clauses often require the most extensive negotiations. These clauses traditionally assign responsibilities for taking care of common areas, including sidewalks or parking lots. VII. Summary Location decisions have strategic importance because they have significant effects on store choice and are difficult advantages for competitors to duplicate. Picking good sites for stores is part science and part art. Four factors that retailers consider when evaluating an area for store locations are economic conditions, competition, strategic fit, and operating costs. Trade areas are typically divided into primary, secondary, and tertiary trading areas. Once retailers have the data that describe their trade areas, they use analytical techniques to estimate demand. Retailers need to negotiate the terms of a lease.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 70. 2. INTERNET EXERCISE Write down the segmentation characteristics you would expect to find in your college location or hometown. Consider population density, age, income, education, race/ethnicity, and so forth. Now go to Explore Your Community's Characteristics on the esri Tapestry Segmentation website at https://www.esri.com/en-us/arcgis/products/tapestrysegmentation/zip-lookup. Type in your university or home zip code and summarize the results in terms of the same attributes. How did the Tapestry Segmentation compare to your initial perceptions? Answers will vary depending on zip code. This exercise will expose students to geographic and economic market segmentation.

Example results for 21042 zip code, https://www.esri.com/en-us/arcgis/products/tapestrysegmentation/zip-lookup. Additional results, http://downloads.esri.com/esri_content_doc/dbl/us/tapestry/segment1.pdf 3. INTERNET EXERCISE Go to What is GIS (geographic information system) on the esri website at https://www.esri.com/en-us/what-is-gis/overview, the home page for ESRI geographic information system, and read about GIS. Define this term in your own words. Afterward, explain how retailers can make better decisions with GIS. ““A geographic information system (GIS) is a framework for gathering, managing, and analyzing data. Rooted in the science of geography, GIS integrates many types of data. It analyzes spatial location and organizes layers of information into visualizations using maps and 3D scenes. With this unique capability, GIS reveals deeper insights into data, such as patterns, relationships, and situations—helping users make smarter decisions.” 18-156 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Retailers can use GIS to find patterns, map distribution, find locations by criteria, measure population density, assess competition, and evaluate change. For more information on retail topics click here, https://www.esri.com/enus/industries/retail/overview. 71. 4. INTERNET EXERCISE The U.S. Census Bureau tracks key population characteristics, such as age, gender, race and ethnicity, families and living arrangements, health, education, language business and economy, employment, housing, income, and poverty. Go to the U.S. Census Bureau site at https://data.census.gov/cedsci/ and, using the community facts search, look up key demographic segmentation data for your state. Explain which factors would be most important for retailers to evaluate if considering this location. This list should include some/all of the following characteristics:             

Description of family and household Educational attainment Number and age of children Veteran or civilian status Marital status Disability status Gender Residence tenure Fertility Place of birth Grandparents’ U.S. citizenship status School enrollment World region of birth if foreign born

72. 5. GO SHOPPING Go to a shopping mall. Get or draw a map of the stores. Analyze whether the stores are clustered in some logical manner. For instance, are all the high-end stores together? Is there a good mix of retailers catering to comparison shoppers near one another? Responses will vary depending on the mall selected. Differences and similarities could be used for a team or class discussion. Students will likely note that most anchor stores are located at opposite ends of the mall. Some competitors like Gap and Abercrombie may choose to locate near each other to facilitate comparison shopping. Highly specialized stores for items like sunglasses or jewelry might request to be far away from competition within the mall. 73. 6. GO SHOPPING Visit a jewelry store in an enclosed mall and one in a neighborhood strip shopping center. List the pros and cons for each location. Which location is the most desirable? Why is this the case? Students’ answers will vary. Some pros of locating in an enclosed mall include increased security, increased pedestrian traffic, and more opportunity for comparison shopping. Some cons of locating in

Chapter 18 - Customer Service an enclosed mall are less convenience for customers, more overhead costs, and less visibility from the road. Pros of the neighborhood strip shopping center include accessibility, drive-by traffic, and high visibility. Cons include decreased security and less control over tenant mix. Given the specialized nature of a jewelry store, most jewelry retailers will likely be destination stores. An advantage of an enclosed mall is the increase in security, which is especially important for expensive products like jewelry. Therefore, an enclosed mall is probably a more desirable location for a jewelry store versus a neighborhood strip shopping center.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 74. 1. Which factors do retailers consider when evaluating an area of the country to locate stores? How do retailers determine the trade area for a store? The best areas for locating stores are those that generate the highest long-term profits for a retailer. Some of these factors include (1) economic conditions, (2) competition, (3) strategic fit of the area’s population with the retailer’s target market, and (4) the costs of operating the stores. Retailers determine trade area by identifying primary, secondary, and tertiary trade zones. The primary trading area is the area from which the shopping center or store derives 50-70 percent of its customers. The secondary trading area is the area generating 20-30 percent of its customers, and the tertiary trading area includes remaining customers who shop at the site but come from far away. The appropriate definition of the three zones should be based on customer’s driving time. Some retailers use distance rather than driving time for this determination, because it is easier to collect this information. 75. 2. True Value Hardware plans to open a new store. Two sites are available, both in middle-income neighborhood centers. One neighborhood is 20 years old and has been well maintained. The other was recently built in a newly planned community. Which site is preferable for True Value? Why? Due to the high cost of home maintenance, middle-income neighborhoods are good candidates for a store such as True Value. The neighborhood that is 20 years old is a good choice, because the homes there will need repairs and continual maintenance. Since the homes in this neighborhood have been well maintained, the indication is that the homeowners use the supplies that True Value carries on a regular basis. The newly planned community may also be a good location; new homes also require regular maintenance. In addition, True Value carries supplies that new homeowners need, such as picture hangers and other similar items. A new community also has the advantage of having a customer base that is not already loyal to any particular store. Thus, being the first hardware store may help it develop a long-term customer base. 76. 3. At Del Frisco’s Steakhouse (https://delfriscos.com/), a filet mignon in Washington, D.C., runs from about $48 to $70, whereas at Outback Steakhouse (https://order.outback.com/home/), it runs from about $21 to $24. What characteristics would Del Frisco’s look for in a trade area for a new location? How would those characteristics change for Outback? To analyze the attractiveness of a potential store site, retailers use information about both the consumers and the competitors in the site’s trade area. Two widely used sources of information about the nature of consumers in a trade area are (1) data published by the U.S. Census Bureau, based on the Decennial Census of the United States, and (2) data from geographic information systems, provided by several commercial firms. Data in ESRI’s consumer spending database are reported by product or service; variables include total expenditures, average amount spent per household, and a Spending Potential Index (SPI). The SPI compares the local average expenditure by product to the national average amount spent. For Del Frisco’s, a higher household income and disposable income would be a better match to the target market. Additionally, the consumer SPI would be higher than that for Outback. 18-159 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 77. 4. Trade areas are often described as concentric circles emanating from the store or shopping center. Why is this practice used? Suggest an alternative method. Which would you use if you owned a store in need of a trade area analysis? In general, consumers would prefer to shop within their area(s) of primary residence to minimize travel and other times. The more a consumer must travel to obtain a product, the more the actual physical and opportunity costs (of time) for the consumer— something the consumer would do only for lower priced products or for unique merchandise. Due to these shopping behaviors of most consumers, trading area polygons assume that a majority of the consumers would come to a store or center from areas closest to it, while the number of consumers arriving at a store or center would decrease as with increasing distance from the store or center. The idea of concentric circles makes sense since consumers may arrive from any direction. An alternate method could be to use city blocks, especially in well-laid, planned, or newer cities. Here, city squares could be used because the major streets traversed run north-south and east-west. Depending on the trade area being considered, either method could be used, but it should be adapted to the specific region by considering the major roadways, travel conditions, natural and artificial barriers, and type of store for which the analysis is being done. 78. 5. Under what circumstances might a retailer use the analog approach for estimating demand for a new store? What about regression analysis? The analog approach is also called the similar store approach; it attempts to match the current store's trading area characteristics with potential new areas having similar characteristics. Retailers would use this approach when it is possible to identify trading areas with similar characteristics. Also, the analog approach works best when a retailer has a relatively small number of outlets (say, 20 or fewer). As the number of stores increases, it becomes more difficult to organize the data in a meaningful way. The regression approach is best when there are multiple variables expected to explain sales, because it is difficult to keep track of multiple predictor variables when using a manual system like the analog approach. However, a higher number of data points (i.e., prior stores) are needed for the regression results to be reliable. Also, proper training is needed to run regression analysis and interpret the results. In general, the analog approach may provide a better qualitative assessment of good or poor potential locations, while the regression approach provides a quantitative average of potential in an area. 79. 6. Retailers have a choice of locating on a mall’s main floor or second or third level. Typically, the main floor offers the best, but most expensive, locations. Why would specialty stores such as Apple, Sephora, and Coach, choose the second or third floor? These stores are destination stores with a national reputation. When people are in the market for specialty beauty and bath products, phones and computers, or accessories, they will search out the stores that carry them. As such, the customer will be willing to walk to a second or third floor. Stores like these do not necessarily need to be in a highly visible area (with the highest rent). 80. 7. What kind of lease should a new retail enterprise, opening its first store in an urban location that is experiencing gentrification and growth, seek to negotiate with the building owner?

Chapter 18 - Customer Service Since the process of gentrification—the renewal and rebuilding of offices, housing, and retailers in deteriorating areas—coupled with an influx of more affluent people that displaces the former, lowerincome residents is an unknown environment, a new retail enterprise should negotiate a percentage lease. Sales are unknown, so this would more favorably benefit the new retail enterprise. Rent is based on a percentage of sales. In addition to the percentage of sales, retailers typically pay a common area maintenance (CAM) fee based on a percentage of their gross leasable square footage. Because retail leases typically run for 5 to 10 years, they appear equitable to both parties if rents go up (or down) with sales and inflation. However, more commonly used by community and neighborhood centers is the fixed-rate lease. A retailer pays a fixed amount per month over the life of the lease. This may be more favorable if the new retail enterprise is looking for a fixed rent amount to better plan expenses. 81. 8. If you were considering the ownership of a Taco Bell franchise (https://www.tacobell.com/about-us), what would you want to know about the location in terms of traffic, population, income, employment, and competition? What else would need to be researched about a potential location? Visit the Entrepreneur website to research franchise information on this popular quick service restaurant at https://www.entrepreneur.com/franchises/tacobell/282858. Several factors should be considered in learning about a potential franchise location. In terms of traffic, the potential franchisee should learn how much vehicle (or in a food court, pedestrian) traffic passes the site and at what times of day. In terms of population, the potential franchisee needs to know both the actual population figures and projections of growth. Is the area growing, stagnating, or decreasing in terms of population? In terms of income and employment, the potential franchisee should consider the level of employment and incomes within its expected trade areas. In terms of competition, the potential franchisee should look at the number and type of similar retailers in the immediate area to be certain the area is not oversaturated. In addition, the prospective franchisee should consider whether the location is considered part of an exclusive territory (no other Taco Bells in the immediate area) and how large the exclusive trade area will be.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type

Topic(s)

Learning Objective(s)

Hutch: Locating a New Store

Case Analysis

Evaluating Retail Sites, Trade Areas and the Site Selection Process

9-1 Summarize the factors considered in locating a number of stores. 9-2 Review the characteristics of a particular site.

Katie's Kids- Trade Area Analysis

Sub Hub-Retail Site Selection

Decision Generator

Case Analysis

Trade Areas and the Site Selection Process, The Importance of Choosing a Store Location

9-2 Review the characteristics of a particular site.

Evaluating Retail Sites

9-2 Review the characteristics of a particular site.

9-3 Understand how retailers analyze the trade area for a site.

CHAPTER 10 INFORMATION SYSTEMS AND SUPPLY CHAIN MANAGEMENT ANNOTATED OUTLINE I.

Creating Strategic Advantage through Supply Chain Management and Information Systems 



INSTRUCTOR NOTES LO 10-1 Understand the strategic advantage generated by a supply chain.

It is the retailer’s responsibility to gauge customers’ wants and needs and work with the other members of the supply chain – distributors, vendors, and transportation companies – to make sure the merchandise that customers want is available when they want it.

See PPT 10-4 for supply chain definition.

In a simplified supply chain, manufacturers ship merchandise either to a distribution

PPT 10-5 illustrates the components of a typical supply chain.

Chapter 18 - Customer Service center, fulfillment center, or they ship directly to stores. 

Supply chain management is a set of activities and techniques firms employ to efficiently and effectively manage these flows of merchandise from the vendors to the retailer’s customers.



The goal for the supply chain is to execute four of the five rights of merchandising: right product, right place, right quantity, right time. Supply chain would not impact “right price” as retail price is not a function of the supply chain (although the cost of transportation may be considered when setting the retail price).



Retailers have increasingly taken a leadership position in their respective supply chains. Based on the consolidation and emergence of large, global retail chains, retailers often play a dominant role in coordinating supply chain management activities. Retailers also are sharing their data on shopping behaviors with suppliers to plan production, promotions, deliveries, assortments, and inventory levels.

Ask students to think about the five “rights” of merchandising. Which one of the five is not a direct function of supply chain management? How are the other four directly related to supply chain management?

A. Strategic Advantage 



Not all retailers can develop a competitive advantage from their information and supply chain systems. Achieving this advantage requires a substantial financial investment as well as the coordinated effort of employees and functional areas throughout the company.

Walmart’s sustainable advantage through supply chain management is summarized in PPT 10-8.

When retailers do develop a competitive advantage from these systems, as Walmart has, the advantage is sustainable – it is very difficult for competitors to duplicate. See PPT 10-7

B. Improved Product Availability 

Zara’s strategic supply chain advantage is discussed in PPT 10-7.

An efficient supply chain has two benefits for customers: (1) fewer stockouts and (2)

Ask students to consider how their feelings toward a retailer change when the product they

Chapter 18 - Customer Service tailored assortments. These benefits translate into greater sales, higher inventory turnover, and lower markdowns for retailers.

want is not available in the store. Would they shop online with that same retailer for the out-ofstock product or would they look to purchase the item from another retailer? Do they lose trust in that retailer? Are stockouts more significant for brick-and-mortar retailers as compared to online retailers?

1. Fewer Stockouts 

A stockout occurs when an SKU that a customer wants is not available.



Data from apparel shoppers show that when experiencing a stockout, 17 percent of consumers will switch to another brand, 39 percent will go to another store to buy the product, and the remaining 44 percent will just stop shopping.



Accordingly, stockouts cost U.S. retailers approximately $130 billion in lost revenue each year.



In general, stockouts have short-term and long-term effects on sales and profits.

Ask students if stockouts drive consumers to another brand, another store, or to stop shopping all together.

2. Tailored Assortments 

Another benefit provided by information systems that support supply chains is making sure the right merchandise is available at the right store.



Retailers use sophisticated statistical methods to analyze sales transaction data and adjust store assortments on a wide range of merchandise on the basis of the characteristics of customers in each store’s local market.

C. Higher Return on Assets 

An efficient supply chain and information system can improve a retailer’s return on assets (ROA) because the system increases sales and net profit margins, without increasing inventory.

See PPT 10-8

Chapter 18 - Customer Service 

Net profit margin is improved by increasing the gross margin and lowering expenses.



An information system that coordinates buyers and vendors allows retailers to take advantage of special buying opportunities and obtain the merchandise at a lower cost, thus improving their gross margins.



Retailers can lower transportation expenses by coordinating deliveries.



With more efficient distribution centers, merchandise can be received, prepared for sale, and shipped to stores with minimum handling, further reducing expenses.



Sophisticated inventory management systems can allow the retailer to carry relatively little backup inventory to stay in stock.



With a lower inventory investment, total assets are also lower, so the asset and inventory turnovers are both higher.

II. The Flow of Information through a Supply Chain 

The flow of information is complex in a retail environment.



As the transaction takes place, the merchandise Universal Product Code (UPC) is scanned and a sales receipt is generated for the customer. Purchase information is recorded in the POS terminal and sent to the buyer/planner. The planner uses this information to plan additional purchases and make markdown decisions. Note: RFID may eventually replace UPC tags (discussed later in the chapter).



LO 10-2 Describe how information flows in a supply chain.

See PPT 10-10, 10-11, and 10-12 for detailed information on the Information Flow process.

Discuss with students what may happen if the incorrect UPC is scanned at the POS. How would this impact stockouts, over-stocks, sales, replenishment, etc.?

The sales transaction data are also sent to the distribution center (DC) or fulfillment center (FC). When the store inventory drops to a specified level, more merchandise is shipped to the store. Inventories across stores, distribution 18-165

Chapter 18 - Customer Service centers, or fulfillment centers are automatically updated in the system. 

When the inventory drops to a specified level, the buyer/planner communicates with the vendor regarding the purchase order for the merchandise. At this point they often negotiate shipping dates and terms of purchase.



The buyer/planner communicates with the DC or FC to coordinate deliveries from the vendor and to the stores, and check inventory status.



In some situations, especially when merchandise is reordered frequently, the ordering process is done automatically, bypassing the buyers/planners.



When the manufacturer ships the product to the DC or FC, it sends an advanced shipping notice (ASN) to the distribution center. An ASN is a document that tells the distribution center what specifically is being shipped and when it will be delivered.



When the shipment is received at the DC for FC, the buyer/planner is notified and then authorizes payment to the vendor.

A. Data Warehouse 



Purchase data collected at the point of sale goes into a huge database known as a data warehouse. The information stored in the data warehouse is accessible on various dimensions and levels. Analysts from various levels of the retail operation extract information from the data warehouse for making marketing decisions about developing and replenishing merchandise assortments. Data warehouses also contain information about customers, which is used to target promotions and group products together in

See PPT 10-13 Ask students what would they like to know about their customers. How would they use that information?

Ask students why one major drug store retailer decided to put beer next to diapers. (Because a market-basket analysis showed that guys were “sent” to the store at night to buy diapers and ended up buying beer.)

Chapter 18 - Customer Service stores. 

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents from a retailer to a vendor and back.



Retailers can transmit information about sales data, purchase orders, invoices, and data about returned merchandise.



Vendors can transmit information about on-hand inventory status, vendor promotions, and cost changes to the retailer, as well as information about purchase order changes, order status, retail prices, and transportation routings.

Ask students what benefit would there be for retailers and vendors to communicate “seamlessly” through systems. How can EDI help build a sustainable competitive advantage in supply chain management?

See PPT 10-14

B. Vendor-Managed Inventory (VMI) and Collaborative Planning, Forecasting and Replenishment (CPFR) 

VMI is an approach for improving marketing channel efficiency, in which the manufacturer is responsible for maintaining the retailer’s inventory levels in each of its stores.1



CPFR is a more advanced form of retailervendor collaboration that involves sharing proprietary information such as business strategies, promotion plans, new product developments and introductions, production schedules and lead time information. LO 10-3 Consider the flow of merchandise through a supply chain.

III. The Flow of Merchandise through a Supply Chain 

Making merchandise flow involves first deciding whether the merchandise will go from the manufacturer to a retailer's DC, FC, or directly on to stores.



Once in a DC, multiple activities take place before merchandise is shipped to a store. FC will be discussed next.

See PPT 10-15. Also see a diagram of Merchandise Flow in PPT 10-16.

Chapter 18 - Customer Service 

The merchandise flows and pertinent decision variables in an Internet channel are similar, except those orders arrive from customers one at a time and go out in relatively small quantities, so the facility used to store and process these orders— that is, the fulfillment center (FC)—works a little differently



Merchandise flows from:



Vendor to distribution center



2. Distribution center to stores



3. Alternatively, from vendor directly to stores. See PPT 10-17

A. Distribution Centers versus Direct Store Delivery 

Retailers can use a distribution center or direct store delivery, depending on merchandise characteristics and the nature of demand.



To determine which distribution system – distribution centers (DC) or direct store delivery (DSD) - is better, the retailer must consider the total cost associated with each alternative versus the customer service criterion of having the right merchandise at the store when the customer wants to buy it.



Discuss the differences in merchandise flow for the Internet as compared to stores. Which aspects are similar and which aspects are different?

Advantages of using a distribution center are: (1) more accurate sales forecasts, (2) the retailer’s ability to carry less merchandise in the individual stores, which results in less inventory investment systemwide, (3) easier to avoid running out of stock or having too much stock, and (4) since distribution centers are better equipped to prepare merchandise for sale, it is more cost-effective to store merchandise and get it ready for sale than in individual stores.

Ask students why DSD would be better for perishable goods. High-fashion goods? Fads?

Ask students to name types of retailers that should use distribution centers and those that should not.

Chapter 18 - Customer Service 

Distribution centers are not viable for all retailers. If a retailer has only a few outlets, then the expense of a distribution center is probably unwarranted. Also, if many outlets are concentrated in metropolitan areas, then the merchandise can be consolidated and delivered by the vendor to all the stores in one area. In some cases, it is quicker to get merchandise to stores by avoiding the extra step of using a distribution center. This is particularly important for perishable goods (meat and produce), high-fashion items, or fads since shelf life is limited.



What type of retailer should use a distribution center? Retailers with wildly fluctuating demand at a store level, stores that require frequent replenishment, stores that carry a relatively large number of items or order in less than full-case quantities, and retailers with a large number of outlets that are not geographically concentrated within a metropolitan area would all benefit from using a distribution center. See PPT 10-19

B. The Distribution (or Fulfillment) Center 

The distribution center performs several functions, which might include: managing inbound transportation; receiving and checking; storing and cross-docking; getting merchandise floor-ready; ticketing and marking; preparing to ship merchandise to stores; and shipping merchandise to stores.



Fulfillment centers perform the same functions but because they deliver direct to customers rather than stores, they do not get merchandise floor ready. They may have different packaging standards since their products are delivered direct to consumer.

1. Managing Inbound Transportation 

Buyers and planners are more involved in coordinating the physical flow of 18-169

Chapter 18 - Customer Service merchandise to the stores. Buyers are generally responsible for the purchase and profitability of merchandise, whereas planners are responsible for the financial planning and analysis of merchandise and its allocation to stores. 

The dispatcher is the person who coordinates deliveries to the distribution center.

2. Receiving and Checking Using UPC or RFID 

Receiving refers to the process of recording the receipt of merchandise as it arrives at a distribution center.



Checking is the process of going through the goods upon receipt to make sure they arrived undamaged and that the merchandise ordered was the actual merchandise received.



Many distribution systems using EDI are designed to minimize, if not eliminate, labor-intensive and time-consuming processes.



Radio frequency identification (RFID) tags are tiny computer chips that automatically transmit to a special scanner all the information about a container's contents or individual products.

3. Storing and Cross-Docking 

After the merchandise is received and checked, it is either stored or cross-docked.



Using a cross-docking distribution center, merchandise cartons are prepackaged by the vendor for a specific store. Because the merchandise is ready for sale, it is placed on a conveyor system that routes it from the unloading dock at which it was received to the loading dock for the truck going to the specific store – thus, the name cross-

Ask students to think about the variety of products they purchase and which of those products would be good candidates for crossdocking. What products would be best stored at the DC and why?

Chapter 18 - Customer Service docked. 

Cross-docked merchandise is only in the distribution center for a few hours before it is shipped to the stores.



Merchandise size and the sales rate typically determine whether cartons are cross-docked or stored.

4. Getting Merchandise Floor-Ready 

Floor-ready merchandise is merchandise that's ready to be placed on the selling floor. Getting merchandise floor-ready entails ticketing, marking, and, in the case of apparel, placing garments on hangers.

Ask students if they think retailers are asking too much of their vendors in making them provide floor-ready merchandise. Consider the challenges for manufacturers of having to adhere to multiple retailers’ floor-ready requirements. What about retailers that sell one commodity (specialty store) as compared to retailers that sell multiple commodities (department store or discount store)?

5. Ticketing and Marking 

Ticketing and marking refers to affixing price and identification labels on the merchandise.



It is more efficient for a retailer to perform these activities at a DC than in the stores.



An even better approach from the retailer's perspective is to get vendors to ship the merchandise floor-ready, thus totally eliminating this expensive, time-consuming process. Having floor-ready merchandise benefits the retailer because the cost of making the merchandise floor-ready is passed on to vendors.

6. Preparing to Ship Merchandise to a Store 

After receiving the store order, the computer at a distribution center creates a pick ticket, a document that tells the order filler how much of each item to get from the storage area.



The pick ticket is printed in warehouse 18-171

Chapter 18 - Customer Service location sequence so the order fillers don’t waste time crisscrossing the distribution center looking for merchandise. The system knows which items are out of stock so it doesn’t even print them on the pick ticket. 

Order fillers take the merchandise to a staging area where an electronic sorter routes the merchandise to the bay with the truck going to the store.



In some distribution and fulfillment centers, the filler functions are performed by robots.

7. Shipping Merchandise to Stores 

The management of outbound transportation from distribution center to stores has become increasingly complex as chain stores expand. Centers may use a sophisticated routing and scheduling computer system. This system considers the rate of sales in the store, road conditions, and transportation operating constraints to develop the most efficient routes possible. As a result, stores are provided with an accurate estimated time of arrival and vehicle utilization is maximized.

C. Inventory Management-through Just-in-Time Inventory Systems 

Just-in-time (JIT) inventory systems, also known as quick response (QR) inventory systems in retailing, are inventory management systems that deliver less merchandise on a more frequent basis than traditional inventory systems.



The benefits of a JIT system include reduced lead time (the amount of time between the recognition that an order needs to be placed and the arrival of the needed merchandise at the seller's store and is available for sale), increased product availability, and lower inventory

Discuss with students how reduced lead times can better forecast demand. How would lower inventory investments delivered more frequently help improve profits and stockouts?

Chapter 18 - Customer Service investment. 

JIT systems are complex, costly and require high collaboration between companies and vendors. A strong commitment is required by the firm and its vendors to cooperate, share data, and develop systems. LO 10-4 Review the considerations and trends in the design of supply chains.

IV. System Design Issues and Trends A. Outsourcing Supply Chain Functions 

To streamline their operations and make more productive use of their assets and personnel, some retailers outsource supply chain functions. Many independent companies are very efficient at performing individual activities or all the supply chain activities.



The primary benefit of outsourcing is that the independent firms can perform the activity at a lower cost and/or more efficiently than the retailer.



The disadvantage is when retailers outsource a supply chain activity they can no longer develop a sustainable competitive advantage based on the performance of this activity (competitors can hire the same firm for outsourcing).

B. Pull and Push Supply Chains 

In a pull supply chain, orders for merchandise are generated at the store level based on sales data captured by POS terminals. The demand for an item pulls it through the supply chain.

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In a pull supply chain, there is less likelihood of being overstocked or out of stock because the store orders merchandise as needed based on consumer demand.



The pull approach increases inventory

See PPT 10-23

Ask students to weigh the pros and cons of outsourcing supply chain functions.

See PPT 10-24 for a summary of characteristics of push and pull supply chains.

Ask students: Compare the advantages and disadvantages of using a push supply chain versus a pull supply chain. Which categories of business are better suited for each method?

Chapter 18 - Customer Service turnover, is more responsive to changes in customer demand, and there is less likelihood of being overstocked or out of stock. 

In a push supply chain, merchandise is allocated to the store based on forecast demand. A forecast is developed and specific quantities of merchandise are shipped to distribution centers and stores at predetermined time intervals.



Although generally more desirable, a pull approach is not the most effective in all situations. It requires a more costly and sophisticated information system to support it, some merchandise does not allow retailers flexibility to adjust inventory levels based on demand, and push supply chains are more efficient for merchandise that has steady, predictable demand. See PPT 10-25, 10-26

C. Radio Frequency Identification Devices 

Radio frequency identification devices are tags that transmit identifying information and are attached to individual items, shipping cartons, and containers.



RFID technology has advantages over traditional bar codes, including (1) the ability to hold more data and update data stored on the device and (2) enables the accurate, real-time tracking of every single product, from manufacturer to checkout in the store.

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RFID has several demonstrated benefits including: (1) reduced labor costs for warehouse and distribution, (2) reduced labor costs at point-of-sale, (3) inventory savings, (4) reduced theft, and (5) reduced out-of-stock conditions.



High costs are the major obstacle to the adoption of RFID systems.



Complex and highly integrated systems are

Discuss the advantages of RFID. Ask students if they foresee any disadvantages. What are the risks or downsides of these systems?

Chapter 18 - Customer Service also a challenge with successful implementation and use of RFID. D. Supply Chain for Fulfilling Catalog and Internet Orders 

The supply chain and information systems for supporting catalog and Internet channels tend to be distinct from those that support the traditional store channel



The information system for supporting a store channel focuses on products—making sure that the right number of products are delivered to each store—while information systems supporting nonstore channels are focused on the customer—making sure that the right customer receives the right product.



Some companies use the store inventory to fulfill the nonstore orders which can reduce inventory costs and shipping expense while reducing the delivery time.

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Synergies between the channels can be exploited if the same centers are used for all channels. See PPT 10-28

E. Drop Shipping 

See PPT 10-27

Drop shipping, or consumer direct fulfillment, is a system in which retailers receive orders from customers and relay these orders to vendors; the vendors then ship the merchandise ordered directly to the customer.



Robots are being used in the drop ship fulfillment environment.

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Advantages include reduced = inventory costs and investment because the vendor, rather than the retailer, assumes the costs and risks of supplying merchandise to customers.



Disadvantages in drop shipping from a

Ask students when drop shipping orders would make the most sense for product-related purchases. Which retailers could utilize drop shipping? Could this be a sustainable competitive advantage? Why or why not?

Chapter 18 - Customer Service retailer’s perspective include a longer delivery time, increased costs (with multiple purchases), loss of control, and defining the process for handling returns. See PPT 10-29

F. Customer Store Pickup 

Rather than shipping orders directly to customers, retailers can enable them to make a purchase online and then pick up the merchandise in stores.



For retailers to be successful with the buyonline/pick-up-in-store option, they need to invest in technology that enables order allocation systems to locate every item in stock to fulfill the order in a timely manner.



Mobile task management technology is a wireless network and a mobile device that receives demand notification and enables a speedy response. This solution allows the associate closest to the ordered item to physically pull it and verify its availability. See PPT 10-30

G. Reverse Supply Chain 

Reverse supply chain is the process of capturing value from and/or properly disposing of merchandise returned by customers and/or stores.



Reverse supply chain systems are challenging. Items may be damaged, and without the original shipping carton, thus causing special handling needs. Transportation costs can be high because items are shipped back in small quantities.

V. Summary 

Supply chain management and information systems have become important tools for achieving sustainable competitive advantage. Developing more efficient methods of distributing merchandise creates an opportunity to reduce expenses and improve customer service levels. 18-176

Chapter 18 - Customer Service 

Efficient supply chain management provides three benefits to retailers: (1) fewer stockouts, (2) tailored assortments, and (3) higher return on assets.

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A retailer’s information system tracks the flow of merchandise through distribution centers to retail stores and from fulfillment centers to their customers. Most communications between vendors and retailers occur via electronic data interchange over the Internet.

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Many retailers are adopting a quick response inventory system that is characterized by smaller, more frequent shipments from manufacturers.

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In designing their supply chain management systems, retailers make decisions about what activities to outsource; when to use a push and pull system for replenishing stores; whether the benefits of radio frequency identification devices outweigh the costs; how to handle merchandise shipped through DCs to stores versus FCs to customers; whether to have manufacturers ship merchandise directly to customers; whether to offer customers the opportunity to pick up

Chapter 18 - Customer Service ANSWERS TO “GET OUT AND DO IT!” QUESTIONS ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 82. 1. CONTINUING ASSIGNMENT Interview the store manager working for the retailer you have selected for the Continuing Case assignment. Write a report that describes and evaluates the retailer’s information and supply chain systems. Use this chapter as a basis for developing a set of questions to ask the manager. Some of the questions might be these: Where is the store’s distribution center (DC)? Does the retailer use direct store delivery from vendors? How frequently are deliveries made to the store? Does the merchandise come in ready for sale? What is the store’s percentage of stockouts? Does the retailer use a push or pull system? Does the store get involved in determining what merchandise is in the store and in what quantities? Does the retailer use vendor-managed inventory (VMI), electronic data interchange (EDI), collaborative planning, forecasting, and replenishment (CPFR), or radio frequency identification (RFID)? Students’ answers will vary based on the retailer selected. 83. 2. INTERNET EXERCISE Go to Barcoding Incorporated’s web page at http://www.barcoding.com and search for retail, warehouse management, and RFID. How is this company using technology to support retailers with information systems and supply chain management? Some of the information students will find on this homepage: If inefficiencies throughout the system could be eliminated, from the stockroom to the shelf to the point of sale, it eases the pressures faced at the register, and unlocks even greater profit potential. Mobile computing and data capture solutions, such as bar code and RFID (radio frequency identification), provide retail companies with greater visibility and control over inventory and stock levels, more productive employees, and a better customer experience. Barcoding Inc. can deliver bottom line benefits to retail companies of all shapes and sizes with our tailored solutions. By leveraging technologies like mobile checkout, and RFID and wireless networks to maximize employees' time on the floor and improve the shopping experience through more face time with customers, Barcoding can deliver key benefits like higher same store sales, decreased inventory stock outs, and increased inventory turnover while delivering long-term efficiencies that help season after season. The field of robotics changes so rapidly that it can be difficult to pin down what to expect next. International Data Corp (IDC) recently announced its predictions for the global robotics industry. They predict that “robot as a service” will account for 30 percent of all commercial service robotic applications by the year 2019, and the same percentage of top organizations will have a designated chief robotics officer role. Talent Shortage They also foresee a talent shortage in robotics that will result in 35 percent of robotics jobs sitting vacant in 2020. At the same time, the average salary for workers in this field is expected to grow by 60 percent or more. 18-178 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service They project that 45 percent of the world’s top commercial companies will use robot systems for delivery operations and order fulfillment warehousing by 2018. Robots will increasingly depend on cloud software, with a robotics cloud marketplace eventually emerging. Better Efficiency Robotic deployments are expected to become more collaborative, and just under a third of new deployments will be smart collaborative varieties that can function three times faster than the robots found today while still being safe for people to work around. Their operational efficiency is expected to improve by 200 percent by 2020 thanks to increased connectivity to a mesh of shared intelligence. 84. 3. INTERNET EXERCISE Go to the homepage for RFID Journal at www.rfidjournal.com/ and search for supply chain in the current issue. Summarize one of the recent articles, and explain how the key concept(s) described could make the shopping experience better for consumers and improve efficiency in the supply chain. Students’ answers will vary depending on the article they search. The website has an entire section devoted to RFID and retail. Students can see how RFID chips improve efficiencies in B2B relationships for everyone from fish mongers to luxury retailers. ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 85. 1. Retail system acronyms include DSD, VMI, EDI, CPFR and RFID. What do these terms means and how are they related to one another? Each of these terms describes a system designed to enhance the efficiency of supply chain management. DSD, direct store delivery, bypasses the retailer’s distribution center and delivers merchandise directly to the retailer’s stores. When DSD happens, retailers receive additional services, such as assessing the store’s stock levels and backroom inventory. DSD and VMI, vendor-managed inventory, are often combined. When a vendor engages in VMI, it likely offers the retailer the option of DSD too. VMI seeks to improve supply chain efficiency by assigning the vendor to maintain inventory levels in the retailer’s stores. These systems are typically based on electronic data interchange (EDI). An EDI is an exchange of data between two or more computers. In most cases, the vendor’s and retailer’s computers “talk to each other” and exchange data on ordering, inventory levels, delivery dates, and sales. CPFR (collaborative planning, forecast and replenishment) is a system of integrated information sharing between retailers and their vendors, including information such as forecasts, strategies, and promotion plans. Collaborative supply chain management relationships are designed to reduce the lead-time for receiving merchandise, thereby lowering inventory investments, improving customer service levels, and reducing distribution expenses. RFID stands for radio frequency identification, the next generation of inventory tracking and identification. 86. 2. Explain how an efficient supply chain system can increase a retailer's level of product availability and decrease its inventory investment. By eliminating the need for paper transactions, an efficient supply chain management system reduces lead-time. Shorter lead-time reduces the need for safety stock because the shorter the lead-time, the easier it is to forecast demand, and therefore, less inventory is needed to hold as safety stock. In short, when the retailer can make purchase commitments closer to the time of sale, inventory investment is 18-179 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service reduced. Finally, an efficient supply chain management system can reduce distribution expenses by allowing the retailer to negotiate a direct store delivery system in which the vendors deliver to each store rather than the distribution center, then prepare the merchandise for sale with services such as price labeling. 87. 3. This chapter presents some trends in supply chain and information systems that benefit retailers. How do vendors benefit from these trends? Vendors benefit from collaboration in supply chain management just as retailers do. Vendors share the retailer’s goals of providing merchandise to customers where and when they want it, with minimum cost, so collaborations to improve the flow of information and merchandise benefit both supply chain members. When working collaboratively with a retailer, the vendor can better plan its purchases of raw materials and production process to provide the optimal merchandise flow, eliminating the potential for a bullwhip effect of excess inventory buildup to take place. Additionally, vendors benefit from enhanced information flows in collaborative relationships, allowing them to respond to retailers’ needs more precisely and rapidly. 88. 4. What type of merchandise is most likely to be cross-docked at retailers’ DCs? Why is this often the case? Merchandise prepackaged by vendors for specific stores is cross-docked because it is ready for sale. No further processing and no storage at the distribution center are required. This merchandise is routed on a conveyor system through the warehouse from the unloading dock to the loading dock for the truck going to the store for which it is designated. Floor-ready merchandise is likely to be cross-docked, as is large or bulky merchandise that would be more cumbersome to store. Also, merchandise that can be relied on to sell quickly likely moves through the cross-dock system in a matter of hours to make its way to the designated retail store. 89. 5. Why haven't more fashion retailers adopted an integrated supply chain system similar to Zara's? Zara's integrated supply chain management system depends on two major factors for its success. The first is the technological connections between the sales floor and the design center in Spain. Such technology requires higher capital investments and employee training. The second is Zara vertical integration; it controls the entire design, production, and sales process. Zara's integrated supply chain management system is particularly beneficial to its effort to sell fast fashion products. For retailers selling conventional products or products that stay in fashion for a longer time, such coordination between sales and design may not be needed. Also, most retailers are not as vertically integrated as Zara. For a conventional retailer, the added cost of collecting consumer information on design issues and transferring it to vendors may not be worth the effort; most retailers would rather let vendors/manufacturers take care of consumer demands and trends through their own marketing research systems. Moreover, the production processes for most products may gain little from the added margins obtained in small lot production, unlike fashion clothing. On the contrary, most manufacturers seek economies of scale and therefore make design changes to products and retooling changes to production processes only infrequently. Such design and manufacturing changes are easier for clothing manufacturers, and the design and production processes at Zara are based on a workstation flow model (rather than assembly line) and are quite labor intensive. 18-180 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 90. 6. Explain the differences between pull and push supply chains. A pull distribution strategy is when orders for merchandise are generated at the store level based on demand data captured by point-of-sale (POS) terminals. A push distribution strategy is when merchandise is allocated to the stores based on historical demand and the inventory position at the distribution center, as well as the needs of the stores. A pull strategy decreases the likelihood of being overstocked or out-of-stock, and the stores may order merchandise based on the needs of their customers. Although it is effective, retailers with less sophisticated forecasting and information systems usually cannot use pull distribution. A push strategy also benefits retailers that have less desirable merchandise that still must be sold. 91. 7. Consumers have five key reactions to stockouts: buy the item at another store, substitute a different brand, substitute the same brand, delay the purchase, or do not purchase the item. Consider your own purchasing behavior, and describe how various categories of merchandise would result in different reactions to a stockout. A stockout occurs when an SKU a consumer wants is not available. Students’ answers will vary widely here. This question allows for a discussion of factors such as brand loyalty and shopping behavior when predicting responses to stockout situations. Consider the different impacts of convenience, comparison, and specialty shopping to determine likely responses. For example, it might be helpful to discuss a consumer’s reaction to a 7-Eleven being out of milk on a quick stop versus Best Buy being out of a popular mobile device, available at several other consumer electronics retailers and online, during a planned shopping trip. 92. 8. Abandoned purchases as a result of stockouts can mean millions of dollars a year in lost sales. How are retailers and manufacturers using technology to reduce stockouts and improve sales? Retailers are turning to investments in information technology and supply chain management systems to help reduce stockouts. Some retailers rely on CPFR systems to share information with vendors to anticipate changes in product offerings, promotions, and business strategies and thus better manage and maintain their product availability. 93. 9. What is a universal product code (UPC)? How does this code enable manufacturers, distributors and retailers to track merchandise throughout the supply chain? “Universal Product Codes (also known as GTIN-12) appear as lines (bars) of varying widths representing the series of numbers commonly shown below the bars. Barcode scanners, as you will know them from your favorite retailers, read the bars and convert them back to the 12-digit UPC number that they represent. This number is then looked up within the retailer's inventory system to find the corresponding product name and price that you provided them with when you signed your agreement for them to carry your product. In short, the UPC is a 12-digit unique code for your product represented by scannable bars.” http://www.upccode.net/faq.html#q1 94. 10. Why are some retailers switching from UPC codes to RFID?

Chapter 18 - Customer Service RFID devices have two advantages over traditional bar codes. First, they can hold more data and update the data stored. For instance, the device can keep track of where an item has been in the supply chain and even where it is stored in a DC. With these data, retailers can dramatically reduce inventory levels and stockouts. Second, the data on the devices can be acquired without a visual line of sight. Thus, RFID enables the accurate, real-time tracking of every single product, from manufacturer to checkout in the store. It eliminates the manual point-and-read operations needed to get data from UPC bar codes. RFID provides an accurate, affordable, real-time measure of item inventory levels. 95. 11. Why is Walmart’s supply chain management successful? Read the post, “Walmart's successful supply chain management,” at https://www.tradegecko.com/blog/supply-chainmanagement/incredibly-successful-supply-chain-management-walmart. Describe how innovation had made supply chain management a competitive advantage for Walmart. Key points from the post include the following excerpts: “Vendor Managed Inventory (VMI) – manufacturers became responsible for managing their products in Walmart’s warehouses. As a result, Walmart was able to expect close to 100% order fulfillment on merchandise. “Walmart has long practiced strategic sourcing to find products at the best price from suppliers who are in a position to ensure they can meet demand. The company then establishes strategic partnerships with most of their vendors, offering them the potential for long-term and high-volume purchases in exchange for the lowest possible prices. “Walmart streamlined supply chain management by constructing communication and relationship networks with suppliers to improve material flow with lower inventories. The network of global suppliers, warehouses, and retail stores has been described as behaving almost like a single firm. “Cross-docking is a logistics practice that is the centerpiece of Walmart’s strategy to replenish inventory efficiently. It means the direct transfer of products from inbound or outbound truck trailers without the need for extra storage, by unloading items from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars (and vice versa), with no storage in between. Cross-docking keeps inventory and transportation costs down, reduces transportation time, and eliminates inefficiencies. “Walmart embraced and invested in technology to become an innovator in the way stores track inventory and restock their shelves, thus allowing them to cut costs. In 2015, the company spent a reported $10.5 billion on information technology and has also invested significantly in improving their eCommerce capability. Walmart’s IT systems allows the company to accurately forecast demand, track and predict inventory levels, create highly efficient transportation routes, manage customer relationships, and service response logistics. “Suppliers and manufacturers within the supply chain synchronize their demand projections under a collaborative planning, forecasting and replenishment scheme, and every link in the chain is connected through technology that includes a central database, store-level point-of-sale systems, and a satellite network. What made Walmart so innovative was that it had been sharing all this information with their partners.

Chapter 18 - Customer Service “Walmart has used radio frequency identification tags (RFID), which use numerical codes that can be scanned from a distance to track pallets of merchandise moving along the supply chain. As inventory must be handled by both Walmart and its suppliers, Walmart has encouraged its suppliers to use RFID technology as well. According to researchers at the University of Arkansas, there has been a 16% reduction in out-of-stocks since Walmart introduced RFID technology into its supply chain.” 96. 12. How is Target working to make the supply chain more sustainable? Read the company press release, “Supply-Chain Sustainability,” at https://corporate.target.com/corporateresponsibility/responsible-sourcing/sustainability. Summarize the Clean by Design program, Sustainable Apparel Collection, and Environmental Oversight efforts with textile suppliers. Key points from the press release include the following excerpts: Clean By Design “Target partners with the Apparel Impact Institute’s (Aii) Clean by Design (CbD) program, which identifies practical, cost-saving opportunities so that our suppliers can increase operational efficiencies in their factories, while simultaneously reducing resource usage, waste and emissions. “In 2011, in collaboration with our suppliers, we piloted the 10 best practices of Clean by Design in three Chinese textile mills, and saw significant savings in water and energy use. Encouraged by those results, and in continued collaboration with additional suppliers, we expanded the program in 2012, onboarding an additional 60 mills into the CbD program. “The facility improvements adopted by our suppliers’ participating mills have yielded strong results. Through the CbD program in 2016, seven participating mills reduced water use by more than 940,000 tons—on average, water usage was down 8%. In addition, all 10 participating mills in 2016 saved more than 10,000,000 kWh of energy. “Then through Cohort 1 of our 2018 CbD program, the 20 participating mills reduced water use by an average rate of 20%, saving 3,560,000 tons. They also lowered energy consumption by an average rate of 12%. As a result, Cohort 1 reduced more than 111,000 tCO2e of greenhouse gas emissions in 2018. Following that, the additional nine participating mills of CbD 2018 Cohort 2 saved at least 13.7% water, amounting to 1,119,000 tons, lowered energy consumption by at least 6.3%, and reduced further 35,800 tCO2e of greenhouse gas emissions. “To date, together with our suppliers, we have engaged 72 Chinese mills in the Clean by Design program, which is just one of the ways we partner with our supply chain to use resources responsibly. It’s a key element of reducing carbon emissions throughout our business to meet our ambitious climate goals, which were approved by the Science Based Targets Initiative. Sustainable Apparel Coalition “In 2011, we became a founding member of the Sustainable Apparel Coalition (SAC), a group of more than 200 brands, retailers, suppliers, non-profits and NGOs who work to reduce the environmental and social impacts of apparel and footwear products around the world. The coalition’s first major project was to create The Higg Index, a tool to help the industry measure the impact of materials, packaging, manufacturing processes and transportation on the environment. 18-183 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service “In 2012, Target began asking business partners and their factories producing Target-brand products to use the Higg Index, a self-assessment. The results are part of our business partners' annual scorecards. Environmental Oversight “At Target, we recently expanded our Standards of Vendor Engagement to include environmental sustainability standards and we are applying them within our merchandise supply chain to ensure our partners are achieving and sustaining a high level of environmental performance. “To apply these standards, we go beyond our tier one suppliers to also work with our tier two apparel textile suppliers using our Secondary Facilities Oversight (SFO) program. The SFO was modeled upon a framework created by the Natural Resources Defense Council for brands developing supply chain policies to improve environmental performance. We’ve taken initial steps to apply the framework by mapping Target’s tier one and tier two apparel and textile suppliers as published within our global factory list, accessible here. Currently, all tier one and tier two apparel textile suppliers disclose environmental impacts related to their production using the Sustainable Apparel Coalition’s Higg Facilities Environmental Module (FEM). Target also holds tier two apparel textile suppliers accountable by using the Higg FEM verification process to audit and ultimately elevate their environmental performance. “Those results are subject to third party verification and are mapped against the applicable environmental sustainability standard to ensure compliance and to promote excellent environmental performance within our supply chain.”

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective

H&M Innovations in Supply Chain Management

Case Analysis

Supply Chains

10-4 Review the considerations and trends in the design of supply chains.

Reed's PharmacyRedesigning the Supply Chain

Case Analysis

Supply Chains

10-4 Review the considerations and trends in the design of supply chains.

Walmart: Pioneer in Supply Chain Management

Case Analysis

Supply Chains

10-1 Understand the strategic advantage generated by a supply chain.

Understanding the Distribution Center

Matching

Supply Chains

10-1 Understand the strategic advantage generated by a supply chain.

Fast Fashion: Efficient Supply Chain Management at Zara

Case Analysis

Supply Chains

10-2 Describe how information flows in a supply chain.

iSeeit! Video Case: Supply Chain

Video Case

Supply Chains

10-1 Understand the strategic advantage generated by a supply chain.

CHAPTER 11 CUSTOMER RELATIONSHIP MANAGEMENT



ANNOTATED OUTLINE INSTRUCTOR NOTES Customer relationship management (CRM) is the set of See PPT 11-3 activities designed to identify and build the loyalty of the retailer's most valuable customers. Also called loyalty Ask students to give examples of retailers in the area who seem to program or frequent-shopper program. have a loyal customer base. With CRM, retailers can develop a base of loyal What are the reasons why customers and increase their share of wallet—the customers (including themselves) 18-185

Chapter 18 - Customer Service



percentage of the customers’ purchases made from that frequent this retailer? What is retailer. the retailer doing for its loyal customers? CRM is based on the philosophy that retailers can increase profitability by building relationships with their better customers. Discuss the costs of attracting Retailers are more profitable when they focus on new customers versus the costs retaining and increasing sales to their best customers of retaining current customers rather than attempting to generate sales from new customers or less profitable existing customers.

I. The CRM Process

LO 11-1 Describe the customer relationship management process.



The objective of the CRM process is to develop loyalty and repeat purchase behavior among a retailer’s best customers.



Customer loyalty means that customers are committed See PPT 11-4 to purchasing merchandise and services from the retailer and will resist the activities of competitors attempting to Ask students if they buy more attract their patronage. products from one specific retailer now, i.e., spend more Loyal customers develop a bond with the retailer that is money with one specific retailer. based on an emotional connection, more than a just If so, why? If not, why do they having a positive feeling about the retailer. This buy different products from emotional bond is a personal connection. different retailers?



While all elements in the retail mix contribute to the development of customer loyalty and repeat purchase behavior, customer service (and personal attention) are the two most effective methods to build loyalty.



Programs that encourage repeat buying by simply offering price discounts can be easily copied by competitors. However, when a retailer develops an emotional connection with a customer, it is difficult for a competitor to attract the customer.

 

See PPT 11-5

Emotional connections develop when the customer Ask students how much they like receives personal attention. a specific retailer. Are they loyal Unusual positive experiences also build emotional to the retailers they like most? If so, why? If not, why not? Note connections. that for emotional bonding, there may be less objective reasons as to why they like a retailer.

Chapter 18 - Customer Service See PPT 11-6 for an overview of CRM

A. Overview of the CRM Process 

CRM is an iterative process that turns customer data into customer loyalty and repeat purchase behavior through See PPT 11-7 for an illustration of four activities: (1) collecting customer shopping data, (2) the CRM Process Cycle analyzing customer data and identifying target customers, (3) developing CRM through frequentshopper programs, and (4) implementing CRM programs. Each of the four activities in the CRM process is discussed in the next sections. LO 11-2 Understand how customer shopping data are The first step in the CRM process is to construct a data collected. warehouse. It contains all of the data the firm has collected about its customers and is the foundation for subsequent CRM activities.

II. Collecting Customer Shopping Data 

A. Data Warehouse  



Ideally, the data warehouse should contain the following See PPT 11-8 information: To demonstrate how a data Transactions – a complete history of the purchases made warehouse could have very by the customer, including purchase date, the SKUs simple beginnings, ask students purchased, the price paid, the amount of profit, and the types of information whether the merchandise was purchased in response to contained in a typical sales a special promotion or marketing activity. receipt. Note that each credit card transaction record would 2. Customer Contacts – a record of the interactions that contain details on the customer's the customer has had with the retailer, including visits to name, products and quantities the retailer's website, inquiries made through in-store purchased, price paid, etc. If a kiosks, comments made on blogs and Facebook pages, whole year's records were merchandise returns, and telephone calls made to the collected, what types of retailer's call center, plus information about contacts information could be obtained? initiated by the retailer, such as catalogs and e-mails sent to the customer. 3. Customer Preferences – what the customer likes, such Ask students to list a store where as favorite colors, brands, fabrics, and flavors, as well as their family shops. What do the apparel sizes. parents buy? What do they buy? What do other family members 4. Descriptive Information – Demographic and purchase at the same retailer? psychographic data describing the customer that can be used in developing market segments. To get a complete view of the customers, the retailer needs to be able to combine the individual customer 18-187

Chapter 18 - Customer Service data from each member of a household. 

The data warehouse also keeps track of spending changes and habits. Anniversaries, birthdays, and even divorces and second marriages are tracked along with style, brand, size, and color preferences, hobbies, and sometimes pets’ names and golf handicaps.

B.. Identifying Information 

Constructing the database is relatively easy for nonstore See PPT 11-9 channels because customers buying from nonstore channels must provide their contact information, their name and address, so that the purchases can be sent to them. It is also easy to keep track of purchases made by customers patronizing warehouse clubs because they need to present their membership cards when they make a purchase.



However, identifying most customers who are making instore transactions is more difficult because they often pay for the merchandise with cash, a third-party credit card such as Visa or MasterCard, or their mobile wallets (e.g., Apple Pay).



Four approaches that store-based retailers use to overcome this problem are to (1) ask customers for identifying information, (2) connect Internet and store purchasing data, (3) offer frequent-shopper programs, or (4) place RFID chips on merchandise. Ask students for their reactions when a cashier asks them for Some retailers ask customers for identifying information their name, address, and phone such as their phone number or name and address when number before ringing up a sale. they ring up a sale. The information is then used to link all transactions to the customer. How could the store minimize consumer concerns and still Some customers may be reluctant to provide the obtain customer identity information and feel that the sales associates are information? violating their privacy.

1. Ask for Identifying Information 



2. Connect Internet and Store Purchasing Data 

When customers use third-party credit cards such as Visa or MasterCard to make a purchase in a store, the retailer cannot identify the purchase by the customer. However, if the customer used the same credit card while shopping at the retailer’s website and provided shipping

What are the various privacy issues when a retailer unobtrusively collects information through checking

Chapter 18 - Customer Service information, the retailer could connect the credit card account numbers, debit cards, purchases through its store and electronic channels. and third-party credit cards? 3. Offer Frequent-Shopper Programs 



Frequent-shopper programs, also called loyalty Ask students if they use a programs, are programs that identify and provide frequent-shopper card. What are rewards for customers who patronize a retailer. the advantages and disadvantages from a customer's Retailers issue customers a frequent shopper card and perspective in using such cards? customer information is automatically captured when the card is scanned at the point of sale terminal. When customers enroll in one of these programs, they provide some descriptive information about themselves or their household. Customers are then offered an incentive to show the card when they make purchases from the retailer.

4. Place RFID Chips on Merchandise 

An RFID reader in the store can acquire the customer’s personal information from small devices carried by customers and RFID tags on the merchandise they want to purchase.



Using a global satellite tracking system, the store reader could also collect information about where the customer has been in the store.

Ask students how they would feel if retailers were tracking their shopping behavior in a store and collecting information about them via small devices. Is this any different than how online retailers collect shopping information while students shop online? Why or why not?

C. Privacy and CRM Programs 

While detailed information about individual customers enables retailers to target information and promotions and provide greater value to their customers, consumers are concerned about retailers violating their privacy when they collect this information.



Even if CRM databases benefit the retailer’s relationship with the consumer, if customers’ data are not secure and susceptible to identity theft, multichannel retailing could cease to exist.

1. Privacy Concerns 

The degree to which consumers feel their privacy has See PPT 11-11 been violated depends on: (1) their control over their 18-189

Chapter 18 - Customer Service



personal information when engaging in marketplace Ask students if they have bought transactions and (2) their knowledge of the collection or buy regularly from Internet and use of personal information. retailers. If they have bought from Internet retailers, how do Cookies are small files stored on a customer’s computer they feel about privacy issues? If that identify customers when they return to a website. they have never bought from Due to the data in the cookies, customers do not have to Internet retailers, is it due to identify themselves or use passwords every time they privacy concerns? visit a store. However, the cookies also collect information about other sites the person has visited and what pages they have downloaded.

2. Protecting Customer Privacy 



In the United States, legal protection for privacy is limited. Existing legislation is limited to the protection of information in a few specific contexts, including government functions and practices in credit reporting, video rentals, and banking. Proactive retailers also can increase customers’ confidence by:

Evaluate the differences between U.S. and European laws regarding privacy. From the point of view of the individual consumer, which one is more comprehensive and better ensures privacy protection? Adopting a strategic “privacy by design” approach that From the point of view of the requires input from various departments, including retailer, which one offers more marketing, legal, human resources, and IT, before making opportunities for reaping the full any choices that might affect customers’ privacy. benefits of a CRM program?

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Retaining customer data only for as long as they are being used, then destroying them.

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Undertaking explicit legal reviews to determine what personal information consumers may access and edit.

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Buying better security measures.

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Appointing privacy advocates to communicate privacy concerns throughout the organization and ensure the firm is adhering to its privacy policies.

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The European Union (EU) is more aggressive in protecting Ask students which one is better from the point of view of consumer privacy and its provisions include: customers – opt-in or opt-out? Similarly, which one is less costly o Businesses can collect consumer information only if they have clearly defined the purpose such from the perspective of the retailer? as completing the transaction. o

The purpose must be disclosed to the consumer from whom the information is being collected.

Chapter 18 - Customer Service o

The information can only be used for that specific purpose.

The business can only keep the information for the stated purpose.



The EU perspective is that consumers own their personal information. Retailers must get consumers to explicitly agree to share this personal information. This is referred to as opt in.



In contrast, personal information in the United States is generally viewed as being in the public domain, and retailers can use it in any way they desire. U.S. consumers must explicitly tell retailers not to use their personal information – they must opt out. LO 11-3 Explain the methods used to analyze customer data The next step in the CRM process is analyzing the and identify target customers. customer data and converting them into information that will help retailers develop programs for building Ask students what questions they customer loyalty and repatronage that will add could answer if they had a significantly to the retailer’s bottom line. computerized record of all of one store's transactions for the last Two objectives for analyzing the customer database are two years. (In other words, what (1) identifying the retailer’s best customers and (2) using patterns in the data would they analytical methods to improve decisions made by retail look for?)managers.

III. Analyzing Customer Data and Identifying Target Customers 



See PPT 11-12

A. Identifying the Best Customers 



One of the goals of CRM is to identify and cater to the See PPT 11-13 for a CLV retailer’s most valuable customers. Retailers often use comparison of two different information in their customer databases to determine shoppers how valuable each customer is to their firm. What can small retailers do to Customer lifetime value (CLV) is the expected determine the customer lifetime contribution from the customer to the retailer’s profits value of their customers? Does a over their entire relationship with the retailer. simple mom-and-pop retailer know who its best customers Retailers typically use past behaviors to forecast their are? CLV. Some of the costs associated with a customer are the cost of advertising and promotion used to acquire Are customers who purchase the customer and the cost of processing merchandise regular priced goods more that the customer has returned. valuable than customers who purchase only sale items? Why or

Chapter 18 - Customer Service why not? See PPT 11-14

B. Retail Analytics 

Retail analytics are applications of statistical techniques and models that seek to improve retail decisions through analyses of customer data.



Data mining is an information processing method that relies on search techniques to discover new insights into the buying patterns of customers, using large databases.



Three of the most popular applications of data mining are market basket analysis, targeting promotions, and assortment planning.



Market basket analysis is a specific type of data analysis See PPT 11-15 for an illustration that focuses on the composition of the basket, or bundle, of the Market Basket Analysis of products purchased by a household during a single approach shopping occasion. Discuss with students examples This analysis is often used for suggesting where to place of when they have seen different categories of merchandise merchandise in a store. presented together.



Targeting Promotions 

Beyond aiding decisions about where to place products in a store, market basket analysis can help provide insights into assortment decisions and promotions.



Assortment Planning



By analyzing which products the retailer’s most valued customers purchase, the manager can ensure that they are available in the store at all times.

IV. Developing CRM Through Frequent-Shopper Programs 

Two objectives of these programs are to (1) build a data warehouse that links customer data to their transactions and (2) encourage repeat purchase behavior and loyalty.

A. Effectiveness of Frequent-Shopper Programs 

LO 11-4 Outline how retailers develop their frequent-shopper programs.

See PPT 11-16

Although frequent-shopper programs are useful for Ask students why customer building data warehouses, they are not particularly useful retention is important, especially for building long-term customer loyalty. since CRM programs cost so 18-192

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The perceived value of these programs by consumers is much. How do the rewards of low because consumers perceive little difference among retention outweigh the costs of the CRM program? the programs offered by competing retailers.



Loyalty programs are difficult to revise or correct.

B. Making Frequent-Shopper Programs More Effective 

Frequent-shopper programs seek to encourage repeated purchases and develop customer loyalty. To build true loyalty, retailers need an emotional connection with consumers, as well as a sense of commitment from them..To move frequent-shopper programs beyond simple data collection and short-term sales effects, retailers might (1) create tiered rewards, (2) treat frequent shoppers as VIPs, (3) incorporate charitable activities, (4) offer choices, (5) reward all transactions, and (6) make the program transparent and simple.

See PPT 11-17 Should a college bookstore use a frequent shopper card? Why or Why not?

Ask students to discuss loyalty programs they currently use and Many frequent-shopper programs contain cascading tier what levels their programs offer. levels, such as silver, gold, and platinum. The higher the Discuss if moving up in the tiers is tier, the better the rewards. an incentive for them to purchase more. A key requirement for a tiered program is to design tiers that consumers perceive as attainable.

1. Offer Tiered Rewards 



2. Treat High CLVs as VIPs 

Consumers respond to being treated as if they are someone special.



Effective programs therefore go beyond discounts on purchases to offer unique rewards.



The rewards accordingly should match the retailer’s target market to make customers feel really special

3. Incorporate Charitable Contributions 

Altruistic rewards can be an effective element of a frequent-shopper program; however, they probably should not be the focal point of the program.

Chapter 18 - Customer Service 

Not all customers value the same rewards, so the most effective frequent-shopper programs provide choices.

5. Reward All Transactions 

To ensure that the retailer collects all customer transaction data and encourages repeat purchases, programs need to reward all purchases, not just purchases of selected merchandise or those made through certain channels (e.g., in-store versus online).

6. Make the Program Transparent and Simple 

Effective programs are transparent in that they make it easy for customers to keep track of their spending and available rewards.

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There is an increasing use of smartphone-linked programs that let customers earn and redeem rewards through a mobile app, instead of requiring them to remember their cards or coupons.

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When loyalty programs also are simple, their effectiveness increases even more. A program with a confusing maze of rules and regulations has little appeal to consumers. LO 11-5 Explain various ways to implement effective CRM Having developed CRM through frequent-shopper programs. programs, the last step in the CRM process is to implement those programs.

V. Implementing CRM Programs 

See PPT 11-19 through 11-21

A. Customer Pyramid 



Most retailers realize that their customers differ in terms of their profitability or CLV. They believe in the 80-20 rule- 80 percent of the sales or profits come from 20 percent of the customers.

A retailer is developing a program whereby it would have a special one-day sales event every month. Which segment(s) of the customer pyramid should it A commonly used segmentation scheme divides target? Why? customers into four segments; platinum, gold, iron and lead. Exhibit 11-2 illustrates the Customer Pyramid

1. Platinum Segment 

This segment is composed of the retailer's customers with the top 25 percent CLVs. These are the most loyal 18-194

Chapter 18 - Customer Service customers who are not overly concerned about merchandise price and place more value on customer service. 2. Gold Segment 

The next 25 percent of customers in terms of CLV still shop a significant amount at the retailer but are more price-sensitive and are not as loyal as the platinum customers.

3. Iron Segment 

Customers in this third tier probably do not deserve much special attention from the retailer due to their modest CLV.



Although it could be possible to move these people up to higher tiers in the pyramid, for reasons such as limited income, price sensitivity, or shared loyalties with other retailers, additional expenditures on them may not be worth it.

4. Lead Segment 

Customers in the lowest segment cost the company money. They often demand a lot of attention but do not buy much from the retailer or they buy a lot of sale merchandise and abuse return privileges.

B. Customer Retention 

Two approaches that retailers use to retain customers and increase the share of wallet are personalization and community. See PPT 11-22

1. Personalization 



With the availability of customer-level data and analysis tools, retailers can now economically offer unique benefits and target messages to individual customers. They now have the ability to develop programs for small groups of customers and even specific individuals.

Most retail store associates wear a name tag. Should customers also wear a name tag or mention their name when shopping at a store? What types of retailing/services may benefit Many small, local retailers have always practiced 1-to-1 from this type of name retailing, developing retail programs for small groups or recognition and identification? individual customers. They know each of their customers, greet them by name when they walk in the store, and then recommend merchandise they know the 18-195

Chapter 18 - Customer Service customers will like. 

Another aspect of personalization is to involve the best customers in the retailer’s business decisions. Some retailers ask their best customers to participate in focus groups to evaluate alternatives the retailer is considering.

2. Community 

Retailers can also develop a sense of community among customers. A retail brand community is a group of customers who are bound together by their loyalty to a retailer and the activities the retailers sponsors and organizes. By participating in such a community, customers are more reluctant to leave the "family" of other people patronizing the retailer.

C. Customer Conversion: Making Good Customers into Best Customers

See PPT 11-24



Increasing the sales made to good customers is referred to as customer alchemy – converting iron and gold customers in to platinum customers. Customer alchemy involves offering and selling more products and services Ask students for examples of to existing customers and increasing the retailer's share cross-selling and add-on selling from their own experience. of the wallet with these customers.



Add-on selling is selling additional new products or services to existing customers, such as a bank encouraging a customer with a checking account to also apply for a home improvement loan from the bank. See PPT 11-25

D. Dealing with Unprofitable Customers 



In many cases, the bottom tier of customers actually has When dealing with unprofitable negative CLV. Retailers actually lose money on every sale customers, a retailer may be they make to these customers. consciously providing lower levels of benefits or service to such Two approaches for getting the lead out are: (1) offering customers. Evaluate the ethical less costly approaches for satisfying the needs of lead issues involved. customers, and (2) charging the customers for the services they are abusing.

VI. Summary 

A customer relationship management program is the set of activities designed to identify and build the loyalty of the retailer's most valuable customers 18-196

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Retailers collect extensive data about customers, which they store in their data warehouses.



Once retailers have collected sufficient data, they must analyze them to derive actionable information. A common measure for describing shoppers is their customer lifetime value (CLV).

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Frequent-shopper programs serve two main purposes: (1) build a customer data warehouse that links customers to transactions and (2) encourage repeat purchase behavior and loyalty.

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Retailers can develop programs to build loyalty in their best customers, increase their share of wallet with better customers.

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Four approaches that retailers use to build loyalty and retain their better customers are (1) launch frequentshopper programs, (2) offer special customer services, (3) personalize the services they provide, and (4) build a sense of community.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 97. INTERNET EXERCISE Go to the home page of a retailer that you frequent and review their privacy policy. How is this retailer protecting its customers’ information? Which policies, or lack of policies, raise your concern? Why? Which policies give you comfort that your private information is being protected? Why? Student responses will vary depending on the website visited. Most should consider: Cookies Personal information E-mail Age of web page users How the company protects customer data and credit card transactions 98. INTERNET EXERCISE Go to the website for the Electronic Privacy Information Center (www.epic.org) and review the issues raised by the organization. What does this watchdog organization feel are the most important retailers’ consumer privacy issues? How will these issues evolve in the future? “Top Ten Consumer Privacy Resolutions - Protect Your Privacy in The New Year! “1. Engage in "privacy self-defense." Don't share any personal information with businesses unless it is absolutely necessary (for delivery of an item, etc.). Don't give your phone number, address, or name to retail stores. If you do, they can sell that information or use it for telemarketing and junk mail. If they ask for your information, say "it's none of your business," or give "John Doe, 555-1212, 123 Main St." Don't return product warranty cards. Don't complete consumer surveys even if they appear to be anonymous. Profilers can build in barely-perceptible codes that link you to the survey, and this data goes straight to direct marketers. “2. Pay with cash where possible. Electronic transactions leave a detailed dossier of your activities that can be accessed by the government or sold to telemarketers. Paying with cash is one of the best ways to protect privacy and stay out of debt. “3. Install anti-spyware, anti-virus, and firewall software on your computer. If your computer is connected to the Internet, it is a target of malicious viruses and spyware. There are free spywarescanning utilities available online, and anti-virus software is probably a necessary investment if you own a Windows-based PC. Firewalls keep unwanted people out of your computer and detect when malicious software on your own machine tries to communicate with others. “4. Use a temporary rather than a permanent change of address. If you move in 2005, be sure to forward your mail by using a temporary change of address order rather than a permanent one. The junk mailers have access to the permanent change of address database; they use it to update their lists. By using the temporary change of address, you'll avoid unwanted junk mail. 18-198 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service “5. Opt out of prescreened offers of credit. By calling 1-888-567-8688 or by visiting https://www.optoutprescreen.com/, you can stop receiving those annoying letters for credit and insurance offers. This is an important step for protecting your privacy, because those offers can be intercepted by identity thieves. “6. Choose Supermarkets that Don't Use Loyalty Cards. Be loyal to supermarkets that offer discounts without requiring enrollment in a loyalty club. If you have to use a supermarket shopping card, be sure to exchange it with your friends or with strangers. “7. Opt out of financial, insurance, and brokerage information sharing. Be sure to call all of your banks, insurance companies, and brokerage companies and ask to opt out of having your financial information shared. This will cut down on the telemarketing and junk mail that you receive. “8. Request a free copy of your credit report by visiting http://www.annualcreditreport.com. All Americans are now entitled to a free credit report from each of the three nationwide credit reporting agencies, Experian, Equifax, and Trans Union. You can engage in a free form of credit monitoring by requesting one of your three reports every four months. By staggering your request, you can check for errors regularly and identify potential problems in your credit report before you lose out on a loan or home purchase. Currently, these reports are available to residents of most western states. By September 2005, all Americans will have free access to their credit report. “9. Enroll all of your phone numbers in the Federal Trade Commission's Do-Not-Call Registry. The DoNot-Call Registry http://www.donotcall.gov or 1-888-382-1222) offers a quick and effective shield against unwanted telemarketing. Be sure to enroll the numbers for your wireless phones, too. “10. File a complaint. If you believe a company has violated your privacy, contact the Federal Trade Commission, your state Attorney General, and the Better Business Bureau. Successful investigations improve privacy protections for all consumers. “For more information about privacy, visit the Electronic Privacy Information Center at http://epic.org/privacy/2004tips.html.” 99. INTERNET EXERCISE Go to the Salesforce.com landing page for consumer goods (www.salesforce.com/solutions/industries/consumer-goods/overview). How does the Sales-force platform help retailers understand customers? What tools drive customer loyalty, brand advocacy, or high value segmentation? When students visit this page, they will see information on the left side of the page (under Overview) for the following categories: Personalize Shopper Marketing, Deliver Any Channel Service, Connect Commerce Everywhere, Holiday Insights, and Resource Hub. There are also demonstrations, solutions to different types of retailing challenges, and customer success stories with examples of customer relationship management (e.g., adidas). Students can answer this question in various ways, depending on which links they explore. The resources the Salesforce platform provides enable retailers to learn about the type of strategies or technologies that could help them solve customer-related inquires related to loyalty, advocacy, high value segmentation, Omni-channel retailing, and so forth.

Chapter 18 - Customer Service Keep in mind that this website is updated frequently. 100. INTERNET EXERCISE Go to Sephora’s Beauty Insider Benefits page at www.sephora.com/profile/beautyInsider and read about this loyalty program. How does this company’s CRM program help it track its better customers, grow its business, and increase customer loyalty? Beauty Insider Benefits is a three-tier CRM program that rewards loyal customers with seasonal savings, free or reduced shipping, dollar savings, and points for discount events. Other rewards include free birthday gift, product samples, point multiplier events, meet & greets, points for services, sweepstakes, exclusive events, and first access to products. Customers who join are more likely to use cosmetics and skin care on a regular basis and enjoy trying new products and brands and experimenting with the latest trends. Early adoption and feedback from this segment can then influence other shoppers and let Sephora know which items best meet customer preferences.

https:// www.sephora.com/profile/BeautyInsider

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS What is a customer relationship management (CRM) program? Describe one CRM program that you have participated in as a customer. Customer relationship management (CRM) is a business philosophy and a set of strategies, programs, and systems that focuses on identifying and building loyalty with a retailer's most value customers. CRM is based on the philosophy that retailers can increase profitability by building relationships with their better customers. Thus, CRM involves attention to two important aspects: (1) building customer loyalty and (2) increasing profitability through better customer relationships. In terms of building customer loyalty, the CRM process involves the collection, management, and analysis of customer data to identify target customers and the development of programs to increase value for these targeted customers. In terms of increasing profitability, the CRM process involves the analysis of profitability at the level of each customer segment and then developing programs to increase the loyalty of the most profitable customers, while concurrently developing tactics to deal with the unprofitable customers. Effective implementation of CRM requires close coordination of activities by different functions within a retailer's organization. Students should describe a CRM that they currently use. Starbucks’ rewards program is one program that might be popular with students. 101. Why do retailers want to determine the lifetime value of their customers? How does past customer behavior help retailers anticipate future customer retention? Retailers have realized that it costs significantly more to sell products and services to new customers than existing customers and that small increases in customer retention can lead to dramatic increases in profits. Thus, it costs the retailer less to focus on customer retention, and building stronger relationships with existing customers, than to focus on customer acquisition, and attracting new customers through a variety of marketing communications efforts. For every retailer, there may be some customers who are very loyal and frequent shoppers, while others may be occasional shoppers, and yet others may cost the retailer more to service than what they bring in for the retailer. Given these characteristics of customers and their different impacts on the retailer's profitability, the retailer needs to identify not only the various segments but also their contribution to the retailer's profitability. Customer lifetime value (CLV) is one measure of the expected contribution of the customer through his or her entire relationship with the retailer to the latter's profits. It provides retailers a measure by which they can identify their best customers in terms of profitability. Moreover, based on the CLV measures, retailers can develop programs to retain their best customers, convert good customers into better customers, and deal with unprofitable customers so that the costs of servicing them does not adversely affect profitability. To estimate CLV, retailers use past behaviors to forecast future purchases. 102. Why do some customers have a low or negative CLV value? What approach can retailers take with these customers to minimize their impact on the bottom line?

Chapter 18 - Customer Service Customers with the lowest CLV can cost the company money. They often demand a lot of attention but do not buy much from the retailer, or they buy a lot of merchandise on sale and abuse return privileges. They sometimes are problem customers—complaining about the firm to others. 103. Why do customers have privacy concerns about the frequent-shopper programs that supermarkets offer, and what can supermarkets do to minimize these concerns? Frequent-shopper programs often collect customers’ descriptive information when they sign up for a frequent-shopper card. When customers use the card at the supermarket, the firm can associate the transaction information with the descriptive information to identify customers and develop various strategies, including promotions targeted specifically to those customers. These data and analysis help retailers make a wide range of strategic decisions, including store location and merchandising. Some customers may be disconcerted by allowing the retailer to know who they are and what they buy during each visit. Specifically, their privacy concerns may come from the perception that they have little control over their personal information. Besides, they may not know or be able to control how retailers use such information or whether the retailer will share this information with other parties. Moreover, customers may be wary about who would safeguard their interests if the information is used by parties that the customer does not even know or with which the customer does not want to build a relationship. In many cases, the most important benefits of the frequent shopper program for supermarkets is the information needed to make better decisions at the corporate and store levels, such as store location, assessing traffic in various departments, merchandising, and inventory management. For all these decisions, specific descriptive customer information may not be needed. As such, supermarkets could educate their customers about how their transaction data are being used for enhancing customer service and assure them that descriptive information will not be used without the customer's prior consent. Moreover, the supermarket could develop privacy policies that limit sharing and use of data by third parties without the customer's explicit consent. In general, supermarkets can reduce the privacy concerns of their customers by (1) giving them more control over their personal data by offering choices to opt-out of various levels of participation in the program and in the use of information, (2) giving them more information about how their data are being used, and (3) limiting access to the information without the customer's explicit consent. 104. Why are most frequent-shopper programs ineffective in terms of building loyalty? What can be done to make these programs more effective? Most frequent-shopper programs are ineffective because consumers don’t perceive much difference between programs from competing retailers. Most frequent-shopper programs offer price discounts to customers that are available to all customers that register for the program. There is no differentiation for high CLV customers. In addition, for most retailers, there is nothing unique about their programs, and because of the high visibility of the programs, they are easily duplicated. Finally, frequent-shopping programs are difficult to adjust or revise. To make frequent-shopping programs more effective, retailers can (1) create tiered rewards to differentiate high CLV customers, (2) treat frequent-shoppers as VIPs, (3) incorporate charitable activities, (4) offer choices, (5) reward all transactions, and (6) make the program transparent and simple. 18-202 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 105. Which of the following types of retailers do you think would benefit most from instituting a CRM program: (a) supermarkets, (b) banks, (c) automobile dealers, or (d) consumer electronic retailers? Why? All of the types of retailers would benefit from instituting CRM. However, for some the benefits of CRM may be far greater than others. Supermarkets may benefit from some aspects of CRM, such as frequent-shopper cards and targeted promotions, especially if there is a strong competitor in the same trading area. However, in the absence of a strong competitor in the neighborhood, supermarkets only need to ensure that their assortment, prices, and services are satisfactory to the residents in the area. Banks may benefit much more than other retailers. Banking as a service can be costly, especially if customers do not have large balances with the bank. Banks should carefully analyze their customer base and devise various types of accounts geared to the needs of the various customer segments. These programs could also ensure that banks are able to match the segment’s profitability with its costs. For example, customers carrying large balances could be offered various additional services, such as free checking and free travelers' checks, while those maintaining low balances could be charged extra fees for various transactions and services. Many banks already do this. Automobile dealers benefit from CRM, especially because automobile servicing at the dealership is a highly profitable business. The dealer’s goals should not be solely to sell a car to a customer but also to ensure that the customer brings the car back to the dealership every time some service is needed. It thus needs to devise programs that enhance dealer repair services and offer targeted promotions to encourage customers to use the dealer’s repair service more often, even beyond the warranty period. Consumer electronics dealers could benefit from CRM due to the tremendous opportunities for add-on selling. For example, a customer buying a new TV may also be in the market for a new sound system, and one buying a stereo system may need speaker wires. These dealers could target special promotions to attract these customers back to the store. Moreover, they could develop programs wherein the best customers get more personalized sales associate attention, with advice and service. In general, while all retailers benefit from CRM, banks are better positioned than others to take advantage of the benefits from CRM programs. For one, these firms are much larger than the others mentioned here, and they are better placed to make the necessary investments in data warehousing and analysis. In addition, there are very few tangible factors for these firms – everything is a service and thus subject to more variations in quality and customer satisfaction. A strong CRM program reduces some of these variations by identifying the types and quality of services to be provided to the various segments of profitable customers. 106. Develop a CRM program for a local store that sells apparel and gifts with your college’s or university’s logo. What type of information should be collected about customers, and how could this information be used to increase sales and profits of the store? The various activities in the CRM program include: (1) collecting customer data, (2) analyzing data and identifying target customers, (3) developing CRM programs, and (4) implementing CRM programs. The focus here on collecting and using information addresses the various activities involved in the CRM program. 18-203 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Collecting Information. The local store could obtain data through various sources to build a comprehensive database. First, it could make some mutually satisfactory arrangement with the college/university and obtain the names and addresses of current students, faculty, and staff, as well as the college/university's alumni. Second, it could use transaction data from all identified customers who have visited the store in the past, as well as those who have bought logo apparel. Third, it should implement a system whereby all customers could be identified. For a local store, this last step may involve simply asking for the customer's phone number as an identifier each time a purchase is made. After matching all sources of information in the database and deleting redundant or repetitive entries, the information collected would (1) show a history of purchases made by the customer, including whether the customer has bought logo apparel in the past, the price paid, and whether or not the customer paid a sale or promotion price for the product; (2) provide a record of all interactions with the store, including the timing of the transactions (e.g., during the college football season); (3) be grouped according to customer preferences, such as the types of apparel sought or sizes; (4) offer descriptive information, at least in terms of the contact information; and (5) record customer responses to marketing activities, such as mailings, special event promotions, or alumni discounts. Uses of Information. The store could use this information to segment customers according to their contributions to store sales and profitability. CLV analysis could be performed to segment customers according to their contributions to store revenues and profitability. These segments could then be matched to the basic descriptive information as well as transaction information. A number of questions could be asked: (1) Do current college students buy more logo apparel? (2) When do alumni buy most from the store? Then different programs could be developed, based on the answers. The store could develop special event promotions during specific sports seasons. It could offer various linked deals, such as buying a baseball cap along with a rugby shirt, or various special services, including ordering over the phone, especially for the alumni who may be living beyond the local trading area. In addition, it could attempt to enhance customer loyalty through targeted mailings, in-store services, and sponsorship of events most valued by students and alumni, such as sports, victory parties, and homecoming or family weekends. 107. What are the different approaches retailers can use to identify customers by their transactions? What are the advantages and disadvantages of each approach? There are three approaches that retailers can use to identify customers by their transactions. They can (1) ask customers for the identifying information, (2) offer frequent-shopper programs, or (3) connect Internet purchasing data with store data. Advantages Asking Customers

Disadvantages

1. Customers do not have to carry a 1. Customers may be reluctant to provide card. information and feel that their privacy is violated. 2. The information is simple and easy to provide, collect, and 2. Sales associates might forget to ask or record. decide not to spend time getting and recording information during a busy period. 18-204

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Offering a FrequentShopper Program

1. Transaction information could be 1. Customers already carry too many cards better linked to descriptive and may not want to carry another one. customer information. 2. Customers may forget to bring the card 2. Rewards offered would motivate or decide not to use it if they are in a hurry. customers to use the card every time they purchase. 3. Rewards may motivate customers to make more visits and purchase more from the retailer.

Connecting Internet Purchasing Data with Stores

1. Information about customers can be obtained unobtrusively.

1. Customers may not feel they have knowledge of use or control over their private information.

108. A CRM program focuses on building relationships with a retailer's better customers. Some customers who do not receive the same benefits as the retailer's best customers may be upset because they are treated differently. What can retailers do to minimize this negative reaction? A negative reaction from customers might involve not patronizing the retailer again. If this segment of customers is the one most costly to serve and the least profitable to the retailer, the unprofitable customers are weeded out. However, the problem is compounded for two likely cases: (1) customers are somewhat profitable but are not yet the retailer's best customers, and (2) customers spread their negative reactions through word of mouth. In the first case, the retailer wants to build a better relationship with the customers, but this negative reaction may jeopardize the future of the relationship. In the second case, the retailer's practices may turn away more prospects and existing customers. Retailers can minimize these negative reactions by being unobtrusive in offering various benefits. The firm could handle the special treatment of its best customers, so others do not see the benefits and services offered to them. Programs, such as special sale events, assignment of sales associates, more reward points for preferred customers, and other direct benefits may be less noticeable to others and could be used more than others. For example, one frequent shopper card member may not know what reward points another is accruing for purchases. Another, opposite approach is to publicize the differences in benefits more clearly. Customers then make their own decision as to the level and quality of interactions they want with the retailer. For example, some banks clearly promote various types of checking and savings accounts customers can enroll in, as well as the interest rates for various levels of balances. Customers can then decide, for example, if they want an account with higher minimum balances and free checking or lower minimum balances and a charge for checks above a low minimum limit per month. Retailers typically have little control over word-of-mouth negative opinions. The best strategy would be to monitor the implementation of benefits and services so that negative reactions are kept to a 18-205 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service minimum. Moreover, retailers could actively encourage and publicize positive word of mouth, such as customer testimonials and referrals. 109. Think of one of your favorite places to shop. How does this retailer create customer loyalty and satisfaction, encourage repeat visits, establish an emotional bond between the customer and the retailer, know the customer’s preferences, and provide personal attention and memorable experiences to its best customers? Retailers have any number of practices in place to create these positive relationships with customers. One effort toward building these relationships is establishing a truly valued frequent-shopper program. A truly valued program is one the retailer’s consumers understand and appreciate as providing them direct benefits through an easily understood program. Many of the frequent-shopper programs now offer tiered benefits, with higher levels of benefits to the retailer’s best customers. Retailers can also create customer satisfaction and loyalty by providing “best customers” with special treatment. These retailers make their customers comfortable and often go above and beyond typical customer service levels to show these customers how valued they are from the retailer’s perspective. An example is an exclusive hair salon providing full service and a full staff at no extra charge on a Sunday afternoon the salon is normally closed to provide hair, manicure, and makeup services for a “best shopper” bride and her attendants on her wedding day. Personalization is another technique retailers use to foster emotional connections and loyalty with customers. One-to-one relationships, like a personal shopper service, allow the retailer to connect with each customer’s needs and wants directly. Internet retailers often use this technique to provide purchase suggestions and tailored merchandise information each time a “best shopper” logs onto the retailer’s website. Finally, retailers create communities of shoppers to foster connections and loyal relationships. The pet store sponsoring a “Happy Hour” for customers and their furry friends to socialize with one another, the ski shop offering lessons, a bulletin board posting local races, and a blog about local ski conditions and the toy store sponsoring playground activities at the local elementary school are all examples of retailers cultivating a relationship with and among their customers that goes beyond the merchandise or service purchase relationship.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic

Learning Objective

Customer Relationship Management Terminology

Click and Drag; Matching (accessible version)

Customer Relationship Management Process

11-1 Describe the customer relationship management process.

Gentry's - Winning with Customer Relationship Management

Case Analysis

Customer Loyalty

11-1 Describe the customer relationship management process. 11-3 Explain the methods used to analyze customer data and identify target customers. 11-5 Explain various ways to implement effective CRM programs.

Customer Pyramid

Click and Drag; Matching (accessible version)

Customer Relationship Management Process

11-5 Explain various ways to implement effective CRM programs.

Collecting Customer Shopping Data

Matching

Customer Relationship Management Process

11-2 Understand how customer shopping data are collected.

CHAPTER 12 MANAGING THE MERCHANDISE PLANNING PROCESS



ANNOTATED OUTLINE Merchandise management activities are undertaken primarily by buyers and their superiors, divisional merchandise managers (DMMs) and general merchandise managers (GMMs).

INSTRUCTOR NOTES

Retail buyers manage a portfolio of merchandise inventory. They buy merchandise they think will be popular with their customers. Like Wall Street investment 18-207

Chapter 18 - Customer Service analysts, they use their retailer’s information system to monitor the performance of their merchandise portfolio – to see what is selling and what is not. 

Merchandise management is the process by which a retailer attempts to offer the right quantity of the right merchandise, in the right place, and at the right time, so it can meet the company’s financial goals.



Buyers need to be in touch with and anticipate what customers will want to buy, but this ability to sense market trends is just one skill needed to manage merchandise inventory effectively. Perhaps an even more important skill is the ability to analyze sales data continually and make appropriate adjustments in prices and inventory levels.

I. Merchandise Management Overview

LO 12-1 Explain the merchandise management organization and performance measures.

A. The Buying Organization

See PPT 12-3



Every retailer has its own system for grouping categories of merchandise, but the basic structure of the buying organization is similar for most retailers.

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The highest classification level is the merchandise group. Each merchandise group is managed by a general merchandise manager (GMM), who is often a senior vice president in the firm. Each of these GMMs is responsible for several departments.

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The second level in the merchandise classification scheme is the department. Departments are managed by divisional merchandise managers (DMMs).

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The third level in the merchandise classification scheme is the classification. A classification is a group of items targeting the same customer type.

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Categories are the lowest level in the classification scheme. Each buyer manages several merchandise categories.

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A stock-keeping unit (SKU) is the smallest unit available for inventory control, usually indicating brand, size, color and style.

An overview of merchandise classifications is illustrated in PPT 12-4.

Chapter 18 - Customer Service See PPT 12-5

B. Merchandise Category – The Planning Unit 

The merchandise category is the basic unit of analysis for making merchandising management decisions.



A merchandise category is an assortment of items that customers see as substitutes for one another.

Ask students to name merchandise that they would consider to be in the same category. Should Ralph Lauren be a category? What about luggage?

1. Ways to Manage Categories 

A category management approach to managing merchandise assigns one buyer or category manager to oversee all merchandising activities for the entire category. Managing by category can help ensure that the store’s assortment includes the “best” combination of sizes and vendors – the one that will get the most profit from the allocated space.



Whereas department stores, in general, manage merchandise at the category level, supermarkets and other general merchandise retailers traditionally have organized their merchandise around brands or vendors.



Managing merchandise within a brand category can lead to inefficiencies because it fails to consider the interdependencies among SKUs in the category.

2. Category Captain 

Some retailers turn to one favored vendor to help them manage a particular category. Known as the category captain, this supplier works with a retailer to develop a better understanding of consumer shopping behaviors, create assortments that satisfy consumer needs, and improve the profitability of the merchandise category.



Selecting vendors as category captains has several advantages for retailers. It makes merchandise management tasks easier and can increase profits. Vendors are often in a better position to manage a category than are retailers because they have superior information about the specific category.



A potential problem with establishing a category captain, however, is that vendors could take advantage of their position.

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Additionally, there are some antitrust considerations

What should retailers be concerned about before appointing a category captain? What are some disadvantages of relying too heavily on a category captain?

Chapter 18 - Customer Service associated with category captains. For example, a vendor’s category captain could collude with the retailer to fix prices or block other brands, particularly smaller ones, from gaining access to valuable shelf space. C. Evaluating Merchandise Management Performance 

A good measure for evaluating a retail firm is return on assets (ROA). Return on assets is composed of two components, asset turnover and net profit margin.



However, ROA is not a good measure for evaluating the performance of merchandise managers because they do not have control over all the retailer’s assets or all the expenses the retailer incurs (operating expenses such as store operations, human resources, real estate, and logistics and information systems.)



Merchandise managers only have control over the merchandise they buy, the cost of the merchandise and the price at which it is sold, which results in the gross margin.

1. GMROI

See PPT 12-7



A financial ratio that assess a buyer’s contribution to ROA is gross margin return on inventory investment (GMROI). It measures how many gross margin dollars are earned on every dollar of inventory investment.

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GMROI is a similar concept to return on assets, only its components are under the control of the buyer rather than other managers.

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GMROI = Gross margin percentage X Sales-to-stock ratio



Also, GMROI = Gross Margin Average Inventory, at cost

Ask students how it is possible for two different types of food products, fresh bakery bread and gourmet canned food, to have the same GMROI. Walk through the Exhibit 12-2. Then ask what would happen to GMROI if bakery bread went on sale. (Answer: it would depend on how much of a margin reduction was taken and how much turnover would increase.)



Average inventory in GMROI is measured at cost, because a retailer’s investment in inventory is the cost of the inventory, not its retail value.



GMROI combines the effects of both profits and turnover. It is important to use a combined measure so departments with different margin/turnover profiles can be compared and evaluated.



GMROI is used as a return on investment profitability

See PPT 12-8 for illustrations of GMROI

Chapter 18 - Customer Service measure to evaluate departments, merchandise classifications, vendor lines, and items. It’s also useful for management in evaluating buyers’ performance since it can be related to the retailer’s overall return on investment. See PPT 12-9

2. Measuring Sales-to-Stock Ratio 

Retailers normally express inventory turnover (sales-tostock) ratios on an annual basis rather than for part of a year. If the sales-to-stock ratio for a three-month season equals 2.3, the annual sales-to-stock ratio will be reported as four times that number (9.2)



The most accurate measure of average inventory is to measure the inventory level at the end of each day and divide the sum by 365. Most retailers can use their information systems to get accurate average inventory estimates by collecting and averaging the inventory in stores and distribution centers at the end of each day. Another method is to take the end-of-month (EOM) inventories for several months and divide by the number of months.

D. Improving GMROI 

There are two paths that buyers can take to increase GMROI: (1) improve inventory turnover (sales-to-stock ratio) or (2) increase gross margin.

1. Improve Inventory Turnover (Sales-to-Stock Ratio) 

To improve the inventory turnover (sales-to-stock ratio), buyers can either reduce the level of inventory or increase sales.



One approach that buyers take to increase inventory turnover is to reduce the number of SKUs within a category. However, reducing the number of SKUs could reduce sales because customers will be less likely to find what they want.



A second approach for reducing the level of inventory is to keep the same number of SKUs but reduce the backup stock for each SKU.

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A third approach for increasing inventory turnover is to buy merchandise more often but in smaller quantities, which reduces average inventory without reducing sales.

See PPT 12-11

Spend extra time with students discussing the difference between sales-to-stock ratio and inventory turnover.

Chapter 18 - Customer Service But buying smaller quantities can decrease the gross margin 

A fourth approach is to increase sales and not increase inventory proportionally. However, while inventory turnover would increase in this situation, gross margin would also decrease, which could have a negative impact on GMROI.



Increasing inventory turnover can have positive impacts on sales by attracting more customer visits, improving sales associate morale, and providing more resources to take advantage of new buying opportunities. When inventory turnover is low, the merchandise begins to look shopworn—slightly damaged from being displayed and handled by customers for a long time.



Finally, when inventory turnover increases, more money is available to buy new merchandise. Having money available to buy merchandise late in a fashion season can open up profit opportunities.

2. Increase Gross Margin 

Three approaches to increasing the gross margins are increasing prices, reducing the cost of goods sold, or reducing customer discounts.



Increasing prices increases gross margin, but it can also decrease sales and inventory turnover because pricesensitive customers buy less.



Buyers usually attempt to lower the cost of goods sold by negotiating for better prices from vendors, or increasing merchandise assortments in private label.



Buyers can increase gross margins by reducing the customer discounts needed to sell unwanted merchandise or merchandise left over at the end of the season.

II. Merchandise Planning Processes 

First, buyers forecast category sales, develop an assortment plan for merchandise in the category, and determine the amount of inventory needed to support the forecasted sales and assortment plan.



Second, buyers develop a plan outlining the sales expected

LO 12-2 Contrast the merchandise management processes for staple and fashion merchandise.

PPT 12-13 summarizes the

Chapter 18 - Customer Service for each month, the inventory needed to support the sales, and the money that can be spent on replenishing sold merchandise and buying new merchandise. Along with the plan, buyers or planners/assorters decide what type and how much merchandise should be allocated to each store. 

Third, having developed a plan, the buyer negotiates with vendors and buys the merchandise.



Buyers continually monitor the sales of merchandise in the category and make adjustments.



These decisions are not necessarily made sequentially. Some decisions may be made at the same time or in a different order than described above.

A. Types of Merchandise Management Planning Systems 

Retailers use different types of merchandise planning systems for managing (1) staple and (2) fashion merchandise categories.



Staple merchandise categories, also called basic merchandise categories, consist of items that are in continuous demand over an extended time period. While consumer packaged-goods companies introduce many “new products” each year, the number of “new to the world” product introductions each year in staple categories is limited.



Because sales of staple merchandise are fairly steady from week to week, it is relatively easy to forecast demand, and the consequences of making mistakes in forecasting are not great. Merchandise planning systems for staple categories focus on continuous replenishment.



Fashion merchandise categories consist of items that are only in demand for a relatively short period of time. New products are continually introduced into these categories, making the existing products obsolete.



Forecasting the sales for fashion merchandise categories is much more challenging than for staple categories. Buyers for fashion merchandise categories have much less flexibility in correcting forecasting errors.



Due to the short selling season for most fashion merchandise, buyers often do not have a chance to

Merchandise Planning Process.

See PPT 12-12

Have students discuss some staple merchandise categories. There might be some product categories that all students consider staples, like bread, milk, eggs, socks, etc. But are there other product categories that some students consider staple products but others don’t?

What happens to demand for stable products during times of instability?

Chapter 18 - Customer Service reorder additional merchandise after an initial order is placed. An important objective of merchandise planning systems for fashion merchandise categories is to be as close to out of stock as possible at the same time that the SKUs move out of fashion. 

Seasonal merchandise categories consist of items whose sales fluctuate dramatically depending on the time of year. Both staple and fashion merchandise can be seasonal categories (examples: swimwear, snow shovels).



Retailers buy seasonal merchandise in much the same way that they buy fashion merchandise.

III. Forecasting Category Sales 

The first step in merchandise management planning is to develop a forecast for category sales.

LO 12-3 Describe how to predict sales for merchandise categories. See PPT 12-15

A. Forecasting Staple Merchandise 

The approach for forecasting sales of staple merchandise is to project past sales trends into the future, while making adjustments for any anticipated factors, such as promotions and weather, that may affect future sales.

1. Use of Historical Sales 

The sales of staple merchandise are relatively constant from year to year. Thus, forecasts are typically based on extrapolating historical sales. Then, statistical techniques can be used to forecast future sales.

2. Adjustments for Controllable and Uncontrollable Factors 

Controllable factors include the opening and closing of stores, the price set for the merchandise in the category, special promotions for the category, the pricing and promotion of complementary categories, and the placement of the merchandise categories in the stores.



Some factors beyond the retailer’s control are the weather; general economic conditions; special promotions or new product introductions by vendors; and new product, pricing, and promotional activities by competitors.

Ask students to consider uncontrollable factors that might influence the sales of staple merchandise. How many can be identified?

Chapter 18 - Customer Service 

Forecasting sales for fashion merchandise is challenging because some or all of the items in the category are new and different than units offered in previous years.



Some sources of information that retailers use to develop forecasts for fashion merchandise categories are (1) previous sales data, (2) market research, (3) fashion trend services, and (4) vendors.

See PPT 12-15

1. Previous Sales Data 

Although some items in fashion merchandise categories might be new each season, many items in a fashion category are often similar to items sold in previous years, and thus, accurate forecasts might be generated by simply projecting past sales data.

2. Market Research 

Information on how customers will react to new merchandise can be obtained by asking customers about the merchandise and measuring customer reactions to new merchandise through sales tests.



Another excellent source of customer information is social media sites. Buyers learn a lot about their customers’ likes, dislikes, and preferences by monitoring their past purchases and by monitoring their interactions with social network sites such as Facebook, Pinterest, and Twitter.

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Customer information can be collected through traditional forms of marketing research like in-depth interviews and focus groups.

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The in-depth interview is an unstructured personal interview in which the interviewer uses extensive probing to get individual respondents to talk in detail about a subject.

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A more informal method of interviewing customers is to require that buyers spend some time on the selling floor waiting on customers.

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A focus group is a small group of respondents interviewed by a moderator using a loosely structured format.

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Finally, many retailers have a program for conducting merchandise sales experiments. 18-215

Chapter 18 - Customer Service

3. Fashion Trend Services 

There are many services that buyers (especially buyers of apparel categories) can subscribe to that forecast the latest fashions, colors, and styles.

4. Vendors 

Vendors have proprietary information about their marketing plans, such as new product launches and special promotions that can have a significant impact on retail sales for their products and the entire merchandise category. See PPT 12-17

C. Sales Forecasting for Service Retailers 

Due to the perishable nature of services, service retailers face a more extreme problem than fashion retailers. Their offering perishes at the end of the day, not at the end of the season.



Some service retailers attempt to match supply and demand by taking reservations or making appointments. Another approach is to sell advance tickets for a service.

IV. Developing an Assortment Plan 

After forecasting sales for the category, the next step in the merchandise management planning process is to develop an assortment plan.



An assortment plan is the set of SKUs that a retailer will offer in a merchandise category. The assortment plan thus reflects the breadth and depth of merchandise that the retailer plans to offer in a merchandise category.

LO 12-4 Summarize the trade-offs for developing merchandise assortments.

See PPT 12-18 Ask students to name retailers with good variety/good assortment/good product availability. Explain that it is difficult to be a master at all three.

A. Category Variety and Assortment 

Variety is the number of different merchandising subcategories offered within a store or department. Stores with a large variety are said to have good breadth.

Ask students to give examples of stores with large variety and those with lower variety.



Some stores carry a large variety of categories, while others carry a much more limited number.

Ask students to give examples of stores with large assortments and

Chapter 18 - Customer Service 

Assortment is the number of SKUs within a subcategory. Stores with large assortments are said to have good depth.

those with narrow assortments.

B. Determining Variety and Assortment 

The process of determining the variety and assortment for a category is called editing the assortment.



When editing the assortment for a category, the buyer considers of the following factors: (1) the firm’s retail strategy, (2) the effect of assortments on GMROI, (3) the complementarities among categories, (4) the effects of assortments on buying behavior, and (5) the physical characteristics of the store.

A retailer must decide what type of store it wants to be. They have a finite space and inventory budget. A store that offers good variety means one-stop shopping - everything that the target market could want. Think of an old-time variety store. A store that offers good assortment can also mean one-stop shopping -- if the customer is hoping for a group of products, e.g., a knife store. You can get anything you want as long as it is a knife. As for product availability -- a retailer can strike a good balance between variety and assortment, but if they run out of a particular size, color, or style (SKU) that a customer wants, a sale is lost. See PPT 12-21

1. Retail Strategy 

The number of SKUs offered in a merchandise category is a strategic decision.



The breadth and depth of the assortment in a merchandise category can affect the retailer’s brand image too.



Retailers might increase the assortment in categories that are closely associated with their image.

2. Assortments and GMROI 

Buyers need to be sensitive to the trade-off of increasing sales by offering greater breadth and depth but at the same time potentially reducing inventory turnover and GMROI.



Increasing assortment breadth and depth also can decrease gross margin. For example, the more SKUs offered, the greater the chance of breaking sizes—that is, stocking out of a specific size or color SKU. If a stockout 18-217

Chapter 18 - Customer Service occurs for a popular SKU in a fashion merchandise category and the buyer cannot reorder during the season, the buyer will typically discount the entire merchandise type, thus reducing gross margin. See PPT 12-23

3. Complementary Merchandise 

When buyers develop assortment plans, they need to consider the degree to which categories in a department complement each other.

4. Effects of Assortment Size on Buying Behavior 

Offering large assortments provides several benefits to customers, including increasing the number of SKUs that customers can purchase, providing a more informative and stimulating shopping experience, and offering more variety.



However, offering a large assortment can make the purchase decision more complex and time-consuming and potentially overwhelms the consumer, which could reduce sales.



Many retailers have initiated SKU rationalization programs in their efforts to analyze the benefits they might gain from deleting, adding, or keeping certain items in their assortments.

5. Physical Characteristics of the Store 

Buyers need to consider how much space to devote to a category. More space is needed to display categories with large assortments.



Multichannel retailers address space limitations in stores by offering a greater assortment through their Internet and catalog channels than they do in stores.

V. Setting Inventory and Product Availability Levels

LO 12-5 Illustrate how to determine the appropriate inventory levels. See PPT 12-24

A. Model Stock Plan 

The model stock plan is the number of each SKU in the assortment plan that the buyer wants to have available for 18-218

Chapter 18 - Customer Service purchase in each store. See PPT 12-26

B. Product Availability 

The number of units of backup stock, also called buffer stock or safety stock, in the model stock plan determines product availability.



Product availability is defined as the percentage of the demand for a particular SKU that is satisfied. Product availability is also referred to as the level of support or service level.



More backup stock is needed in the model stock plan if a retailer wants to increase product availability—that is, increase the probability that customers will find the product they want when they visit the retailer’s store or website.



The trade-off among variety, assortment, and product availability is a crucial issue in determining a retailer’s merchandising strategy.



Retailers often classify merchandise categories or individual SKUs as A, B, or C items, reflecting the product availability the retailer wants to offer. For A items, the retailer rarely wants to stock out. Lower availability is acceptable for C items.



Other factors to consider are fluctuations in demand, the lead time for delivery from the vendor, fluctuations in vendor lead time, and the frequency of store deliveries.

VI. Establishing A Control System for Managing Inventory 



The next step in the merchandise management process is to establish a control system for how the orders, deliveries, inventory levels, and merchandise sales will evolve over time.

When using a Quick Response inventory system, product availability can increase and inventory investment actually stays the same or decreases.

LO 12-6 Analyze merchandise control systems. See PPT 12-28

The objective of this control system is to manage the flow of merchandise into the stores so that the amount of inventory in a category is minimized but the merchandise will still be available when customers want to buy it.

A. Control System for Managing Inventory of Staple Merchandise 

Why does inventory investment increase so fast as product availability goes up? Because of safety stock-- a retailer must carry more and more safety stock to satisfy increasing levels of demand.

See PPT 12-30

The SKUs in a staple merchandise category are sold month 18-219

Chapter 18 - Customer Service after month, year after year. 

An automated continuous replenishment control system is used to manage the flow of staple merchandise SKUs and categories.



The continuous replenishment system monitors the inventory level of each SKU in a store and automatically triggers the reorder of an SKU when the inventory falls below a predetermined level.

1. Flow of Staple Merchandise 

Staple merchandise buying systems are used for merchandise that follows a predictable order-receipt-order cycle. Most merchandise fits this criterion.



Staple merchandise planning systems manage inventory at the level of the SKU.



Inventory that goes up and down due to the replenishment process is called cycle stock, or base stock. The retailer hopes to reduce the base stock inventory to keep its inventory investment low. Backup stock is the level of inventory needed to ensure merchandise is available in light of these uncertainties.

2. Determining the Level of Backup Stock 

Several factors determine the level of backup stock needed for a SKU: (1) the product availability the retailer wants to provide, (2) fluctuation in demand (greater fluctuation requires more backup stock), (3) the lead time (amount of time between recognition that an order needs to be placed and the point at which the merchandise arrives in the store and ready for sale) from the vendor, (4) fluctuations in lead time (retailers using collaborative supply chain management systems typically require their vendors to deliver within a very narrow window to reduce fluctuations in lead time), and (5) the vendor’s fill rate (the percentage of SKUs received complete on a particular orer). See PPT 12-32

3. Automated Continuous Replenishment 

Once the buyer sets the desired product availability and determines the variation in demand and the vendor’s lead time and fill rate, the continuous replenishment systems 18-220

Chapter 18 - Customer Service for staple SKUs can operate automatically. 

Retailer’s information system determines the inventory level at each point in time, the perpetual inventory, by comparing the sales made through the POS terminals with the shipments received by the store.



However, it is difficult to achieve fully automated continuous replenishment of staple merchandise because of errors in determining the actual inventory (due to shoplifting or an incorrect number of units being input into the information system about a shipment from the distribution system to the store when it is delivered).

4. The Inventory Management Report 

The inventory management report provides information about the inventory management for a staple category. The report indicates the decision variables set by the buyer, such as product availability, the backup stock needed to provide the product availability, the order points, and quantities, plus performance measures such as planned and actual inventory turnover, the current sales rate or velocity, sales forecasts, inventory availability, and the amount on order. The combination of having a prespecified schedule based on the trade-off between inventory carrying and ordering costs, and the flexiblity to react to demand fluctions, helps to ensure a profitable ordering strategy.

PPT 12-33 shows a retailer’s sample inventory management report for Rubbermaid SKUs.

5. Order point 

The order point is the amount of inventory below which the quantity available should not go or the item will be out of stock before the next shipment arrives.



This number tells the buyer that when the inventory level drops to this point, additional merchandise should be ordered.

6. Order Quantity 

When inventory reaches the order point, the buyer, or system, needs to order enough units to ensure product availability before the next order arrives.

Chapter 18 - Customer Service 

The control systems for managing fashion merchandise categories are the merchandise budget plan and the opento-buy.

See PPT 12-34

1. Merchandise Budget Plan 

The merchandise budget plan specifies the amount of merchandise in dollars (not units) that needs to be delivered during each month, based on the sales forecast, the planned discounts to employees and customers, and the level of inventory needed to support the sales and achieve the desired GMROI objectives.



Inventory turnover, GMROI, and the sales forecast are used for both planning and control. Then merchandise budgets are developed to meet these goals.



After the selling season, the buyer must determine how the category actually performed compared with the plan.

2. Open-to-Buy System 

The open-to-buy system starts after the merchandise is purchased using the merchandise budget plan or staple merchandise management system.



The open-to-buy system keeps track of the actual merchandise flows while they are occurring. Specifically, the open-to-buy system records how much is spent each month, and therefore how much is left to spend.



Differences between actual and planned levels may arise because an order was shipped late or sales deviated from the forecast.

VII. Allocating Merchandise to Stores 



After developing a plan for managing merchandise inventory in a category, the next step in the merchandise management process is to allocate the merchandise purchased and received to the retailer’s stores. Research indicates that these allocation decisions have a much bigger impact on profitability than does the decision about the quantity of merchandise to purchase.. Allocating merchandise to stores involves three decisions: (1) how much merchandise to allocate to each store, (2) what type of merchandise to allocate, and (3) when to allocate the

See PPT 12-36 Now that the buyer knows how much to spend in each month (based on the merchandise budget plan), the buyer must keep track of spending using open-to-buy.

LO 12-7 Describe how multistore retailers allocate merchandise to stores. See PPT 12-37 Ask students to consider some of the challenges of allocating merchandise to stores. What might influence the decision of which stores should get what amounts? Factors like store size, trade area, seasonality, regional

Chapter 18 - Customer Service merchandise to different stores.

preferences, etc.

A. Amount of Merchandise Allocated 

Retail chains typically classify each of their stores on the basis of annual sales. Thus, A stores would have the largest sales volume and typically receive the most inventory, while C stores would have the lowest sales volume and receive the least inventory for a category.



In addition to the store’s sales level, when making allocation decisions for a category, allocators consider the physical characteristics of the merchandise and the depth of assortment and level of product availability that the firm wants to portray for the specific store See PPT 12-28

Type of Merchandise Allocated 

In addition to classifying stores on the basis of their size and sales volume, retailers classify stores according to the characteristics of the stores’ trading area.



Store trade area geodemographics are used to develop merchandise assortments for specific stores.

C. Timing of Merchandise Allocation 

Differences in the timing of category purchases across stores also needs to be considered.



Buyers need to recognize regional differences and arrange for merchandise to be shipped to the appropriate regions when customers are ready to buy to increase inventory turnover in the category.



Retailers also consider the “paycheck cycle” when making merchandise allocation and promotion decisions, particularly in difficult economic times. Cash-strapped consumers tend to make their largest purchases when they get their paychecks at the beginning of the month, but cut back on purchases as that money runs out toward the end of the month.

VIII. Analyzing Merchandise Management Performance 

The next step in the merchandise management process is to analyze the performance of the process and make adjustments as necessary.

LO 12-8 Review how retailers evaluate the performance of their merchandise management decisions.

Chapter 18 - Customer Service 

Three types of analyses related to the monitoring and adjustment step are (1) sell-through analysis, (2) ABC analysis of assortments, and (3) multiattribute analysis of vendors.



The first analysis provides an ongoing evaluation of the merchandise management plan compared with actual sales. The remaining two analyses offer approaches for evaluating and altering the assortment plan using the specific SKUs in the plan and the vendors that provide the merchandise to support the plan.

See PPT 12-41

A. Evaluating the Merchandise Plan Using Sell-Through Analysis: 

A sell-through analysis is a comparison between actual and planned sales to determine whether price reuctions (markdowns) are required or whether more merchandise is needed to satisfy demand.



The decision depends on experience with the merchandise in the past, whether the merchandise is scheduled to be featured in advertising, whether the vendor can reduce the buyer's risk by providing markdown money, and other merchandising issues.

Ask students what action should be taken with the white and blue silk blouses Exhibit in PPT 12-43.

B. Evaluating the Assortment Plan Using ABC Analysis 

ABC analysis identifies the performance of individual SKUs in the assortment plan.



It is used to determine what SKUs should be in the plan and how much backup stock and resulting product availability are provided for each SKU in the plan.



ABC uses the general 80-20 principle that implies that approximately 80 percent of a retailer's sales or profits come from 20 percent of the products.



The first step in the ABC analysis is to rank-order SKUs using one or more performance measures.



Measures commonly used in ABC analysis are sales dollars, sales in units, gross margin, and GMROI (gross margin return on investment).



The next step is to classify the items. Then, on the basis of the classification, determine whether to maintain the item in the assortment plan and if so, what level of product

See PPT 12-43 Ask students to think of other instances where the 80-20 principle seems to work, e.g., 80% of a store's sales are generated by 20% of its sales force or 20% of its space.

Chapter 18 - Customer Service availability to offer. 

A items account for 5 percent of items and represent 70 percent of sales. These items should never be out of stock.



B items represent 10 percent of the SKUs and an additional 20 percent of sales. The store should pay close attention to the B items, but it may run out of some SKUs in the B category, since it's not carrying the same amount of backup stock as for A items.



C items account for 65 percent of SKUs but contribute to only 10 percent of sales.



There are also D items (the reamining 20 percent of the SKUs). These items have virtually no sales until they are marked down. Not only are these items excess merchandise and an unproductive investment, but they also distract from the rest of the inventory and clutter the store shelves. The buyer decides to eliminate most of these items from the assortment plan.

1. Evaluating Vendors Using the Multiattribute Method 

The multiattribute analysis method for evaluating vendors uses a weighted-average score for each vendor.



A buyer can evaluate vendors by using five steps. Develop a list of issues to consider in the decision. A balance should be made between too short or too comprehensive a list of issues. 2. Importance weights for each issue should be determined by the buyer/planner in conjunction with the merchandise manager. A scale of 1 – 10, with 1 being least important and 10 being most important, can be used. 3. Make judgments about each individual brand's performance on each issue. 4. Combine the importance and performance scores by multiplying the importance for each issue by the performance for each brand or its vendor.

See PPT 12-44

Students may find this a little too “academic.” To make it a little more palatable, ask them to consider how difficult it was to choose a college. Doing a multiattribute model may have made their ultimate choice seem more rational. They might argue that the ratings and the importance weights are arbitrary. But they really aren’t. If you buy into the weights and the ratings, then you have to buy into the result.

5. Determine the vendor’s overall rating by summing the product for each brand for all issues to compute an 18-225 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service overall rating. IX. Summary 

This chapter provides an overview of the merchandise management planning process and examines sales forecasting and assortment planning in more detail.



Performance measures used to assess merchandise management are GMROI, sales-to-stock ratios and inventory turnover, and gross margin.



When developing a sales forecast, retailers need to know what stage of the life cycle a particular category is in.



The next step in the merchandise planning process is developing an assortment plan and model stock list.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS INTERNET EXERCISE Go to www.liquidation.com and www.naeir.org . Read how each organization helps to offload excess merchandise. What are the pros and cons of using such services for a retailer that may have bulk inventory that it needs to move? About Liquidity Services (Source: https://www.liquidation.com/c/about/index.html) “Liquidity Services (NASDAQ: LQDT) operates a network of leading e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. The Company employs innovative e-commerce marketplace solutions to manage, value and sell inventory and equipment for business and government sellers. Our superior service, unmatched scale and ability to deliver results enable us to forge trusted, long-term relationships with over 14,000 sellers worldwide. With over $8 billion in completed transactions, and more than 3.6 million buyers in almost 200 countries and territories, we are the proven leader in delivering smart commerce solutions. Visit us at LiquidityServices.com.” NAEIR IS MAKING HISTORY (Source: https://www.naeir.org/about/history/) “How does a small non-profit grow into a national organization that has received almost $3 billion in new merchandise? One donation at a time… “NAEIR was founded as a charitable organization by Norbert C. Smith, the former President of Capital Recovery Company, a consulting firm that arranged donations of capital equipment and buildings to schools and non-profit organizations. “In 2012 NAEIR celebrated its 35th birthday, making it the oldest in-kind giving organization in America. As part of the celebration, NAEIR debuted the Best Values catalog. It allows members to request individual items, rather than an entire assortment of products. At this time NAEIR introduced a new logo, the Empowering Generosity tagline and revamped catalogs and website. Membership levels were renamed to Basic and Premier for ease of understanding.”

https://www.naeir.org/

Chapter 18 - Customer Service 110. IN-STORE or INTERNET EXERCISE Go to the store location or homepage for a craft store such as Michaels Stores or Jo-Ann Fabric and Craft Stores (https://www.michaels.com/ , https://www.joann.com/ (. How does this retailer organize its merchandise in terms of merchandise group, department, category, and stock-keeping unit? Select two categories of merchandise: one you would expect to have a high inventory turnover and the other, a low inventory turnover. Explain your reasoning for each selection. From the Michael’s Homepage - Departments “Art Supplies, Beads, Craft Painting, Framing, Home Décor, Scrapbooking, Wedding, Bakeware, Christmas, Floral, General Crafts, Kids / Teachers, Yarn & Needle Crafts, Seasons & Celebrations” By clicking on the Yarn Department, then the customer sees brands offered: “Bernat®, Caron®, Lily® Sugar 'N Cream, Lion Brand®, Loops & Threads™, Patons®, Red Heart®, Vanna's Choice®” Popular crafts that frequently go on sale would likely have a high inventory turnover. Big thick items would probably have a lower inventory turnover. 111. GO SHOPPING Visit a big-box office supply store and then a discount store to shop for school supplies. Contrast the variety and assortment offered at both. What are the advantages and disadvantages of breath versus. depth for each retailer? What are the advantages and disadvantages from the consumer’s perspective? Students should be able to describe that an office supply store has greater depth in office and school supplies. The discount store carries this type of merchandise, but with less selection. Shoppers can buy other merchandise at a discount store, such as clothes, toys, food, and heath/beauty items. If customers want more school/office supply selection, then they would prefer the office super store. 112. INTERNET EXERCISE. Go to the home page of Chain Store Age at www.chainstoreage.com . Find an article that focuses on merchandise planning. How can this article assist retailers with merchandise planning decisions? Answers here will vary based on the article selected. 113. INTERNET EXERCISE Go to www.sas.com/en_us/industry/retail/integrated-merchandiseplanning.html, the SAS Merchandise Planning website. How does its system provide retailers with information to support merchandising planning, forecasting, and measurement? From the company website… “Right merchandise. Right place. Right price. “Only SAS Merchandise Intelligence provides real intelligence at every step of the merchandising life cycle. With this collection of software and services, you can maximize the profitability of the merchandising process while improving customer loyalty and satisfaction levels. Retailers get reporting, planning, forecasting and optimization at critical points through the planning process, which lead to faster and better decisions. 18-228 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service “SAS® Merchandise Intelligence includes: SAS Integrated Merchandise Planning, which provides complete planning capabilities for the merchandising process, including performance analysis, financial planning, assortment planning, space planning, allocation and more. SAS Size Optimization, which uses powerful analytics to transform historical sales data into valuable size-demand intelligence. The solution accurately predicts future sales and inventory needs by size, and determines case-pack supply to optimally meet this demand. SAS Revenue Optimization Suite, the only software suite available today that helps retailers manage revenue and margin through the entire merchandise life cycle. This suite includes three integrated components: SAS Regular Price Optimization – Establish and maintain optimal everyday prices based on costs, regional demand patterns and competitive price information. SAS Promotion Optimization– Maximize margin and revenue through improved promotion planning powered by advanced demand modeling and optimization. SAS Markdown Optimization – Determine which items should be marked down, by how much, when and in which markets or stores. “Because it includes our leading forecasting capabilities and advanced analytics, SAS Merchandise Intelligence helps you drive profits by optimizing the merchandising process from planning through inventory fulfillment. “All of these solutions leverage the SAS® Business Analytics Framework and its core components – industry-leading data integration, analytics and reporting technologies. This framework ensures an open, extensible foundation that integrates with your existing infrastructure to deliver accurate, indepth retail intelligence.”

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS How and why would you expect variety and assortment to differ between a brick-and-mortar Athleta store and its Internet site (https://athleta.gap.com/)? The retail website in March 2021 offers merchandise by activity, tops, bottoms, bras, dresses, jackets, and swim. If a shopper clicks on Activity, the following pull down menu appears: All Activities Restore Yoga & Studio Run & Train Hike & Explore Travel & Commute Tennis & Golf Swim, SUP & Surf Stores offer the same merchandise as the web site and consumers can check store availability before they drive to the closest store or order online. Some promotions do differ between the store and online site; however stores will accept online sale prices.

Chapter 18 - Customer Service Source: https://athleta.gap.com/ 114. Simply speaking, increasing inventory turnover is an important goal for a retail manager. What are the consequences of turnover that’s too low? Too high? With a high amount of turnover, sales volume increases. When retailers sell merchandise quickly, they are able to obtain fresh stock, improve salesperson morale, and create more open-to-buy opportunities. Also, there are fewer markdowns caused by slow selling merchandise. There are fewer costs of goods sold and lower operating expenses, and asset turnover increases. When inventory turnover is low, merchandise begins to look shopworn. When inventory turnover is too high, sometimes sales associates might not have a chance to learn about a new product. In addition, buyers have to plan for high inventory turnover and account for the appropriate levels of backup stock to keep the retail floor from being too sparse. 115. Assume you are the grocery buyer for canned fruits and vegetables at a five-store supermarket chain. Del Monte has told you and your boss that it would be responsible for making all inventory decisions for those merchandise categories. It would determine how much to order and when shipments should be made. It promises a 10 percent increase in gross margin dollars in the coming year. Would you take Del Monte up on its offer? Justify your answer. In this case, Del Monte would act as a category captain for the fruits and vegetables category for the supermarket chain. The supermarket is a small five-store chain, so it likely does not have sufficient resources to implement sophisticated market research, forecasting, or inventory management. Instead, it is possible that store managers or category managers may be making these decisions based simply on daily turnover and customer demand and traffic patterns. A partnership arrangement with Del Monte would provide this chain with tremendous benefits. It can leverage the customer insights developed at Del Monte through its expertise in the field and experience in working with other supermarkets. These insights, in turn, would help the chain become more responsive to the customers and therefore improve performance and profits across this category. The chain would also benefit from the category and brand awareness created by Del Monte through its national promotions and advertising. On the flip side, there could be several issues that must be settled before proceeding further on the arrangement. First, Del Monte may be able to take advantage of its position as the controller of information and inventory and make decisions that may profit it more than the supermarket chain. Second, if Del Monte stocks more of its own brands with no space devoted to competitive products, consumers may be deprived of a good assortment and brand choice. Third, there may be other attempts by Del Monte to control more store-level decisions, including shelf space utilizations or displays. Del Monte could offer a lot of advantages, but several risks and issues remain. The various benefits and the promise of a 10 percent increase in gross margin dollars is attractive. But a cautious supermarket executive would try to negotiate a deal that safeguards the chain's interests. One option is to develop contract provisions, including trying out Del Monte for a short-term contract period first. Additional contract provisions should clearly specify the areas of cooperation, redress in case the promised 10

Chapter 18 - Customer Service percent increase in margins are not realized, and cancellation of the agreement at any time for any reason with only a 90-day notice. 116. A buyer at Old Navy has received a number of customer complaints that he has been out of stock on some sizes of men’s T-shirts. The buyer subsequently decides to increase this category’s product availability from 80 percent to 90 percent. What will be the impact on backup stock and inventory turnover? Would your answer be the same if the product category were men’s fleece sweatshirts? An increase in customer service by 10 percent will increase backup stock by much more than 10 percent (see Exhibit 11-10). Inventory turnover will be adversely affected. Although net sales will increase by 10 percent, because service level increased by 10 percent, inventory investment will increase by more than 10 percent. In calculating inventory turnover, net sales and inventory investment both increased. But inventory investment increased at a higher rate, so inventory turnover must decrease. As both types of shirts could be considered staple merchandise for Old Navy, the results may be expected to be similar for men’s T-shirts and men’s sweatshirts. 117. Variety, assortment, and product availability are the cornerstones of the merchandise planning process. Provide examples of retailers that have done an outstanding job of positioning stores based on one or more of these issues. Students will have a variety of answers to this question. However, some possible responses are: * Costco has a wide variety of merchandise with 4,000 carefully chosen products. The assortment within each category, however, is narrow. *Amazon.com has a great assortment of products. With the introduction of AmazonFresh grocery, Amazon is quickly becoming a one-stop shop. *The Gap is strong on product availability for their basic merchandise. It doesn’t want to be out of any size of jeans or khakis. Consumers can even special-order out-of-stock or hard to find sizes. 118. The fine jewelry department in a department store has the same GMROI as the small appliances department, even though characteristics of the merchandise are quite different. Explain this situation. The jewelry department has low turnover but very high margins. Typically, a jewelry department can command a very high markup because it sells merchandise the customer perceives as being unique. It is also difficult to make price comparisons for jewelry. The jewelry store may also carry some brand names, such as Rolex watches, that are not available in many stores. Because the merchandise is priced high, and not generally purchased regularly, inventory turnover is often low. Inventory turnover is also generally low because jewelry departments must carry a large selection of high-priced merchandise. The small appliance department instead tends to be used as a “loss leader” department. That is, the department specializes in selling merchandise at low margins to bring customers into the store in the hope that they will buy other things. The relatively low price creates a high velocity of sales. In turn, the high velocity of sales keeps inventory relatively low. The combination of high sales and low inventory facilitates high inventory turnover.

Chapter 18 - Customer Service 119. Calculate the GMROI and inventory turnover given annual sales of $20,000, average inventory (at cost) of $4,000 and a gross margin of 45 percent. GMROI = Gross margin % x Sales-to-stock ratio GMROI = 45% x (20,000 ÷ 4,000) .45 x 5 = 2.25 Inventory turnover (IT) = (1 – Gross margin percentage) x Sales-to-stock ratio IT = (1 - .45) x 5 IT = .55 x 5 = 2.75 120. As the athletic shoe buyer for Dick’s Sporting Goods, how would you go about forecasting sales for a new Nike running shoe? As the athletic shoe buyer for Dick’s Sporting Goods, you are dealing with a staple merchandise category. Sales of athletic shoes should prove to be relatively steady over time for Dick’s Sporting Goods. Because your sales are relatively constant from year to year, you can use historical sales figures to project likely sales to come from Nike’s new running shoe as a starting point for further evaluation. As the athletic shoe buyer, you must be careful to take into account factors such as openings and closings of stores, price for the shoes relative to the category, special promotions, or placements of the shoes that will impact sales in the category or for this particular Nike shoe. 121. Using the 80-20 principle, how can a retailer make certain it has enough inventory of fastselling merchandise and a minimal amount of slow-selling merchandise? Retailers should rank products by the 80-20 principle, which maintains that 80 percent of a retailer’s sales or profits come from 20 percent of the products. This ranking system is known as the ABC Analysis. Essentially, the retailer should divide the inventory into “A,”“B,” or “C” categories depending upon the importance of each item. The “A” category items are those that are most important. The retailer should make sure that the store has these items all the time. The “B” category items are important, but the retailer can afford to be out of these items once in a while. The “C” category items are not that important, and the retailer should try to only special order these items for specific customer orders. 122. A buyer at a sporting goods store in Denver receives a shipment of 400 ski parkas on October 1 and expects to sell out by 31. On November 1, the buyer still has 350 parkas left. What issues should the buyer consider in evaluating the selling season’s progress? Using a sell-through analysis, if the selling season is supposed to be four months, the buyer should expect to sell about 100 units in the first month. Before deciding whether or not the merchandise is really selling significantly slower than it should be, the buyer should consider any environmental factors such as a particularly warm autumn. If the weather is normal, the buyer should take drastic action, such as marking down the parkas or promoting them. If the markdown strategy is chosen, the buyer should try to obtain markdown money from the vendor. 18-233 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 123. A buyer is trying to decide from which vendor to buy a certain item. Using the following information, determine from which vendor the buyer should purchase. VENDOR PERFORMANCE Importance Issues Weight Vendor A Vendor B Reputation for collaboration 8 9 8 Service 7 8 7 Meets delivery dates 9 7 8 Merchandise quality 7 8 4 Gross margin 6 4 8 Brand-name recognition 5 7 5 Promotional assistance 3 8 8 Vendor A Vendor B 8 x 9= 72 8 x 8 = 64 7 x 8 = 56 7 x 7 = 49 9 x 7 = 63 9 x 8 = 72 7 x 8 = 56 7 x 4 = 28 6 x 4 = 24 6 x 8 = 48 5 x 7 = 35 5 x 5 = 25 3 x 8 = 24 3 x 8 = 24 330 310 Therefore the buyer should choose Vendor A.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Merchandise Management Process

Drag and Drop; Matching (accessible version)

Overview of Merchandise Management

12-1 Explain the merchandise management organization and performance measures.

Belle's BoutiqueManaging Merchandise Across Stores

Case Analysis

Allocating Process, Overview of Merchandise Management

12-1 Explain the merchandise management organization and performance measures. 12-3 Describe how to predict sales for merchandise categories. 12-4 Summarize the trade-offs for developing merchandise assortments. 12-7 Describe how multistore retailers allocate merchandise to stores.

Merchandise Planning at Buycostumes.com

Video Case

Merchandise Forecasting and Budgeting, Inventory Levels and Inventory Management

12-5 Illustrate how to determine the appropriate inventory levels.

Merchandise Management: Allocation and Performance

Drag and Drop; Matching (accessible version)

Allocating Process, Overview of Merchandise Management

12-8 Review how retailers evaluate the performance of their merchandise management decisions.

Chapter 18 - Customer Service

BUYING MERCHANDISE ANNOTATED OUTLINE

INSTRUCTOR NOTES

I. Introduction After creating an assortment plan for the category, forecasting sales, and developing a plan outlining the flow of merchandise, the next step in the merchandise management process is to buy the merchandise. The first strategic decision that needs to be made is the type of merchandise to buy for the category: well-known national brands or store brands that are exclusively available from the retailer. Although buyers meet and negotiate with vendors and manufacturers each season concerning new merchandise, there is a trend toward developing long-term strategic relationships with key suppliers (as discussed in Chapter 9) An examination of the legal, ethical, and social responsibility issues surrounding the buying of merchandise must also be considered. LO 13-1 Identify the branding options available to retailers.

II. Brand Alternatives Retailers and their buyers face a strategic decision about the mix of national and private-label brands sold exclusively by the retailer.

See PPT 13-3 Ask students to name several of their favorite brands. What appeals to them about these brands? In contrast, what brands do they truly dislike? Ask for their reasoning.

A. National Brands National brands, also known as manufacturer’s brands, are products designed, produced, and marketed by a vendor and sold to many different retailers. The vendor is responsible for developing the merchandise, producing it with consistent quality, and undertaking a marketing program to establish an appealing brand image.

Ask students which brands on their “list of favorite brands” are national brands.

Some vendors use an umbrella or family brand associated with their company and a subbrand associated with the 18-236 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service product. In other cases, vendors use individual brand names for different product categories and don’t associate the brands with their companies. Some retailers focus their buying activities around nationalbrand vendors that cut across merchandise categories. Despite some inefficiencies, managing a merchandise by vendor, rather than by category, gives the retailer more clout in dealing with the vendor. See PPT 13-5

B. Store Brands Store brands (also called private-label brands, house brands or own brands) are products developed by retailers. In many cases, retailers develop the design and specifications for their store-brand products and then contract with manufacturers to produce those products. In other cases, national-brand vendors work with a retailer to develop a special version of its standard merchandise offering to be sold exclusively by the retailer. In these cases, the national-brand vendor or manufacturer is responsible for the production of the merchandise. In recent years, as the size of retail firms has increased through growth and consolidation, more retailers have the economies of scale to develop store-brand merchandise and to use this merchandise to establish a distinctive identity. Also, manufacturers and national-brand suppliers are more willing to accommodate the needs of retailers and develop exclusive private labels for them. There are three categories of private brands; premium, exclusive and copycat.

Ask students which brands on their “list of favorite brands” are store brands.

Ask students why a manufacturer of national brands would want to produce store-brand products for grocery stores. (Excess production capacity) Ask students about the brand reputation and quality of various private labels vis-à-vis manufacturer brands in some items, e.g., jeans (Gap versus Levi's), shoes (Nike versus Payless), and cheese (Kraft versus local supermarket brand). What are the reasons behind these differences in perceived brand reputations and quality? When does it not matter if the brand was a manufacturer brand or a private-label brand?

1. Premium Store Brands Premium store brands offer the consumer a product that is comparable to a manufacturer’s brand quality, sometimes with modest price savings, such as Kroger’s Private 18-237 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Selection. 2. Exclusive Brands An exclusive brand is a brand developed by a national-brand vendor, often in conjunction with a retailer, and sold exclusively by the retailer, such as a Canon digital camera sold at Best Buy that might have a different model number than a Canon digital camera with similar features available at Walmart. These exclusive models make it difficult for consumers to compare prices for virtually the same camera sold by different retailers. 3. Copycat Brands Copycat brands imitate the manufacturer’s brand in appearance and packaging, generally are perceived as lower quality, and are offered at lower prices. For instance, CVS or Walgreens brands are placed next to the manufacturer’s brands and often look like them. B. Generic Brands Generic brands are labeled with the name of the commodity and thus actually have no brand name distinguishing them. These products target a price-sensitive segment by offering a no-frills product at a discount price. See PPT 13-7

C. National Brands or Store Brands? When determining the mix between national versus store brands, retailers consider the effect on their overall assortment, profitability, and flexibility. Buying from vendors of national brands can help retailers build their image and traffic flow and reduce their selling/promotional expenses. Retailers need to spend relatively less money selling and promoting national brands. However, since vendors of national brands assume the expenses of designing, manufacturing, distributing, and promoting the brand, retailers typically realize lower gross margins for them compared with those for their own store brands. Also, since national brands are sold by other retailers, competition can be intense. Customers compare prices for these brands across stores.

Chapter 18 - Customer Service

1. Store Brands Enhance and Expand Assortments Retailers examine their assortments to make sure they are providing what their customers want. They may introduce an innovative new store-branded product that isn’t being offered by their national-brand vendors or a product that can be offered at a better value—or both. Many store brands today extend assortments by creating multiple price tiers, often referred to as low cost, value, and premium. 2. Profitability Stocking national brands is a double-edged sword for retailers. Many customers have developed loyalty to specific national brands. If a retailer does not offer the national brands, customers might view its assortment as lower in quality, with a resulting loss of profits. On the other hand, the consistency of national brands means that it is easy to compare the retailer’s prices for national brands. Offering store brands has several advantages: (1) exclusivity boosts store loyalty, (2) well known, highly desirable store brands enhance the retailer’s image and draw in customers, (3) relatively lower prices for consumers, (4) fewer restrictions on merchandise display, promotion or pricing, and (5) potentially greater gross margin opportunities. There are draw-backs to store brands as well. Retailers must make significant investments to design merchandise, manage global manufacturers, create customer awareness, and develop a favorable image for the brand. In addition, if the store branded merchandise doesn’t sell well, the merchandise can’t be returned to a vendor or sold at an off-price retailer. 3. Flexibility National brands can limit a retailer’s flexibility. Vendors of strong brands can dictate how their products are displayed, advertised, and priced LO 13-2 Describe how retailers buy national brands.

III. Buying National-Brand Merchandise Retail buyers of national brands meet with vendors, review the merchandise they have to offer at wholesale markets, and place orders.

See PPT 13-9

Chapter 18 - Customer Service

A. Meeting National-Brand Vendors A wholesale market for retail buyers is a concentration of vendors within a specific geographic location, perhaps even under one roof or over the Internet. These markets may be permanent wholesale market centers or annual trade shows or trade fairs.

Ask students if they think they would enjoy a career as a retail buyer in the future. What do they see as the pros and cons of retail buying as a career?

1. Wholesale Market Centers For many types of merchandise, particularly fashion apparel and accessories, buyers regularly visit with vendors in established market centers. At specific times during the year, these wholesale centers host market weeks during which buyers make appointments to visit the various vendor showrooms. Vendors that do not have permanent showrooms at the market center lease temporary space to participate in market weeks. 2. Trade Shows Trade shows provide an opportunity for buyers to see the latest products and styles and to interact with vendors. Trade shows are typically staged at convention centers not associated with wholesale market centers. Vendors display their merchandise in designated areas and have sales representatives, company executives, and sometimes celebrities available to talk with buyers as they walk around the exhibit area. Vendors from outside the United States and store-brand manufacturers have started to attend trade shows to learn about the market and pick up trend information. Despite these trends, most participants at the shows are nationalbrand vendors. See PPT 13-10

B. National--Brand Buying Process When attending market weeks or trade shows, buyers and their superiors typically make a series of appointments with key vendors. The meetings during market weeks offer an opportunity for indepth discussions, whereas trade shows provide the opportunity for buyers to see a broader array of merchandise in one location and to gauge reactions to the merchandise by observing the level of activity in the 18-240

Chapter 18 - Customer Service vendor’s display areas. IV. Developing and Sourcing Store-Brand Merchandise Retailers use a variety of different processes to develop and buy store brands. Developing Store Brands Larger retailers that offer a significant amount of store-brand merchandise, like Kroger, J.Crew, H&M, and IKEA have large divisions dedicated to managing their store-brand merchandise all the way from design to manufacture.

LO 13-3 List the issues retailers consider when developing and sourcing store-branded merchandise internationally. See PPT 13-12

Smaller retail chains can offer store-brand merchandise without making a significant investment in the supporting infrastructure. Many national brands will modify their national-brand merchandise and put the store’s label on the products. See PPT 13-13

B. Sourcing Store-Brand Merchandise Once the decision has been made about which and how much store-brand merchandise will be acquired, the designers develop a complete specification and work with the sourcing department to find a manufacturer for the merchandise. As barriers to international trade continue to fall, retailers can consider more sources for merchandise, anywhere in the world. 1. Costs Associated with Global Sourcing Decisions Retailers use production facilities located in developing economies for much of their private-label merchandise because of the very low labor costs in these countries. Counterbalancing the lower acquisition costs may be offset by increases in the costs of sourcing private-label merchandise from other countries. These costs include the relative value of foreign currencies, tariffs, longer lead times, and increased transportation costs. A tariff, also known as a duty, is a tax placed by a government upon imports. Import tariffs have been used to shield domestic manufacturers from foreign competition and to raise money for the government. The relative value of foreign currencies can have a strong 18-241

Chapter 18 - Customer Service influence on the cost of imported merchandise. 2. Managerial Issues Associated with Global Sourcing Decisions Whereas the cost factors associated with global sourcing are easy to quantify, some more subjective issues include quality control, time to market, and sociopolitical risks. Another issue related to global sourcing is the problem of policing potential violations of human rights and child labor laws. It is also more difficult to predict exactly how long lead time will be when sourcing globally. Transportation costs are significantly higher when merchandise is produced in foreign countries.

Ask students to discuss barriers to the development of global collaborative supply chain relationships.

Have students give examples of a product that they believe has a higher/lower image than it deserves just because of the country in which it is made.

3. Resident Buying Offices Many retailers purchasing private-label merchandise use resident buying offices, which are organizations located in major market centers that provide services to help retailers buy merchandise. 1. Reverse Auctions Rather than negotiating with a specific manufacturer to produce their store-brand merchandise, some retailers use reverse auctions to get quality store-brand merchandise at low prices. The most common use of reverse auctions is to buy the products and services used in retail operations rather than merchandise for resale.

Ask students to consider the costs and benefits of the reverse auction from both retailer’s and vendor’s sides.

See PPT 13-15

Auctions conducted by retailer buyers of store-brand merchandise are called reverse auctions because there is one buyer, the retailer, and many potential sellers, the manufacturing firms. In reverse auctions, retail buyers provide specifications for what they want a group of potential vendors to bid on. The competing vendors then bid on the price at which they are willing to sell until the auction is over. Reverse auctions have not been very popular with vendors who prefer not to be anonymous contestants in bidding wars where price alone, without consideration of service 18-242 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service or quality is the sole basis for winning business. V. Negotiating with Vendors When buying national brands or sourcing store-brand merchandise, buyers and firm employees responsible for sourcing typically enter into negotiations with suppliers.

LO 13-4 Understand how retailers prepare for and conduct negotiations with their vendors. See PPT 13-16

A. Knowledge Is Power The more the buyer knows about the retailer’s and vendor’s situations, as well as trends in the marketplace, the more effective he or she will be in negotiations. One important issue to be aware of is the vendor’s policy on markdown money – funds vendors give retailers to cover lost gross margin dollars due to the markdowns needed to sell unpopular merchandise. Vendors and their representatives are excellent sources of market information. They know what is, and is not, selling. Retail buyers also can provide market information to the vendor. See PPT 13-17

B. Negotiation Issues Buyers should be prepared to cover a variety of issues in their meeting with the vendor including: (1) price and gross margin, (2) additional markup opportunities, (3) terms of purchase, (4) exclusivity, (5) advertising allowances, and (6) transportation.

Ask students to consider the positions of both the buyer and the vendor on each of these six issues. What position will each of them bring to the negotiation?

1. Price and Gross Margin The retail buyer wants to buy the merchandise at a low price to have a higher gross margin while the vendor wants to sell the merchandise at a higher price to achieve better profits. Although the wholesale price the buyer negotiates might enable achievement of gross margin goals, if the merchandise not sell as expected, the merchandise may have to be put on sale, falling short of the margin goal. Faced with this uncertainty, the buyer may seek a margin guarantee, the vendors promise to provide markdown money if necessary. In addition to negotiating the wholesale price, supermarket 18-243 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service buyers often negotiate slotting fees, or slotting allowances. Slotting allowancesare charges imposed by a retailer to stock a new item. When a vendor agrees to pay that fee, the retailer will stock the product for a period of time, assess its sales and margin, and, if successful, continue to offer the product after the trial period. Vendors may view slotting allowances as extortion, and small vendors believe these fees preclude their access to retail stores. However, retailers, and most economists, agree that slotting allowances are a useful method to determine which new products the retailer should carry. 2. Additional Markup Opportunities As part of the negotiation, the vendor may offer the buyer discounted prices to take excess merchandise. Although the buyer can realize higher than normal gross margins on the merchandise or put the merchandise on sale and pass the savings on to customers, the buyer must consider the retailer’s image. 3. Terms of Purchase The buyer hopes to negotiate for a long period in which to pay for the merchandise to improve cash flow, lower liabilities, and even reduce interest expense if it is borrowing money to pay for its inventory. In contrast, the vendor would like to be paid soon after the merchandise is delivered. 4. Exclusivity Retailers often negotiate with vendors for an exclusive arrangement so that no other retailer can sell the same item or brand. This helps the retailer differentiate from competitors and realize higher margins due to reduced price competition. Vendors may also benefit by making certain the image of the retailers selling their merchandise is consistent with their own brand image. In fashion merchandise categories, being the first retailer in a market to carry certain products helps the retailer hold a fashion-leader image. 5. Advertising Allowances Retailers often share the cost of advertising through a 18-244 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service cooperative arrangement with vendors known as cooperative (co-op) advertising – a program undertaken by a vendor in which the vendor agrees to pay for all or part of a pricing promotion. 6. Transportation The question of who pays for shipping merchandise from the vendor to the retailer will be a significant negotiating point, as transportation costs can be substantial. See PPT 13-18

C. Tips for Effective Negotiating 1. Have at Least as Many Negotiators as the Vendor Retailers have a psychological advantage at the negotiating table if the vendor is outnumbered. At the very least, the negotiating teams should be the same size. 2. Choose a Good Place to Negotiate From a psychological perspective, people generally feel more comfortable and confident in familiar surroundings.

Ask students to suggest some locations for the negotiation that would be comfortable for the buyer and for the vendor.

3. Be Aware of Real Deadlines Recognizing important deadlines will help the parties come to closure in a timely manner. 4. Separate the People from the Problem Personal relationships, favors, and threats have no place in the negotiation meeting. 5. Insist on Objective Information The best way to separate people from business information is to rely on objective information. 6. Invent Options for Mutual Gain Inventing multiple options is part of the planning process, but knowing when and how much to give, or give up, requires quick thinking at the bargaining table. 7. Let Them Do the Talking There’s a natural tendency for one person to continue to talk if the other person involved in the conversation doesn’t 18-245 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service respond. If used properly, this can work to the negotiator’s advantage. 8. Know How Far to Go Recognize the fine line between negotiating too hard and walking away from the table with less than necessary. 9. Don’t Burn Bridges The world of retailing is relatively small. Neither buyer nor vendor can afford to be known in the trade as unfair, rude, or worse. 10. Don’t Assume To be certain there are no misunderstandings, participants should orally review the outcomes as the end of the negotiating session. Both parties should also summarize the session in writing as soon as possible after it ends. VI. Strategic Relationships Maintaining strong vendor relationships is an important method of developing a sustainable competitive advantage.

LO 13-5 Determine why retailers build strategic relationships with their vendors. See PPT 13-19

A. Defining Strategic Relationships Relationships between retailers and vendors are often based on arguing over splitting up a profit pie. This is basically a win-lose relationship because when one party gets a larger portion of the pie, the other party gets a smaller portion. Both parties are interested exclusively in their own profits and are unconcerned about the other party’s welfare.

Ask students to identify the benefits of entering into strategic relationships. One way to tease out the various issues is to compare relationships that are not of the partnering type with partnering relationships. The A strategic relationship, also called a partnering relationship, costs of transactions, is when a retailer and a vendor are committed to negotiations, as well as some maintaining the relationship over the long term and obvious costs of dealing with investing in opportunities that are mutually beneficial to partners who have only their own the parties. interests at heart can be uncovered. By contrast, the A strategic relationship is a win-win relationship. Both parties partnering relationship admits benefit because the size of the pie has increased – both mutual goals, a commitment to the retailer and vendor increase their sales and profits. preserving the relationship, and Strategic relationships are created explicitly to uncover and may forsake short-term gains for exploit joint opportunities. a long-term mutually profitable relationship. Members in strategic partnerships depend on and trust each other heavily; they share goals and agree on how to 18-246 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service accomplish those goals; and they’re willing to take risks, share confidential information, and make significant investments for the sake of the relationship. A strategic relationship is like a marriage. When businesses form strategic relationships, they are wedded to their partners for better or worse. See PPT 13-20

B. Building Partnering Relationships The development of strategic partnerships tends to go through a series of phases characterized by increasing levels of commitment: (1) awareness, (2) exploration, (3) expansion, and (4) commitment.

Ask students for examples of manufacturers who sell direct over the Internet. (HewlettPackard) Ask them whether they think the increased sales they get by selling over the Internet is worth alienating their traditional retail customers.

1. Awareness In the awareness stage, no transactions have taken place. Reputation and image of the vendor can play an important role in determining if the buyer moves to the next stage. 2. Exploration During the exploration phase, the buyer and vendor begin to explore the potential benefits and costs. 3. Expansion Eventually, the buyer has collected enough information about the vendor to consider developing a longer-term relationship. The buyer and the vendor determine if there is the potential for a win–win relationship. 4. Commitment If both parties continue to find the relationship mutually beneficial, it moves to the commitment stage and becomes a strategic relationship. The buyer and vendor make significant investments in the relationship and develop a long-term perspective toward it. See PPT 13-21

C. Maintaining Strategic Relationships The four foundations of successful strategic relationships are (1) mutual trust, (2) common goals, (3) open 18-247

Chapter 18 - Customer Service communication, and (4) credible commitments. 1. Mutual Trust The glue in strategic relationships is trust. Trust is a belief that a partner is honest (reliable, stands by its word, sincere, fulfills obligations) and is benevolent (concerned about the other party's welfare).

If the retailer doesn’t trust their vendors, they won’t be willing to share information necessary for strategic partnerships to succeed.

When vendors and buyers trust each other, they’re more willing to share relevant ideas, clarify goals and problems, and communicate efficiently.

2. Common Goals Shared goals give both members of the relationship incentive to pool their strengths and abilities, and to exploit potential opportunities between them. Common goals also help to sustain the partnership when expected benefit flows aren’t realized.

Retailer and vendor must have the same goals, such as maintaining high product image, limiting distribution outlets, and maintaining suggested retail prices.

3. Open Communication Buyers and vendors in a relationship need to understand what’s driving each other’s business, their roles in the relationship, each firm’s strategies, and any problems that arise over the course of the relationship. 4. Credible Commitments Credible commitments are tangible investments in the relationship. Credible commitments involve spending money to improve the supplier’s products or services provided to the customer. VII. Legal, Ethical, and Social Responsibility Issues for Buying Merchandise Indicate the legal, ethical, and social responsibility issues involved in buying merchandise.

Some vendors help retailers by investing in store displays, co-op advertising, and/or inventory management systems LO 13-6 Indicate the legal, ethical, and social responsibility issues involved in buying merchandise. See PPT 13-25

A. Legal and Ethical Issues Some practices that arise in buyer–vendor negotiations that may have legal and/or ethical implications are counterfeit 18-248 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service merchandise, gray-market, terms and conditions purchase, commercial bribery, chargebacks, buybacks, exclusive dealing agreements, tying contract and refusal to deal. Additionally, retailers are becoming more socially responsible in their buying practices.

1. Counterfeit Merchandise Counterfeit merchandise includes goods that are made and sold without permission of the owner of a trademark or copyright. Trademarks and copyrights are intellectual property.

Ask students what products they have seen that they think are counterfeit.

Intellectual property is intangible and is created by intellectual (mental) effort as opposed to physical effort. A trademark is any mark, word, picture, device, or nonfunctional design associated with certain merchandise. A copyright protects original work of authors, painters, sculptors, musicians, and others who produce works of artistic or intellectual merit. The nature of counterfeiting has changed over time. Counterfeit name-brand merchandise, such as women’s handbags or dresses, has improved in quality, making these items more expensive and difficult to distinguish from the real merchandise. Also, there is a thriving business in counterfeit information products such as music, software, and Blu-rays. This type of merchandise is attractive to counterfeiters because it has a relatively high unit value, is easy to duplicate and transport, and prompts high consumer demand. 2. Gray-Market, Diverted, and Black-Market Merchandise Gray-market goods, also known as parallel imports, involve the flow of merchandise through distribution channels, usually across international borders, other than those authorized or intended by the manufacturer or producer. Diverted merchandise is similar to gray-market merchandise except there need not be distribution across international boundaries.

It is important to note that graymarket merchandise is not counterfeit! It is imported and sold to the retailer without the knowledge of (or profit to) the U.S. trademark owner.

This term applies to merchandise that is diverted from its legitimate channel of distribution. The diversion often involves a wholesaler (the diverter) and a discount store 18-249 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service operator. Some discount store operators argue that customers benefit from the lack of restriction on gray-market and diverted goods because it lowers prices. Traditional retailers claim gray-market and diverted merchandise has a negative impact on the public. After sale service will be unavailable and trademark images may be hurt.

See PPT 13-23 Ask students to discuss the difference between gray-market and diverted merchandise.

Vendors wishing to avoid the gray-market problem have several remedies. First, they can require all of their retail and wholesale customers to sign a contract stipulating that they will not engage in gray marketing. Another strategy is to produce different versions of products for different markets. A black market occurs when consumer goods are scarce, such as water or gasoline after a natural disaster; heavily taxed, such as cigarettes or alcohol; or illegal, such as drugs or arms. See PPT 13-24

3. Terms and Conditions of Purchase The Robinson-Patman Act, passed by the U.S. Congress in 1936, potentially restricts the prices and terms that vendors can offer to retailers. The act makes it illegal for vendors to offer different terms and conditions to different retailers for the same merchandise and quantity. Sometimes called the Anti-Chain-Store Act, it was passed to protect independent retailers from chainstore competition. 4. Commercial Bribery Commercial bribery occurs when a vendor or its agent offers or a buyer asks for “something of value” to influence purchase decisions. To avoid such problems, many retailers forbid employees to accept any gifts from vendors. 5. Chargebacks A chargeback is a practice used by retailers in which they 18-250

Chapter 18 - Customer Service deduct money from the amount they owe a vendor. Retailers often use a chargeback when a vendor did not meet the agreed-on terms. Vendors sometimes feel that the chargebacks retailers take are not justifiable and thus are unethical. 6. Buybacks The buyback (also known as stocklift or lift-out) is a strategy vendors and retailers use to get products into retail stores. A buyback can occur under two scenarios. First, and most ethically troubling, is when a retailer allows a vendor to create space for its goods by “buying back” a competitor’s inventory and removing it from a retailer’s system. Second, the retailer forces a vendor to buy back slowmoving merchandise.

Ask students “how bad” an ethical situation this practice seems to them.

Technically, a company with market power may violate federal antitrust laws if it stocklifts from a competitor so often as to shut it out of a market. But such cases are difficult to prove. 7. Exclusive Dealing Agreements Exclusive dealing agreements occur when a manufacturer or wholesaler restricts a retailer into carrying only its products and nothing from competing vendors. The effect on competition determines the legality of these contracts. 8. Tying Contract A tying contract exists when a vendor and a retailer enter into an agreement that requires the retailer to take a product it does not necessarily desire (the tied product) to ensure it can buy a product it does desire (the tying product). Tying contracts are illegal if the effect may be to substantially lessen competition or tend to create a monopoly, but the complaining party has the burden of proof.

Ask students to give an example of a product that could be legitimately used in a tying contract (e.g., McDonald's ground beef) and one that would not (napkins at McDonald's).

9. Refusal to Deal Generally, both a supplier and a retailer have the right to deal or refuse to deal with anyone they choose. There are exceptions to this general rule when there is evidence of anti-competitive conduct by one or more firms wielding

The issue again is whether the vendor is large enough to restrict trade or create a monopoly. See

Chapter 18 - Customer Service market power.

exclusive territories.

A manufacturer may refuse to sell to a particular retailer, but it cannot do so for the sole purpose of benefiting a competing retailer. See PPT 13-25

B. Corporate Social Responsibility Corporate social responsibility (CSR) describes the voluntary actions taken by a company to address the ethical, social, and environmental impacts of its business operations. Retailers act socially responsibly in many ways, from giving to charity to donating time to philanthropic community activities to supporting the rights of minority groups to adopting responsible marketing and sales practices. Some retailers are getting involved in fair trade, a socially responsible movement that ensures that producers receive fair prices for their products. These initiatives and many others suggest a complicated business model. Some are more expensive than traditional products and initiatives. Greenwashing (doing a green whitewash) or practicing green sheen, is the disingenuous practice of marketing products or services as being environmentally friendly with the purpose of gaining public approval and sales rather than actually improving the environment. VIII. Summary Retailers can purchase either national brands or store (privatelabel) and generic brands. Buyers of manufacturer’s brands attend trade shows and wholesale market centers to meet with vendors, view new merchandise, and place orders. Buying merchandise sometimes is facilitated by resident buying offices. Buyers of both national brands and store brands engage in negotiating a series of issues with their vendors, including prices and gross margin, additional markup opportunities, terms of purchase, exclusivity, advertising allowances, and transportation. Successful vendor relationships depend on planning for and being adept at negotiations. 18-252

Chapter 18 - Customer Service

Retailers that can successfully team up with their vendors can achieve a sustainable competitive advantage. Buyers need to be aware of ethical and legal issues that can guide them in their negotiations and purchase decisions.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 124. Go to the home page for the Private Label Manufacturer’s Association (PLMA), and read the “What are Store Brands?” page, which can be found at http://plma.com/storebrands/facts13.html. What are store-brand products? Who purchases store brands? Who makes store brands? What store brands are you purchasing on a regular basis? What are store brands? According to the website: Store brands: “have come to represent better selection, value and savings. Simply put, they are products that stores put their own names or brands on. They may also be called private label, private brands, house brands, own brands, own label or retailer brands, but they all have one thing in common – they are manufactured and brought to market in much the same way as the familiar national brands sitting next to them on store shelves. Years ago, they might have been called generics, but that name isn't accurate anymore. Today, they are brands like any other. “Store brand products encompass all merchandise sold under a retail store's private label. That label can be the chain's own name or a brand name created exclusively by the retailer for their stores. In some cases, a store may belong to a wholesale buying group that owns labels that are available to the members of the group. These wholesaler-owned labels are referred to as controlled labels. “Store brand items are offered in just about every food and non-food grocery category: fresh, frozen and refrigerated food, canned and dry foods, snacks, ethnic specialties, pet foods, health and beauty care, over-the-counter drugs, cosmetics, household and laundry products, lawn and garden chemicals, paints, hardware, auto aftercare, stationery and house wares, among other sections of the store. “Retail chains of all sizes develop and market store brands in various ways. They may create a whole line of products around a particular feature -- such as Safeway's O Organics and Eating Right offerings, or Kroger's Private Selection and Albertsons Wild Harvest organic lines. In other cases, a majority of the store brand items in a chain may carry the same name -- such as Costco's Kirkland, Wal-Mart's Great Value or Whole Foods' 365 Everyday Value products.” Who purchases store brands? “Last year, American shoppers who reached for the store brand version of their favorite food and nonfood grocery products rather than the national brand enjoyed an estimated $32 billion in annual savings. Ongoing research by PLMA consistently reveals that on a trip to a typical supermarket, shoppers save about one-third on basic grocery and household items by choosing store brands over national brands. Who makes store brands? “More and more store brands are appearing on the shelves of stores throughout the country. But how do they get there, why are they there and who makes them? For many consumers, store brands have become an important ally in how they provide their families with high quality, everyday products at good value. Store brands have also become important to retail chains, another reason they have grown so quickly. They give the chains a way to set themselves apart from the competition and enable them to 18-254 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service offer customers more choice. Consumers know they can buy a national brand anywhere but they can only buy their favorite store brand at their favorite store. “Historically, store brands signified good value for consumers while national brands were usually seen as the premium item in a category. That is no longer true. Store brands have come to mean more than value. Many chains now offer a range of products that are not solely focused on value. They offer premium products just like the national brands. As they become more than just a place to buy products, stores are involved in finding and developing new items they can put their own name or brand on. “To produce those products for them, they turn to store brand manufacturers. When they do, they make it clear that high quality across the board – from ingredients to the supply chain, from the packaging and labeling to the final product itself -- is the number one requirement. “Store brand manufacturers who meet those high standards come in all sizes and many are listed on stock exchanges. There are thousands of companies in hundreds of categories that produce the products in partnership with retailers. “Manufacturers of store brand products fall into four general classifications: • They are large national brand manufacturers that utilize their expertise and excess plant capacity to supply store brands. • They are small, quality manufacturers that specialize in particular product lines and concentrate on producing store brands almost exclusively. Often these companies are owned by corporations that also produce national brands. • They are major retailers and wholesalers that own their own manufacturing facilities and provide store brand products for themselves. • And they are also regional brand manufacturers that produce private label products for specific markets.” What store brands are you purchasing on a regular basis? Students’ answers will vary.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS Assume you have been hired to consult with Nike or Adidas on sourcing decisions for sportswear (https://about.nike.com/, https://www.adidas-group.com/en/group/profile/). What issues would you consider when deciding whether you should buy from Mexico or China or find a source within the United States? Students should consider the following issues related to sourcing decisions: country of origin effect, foreign currency fluctuations, tariffs, foreign trade zones, cost of carrying inventory, transportation costs, quality control, collaborative supply chain management, and international human rights and child labor violations. Given the choice of sourcing from Mexico, China, or the United States, various combinations of these issues will influence the decision. For example, China might be a problematic choice because of its history of human rights abuse, but it is also a good choice because labor is comparatively inexpensive. Similarly, Mexico might be problematic because of instability of its currency but a positive choice on the issue of tariffs and less costly expenses due to its proximity to the United States. The United States might be the best choice when accounting for every one of the aforementioned issues and other issues, but labor is expensive, and unions may be difficult to deal with. Corporate priorities would also have to be accounted for, given the relative advantages and disadvantages that exist for sourcing in any country. 125. What are the differences among counterfeit, gray-market, and black-market merchandise? Is the selling of this type of merchandise legal? Do you believe that the selling of these types of merchandise should be allowed? Provide a rationale for your position. Would you purchase a counterfeit wallet? What about a counterfeit car part or prescription medicine? Counterfeit merchandise includes goods that are made and sold without permission of the owner of a trademark, a copyright, or a patented invention that is legally protected in the country where it is marketed. Gray-market merchandise, also known as parallel imports, refers to merchandise that moves through distribution channels other than those authorized or intended by the manufacturer or producer. Counterfeit merchandise is illegal, whereas gray-market merchandise is legal (though potentially very unpopular with vendors). A black market occurs when goods are scarce such as water or gasoline, or when an item is heavily taxed, like cigarettes or alcohol. Students will likely have various opinions as to whether selling counterfeit merchandise, gray-market merchandise, or both, should be allowed. Most students will likely agree that the quality of blackmarket goods is usually suspicious and would steer away from purchasing black-market goods because of the clear legal restrictions. The purpose of this question is to make students think about what their own moral/ethical positions are in relation to these types of merchandise. Do they feel advantages to consumers outweigh other disadvantages to retailers and vendors? Do they feel these types of competition are just part of “doing business”? 126. What are the advantages and disadvantages of manufacturer’s brands versus store brands? Consider both the retailer's and customer's perspectives. National brands are products designed, produced, and marketed by a vendor/manufacturer and sold to many different retailers. The vendor is responsible for developing the merchandise and establishing an image for the brand. Retailers carrying national brands receive advantages. These brands help build 18-256 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service both the retailer’s image and its traffic flow. They also reduce expenses, because the vendor is responsible for promoting the merchandise. Store brands are products developed and marketed by a retailer. These include labels like Arizona in JCPenney and Kmart’s Martha Stewart or stores that sell their own labels like The Gap. In recent years, store brands have assumed a new level of significance by establishing distinctive identities among retailers. In discussing the strategies of their favorite clothing stores, students should identify several advantages that would lead the retailers to carry store-brand merchandise. Store-brand products now account for an average of 20 percent of the purchases in grocery stores and as much as 50 percent in some product categories in drug stores. Offering store brands provides a number of benefits to retailers. First, their exclusivity boosts store loyalty. Second, they can enhance store image if the brands are high quality and fashionable. Third, they can draw customers to the store. Fourth, there are no restrictions on display. Fifth, gross margin opportunities may be greater. 127. Explain why a grocery store, such as Kroger or Stop n’ Shop (https://www.kroger.com/, https://stopandshop.com/home) (or other major grocery retailer) offers more than one tier of store brands within a particular product category. Different types of store brands offer consumers different advantages. Kroger may choose to provide more than one store brand within a product category to reach different target consumer segments based on what the brand provides. For instance, within the cold breakfast cereal category, Kroger may carry a premium store brand to offer consumers a product of the same quality as the national brand, at modest price savings. Kroger may also elect to offer a cereal classified as a copycat brand, one offering consumers somewhat lower quality for a significantly lower price. 128. Why have retailers found exclusive store brands to be an appealing branding option? Choose a department store, a discount store, and a grocery store. What exclusive store brands are offered? How are store brands positioned in relation to national-brand counterparts? In recent years, exclusive store brands have become increasingly prominent in the marketplace. Before this upswing in popularity, store brands were viewed as representing lower quality merchandise from the consumer’s perspective. More recently, national-brand manufacturers have entered these exclusive relationships to provide store-brand merchandise for specific retailers at the same level of quality as the vendor’s own brands. Department store exclusive store brands include Alfani, Macy’s Charter Club, and T. Tahari and Nordstrom’s BP, Caslon and Rubbish brands. Discount store exclusive store brands include Target’s Archer Farms, Merona, and Michael Graves Design and Costco’s Kirkland Signature brands. Grocery store private-label brands include Shaw’s/Star Market’s Wild Harvest brand and Whole Foods’ 365 brand. This trend toward national-brand vendors producing exclusive store-brand merchandise for their strategic partners allows a retailer to use its store brand to create or enhance a distinctive retail image and to generate customer loyalty for its own store brand. The intense level of competition within the retail industry, as well as economic pressures on consumer spending, encourage the creation of store-

Chapter 18 - Customer Service brand merchandise targeted at enhancing the retailer’s image and fostering increased loyalty from its customer base. 129. When you go shopping in which product categories do you prefer store brands or national brands? Explain your preference. Students will likely respond to current marketplace trends here. Clothing (The Gap and Banana Republic), cosmetics (American Beauty and Good Skin), and home goods (Martha Stewart and American Living) are among the many popular categories of store brand spending. Drugstores, supermarkets, and mass merchandisers all report significant sales growth for their store brands. This growth has fueled store-brand expansion into food products, health and beauty products, and household items. 130. How do you think the COVID-19 pandemic has affected the buying process for national brands? For private labels? Do you think that there will be long-term changes to these processes as a result? This article may help students with background information for a response: Morris, Chris, “Brand loyalty is changing due to the pandemic,” Fortune, https://fortune.com/2020/10/21/brand-loyalty-retail-trends-covid/, October 21, 2020. Examples of possible responses based on this article: Consumers shifted toward more private labels during the pandemic, exhibiting less brand consciousness during their lockdowns and in the face of product scarcity. Such behaviors might persist, if consumers learned through experience with them that the products are just as acceptable as the national brands they previously bought. Research shows that more than 60 percent of U.S. consumers plan to stick with new behaviors picked up during the pandemic, so there is a strong chance of shifts in long-term buying behaviors. 131. What are retailers doing to be more socially responsible in buying merchandise? Why are retailers becoming more socially responsible? Do you buy products that you believe were produced in a socially responsible manner, even at a higher cost? In response to significant pressures from the marketplace, retailers have become very aware of their social responsibilities as part of their global sourcing efforts. They have faced a number of very public critiques of global practices, particularly regarding sweatshops and child labor. To avoid these abuses, many U.S. apparel retailers have engaged in self-policing of their entire organizations, including compliance policies with all vendors regarding labor practices. Students may bring up examples of fair trade sourcing, environmentally friendly practices, and charitable giving. Students will have their own personal preferences regarding price compromises for sustainability in their purchase behavior. 132. You have decided that you don’t want to take the final in this class. Explain how you would negotiate this request with the instructor. Consider place, deadlines, past relationship, possible objections, options for mutual gain, and how to maintain a professional relationship.

Chapter 18 - Customer Service The negotiation session should be planned in advance, including gathering all the necessary facts (knowledge is power) before the meeting. Next, students should determine their negotiation issues: what it is they are looking for and exactly what are they willing to concede to the instructor in return. Finally, students should consider the 10 Tips for Effective Negotiations presented in the chapter.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Brand Alternatives

Drag and Drop; Matching (accessible version)

Brand Alternatives and Options

13-1 Identify the branding options available to retailers. 13-2 Describe how retailers buy national brands.

Power's Books

Case Analysis

Negotiating With Vendors, Strategic Relationships Between Retailers and Vendors

13-3 t the issues retailers consider when developing and sourcing store-branded merchandise internationally. 13-4 Understand how retailers prepare for and conduct negotiations with their vendors.

Starbucks – Fair Trade Relationships with Coffee Farmers

Video Case

Legal, Ethical, and Social 13-4 Understand how Responsibility Issues for retailers prepare for Buying Merchandise, and conduct negotiations with their Negotiating With vendors. Vendors 13-5 Determine why retailers build strategic relationships with their vendors. 13-6 Indicate the legal, ethical, and social responsibility issues involved in buying merchandise. 13-6 Indicate the legal, ethical, and social responsibility issues involved in buying merchandise.

Legal and Ethical Issues

Click and Drag; Matching (accessible

Legal, Ethical, and Social 13-6 Indicate the legal, Responsibility Issues for ethical, and social 18-260

Chapter 18 - Customer Service of Merchandise

version)

Buying Merchandise

responsibility issues involved in buying merchandise.

Chapter 18 - Customer Service ANCILLARY LECTURES AND EXERCISES LECTURE # 13-1: NEGOTIATING WITH THE VENDOR Introduction What is negotiation? Negotiation is a two-way communication designed to reach an agreement when parties have both shared and conflicting interests. Three key points: 1. Two-way communication - to have a negotiation there has to be communication being sent and received. 2. Agreement - that our goal to get mutual agreement among the parties. 3. Shared or conflicting interests - both parties can have the same or very different interests. For instance, a buyer and seller can start off with very different goals, but at the end they must be in agreement for the negotiation to be successful. If we agree that negotiating is simply getting what you want from others, then it stands to reason that people are involved in the negotiating activity everyday. Ask students: whom do you negotiate with and for what results? Responses might include: 1. Spouse - Where to go for dinner. 2. Shopkeeper - Dickering price on antiques. 3. Children - What time they should go to bed. 4. Boss - Due date on project. 5. Stranger - Seat on subway/bus. Everyone negotiates everyday. Though we all have lots of practice, negotiating is still not easy to do well. As buyers, the success, i.e., profitability of the business would be greatly affected by how well they negotiate. In talking about negotiating we want to direct our attention to results. What is it we want to achieve? What are the benefits and effects of a successful negotiation? At the same time, what are the negotiating results we want to avoid?

Chapter 18 - Customer Service Potential results Today, planning and execution is the method through which obstacles are overcome. When involved in negotiating, the results you achieve can be any of the following: 1. WIN - WIN (Buyer wins, vendor wins) 2. WIN - LOSE (Buyer wins, vendor loses) 3. LOSE - LOSE (Buyer loses, vendor loses) WIN - WIN This is the best situation. Based on cooperation and collaboration. Enhances vendor trust in buyer as a professional. Produces long-term, best deals for buyer and the company. Unless you are involved in used car sales, an important goal of negotiations is to develop long-term relationships. The only way this can be done is if both parties win. Does not mean “giving-in or being soft.” WIN - LOSE There are some instances where win/lose can be positive -- if buyer doesn’t want to develop a longterm relationship. It is generally negative because if the vendor feels like a loser, then there is little possibility of going back to the vendor again. Win/lose can turn into lose/lose. For instance, if a buyer gets the lowest price in the market, the vendor might just conveniently not ship. Vendor in business to make money, cannot “lose” all the time. For instance, an appliance distributor decided not to sell to a department store in Denver because the distributor was unable to make money because the negotiations were always so unfavorable to the distributor. LOSE - LOSE Wastes time and energy. No relationship established. 18-263 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Objectives not met. How can you determine what negotiating result you are going to achieve? Your style will play an important role. Let‘s take a look at a video and see if these buyers are getting the results they want. Principled Negotiations The concept of principled negotiating is based on four basic points: 1. People 2. Interests 3. Options 4. Criteria Let’s talk about them individually. Separate the people from the problem Negotiators are people first -- all have human aspects. Relationships between negotiators tend to become entangled with the problem. There is a need to separate the relationship from the problem and see ourselves as working side by side. Attack the problem, not each other. Focus on interests, not positions Position is something you have decided on. Interests are what caused you to decide (desires, concerns) Put yourself in the other person’s shoes and examine each position taken; look for understanding of their interests. Ask yourself why they have taken that position? Communicate your interests firmly and openly. Invent options for mutual gains Think of a wide range of possible solutions that will benefit both parties. Consider all options -- all sides. Get over the obstacles that inhibit you from inventing an abundance of options. Don't make premature judgment, i.e., jumping to conclusions. 18-264 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service There is no one best single answer. There are many possibilities. Don't assume there is a “fixed pie”, “either I get it or you do”. There are possibilities to make the pie bigger for both parties. Thinking that a solution to their problem is their problem. A good negotiator always thinks of many solutions to their problem. Get the options out in the open. Look for mutual gain and shared interests. Insist on using objective criteria Use fair standards, i.e., market value, cost. Once agreement is reached, what standards will be used to make sure the deal is carried out? Be reasonable and be open to reason. Reach solutions based on principle not pressure. For greater clarification, let’s contrast the three styles of negotiating and the characteristics of the negotiator using each specific style. Which style do you feel will get the desired result of Win/Win? Why? We said earlier that success is based on negotiating style. Planning In addition to style and probably even more important is one simple word/action -- PLANNING. To be effective in the market, to get the success you want, you must plan effectively. Being prepared -- ready to anticipate and answer questions gives the buyer confidence. Confidence breeds success! What are the areas that we must look at in order to plan? 1. History - To go forward, you must understand what has happened in the past. Know the merchandise and its sales history. What is the customer telling you? What is the future potential? 2. Buyer Objectives -- optimum and realistic - Know what you want and what you will settle for to achieve it. Set optimum goals and realistic goals. Determine what you could give up in your optimum goal to reach your realistic goal. 3. Concessions. Concessions are those we can afford to give up. Only use your concessions after you have explored every option available.

Chapter 18 - Customer Service 4. Vendor objectives - An important point in preplanning is anticipating what the vendor wants and what he will settle for. Vendors, like buyers, will have concessions ready, but will keep them hidden. Setting objectives Keep in mind that to set goals you must: 1. Know the market: What are the current trends? How is business generally? How are each of your vendors performing against the overall market? 2. Know the vendor: How is his/her business? What inventory position is he/she in? (Did they make too much this season? Is he/she a manufacturer or an importer? This will determine the delivery dates, and amount of control you and the vendor have over the order. Has he/she been hit with major cancellations from another retailer? If so, you may be able to get a very good price. Who can you replace his/her goods with? At what price? 3. Know the numbers: What is a realistic sales plan for this vendor? What is a realistic margin projection for this vendor? Are you accurately anticipating markdowns? What is the amount of inventory on hand? What should it be? What is the amount of inventory on order? Do you need to cancel or buy goods? How much of the merchandise will be sold on sale? Are you being realistic in the current business environment? If business is tough, how deep do you need to cut prices to generate sales? Know what you need! 4. Know the competition: Who are they? Other department stores, chains, specialty stores? What financial condition are they in? What is their inventory position? How much of the same type of merchandise do they carry? Are they canceling orders or buying merchandise at lower than normal prices? How will you protect your margin if you are forced to meet competitive prices? 5. Know yourself: Know your personal strengths and limits. Are you a morning or afternoon person? Set up your meetings for when you are at your best. Can you pull this off by yourself or do you need help? If so, get it! Negotiating tips There are several tips that one can use while negotiating: 1. Beware of time pressures. Almost everything happens at or just before the deadline. Think of the last major labor strike. Give and get appropriate deadlines. 2. Keep the numbers of negotiators even, or even try to have more people on your side. In some countries in the Orient they will get people to come in from the factory who don't even speak English just to keep the numbers at least equal. 3. Let the other guy talk. Be patient and listen. The more he/she talks, the more you learn from him/her about his/her business. The person who breaks the silence first, usually loses. 4. Let the other guy mention a figure first. It might be better than you would ask for. In any case, it tells you where you are starting. 5. Know when to use your boss as a partner and source of extra power. The bigger your deal, the higher you go. 6. Don‘t be afraid to say no to an offer that doesn’t help you get what you need.

Chapter 18 - Customer Service 7. Don‘t be greedy -- don‘t over-negotiate. Know when you‘ve reached the limit and don’t go beyond it, or you could sour your deal. If you ask for too much, even if they initially agree, you may never get the merchandise. 8. Don‘t assume -- recap everything and, if appropriate send a letter to follow. 9. Go into the meeting knowing exactly where you will come out on profit margin, using several different scenarios. Remember to invent options for mutual gain. 10. Before you go into the negotiation, use a technique that Olympic athletes use: envision how the meeting will go, and picture yourself being very successful -- it will build your self-confidence. 11. Make sure that you plan to meet when you are at your best. Plan your schedule thoroughly -- the amount of time the meeting will take (don’t arrange two tough meetings back-to-back); see your most important vendors or biggest problems early in the week. You might have to go back. 12. Make every effort to reduce stress for yourself. Just being in New York City can be stressful, so do things that make you feel better -- whether it‘s exercise, staying in touch with family at home, seeing friends outside the business -- whatever is a harmless escape. Don‘t burn the candle at both ends; get a decent amount of sleep and don‘t overindulge in bad habits like drinking and overeating. Keep yourself in top condition. 13. Always leave the door open for the future. Finally, here are some key points to remember when negotiating: 14. Planning is critical 15. Knowledge is power! 16. The secret in any negotiation is that the other person will only do what is right for him!

Chapter 18 - Customer Service ANCIALLRY EXERCISE : ROLE PLAYING NEGOTIATIONS Instructor’s Note: This exercise should be used in conjunction with Chapter 12, but only after the class has had Lecture 13-1. Directions Get two groups of students to volunteer for this exercise. One group will represent Drip-Dry; while the other will represent Burdines. Each group should have three to four people. Provide the entire class with the following handouts: 1. Dealer letter from Drip-Dry 2. Burdines Fact Sheet 3. Observers' Notes Sheet Give the two groups 15 minutes to prepare or give them the assignment one class period in advance. The two groups will role play the negotiation for about 15 minutes. The rest of the class should be encouraged to fill out the Observers' Notes. Then, the relative successes of the two teams should be discussed in class.

Chapter 18 - Customer Service

P.O. BOX 999 NEW YORK, N.Y. 10038 October 12, 2017 DEAR MR DEALER DRIP-DRY is proud to announce a SUPER MARKET SPECIAL on all orders placed in our showroom the week of June 10.   

INTRODUCTORY SALE ON ALL NEW MODEL WASHERS @ 15% off regular prices! $5.00/unit ADVERTISING ALLOWANCE included! PREPAID FREIGHT!  Regular CASH DISCOUNT of 2% (our normal teens) stD1 applies!

These SPECIAL MARKET WEEK SALE PRICES, along with all the EXTRAS, will apply to any orders placed DURING MARKET WEEK, June 10 through June 17, under the conditions listed below:  

Minimum quantity purchase of 25 units or more. Delivery must be taken by July 1st  Factory selected color mix with NO LESS THAN 40% WHITE.

Here’s how the promotion actually works. On any purchase of 25 units or more, we will invoice you as follows: Regular Wholesale Price Less 15% Sale Discount Promotia1On “sale. Price

$175.00 ea. 26.25 $148.75 ea.

In addition, you may bill us back $5.00/unit advertising allowance, all freight costs, as well as your regular 2% Cash Discount: Promotion “sale”. Price

$148.75 – 5.00 – 7.19 – 2.73

ea. (Adv. Allow) (Freight Chg.) (2% Cash Disc.)

JUST SEND YOUR CHECK FOR: $133.83 ea. COME IN TODAY!!. REMEMBER THIS SPECIAL OFFER IS GOOD ONLY DURING MARKET WEEK. HOPE TO SEE YOU IN SPACE 1075, SHOWROOM BUILDING. SINCERELY, ROBERT SNOGRASS PRESIDENT

Chapter 18 - Customer Service BURDINES vs. DRIP-DRY APPLLANCE CORP. BUYER’S FACTS AND GOALS General information: The appliance business has been good this season. It is Market Week, and you. received a brochure from Drip-Dry outlining their market Special in the new model washers. You are shopping for a mayor promotion for Labor Day Weekend Sale. A PREVIOUS PURCHASE YOU HAD MADE FOR THIS EVENT HAS FALLEN THROUGH, AND THAT VENDOR HAS REFUSED TO SHIP TO YOU DUE TO PROBLEMS WITH THE ACCOUNTS PAYABLE. YOU MUST COMPLETE A DEAL IN THE NEXT FIFTEEN MINUTES OR BE CLOSED OUT OF THE LABOR DAY PROMOTION ALTOGETHER, KILLING YOUR MOMENTUM FOR SEPTEMBER. Drip-Dry is the sixth largest appliance manufacturer in the United States, and you are his second largest account nationally. Specifics: You are looking for a LABOR DAY PROMOTION, and you need between 200 and 250 washers. Your goal is to run a Preseason Introductory Sale on new model washers @ 25% off the regular prices. Regular Retail Price $250 ea. Proposed Retail: $187.50 ea. Regular Cost Price: $175 ea. Previous statistics show that at least 50% of the assortment should be WHITE with the balance made up of Copper, Harvest Gold, Avocado, and Blue. You have $1 000 budgeted for the Ad. Your normal department Markup is 30%. st

Your open-to-buy is $25,000 until August 1 . No problem for August deliveries. Regular terms with Drip-Dry are _10 EOM.3 (Freight usually runs 5% of cost). YOU MUST COMPLETE THIS DEAL IN THE NEXT FIFTEEN MINUTES OR BE CLOSED OUT OF ALL LABOR DAY ADVERTISING. IF NEEDED, YOU WILL SETTLE FOR 25% MARK-UP ON THIS PURCHASE

Chapter 18 - Customer Service

OBSERVER’S NOTE During the negotiation: What did the buyer attempt to get? What did the vendor agree to? BUYER’S ATTEMPT VENDOR AGREEMENT

Indicate 

What talked most often?



Who cited first number?



Was vendor self-esteem maintained?



Were concessions made? By whom?



How profitable was the deal for the other?



How did the participants feel after the negotiating visit?

Chapter 18 - Customer Service ANCILLARY LECTURE 13-2- INTERNATIONAL SOURCING DECISIONS Instructor’s Note: The purpose of this lecture is to supplement material in the text. A good portion of this material is already in the book. Therefore, instructors should use either this version or the shorter version in the book. Refact: Over the last 20 years, importing has gone from a small segment of the production strategy for apparel to a dominant force, now accounting for about 67 percent of all goods sold at retail.1 Take a look at what you are wearing to see if anything is made in the US. Chances are your shirt or blouse is made in Hong Kong. Your jeans are made in Italy. Those beautiful new shoes are Brazilian, while those old sweat socks are from China. Your undergarments are from Honduras. To top it off, your watch is probably from either Japan or Switzerland. A decision that is closely associated with branding decisions, which we discussed in the previous section, is to determine where the merchandise is made. A product’s country of origin is often used as a signal of quality. Certain items are strongly associated with specific countries, and products from those countries, such as chocolate from Switzerland or cars from Japan, often benefit from those linkages.2 But there is more to global sourcing decisions that simply buying from those countries with reputations for high quality merchandise. In this section we will first examine the cost implications of international sourcing decisions. On the surface, it often looks like retailers can get merchandise from foreign suppliers cheaper than from domestic sources. Unfortunately, there are a lot of “hidden” costs, including managerial issues, associated with sourcing globally that make this decision more complicated. The influence of Collaborative supply chain management inventory systems on Global sourcing decisions is then examined. Clearly it takes longer to source globally than it does to buy from a vendor close to home. Since Collaborative supply chain management inventory systems have become such an important facet of merchandise management, we will examine ways that retailers can derive benefits from Collaborative supply chain management while still sourcing globally. This section concludes with an examination the ethical issues associated with retailers who buy from vendors engaged in human rights and child labor violations. We discuss what some retailers are doing to eliminate the problem. Costs Associated with Global Sourcing Decisions A demonstrable reason for sourcing globally rather than domestically is to save money. Retailers must examine several cost issues when making these decisions. The cost issues discussed in this chapter are:

Arthur Friedman, “Sourcing Now: The Proximity Factor, Imports: A Change of Venue,” Women’s Wear Daily, Mary 26, 1996, p. 6, citing the Commerce Department.

See Gary M. Erickson, Johny K. Johansson, and Paul Chao, “Image Variables in Multi-Attribute Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research 16 (September 1989), pp. 175-87; Sung-Tai Hong and Robert S. Wyer, Jr., “Effects of Country-Of-Origin and Product-Attribute Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research 16 (September 1989), pp. 175-87; Michael R. Solomon, Consumer Behavior, Boston: Allyn and Bacon, 1992, p. 262.

Chapter 18 - Customer Service Country of origin effects, foreign currency fluctuations, tariffs, free trade zones, inventory carrying costs, and transportation costs. Country of Origin Effects The next time you are buying a shirt that is made in Western Europe -- Italy, France, or Germany -notice that it is probably more expensive than a comparable shirt made in a developing country like Hungary, Ecuador, or Taiwan. These European countries have a reputation for high fashion and quality. Unfortunately for the US consumer, however, the amount of goods and services that can be purchased in those countries with US dollars is significantly less than in the developing countries. When making international sourcing decisions, therefore, retailers must weigh the savings associated with buying from developing countries with the panache associated with buying merchandise from a country that has a reputation for fashion and quality. Jeans from Italy, for example, can retail for over $100; whereas those made in Ecuador or even in the United States are much less. Other countries, such as Japan for instance, might have a technological advantage in the production of certain types of merchandise and can therefore provide their products to the world market at a relatively lower price than other countries. For example, Japan has always been a leader in the development of consumer electronics. Although these products often enter the market at a high (penetration) price, the price soon drop as manufacturers learn to produce the merchandise more efficiently. Foreign Currency Fluctuations An important consideration when making global sourcing decisions is fluctuations in the currency of the exporting firm. Unless currencies are closely linked, for example, between the US and Canada, changes in the exchange rate will increase or reduce the cost of the merchandise. Suppose that Service Merchandise is purchasing watches from Swatch in Switzerland for $100,000, which is equivalent to 120,000 Swiss Francs (SFr) since the exchange rate is 1.2 Sfr for each US dollar. If Service Merchandise believes the value of the dollar will fall to, say 1.1 SFr, before they have to pay for the watches, they should negotiate payment for the watches in US dollars. In this case, Service Merchandise would pay $100,000 and the risk of devaluation of the dollar lies with Swatch. If, however, Swatch demands payment is Swiss Francs, Service Merchandise assumes the currency fluctuation risk. In this case, Service Merchandise would end up paying $109090 (120,000 SFr ÷ 1.1). To lessen the risk of a falling currency exchange, i.e., the US dollar becoming less valuable compared to the currency of the vendor, Service Merchandise could engage in the foreign exchange market. Suppose that Service Merchandise believes that the value of the dollar will fall in relation to the Swiss Franc before payment is due, as in our example. Service Merchandise can get a bank to agree to guarantee the Swiss Francs at the $1.20 rate for an additional fee to be used to pay for the watches at the time that payment is due. There is still a risk involved with this strategy, however. Service Merchandise could miss an opportunity to get the watches at a lower price by locking in the $1.20 rate if the value of the US dollar goes up instead of down. Tariffs A tariff, also known as a duty, is a list of taxes placed by a government upon imports or exports. Import tariffs have been used to shield domestic manufacturers from foreign competition and to raise money for the government. Although more common in less developed countries, export taxes are only used to 18-273 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service generate additional revenue. For instance, the Argentinean government may impose an export tariff on wool that is exported. An export tariff actually lowers the competitive ability of domestic manufacturers, rather than protecting them, as is the case with import tariffs. In general, since tariffs raise the cost of imported merchandise, retailers have always had a strong incentive to reduce them. In this section we will discuss several mechanisms used for reducing tariffs: the General Agreement on Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA), and Foreign Trade Zones. The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). In 1946, the average US tariff rate was 26 percent, compared to approximately five percent in 1987.3 The General Agreement on Tariffs and Trade (GATT) is partially responsible for this reduction. Started in 1947, GATT has evolved into a group of 125 member countries that sponsors international trade negotiations. In 1993, a GATT accord was reached that has far-reaching effects on the reduction of tariffs and other trade barriers. Importantly, in January 1995, the World Trade Organization (WTO) was formed to supervise and arbitrate GATT agreements and encourage future negotiations. North American Free Trade Agreement (NAFTA). The ratification of NAFTA on January 1, 1994 created 4 a tariff free market with 364 million consumers and a total output of $6 trillion. NAFTA members are currently the US, Canada, and Mexico, but other Latin American countries are expected to join in the next few years. US retailers stand to gain from NAFTA on several fronts. First, Mexican labor is relatively low-cost and abundant. Thus, retailers can either search for lower-cost suppliers in Mexico or begin manufacturing merchandise there themselves. Maquiladoras -- plants in Mexico that make goods and parts or process food for export to the United States -- are plentiful, have lower costs than their US counterparts, and are located throughout Mexico, but particularly in border towns such as Nogales and Tijuana. Second, with the growing importance of Collaborative supply chain management inventory systems, the time it takes to get merchandise into stores has become even more critical than in the past. Transit times are shorter and managerial control problems are reduced when sourcing from Mexico, compared to the Far East or Europe. Finally, many US retailers view Mexico as an attractive market for expansion (See Chapter 5 (Strategy chapter).) NAFTA was not passed without opponents, however. There are segments of the US economy that will suffer. Since US employers will be able to buy or manufacturer merchandise cheaper in Mexico, the wages and employment of US unskilled workers may decrease. Further, some labor-intensive industries such as furniture, and clothing are likely to suffer. Finally, those involved in the production of sugar, peanuts, citrus, vegetables and seafood may lose business to Mexican competition. Foreign Trade Zones

Thomas R. Graham, “Global Trade: Ware and Peace,” Foreign Policy (Spring 1983), pp. 124-137, taken from Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 85.

The Likely Impact on the United States of a Free Trade Agreement with Mexico (Washington, DC: United States International Trade Commission, 1991).

Chapter 18 - Customer Service Retailers involved in foreign sourcing of merchandise can avoid import tariffs completely by using foreign trade zones. A foreign trade zone is a special area within a country that can be used for warehousing, packaging, inspection, labeling, exhibition, assembly, fabrication or transshipment of imports without being subject to that country’s tariffs. To illustrate how a foreign trade zone can benefit retailers, consider how German cars are imported to a foreign trade zone in Guatemala for distribution throughout Central America. The duty for passenger vehicles is 100 percent of the landed cost of the vehicle. The duty for commercial vehicles, however, is only 10 percent. The German manufacturer imported commercial vans with no seats or carpeting, and with panels instead of windows. After paying the 10% import duty, they converted the vans to passenger station wagons in the foreign trade zone in Guatamala and sold them throughout Latin America. Cost of Carrying Inventory The cost of carrying inventory is likely to be higher when purchasing from suppliers outside the US than from domestic suppliers. Recall from Chapter 6 that: Cost of carrying inventory = Average inventory value (at cost) X Opportunity cost of capital. The opportunity cost of capital is the rate available on the next best use of the capital invested in the project at hand. There are several reasons for the higher inventory carrying costs. Consider The Spoke bicycle store in Aspen, Colorado, that is buying Moots bicycles manufactured in Steamboat Springs, Colorado. They know that the lead time -- the amount of time between recognition that an order needs to be placed and the point at which the merchandise arrives in the store and is ready for sale -- is usually two weeks plus or minus three days. But if The Spoke is ordering their bikes from Italy, the lead time might be three months, plus or minus three weeks. Why is the lead time typically longer when sourcing globally? The lead time tends to be longer because order transmission, order filling, packing and preparation for shipment, and transportation tends to be longer and more complicated for global transactions. Order transmission time -- the time it takes for the order to get from the retailer to the supplier -- depends on whether electronic data interchange (EDI), telephone, fax, or mail is used in communicating. The order filling time may also increase because of a lack of familiarity of customs and procedures between the retailer and their foreign supplier. Packing and shipment preparation require more attention. Finally, and probably most important, 5 transportation time increases with the distances involved. Since lead times are longer, retailers must maintain larger inventories to ensure that merchandise is available when the customer wants it. Larger inventories mean larger inventory carrying costs. It is also more difficult to predict exactly how long the lead time will be when sourcing globally. When the bicycle goes from Steamboat Springs to Colorado, the worst that could happen is that it gets caught in a snow storm for a day or two. On the other hand, the bicycle from Italy might be significantly

Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 488.

Chapter 18 - Customer Service delayed because of multiple handlings at sea or airports, customs, strikes of carriers, poor weather, or other bureaucratic problems. Similar to longer lead times, inconsistent lead time require the retailer to maintain higher levels of safety stock. Transportation Costs: In the previous section, we described how the cost of carrying inventory is higher when sourcing globally than when sourcing domestically. Part of this cost is due to longer shipping distances -- the longer the distance, the higher the transportation cost for any particular mode of transportation. For instance, the cost of shipping a container of merchandise by ship from China to New York is significantly higher than from Panama to New York. The introduction of different modes into the transportation cost equation complicates the sourcing decision. Suppose The Spoke in Aspen decides to have the bicycles from Italy shipped by airfreight instead of by ship and then train. The shipping cost per bicycle skyrockets. In essence they are adapting a Collaborative supply chain management inventory system with all the associated benefits. The inventory carrying cost is significantly reduced because the lead time and fluctuations in lead time go down for all of the reasons detailed above. Also, sales might also increase because The Spoke is better able to provide their customers with exactly what they want. It is easier to stay in stock with the bicycles that are most popular, and they can promote special orders. Retailers can use the following rule of thumb to determine which transportation mode is best. First, relatively high weight/high density/low cost staple merchandise such as furniture is more likely to be shipped via lower cost modes such as water, truck, or train. Alternatively, relatively low weight/low density/high value fashion merchandise such as jewelry is more likely to be shipped by air. What do retailers that are in the middle of this weight/density/cost spectrum do? Some of the best have chosen airfreight. The Limited, for example, leases Boeing 747s to airfreight merchandise from the Orient to its distribution centers in the United States. Managerial Issues Associated with Global Sourcing Decisions In the previous section we examined the specific costs associated with global sourcing decisions. In most cases, retailers can obtain hard cost information that will help them make their global sourcing decisions. The managerial issues discussed in this section -- quality control and developing strategic alliances -- are not as easily evaluated. Quality Control When sourcing globally, it is more difficult to maintain and measure quality standards than when sourcing domestically. Typically these problems are more pronounced in countries that are further away and that are less developed. For instance, it is easier to address a quality problem if it occurs on a shipment of dresses from Costa Rica to the US than if the dresses were shipped from Singapore. In the same way, since Germany is known for its high engineering standards and since Volkswagen’s corporate offices are in Germany, one might expect fewer defects on Volkswagens made in Germany than those made in Mexico. There are both direct and indirect ramifications for retailers if merchandise is delayed because it has to be remade due to poor quality. Suppose Banana Republic is having pants made in Haiti. Before leaving 18-276 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service the factory, Banana Republic representatives find that the workmanship is so poor that the pants need to be remade. This delay reverberates throughout the system. Banana Republic could carry extra safety stock to carry them through until the pants can be remade. More likely, however, they won’t have advance warning of the problem, so the stores will be out-of-stock. A more serious problem occurs if the pants are delivered to the stores without detecting the problem. This could happen if the defect is subtle, such as inaccurate sizing. In this case, customers must try on multiple pants, and special orders and transfers from other stores are useless since there is no size integrity. In the end, customers can become irritated and question merchandise quality. Also, markdowns ensue because inventories become unbalanced and shop-worn. Building Strategic Alliances The importance of building strategic alliances is examined later in this chapter. It is typically harder to build these alliances when sourcing globally, particularly when the suppliers are further away and are from less developed countries. Communications are more difficult. There is often a language barrier, and there are almost always cultural differences. Business practices -- everything from terms of payment to the mores of trade practices such as commercial bribery -- are different in a global setting. The most important element in building a strategic alliance -- maintaining the supplier’s trust -- is more arduous in an international environment. The Influence of Collaborative supply chain management on Global Sourcing Decisions Sourcing globally and collaborative supply chain management inventory systems are inherently incompatible. Yet both are important and growing trends in retailing. Collaborative supply chain management systems are based on short and consistent lead times (See Chapter X -- systems). Vendors provide frequent deliveries with smaller quantities. There is no room for defective merchandise. For a Collaborative supply chain management system to work properly, there needs to be a strong alliance between vendor and retailer that is based on trust and a sharing of information through electronic data interchange (EDI). In the preceding section we argued that each of these activities are more difficult to perform globally than domestically. Further, each of these activities is more difficult to perform globally than domestically. Further, the level of difficulty increases with distance and the vendor’s sophistication.6 What can a retailer do to lessen the impact of these seemingly incompatible trends? Retailers can use third party logistics companies and source closer to home. In the next section, we examine how thirdparty logistics companies can help retailers and why so many retailers are choosing suppliers that are located closer to their stores. Third Party Logistics Companies Third party logistics companies are companies that facilitate the movement of merchandise from manufacturer to retailer, but are independently owned. These companies provide transportation,

Stanley E. Fawcett and Laura M. Birou, “Exploring the Logistics Interface between Global and JIT Sourcing,” International Journal of Physical Distribution & Logistics Management, 22, No. 1, 1992, pp. 3-14.

Chapter 18 - Customer Service warehousing, consolidation of orders, and documentation, or a combination of several of these services. Increasingly, third party logistics companies provide information services called Value Added Networks (VANs) that facilitate the electronic data interchange that is such an integral part of collaborative supply chain management systems. Transportation. Retailers must choose their shippers carefully and demand reliable, customized services. After all, to a large extent, the retailer’s lead time and the variation in lead time is determined by the chosen transportation company. Also, many retailers are finding that airfreight is worth the added costs. Some retailers mix modes of transportation in order to reduce overall cost and time delays. For example, many Japanese shippers send Europe-bound cargo by ship to the U.S. West Coast. From there, the cargo is flown to its final destination in Europe. By combining the two modes of transport, sea-air, the entire trip takes about two weeks, as opposed to four or five weeks with an all7 water route, and the cost is about half of an all-air route. Warehousing. To lessen the chance of being out-of-stock as a result of long and inconsistent lead times on overseas shipments, retailers are insisting that their vendors maintain inventories in warehouses in the US. Rather than owning these warehouses themselves, the vendors typically use public warehouses which are owned and operated by a third party. By using public warehouses, vendors can provide their retailers with the same level of service as domestic suppliers can. International freight forwarder. Although there are several types of organizations that help in the management of global shipments, the most comprehensive is the international freight forwarder.8 International freight forwarders are companies that purchase transport services. They then consolidate small shipments from a number of shippers into large shipments that move at a lower freight rate. These companies offer shippers lower rates than the shippers could obtain directly from transportation companies because small shipments generally cost more per pound to transport than 9 large shipments. One of the most daunting tasks for a retailer involved in importing merchandise to the US is government bureaucracy. The international freight forwarder helps retailers by preparing and expediting all documentation such as government-required export declarations, consular and shipping documents.10 Value Added Networks (VANs). Value Added Networks are a relatively new type of third party logistics company that that was spawned by the use of Collaborative supply chain management systems. Value Added Networks are companies that facilitate EDI by making computer systems between suppliers and retailers compatible. Suppose Wal-Mart has contracted with a manufacturer in Mexico to supply them with toys. Since Wal-Mart insists that their vendors utilize an EDI system, and their computer systems

“Sea-Air: Cheap and Fast,” Global Trade, February 1992, pp. 16-18, taken from Michael R. Czinkota and Ilkka A. Ronkainen, Global Marketing, Harcourt Brace & Company, 1996, p. 486.

Other third part providers are: Export distributor, customs-house broker, and trading company. For a discussion see: Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 696699.

Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 181.

Douglas M. Lambert and James R. Stock, Strategic Logistics Management, 3rd ed., Irwin, 1993, pp. 698.

Chapter 18 - Customer Service are incompatible, they might contract with a VAN like General Electric Information Services to provide the communications link. Computer files would be sent to the VAN via EDI, translated to Wal-Mart’s format, and sent on to Wal-Mart’s computer. Integrated third-party logistics services. Traditional definitions between transportation, warehousing, freight forwarding, and VANs have become blurred in recent years. Some of the best transportation firms, for example, now provide public warehousing, freight forwarding and VANs. The same diversification strategy is being used by the other types of third party logistics providers. Retailers are finding this “one stop shopping” useful when implementing Global sourcing. Business Logistics Services, a division of Federal Express, for example, performs multiple logistics functions well beyond transportation for Laura Ashley. Refact: In 1995, the volume of imports from Mexico, propelled by NAFTA, grew 61 percent, and the country was the third-largest foreign apparel supplier to the US. Right behind Mexico was the Dominican Republic. Nevertheless, China remains the number one apparel supplier, followed by Hong Kong.11 Source Closer to Home (or Stay Home) Some US retailers are shifting suppliers from Asia to nearby Central American and Caribbean countries to improve quality control and shipping times. Others are attempting to “Buy American.” (See following section.) For example, although China is still an important source for apparel, the North American Free Trade Agreement (NAFTA) and similar initiatives with other Latin American Countries such as the Caribbean Basin Initiatives and the Enterprise for the Americas Initiative (EAI) make Mexico, Guatemala, Costa Rica, Haiti, Honduras and the Dominican Republic likely sources for US retailers. Also, the standard of living in traditional import powerhouses like Japan, South Korea, Hong Kong, and Singapore have become so high that cheap labor is not as readily available as it one was. Thus, the less 12 developed countries in the Western Hemisphere have become more viable sources of suppliers. Made in America Controversy Refact: In a national survey, 84% indicated a preference for buying American-made products; 64% said they would spend 10% more for domestically-produced goods over foreign-made items.13 During the 1980s and into the 1990s, America has seen much of its dominance in manufacturing move offshore. More recently, however, the tide appears to be turning back to the US, at least in certain industries. There are two reasons for this shift. First, a national survey of consumers indicates that Americans purchase goods based first on quality, then features, followed by price, warranty, and country of origin. Importantly, American-made products are perceived as being superior in quality to

“Asia‟s Fertile Fields,” Women’s Wear Daily, May 1, 1996, p. 8, 9.

Arthur Friedman, “Sourcing Now: The Proximity Factor, Imports: A Change of Venue,” Women’s Wear Daily, Mary 26, 1996, p. 6.

“„Buy American‟ Emotional Appeal No Match for Bargains,” Discount Store News, June 20, 1994, p. 23.

Chapter 18 - Customer Service foreign-made goods, especially for tools, clothing, candy or confections, and toys.14 Retailers are simply reacting to the quality perceptions of their customers. The second reason that retailers are attempting to buy more products that are “Made in America” it is simply more profitable. They don’t have to worry about foreign currency fluctuations or tariffs. Also, it is easier to implement Collaborative supply chain management inventory systems with suppliers that are located close to their retailers. Since lead time and fluctuations in lead time are shorter when buying domestically, retailers don’t have to carry as much inventory. Transportation costs and the problems associated with global transportation issues are also less when “Buying American.” Finally, it is typically easier to manager quality and develop and maintain strategic alliances when sourcing domestically. The apparel industry in New York City has initiated a Made in New York program to promote domestic production. Participants stress, however, that patriotism has little to do with their sourcing decisions. For instance, after Federated Department Stores placed a $1 million order for sportswear with a New York Chinatown contractor through the Made in New York Program, the vice president of better sportswear for the retailer said that quality price and delivery, but not politics contributed to the 15 decision. Ethical Issues -- Violation of Human Rights and Child Labor in a Global Setting Wal-Mart, The Gap, J.C. Penney, Dayton Hudson, Columbia Sportswear, Liz Claiborne, Eddie Bauer and Phillips Van Heusen, among many others, have had to publicly deflect allegations about human rights, child labor or other abuses involving factories and countries where their goods are made.16 These days, companies faced with such accusations are likely to respond with promises of an inquiry. They point to strict codes of conduct that their contractors must now sign, which threaten withdrawal of business if labor abuses occur. Many companies are asking their quality control people to look out for worker abuses while also watching that zippers are sewn on straight.

Nevertheless, in the eyes of activists pressing the cause of factory workers abroad, manufacturers and retailers alike largely fall short of their ethical obligation as importers. How companies view their role in the business of socially responsible importing varies. Some have embraced the idea pushed by human rights groups of establishing independent monitoring programs to keep tabs on contractors. Others say periodic, announced inspections of contractors and reports by quality control employees are the most they will require.

Ibid.

Dianne M. Pogoda, “Sourcing Now: The Proximity Factor, Patriot Games: Strictly Business,” Women’s Wear Daily, Mary 26, 1996, p. 7.

This section adapted from: Joanna Ramey, “Apparel’s Ethics Dilemma.” Women’s Wear Daily, March 18, 1996, pp. 10-12; and Susan Chandler, “Look Who’s Sweating Now,” Business Week, October 16, 1995, pp. 96, 97. 18-280

Chapter 18 - Customer Service With thousands of products and commercial relationships to keep track of, stores say they would be unable -- and ill-equipped -- to police workplace conditions around the globe. But one point on which most importers and retailers involved in this debate do agree is that they can encourage Third World contractors and governments to improve conditions. Sometimes this can be accomplished with the assistance of industry supported nonprofit organizations. One such group is Business for Social Responsibility (BSR), a San Francisco-based nonprofit organization started three years ago and designed to help member companies address the question of rights in factories abroad. Some prominent BSR members include Liz Claiborne Levi Strauss, Patagonia, Reebok and Timberland. Another effort at improving worker standards at foreign factories is a handbook on how to prevent child labor, prepared by the Council on Economic Priorities (CEP), a New York-based think tank that analyzes national issues. The CEP prepared the handbook for the International Labor Organization with a $25,000 grant and the help of several leading apparel importers, including Levi’s, Claiborne, L.L. Bean, Nordstrom, Sears and The Limited. The handbook is directed at the four industries that employ children under 14: apparel, footwear, toys and carpets. David Zwiebel, vice president of the CEP, said he would ask importers to establish a set of internationally accepted compliance standards, much like what is being done by the television industry to curb violent programming. This would be particularly helpful for small to medium-size importers that don’t have the wherewithal of a Levi’s to embark on a company-wide endeavor.

CHAPTER 14 RETAIL PRICING



ANNOTATED OUTLINE The importance of pricing decisions is growing because today's customers have more alternatives to choose from and are better informed about the alternatives available in the marketplace.

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Value is the ratio of what customers receive (the perceived benefit of the products and services offered by the retailer) to what they have to pay for it.

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Value = Perceived Benefits/Price

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Retailers can increase value and stimulate more sales by either increasing the perceived benefits offered or reducing the price.

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If retailers set prices higher than the benefits they offer,

INSTRUCTOR NOTES

Query students on what is a good value for them when buying a specific product, such as jeans or sneakers. Different conceptions of value would emerge, including the lowest price, good quality for the money paid, etc. Note that students willing to pay different prices would still consider their own choices as being good value.

Chapter 18 - Customer Service sales and profits will decrease. 

If retailers set prices too low, their sales might increase, but profits might decrease due to the lower profit margin.



In addition, retailers need to consider the value proposition offered by their competitors and legal restrictions related to pricing.

I. Pricing Strategies 

Retailers use two basic retail pricing strategies: high/low pricing and everyday low pricing (EDLP).

LO 14-1 Explain the difference between a high/low pricing strategy and an everyday lowpricing strategy.

See PPT 14-3 A. High/Low Pricing 

With this strategy, retailers frequently – often weekly – discount the initial prices for merchandise through sales promotions.



This strategy is in response to competitive moves and to the positive response from value-conscious consumers.

Ask students to name retailers using a high/low pricing strategy from the following: women’s shoes, men’s suits, home electronics, and home furniture.

B. Everyday Low Pricing 

This strategy stresses continuity of retail prices at a level somewhere between the regular nonsale price and the deep-discount sale price of the retailer’s competitors.



EDLP does not necessarily mean the lowest price in the market.



A more accurate description of this strategy is everyday same prices because the prices don’t have significant fluctuations.

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Some retailers have adopted a low-price guarantee policy in which they guarantee that they will have the lowest possible price for a product or group of products. The guarantee usually promises to match or better any lower price found the local market and might include a provision to refund the difference between the seller’s offer price and the lower price.

Name retailers using EDLP strategies from the following: grocery store chain and building supplies. Customers comparison shop now more than ever before. It is becoming increasingly difficult for retailers to offer a true EDLP strategy.

Chapter 18 - Customer Service See PPT 14-5

C. Advantages of the Pricing Strategies 



Advantages of High/Low Pricing: o

Increases profits through price discrimination

Sales create excitement

Allows retailers to sell of slow-moving merchandise

Advantages of EDLP: o

Assures customers of low prices

Reduces advertising and operating expenses

Reduces stockouts and improves inventory management

II. Setting Retail Prices 

A chain of supermarkets that has strong national buying power wants to open several stores in a competitive area. Which strategy is best for them and why? How would the situation be different for a jewelry store chain?

Retailers consider five factors when setting retail prices; (1) the price sensitivity of consumers; (2) competition; (3) the pricing of services; (4) analytical factors such as cost, break-even points, pricing software, and Internet, mobile, and social; and (5) legal and ethical issues.

LO 14-2 Identify the factors retailers consider when pricing their merchandise. See PPT 14-7

A. Customer Price Sensitivity 

As the price of a product increases, the sales for the product will decrease because fewer and fewer customers feel the product is a good value.



The price sensitivity of customers determines how many units will be sold at different price levels. One approach that can be used to measure the price sensitivity of customers is a price experiment.

1. Price Elasticity 

A commonly used measure of price sensitivity is price elasticity. Price elasticity is the percentage change in quantity sold divided by the percentage change in price.



Elasticity =

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% change in quantity sold/% change in price

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The target market for a product is considered price

Ask students to list products or services they would estimate to be price elastic and others they would estimate to be price inelastic.

See PPT 14-10

Chapter 18 - Customer Service insensitive (inelastic) when its price elasticity is greater than -1. 

The target market for a product is considered price sensitive (elastic) when its price elasticity is less than -1.



A number of factors affect the price sensitivity for a product.

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The more substitutes a product or service has, the more likely it is to be price elastic.

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Products and services that are necessities are price inelastic.

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Products that are expensive relative to a consumer’s income are price elastic. See PPT 14-11

B. Competition 

Retailers can price above, below, or at parity with the competition. The chosen pricing policy must be consistent with the retailer’s overall strategy and its relative market position.



. Most retailers routinely collect price data about their competitors to see if they need to adjust their prices to remain competitive. See PPT 14-12

C. Pricing of Services 

Ask students for examples of retailers using each of these pricing strategies relative to competing retailers.

Additional issues need to be considered when pricing services relative to products, including the need to match supply and demand and the difficulties that customers have in determining service quality.

1. Matching Supply and Demand 

Services are intangible and thus cannot be inventoried.



Most services have limited capacity.

2. Determining Service Quality 

Due to the intangibility of services, it is often difficult for customers to assess service quality.

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Another factor that increases the dependence on price as a quality indicator is the risk associated with a service 18-284

Chapter 18 - Customer Service purchase. See PPT 14-13

D. Using Analytical Tools to Set Prices 

Many retailers need to set prices for over 50,000 SKUs and make thousands of pricing decisions each month. From a practical perspective, they cannot conduct experiments nor do statistical analyses to determine the price sensitivity for every item.



Therefore, they rely on some standard analytical approaches, such as those based on cost or break-even points, which they adopt by relying on pricing software and Internet, mobile, and social capabilities.

1. Setting Prices Based on Costs 

Many retailers set prices by marking up the item’s cost to yield a profitable gross margin. Then, this initial price is adjusted on the basis of insights about customer price sensitivity and competitive pricing.

2. Retail Price and Markup 

When setting prices based on merchandise cost, retailers start with the following equation:

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Retail price = Cost of merchandise + Markup

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The markup is the difference between the retail price and the cost of an item.

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The appropriate markup is determined to cover all of the retailer’s operating expenses needed to sell the merchandise and produce a profit for the retailer.

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The markup percentage is the markup as a percentage of the retail price:



Markup percent =

Setting prices is primarily dependent on the margin management component of the strategic profit model. Although, if prices are lowered, the velocity of sales in terms of inventory turnover should also increase.

(Retail price – Cost of merchandise)/Retail price 

The retail price based on the cost and markup percentage is: Retail price = Cost of merchandise/( 1 – Markup percentage (as a fraction)) 18-285

Chapter 18 - Customer Service 

Traditionally, apparel retailers used a 50 percent markup, referred to as keystoning, that set the retail price by simply doubling the cost.

3. Initial Markup and Maintained Markup 

Retailers rarely sell all items at the initial price. They frequently reduce the price of items for special promotions or to get rid of excess inventory at the end of a season.

See PPT 14-14



Initial markup is the difference between the retail selling price originally placed on the merchandise and the cost of the merchandise, whereas maintained markup is the actual sales you get for the merchandise less its cost.

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The difference is due to various reductions, such as markdowns, discounts to employees and customers, and inventory shrinkages (due to shoplifting, breakage, or loss).

Instructors may wish to stress the difference between maintained markup and gross margin. We find it more important, however, to stress that they are almost the same thing. Even those students going into retailing are more likely to remember the similarity.



Initial markup must be high enough so that after reductions are taken out, the maintained markup is left.



The relationship between initial markup and maintained markup is:

Initial markup % = (Maintained markup % + % Reductions) ----------------------------------------------------100% + % Reductions 4. Setting Prices Using Break-Even Analysis 

Break-even analysis determines how much merchandise is required to be sold to achieve a break-even (zero) profit at various sales levels.



Break-even point quantity =Total fixed costs/(Actual unit sales price – Unit variable cost)

5. Calculating Break-Even for a New Product 

The break-even point (BEP) is the quantity at which total revenues are equal to total cost, and beyond which profit occurs.



BEP quantity= Fixed costs/(Actual unit sales price - Unit variable cost)



The retailer can choose the profit they wish to make, and

See PPT 14-16

Assume you have a lemonade stand that rents for $5.00. Lemonade costs $.30 and sells for $.50/cup. BEPquantity would be: $5.00 ÷ $.20 = 25 cups. Assume an ad costs $10,000, shirts cost $30 and sell for $50. How many shirts do you need to

Chapter 18 - Customer Service



calculate quantity by adding profit to the numerator, i.e., BEP quantity = (Fixed costs +profit) ÷ (Unit price - Unit variable costs)

sell to break even?

To convert the break-even quantity to break-even sales dollars, multiply the BEP quantity by the selling price.

What if the vendor splits the cost of the ad?

$10,000 ÷ $20 = 500 shirts

$5,000 ÷ $20 = 250 shirts 6. Calculating Break-Even Sales 

The retailer can calculate how much sales would have to increase to profit from a price cut.

7. Setting Prices Using Optimization Software 

A relatively new approach to setting retail prices takes a more comprehensive approach using pricing optimization software. These software programs use a set of algorithms that analyze past and current merchandise sales and prices, estimate the relationship between prices and sales generated, and then determine the optimal (most profitable) initial price for the merchandise and the appropriate size and timing of markdowns.



Given its cost, however, (more than $1 million) the software is only used currently by a small set of the largest retail firms.

8. Setting Prices by Relying on Internet, Mobile, and Social Capabilities 

The growth of the electronic channel, the popularity of social media, and the adoption of smartphones has greatly changed the way consumers get and use information to make purchasing decisions based on price.



Today, growing numbers of consumers are opting into services provided by various mobile firms and their applications.



The latest generation of price promotional offers considers the consumers’ geographic location that is accessed from their phone location or locational coding via certain sites and offers them localized promotions for retailers who are in close proximity. This concept is called geofencing.



The redemption of online coupons is growing at an 18-287

Chapter 18 - Customer Service astronomical rate. III. Markdowns 

Retailers initially set prices on the basis of the merchandise cost and desired maintained margin.



Markdowns are a reduction in the initial retail price.

LO 14-3 Examine how and why retailers take markdowns.

A. Reasons for Taking Markdowns 

Markdowns can be classified as either clearance (to get rid of merchandise) or promotional (to generate sales).



When merchandise is slow-moving, obsolete, at the end of its selling season, or priced higher than competitors’ goods, it generally gets marked down.



Markdowns are part of the cost of doing business. Retailers set their initial markup high enough so that after markdowns and other reductions are taken, the planned maintained markup is achieved.

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Retailers employ markdowns to promote merchandise to increase sales. Markdown sales generate cash flow to pay for new merchandise.

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Markdowns are also taken to increase customers' traffic flow.



Markdowns may also increase the sale of complementary products.

See PPT 14-20 Ask students why retailers take markdowns.

1. Optimizing Markdown Decisions 

Retailers have traditionally created a set of arbitrary rules for taking markdowns to dispose of unwanted merchandise. Such a rule-based approach, however, is limiting because it does not consider the demand for the merchandise at different price points or in different locations and thus produces less-than-optimal profits.The optimization software described previously in this chapter, used to set initial retail prices, can also indicate when to take markdowns and how much they should be in different locations.28 It works by continually updating its pricing forecasts on the basis of actual sales throughout the season and factoring in differences in price sensitivities. .

Chapter 18 - Customer Service See PPT 14-22

2. Reducing the Amount of Markdowns 

Retailers can reduce the amount of markdowns by working closely with their vendors to time deliveries with demand.



Retail buyers can often obtain markdown money - funds a vendor gives the retailer to cover lost gross margin dollars that result from markdowns and other merchandising issues.



As discussed in Chapter 9, collaborative supply chain management systems reduce the lead time for receiving merchandise so that retailers can monitor changes in trends and customer demand more closely, thus reducing markdowns.



When customers believe that a particular retailer offers them a good value, they will be less likely to wait for markdowns. An everyday low-price strategy implies that a retailer’s products are already at low prices and therefore will not be further discounted.

Ask students how retailers can reduce the amount of markdowns. Ask students under what circumstances markdown money would be legal. Under the Robinson Patman Act, it would only be legal if it were offered to all retailers on a proportionately equal basis.

3. Liquidate Markdown Merchandise 

Retailers can use one of six strategies to liquidate unsold merchandise: sell to another retailer, consolidate unsold merchandise, sell on the Internet, return to vendor, donate to charity, and carry over the merchandise to the next season.

See PPT 14-23

4. Sell to Another Retailer 

Sell the unsold merchandise to another retailer.



However, this approach for liquidating unsold merchandise enables retailers to recoup only a small percentage of the merchandise’s cost—often a mere 10 percent.

5. Consolidate Unsold Merchandise 

Markdown merchandise can be consolidated in a number of ways.



First, the consolidation can be made into one or a few of the retailer’s regular locations.



Second, markdown merchandise can be consolidated into another retail chain or an outlet store under the same 18-289

Chapter 18 - Customer Service ownership. 

Finally, markdown merchandise can be shipped to a distribution center or a rented space such as a convention center for final sale.

6. Sell on the Internet 

The Internet is increasingly useful for liquidating unsold merchandise.

7. Return to Vendor 

Some large retailers have enough clout to negotiate an agreement that some merchandise be returned to vendors.

8. Donate to Charity 

Donating clearance merchandise to charities is a common practice. Charitable giving is always a good corporate practice.

9. Carry Over the Merchandise to the Next Season 

The final liquidation approach—to carry over merchandise to the next season—is used with relatively high-priced nonfashion merchandise, such as traditional men’s clothing and furniture

IV. Pricing Techniques for Increasing Sales and Profits 

There are three strategies that could be used to increase retail sales without resorting to price discrimination.

LO 14-4 Identify the pricing techniques retailers use to increase sales and profits.

See PPT 14-24, 14-25, 14-27 A. Dynamic Pricing 

Dynamic pricing, also known as individualized pricing, refers to the process of charging different prices for goods or services based on the type of customer, time of the day, week, or even season, and level of demand.



Ideally, retailers would maximize their profits if they charged each customer as much as the customer was willing to pay.

Chapter 18 - Customer Service

B. Promotional Markdowns 

Retailers employ promotional markdowns to promote merchandise and increase sales. Markdowns can increase customer traffic flow.

C. Clearance Markdowns for Fashion Merchandise 

While the discussion of clearance markdowns earlier in the chapter focused primarily on how retailers get rid of unwanted merchandise, this merchandise can also be used to attract different market segments based on their degree of price sensitivity.

D. Coupons 

Coupons offer a discount on the price of specific items when they're purchased at a store.



Coupons are used because they induce customers to try products for the first time, convert first-time users to regular users, encourage large purchases, increase usage, instill loyalty, and protect market share against the competition.

E. Price Bundling 

Price bundling is the practice of offering two or more different products or services for sale at one price.



Price bundling is used to increase both unit and dollar sales by bringing traffic into the store.

Ask students if they, or anyone they know, use coupons regularly. Why or why not? This is a way of getting to the advantages and disadvantages of coupons.

Ask students to identify retailers that use price bundling, and what products they use. (It is used a lot with travel -- cruises, tours)

F. Quantity Discounts 

Quantity Discounts, or multiple-unit pricing is similar to price bundling in that the lower total merchandise price increases sales, but the products or services are similar, rather than different.



This strategy is used to increase sales volume.



Depending on the type of product, customers may stockpile for use at a later time, resulting in no long-term effect on sales.

Chapter 18 - Customer Service

G. Zone Pricing 

Zone pricing is the practice of charging different prices in different stores, markets, regions, or zones.



This practice is generally used by retailers to address different competitive situations in their various markets.

H. Leader Pricing 

Leader pricing is the practice of pricing certain items lower than normal to increase customers’ traffic flow or boost sales of complementary products. Some retailers call these products loss leaders.



In a strict sense, loss leaders are sold below cost and would therefore be considered predatory pricing, which is discussed in the next section.



One problem with leader pricing is that it might attract shoppers referred to as cherry pickers, who go from one store to another buying only items that are on special.



The best items for leader pricing are frequently purchased products. The retailer hopes consumers will also purchase other products while buying loss leaders.

Ask students what retailers typically use a leader pricing strategy, and what products they use.

I. Price Lining 

Retailers frequently offer a limited number of predetermined price points within a merchandise category, a practice known as price lining.

Ask students to identify retailers that use price lining. Then ask if a price lining strategy helps them in making their shopping decisions.

J. Odd Pricing 

Odd pricing, which has a long history in retailing, refers to the practice of using a price that ends in an odd number, typically a 9.



Because merchandise had an odd price, salespeople typically had to go to the cash register to give the customer change and record the sale, making it more difficult for salespeople to keep the customer’s money.



Odd pricing was also used to keep track of how many times an item had been marked down. After an initial price of $20, the first markdown would be $17.99, the second

Ask students if they think an odd pricing strategy works. For example, if they bought a pair of jeans for $29.99, what price would they tell a friend when asked later - $29 or $30?

Chapter 18 - Customer Service markdown $15.98, and so on. V. Legal and Ethical Pricing Issues 

In addition to customer price sensitivity, cost and competition, retailers need to consider legal and ethical issues when setting prices.

LO 14-5 Indicate the legal and ethical issues retailers should consider when setting prices.

These issues are summarized in PPT 14-29. A. Deceptive Reference Prices 

A reference price is the price against which buyers compare the actual selling price of the product, and thus it facilitates their evaluation process. Typically, the retailer labels the reference price as the “regular price” or “original price.”

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If the reference price is bona fide, the advertisement is informative. If the reference price has been inflated or is just plain fictitious, however, the advertisement is deceptive and may cause harm to consumers.



In general, if a seller is going to label a price as a regular price, the Better Business Bureau suggests that at least 50 percent of the sales should have occurred at that price.

B. Predatory Pricing 

Predatory pricing is a particular form of price discrimination where a dominant retailer sets prices below its costs to drive competitive retailers out of business. Eventually, the predator hopes to raise prices when the competition is eliminated and earn back enough profits to compensate for its losses. A retailer generally may sell merchandise at any price so long as the motive isn't to eliminate competition, and this motive is very difficult to prove.

C. Resale Price Maintenance 

Vendors often encourage retailers to sell their merchandise at a specific price, known as the manufacturer’s suggested retail price (MSRP), in order to reduce price competition among retailers, eliminate free riding, and stimulate retailers to provide complementary services. 18-293

Chapter 18 - Customer Service 

The U.S. Supreme Court recently ruled that the ability of a vendor to require retailers to sell merchandise at MSRP should be decided on a case by case basis, depending on the individual circumstances.

D. Horizontal Price Fixing 

Horizontal price fixing involves agreements between retailers that are in direct competition with each other to set the same prices.



As a general rule of thumb, retailers should refrain from discussing prices or terms or conditions of sale with competitors.

Retailers can, however, offer different prices to different customers as long as the pricing policies aren’t discriminatory.

E. Bait-and-Switch Tactics 

Bait-and-switch is an unlawful, deceptive practice that lures customers into a store by advertising a product at a lower-than-normal price (the bait) and then, once they are in the store, induces them to purchase a higher-priced model (the switch).



To avoid disappointed customers and problems with the FTC, retailers should have sufficient quantities of advertised items, or if they run out of stock, should offer customers a rain check. A rain check is a promise to customers to sell currently out-of-stock merchandise at the advertised price when it arrives.

Ask students if they have ever experienced bait-and-switch.

VI. Summary 

Setting prices is a critical decision in implementing a retail strategy, because price is a critical component in customers’ perceived value.

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Retailers consider the price sensitivity of consumers in their target market, the cost of the merchandise and services offered, competitive prices, and legal restrictions.

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Initial prices are adjusted over time using markdowns and for different market segments using variable-pricing strategies. Retailers take markdowns to either dispose of merchandise or generate sales. Markdowns are part of the cost of doing business, and thus buyers plan for them.

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Retailers use a variety of techniques to maximize sales and profits by charging different prices to different customers. These techniques include dynamic pricing, promotional 18-294

Chapter 18 - Customer Service markdowns, clearance markdowns for fashion merchandise, coupons, price bundling, quantity discounts, zone pricing, leader pricing, price lining, and odd pricing. 

There are several legal and ethical issues retailers consider when setting prices. These include deceptive reference prices, predatory pricing, resale price maintenance, horizontal price fixing, and bait-and-switch tactics

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 133. INTERNET EXERCISE Go to the web page of Overstock.com and look at its top-selling merchandise. Select a few key items and compare the price of each product at other online retail sites such as Target.com, Amazon.com, Sears.com, and Macys.com. How do the prices at this Internet outlet compare to those at a discount store, online retailer, and department stores? Are the results what you expected or were you surprised? Explain your reaction. Results here will vary depending on the merchandise selected. Answers could be discussed in class to share the findings. 134. INTERNET EXERCISE Go to the website of Sandals Resorts (www.sandals.com) and see what you can get for an all-inclusive price. Describe how bundling services and products provides vacationers with value. Find an example of price bundling outside the travel industry. Which method, bundling or nonbundling, do you believe provides the customer with the best value? Which makes the retailer or service provider more profits? The Sandals website highlights what is included in the all-inclusive package (e.g., room, food, beverages, activities). Bundling services is convenient for some travelers who wish for a one-stop, no-hassle vacation. It can also provide value for consumers who want to know upfront their major costs before committing to a vacation. If they were to plan only by considering the flight and room alone, without including meals, drinks, and activities, the prices may be much higher than they had planned. Other examples of bundling include travel sites like Expedia.com that can bundle airfare and hotel together and fast-food restaurants that offer value meals. Students’ opinions on the value provided by price building will vary. 135. GO SHOPPING Go to your favorite food store and your local Walmart to find prices for the market basket of goods listed in the accompanying table. What was the total cost of the market basket at each store? How did the prices compare? Did Walmart live up to its slogan of “Save Money. Live Better”? One of Walmart’s current advertising strategies is to encourage customers to compare the prices of frequently purchased items to Walmart’s prices. However, some critics suggest that Walmart is not always comparing the prices of the exact same merchandise. For this exercise, students should shop the products listed in the table and see if there is a true price difference between a local grocery store and Walmart.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS What types of retailers often use a high/low pricing strategy? What types of retailers generally use an everyday low-pricing strategy? How would customers likely react if a retailer switched its pricing strategy from one to the other? Explain your response. High/Low Pricing - Retailers using a high/low pricing strategy frequently—often weekly—discount the initial prices for merchandise through sales promotions. Examples: Department stores and specialty stores. Some customers learn to expect frequent sales and simply wait until the merchandise they want goes on sale and then stock up at the lower prices. Everyday Low Pricing - Many retailers, particularly supermarkets, home improvement centers, and discount stores, have adopted an everyday low-pricing (EDLP) strategy. This strategy emphasizes the continuity of retail prices at a level somewhere between the regular nonsale price and the deepdiscount sale price of high/low retailers. Although EDLP retailers embrace their consistent pricing strategy, they occasionally have sales, just not as frequently as their high/low competitors. 136. Why would sewing pattern manufacturers such as Simplicity (www.simplicity.com/patterns/) and Butterick (https://butterick.mccall.com/) ask $12.95 (or more) on each pattern and then two times a year offer patterns for sale at $1.99 each? How could this markdown influence demand, sales, and profits? Sewing patters are marked down twice a year to move inventory and make space for new designs. The seasonal nature of patterns can impact demand. Some consumes will wait for a sale and the stock up. Others will be excited to see what’s new and purchase patterns at full price. 137.

What is the difference between bundled pricing and multiple-unit pricing?

Bundled pricing is the practice of offering two or more different products or services for sale at one price. Multiple-unit pricing or quantity discounts refer to the practice of offering two or more similar products or services for sale at one lower total price. 138. A department store’s maintained markup is 38 percent, reductions are $560, and net sales are $28,000. What is the initial markup percentage? MMU$ = 10,640.00 Initial markup (IMO) % = (MMU$ + Reductions) ÷ (Net sales + Reductions) IMO% = 11,200 ÷ 28,560 IMO% = .392 or 39.2% 139. Maintained markup is 39 percent, net sales are $52,000, and reductions are $2,500. What are the gross margin in dollars and the initial markup as a percentage? Explain why initial markup is greater than maintained markup. 18-297 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Gross margin (GM) = Maintained markup - Reductions GM = (52,000 x .39) - 2,500 GM = 20,280 – 2,500 GM = $17,780.00 Initial markup (IM) = (Maintained markup + Reductions) ÷ (Net sales + Reductions) IM = (20,280 + 2500) ÷ (52,000 + 2,500) IM = 22,780 ÷ 54,500 IM = .418 or 41.8% The initial markup is greater than the maintained markup because the retailer must initially markup merchandise high enough to achieve the planned maintained markup after the reductions are taken. 140. The cost of a product is $150, markup is 50 percent, and markdown is 30 percent. What is the final selling price? Retail Price = Cost + Markup R = 150 + .5 R R = 300 Markdown (MD) = R x (1 - Markdown) MD = 300 x .70 MD = 210 141. Orvis purchased black leather belts for $25.99 each and priced these accessories to sell for $59.99 each. What was the markup on the belts? The basic formula applies: Markup = Retail - Cost Since we are calculating markup at retail, we know that the retail price equals 100%. The problem asks what part of retail price (100%) is represented by markup. Therefore: Dollar markup = Retail price - Cost price Dollar markup = $59.99 - $25.99 Dollar markup = $34.00 Dollar markup Markup = Dollar markup/Retail price 18-298 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Markup = $34.00/$59.99 Markup = 57% Markup 142. Answer the following questions: (a) J.Crew is planning a new line of jackets for fall. It plans to sell the jackets for $100. It is having the jackets produced in the Dominican Republic. Although J. Crew does not own the factory, its product development and design costs are $400,000. The total cost of the jacket, including transportation to the stores, is $45. For this line to be successful, J.Crew needs to make $900,000 profit. What is its break-even point in units and dollars? (b) The buyer has just found out that The Gap, one of J. Crew’s major competitors, is bringing out a similar jacket that will retail for $90. If J. Crew wishes to match The Gap's price, how many units will it have to sell? (a) Product development and design costs could be taken as fixed costs. Unit price is $100, and unit variable costs are $45. Therefore, the contribution margin (= Unit Price minus Unit Variable Cost) = $55. Fixed Costs + Profit

$400,000 + $900,000

Breakeven Quantity = __________________ Unit Price – Unit Variable Cost

_________________

$100 - $ 45

Breakeven Quantity = 23, 636 units. At the unit price of $100, the breakeven point in dollars is 23,636 X $100 = 2,363,600. (b) If J. Crew wishes to match The Gap's price, its unit price will be reduced by 10%. The contribution margin percentage (%CM) was (Selling price – Variable costs)

$100 - $ 45

_________________________ X 100 = ____________ X 100 = 55% Selling price

$100

- % price change % Breakeven Sales Change = ___________________________ X 100 % CM + % price change -(-10) ______________ X 100 = 22.22% 55 + (-10) 18-299 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Therefore, unit breakeven sales change will be: 23,636 unit x X 22.22% = 5,252 units. Thus, J. Crew would have to sell an additional 5,252 units or a total of 28,888 units. Another way to calculate this would be to insert the new unit price of $90 in the breakeven formula used earlier and re-calculate the breakeven quantity. The resulting number would only differ by 1 unit, due to rounding of the numbers past the decimal.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective

Performance-Setting Retail Prices

Case Analysis

Considerations in Setting Retail Prices,

14-1 Explain the difference between a high/low pricing strategy and an everyday low-pricing strategy.

Pricing Techniques for Increasing Sales and Profits

14-2 Identify the factors retailers consider when pricing their merchandise. 14-4 Identify the pricing techniques retailers use to increase sales and profits. Legal and Ethical Pricing Issues

Drag and Drop; Matching (accessible version)

Legal and Ethical Pricing Issues

14-5 Indicate the legal and ethical issues retailers should consider when setting prices.

Setting Retail Prices

Drag and Drop; Matching (accessible version)

Considerations in Setting Retail Prices,

14-2 Identify the factors retailers consider when pricing their merchandise.

Markdowns Pizza Players, Pizza Prices

Case Analysis

Pricing Strategies

14-4 Identify the pricing techniques retailers use to increase sales and profits.

CHAPTER 15 RETAIL COMMUNICATION MIX ANNOTATED OUTLINE

INSTRUCTOR NOTES

I. Introduction 

The communication program informs customers about the

Ask students how new forms of

Chapter 18 - Customer Service retailer, describes the merchandise and services offered, and plays a critical role in developing repeat visits and customer loyalty. 

Communication programs can have both long-term and short-term effects on a retailer's business. From a longterm perspective, communications programs can be used to create and maintain a strong, differentiated image of the retailer and its store brands. This image develops customer loyalty and creates a strategic advantage.

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For any communications campaign to succeed, the retailer must deliver the right message to the right audience through the right media at the right time, with the ultimate goal of profiting from long-term customer relationships, as well as short-term sales.

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Advertising is paid communications delivered to customers through nonpersonal mass media such as newspapers, television, radio, direct mail, and the Internet. Today, successful retailers utilize an integrated marketing communication (IMC) program in which they integrate a variety of communication elements to deliver a comprehensive, consistent message to all customers over time, across all elements of their retail mix and across all delivery channels.Elements of a retail communication strategy are divided into new and traditional media. The new media elements include online (websites, e-mail, mobile) and social media (YouTube, Facebook, blogs, and Twitter). Traditional media elements include mass advertising, sales promotions, in-store marketing/design elements, personal selling, and public relations.



These media elements vary on five dimensions: personalization, interactivity, message control, extent of information provided, and the cost per exposure.

II. New Media Elements 

Over the past decade or so, the use of newer forms of media, such as online (e.g., websites, e-mail, and mobile), and social media (e.g., YouTube, Facebook, blogs, and Twitter) has exploded.

social media elements (YouTube, blogs, Twitter, Facebook) have impacted retailers today in terms of personalization, interactivity, and costs.

See PPT 15-3

LO 15-1 Identify the new media elements. See PPT 15-5 for the Elements of an Integrated Marketing Communication Strategy See PPT 15-6

A. Online Media 1. Websites 18-302

Chapter 18 - Customer Service 

Retailers use their websites to build their brand image; inform customers of store locations, special events, and the availability of merchandise in local stores; and sell merchandise and services.

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Many retailers also devote areas of their websites to community building.

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Retailers are actively using search engine marketing (SEM) to improve the visibility of their websites in searches. One SEM method is to use search engine optimization (SEO), which is creating and adjusting website content to show up closer to the top of a search engine results page (SERP).

2. E-mail 

E-mail involves sending messages over the Internet to specific individuals. Retailers use e-mail to inform customers of new merchandise and special promotions, confirm the receipt of an order, and indicate when an order has been shipped.

Compare e-mail communication with direct mail.

3. Mobile Marketing 

Mobile marketing, also called mobile commerce, Mcommerce, or mobile retailing, is marketing through wireless handheld devices such as cellular telephones.



As both technology and consumers become more sophisticated, retailers are beginning to add m-commerce (mobile commerce) to their communications programs.

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Marketing success rests on integrating marketing communications with fun, useful apps that are consistent with these consumer attitudes toward mobile devices. In response, firms are steadily improving customers’ potential experience with their mobile interface. See PPT 15-8

B. Social Media 

Social media include various forms of electronic communication, which users can employ to create online communities in which they share ideas, information, their interpersonal messages, and other content (e.g., videos).

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Three major online facilitators of social media are YouTube, Facebook, and Twitter.

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Sentiment analysis is the process of analyzing data posted 18-303

Chapter 18 - Customer Service on social media sites to assess customers’ overall valence (positive, neutral and negative) and their intensity of their sentiments and can be used to understand overall attitudes and preferences for products and advertising campaigns. 

The cost per exposure for social media is relatively low compared to traditional media.

1. YouTube 

On this video-sharing social media platform, users upload, share, view, and comment on videos. This medium gives retailers a chance to express themselves in a different way than they have before.

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YouTube also provides an effective medium for hosting contests and posting instructional videos.

Ask students if they have ever looked up “how to do” something on YouTube. Discuss how retailers could benefit by demonstrating product uses or giving tips on DIY projects.

2. Facebook 

This social media platform with more than 1.5 billion active users gives companies a forum to interact with fans.

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Retailers have access to the same features that regular users do, including a “wall” where they can post company updates, photos, and videos or participate in a discussion board.

3. Blogs 

On a blog (weblog), an individual blogger or a group of users regularly post their opinions and various topical information on a web page.

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A well-received blog can communicate trends, announce special events, and create word of mouth, which is communication among people about an entity such as a retailer or a product or service.

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Blogs connect customers by forming a community, allowing a retailer to respond directly to customers’ comments, and facilitate long-term relationships between customers and the retailer.

Ask students to share some of their favorite blogs and the characteristics of the blog that make them loyal readers.

4. Twitter 

Twitter is a microblog—a short version of a blog—in which 18-304

Chapter 18 - Customer Service users are limited to 140-character messages. 

Retailers are likely to use Twitter to announce up-to-date or fast-changing information to excite consumers.



Twitter has also changed the way customers get product or service information and register praise and complaints.

III. Traditional Media Elements 

Retailers use various traditional media elements: mass media advertising, promotions, in-store marketing, personal selling, and public relations.

LO 15-2 Identify the traditional media elements. Ask students why retailers want to communicate with their customers. What do they want to tell them? See PPT 15-9

A. Mass Media Advertising 1. Advertising 

This form of mass media entails the placement of announcements and persuasive messages purchased by retailers and other organizations that seek to inform and/or persuade members of a particular target market or audience about their products, services, organizations, or ideas.

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Mass advertising is typically used to generate awareness because of its is low cost per exposure and the control retailers have over content and the timing of the communication.

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However, mass advertising is not personalized and does not allow for personal interaction. The amount of information transmitted can be limited.

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Traditionally, mass advertising has been limited to newspapers, magazines, direct mail, TV, radio, and billboards.

Discuss with students the benefits and drawbacks of different types of advertising. For example, why might a retailer choose to run a newspaper advertisement versus a television advertisement?

2. Newspapers 

Retailing and newspaper advertising grew up together over the past century. But the growth in newspaper advertising by retailers has slowed recently as retailers have begun using other media.



In addition to displaying ads with their editorial content, newspapers distribute freestanding inserts. A freestanding 18-305

Chapter 18 - Customer Service insert (FSI), also called a preprint, is an advertisement printed at the retailer’s expense and distributed as an insert in the newspaper. 

Newspapers are mostly effective for targeting specific retail markets.



While the cost of developing newspaper ads is relatively low, the cost of delivering the message may be high if the newspaper’s circulation is much broader than the retailer’s target market, requiring the retailer to pay for exposure that won’t generate sales.

3. Magazines 

Advertising in national magazines is mostly done by national retailers such as Target and Sephora.



Many magazines either offer both a print and an online version, or have transitioned to online only. This change in the business model for some magazines from print to online (or both) enables retailers to reach potential customers at a lower cost per exposure.



Retailers tend to use it for image advertising because the reproduction quality is high.

4. Direct Mail 

Direct mail refers to any brochure, catalog, advertisement, or other printed material delivered directly to the consumer.



These communications are frequently targeted to customer groups on the basis of data collected through CRM systems.



Although relatively expensive on a per customer basis because of printing and mail costs, along with a relatively low response rate, directly mail is extensively used by many retailers because many consumers respond favorably to these personal messages.

5. Television 

Television commercials can be placed on a national network or local station. Retailers typically use TV for image advertising, to take advantage of the high production quality and the opportunity to communicate 18-306

Chapter 18 - Customer Service through both visual images and sound. 

In addition to its high production costs, broadcast time for national TV advertising is expensive. Spots, which are ads in local markets as opposed to national ads, have relatively small audiences, but they may be economical for local retailers.

6. Radio 

Many retailers use radio advertising because messages can be easily targeted to a specific segment of the market.



The cost of developing and broadcasting radio commercials is relatively low.



One disadvantage of radio advertising, however, is that listeners generally treat the radio broadcast as background, which limits the attention they give the message and they cannot refer to the advertisement for information they didn’t hear or don’t remember.

7. Billboards 

Billboards are outdoor advertisements that are generally large and appear adjacent to and above roads or highways.



Retailers typically use billboards to attract customers to a specific store location.



A potential disadvantage, however, is that everyone is exposed but potentially few are in a retailer's target market. See PPT 15-11

B. Sales Promotions 

Sales promotions are special incentives or excitementbuilding programs that encourage consumers to purchase a particular product or service.

Ask students how they respond to sales promotions. Do sales promotions generate excitement? Do they expect certain retailers to engage in more sales promotion activities than other? Consider Victoria’s Secret. Why does Victoria’s Secret only offer two sales per year when companies like Macy’s offer hundreds?

Chapter 18 - Customer Service

1. Coupons 

Coupons offer a discount on the price of specific items when they’re purchased at a store.



Retailers use coupons because they are thought to induce customers to try products for the first time, convert firsttime buyers into regular users, encourage large purchases, increase usage, and protect market share against competition.



Some retailers have linked coupons directly to their loyalty programs.

2. Rebates 

Rebates provide another form of discounts for consumers. In this case, however, the manufacturer, instead of the retailer, issues the refund as a portion of the purchase price returned to the buyer in the form of cash.

3. Premiums 

A premium offers an item for free or at a bargain price to reward some type of behavior, such as buying, sampling, or testing. See PPT 15-12

C. In-Store Marketing/Design Elements 

Retailers and their vendors are focusing considerable attention on in-store marketing design elements and activities.

1. Point-of-Purchase Displays 

Point-of-purchase (POP) displays are merchandise displays located at the point of purchase, such as at the checkout counter in a supermarket.



Cost per exposure is low. Interactivity is low.

2. Samples 

Samples offer potential customers the opportunity to try a product or service before they make a buying decision.



Sampling can also be highly interactive, the message can be controlled, and the information provided can be high because the sales associate can adapt based on the 18-308

Chapter 18 - Customer Service situation and the customer. 

Cost per exposure, however, is relatively high.

3. Special Events 

A special event is a sales promotion program comprising a number of sales promotion techniques built around a seasonal, cultural, sporting, musical, or some other type of activity.



Although it does not always take place in stores, event sponsorship occurs when retailers support various activities (financially or otherwise), usually in the cultural or sports and entertainment sectors.

E. Personal Selling 

Personal selling is a communication process in which sales associates help customers satisfy their needs through faceto-face exchanges of information.

See PPT 15-14 and 15-15

F. Public Relations 

Communicating through salespeople is much more expensive than communicating through advertising. Ask students why department stores place more emphasis on paid personal versus impersonal communications. Why do supermarkets do just the opposite?

Public relations (PR) involves managing communications and relationships to achieve various objectives, such as building and maintaining a positive image of the retailer, handling or heading off unfavorable stories or events, and maintaining positive relationships with the media.

Ask students to describe some instances of retailers communicating through public relations. Public relations is cheap. Why don't retailers rely on public relations rather than advertising?

1. Neiman Marcus and Its Christmas Catalog 

The Neiman Marcus Christmas book is perhaps the nation’s best-known retail catalog. Its reputation is largely due to its annual tradition of ultra-extravagant his-andhers gifts.



The unique merchandise generates free publicity as journalists and style watchers are astonished at what the retailer came up with each year.

Chapter 18 - Customer Service 

Macy’s has partnered with many charities in a successful cause-related marketing campaign (i.e., commercial activity in which businesses and charities form a partnership to market an image, product, or service for their mutual benefit).

3. Retailers and Product Placement 

When retailers and vendors use product placement, they pay to have their product included in nontraditional situations, such as in a scene in a movie or television program.

IV. Planning the Retail Communication Program 

The four steps in developing and implementing the retail promotion program are establish objectives, determine a budget, allocate the budget, and implement and evaluate the program.

LO 15-3 List the steps involved in developing a communication program. Review the steps in developing a communication program.

A. Establish Objectives 



Retailers establish objectives for their communication programs to provide (1) direction for people implementing the program and (2) a basis for evaluating its effectiveness. Some promotion programs have a long-term objective, such as creating or altering a retailer's brand image. Other communication programs focus on improving short-term performance, such as increasing store traffic on weekends.



Communication objectives are specific goals related to the retail promotion mix's effect on the customer's decisionmaking process.



To effectively implement and evaluate a communication program, objectives must be clearly stated in quantitative terms.



The target audience for the communication mix needs to be defined along with the degree of change expected and the time period over which the change will be realized.



The communication objectives and approaches used by vendors and retailers differ, and the differences can lead to conflicts. Points of conflict can be long-term vs. shortterm goals, product vs. location, and breadth of merchandise.

See PPT 15-17 Discuss the goals for a communications program. Review the communication objectives. Ask students what communication problem is suggested by this pattern. What would a pattern look like if customers had little knowledge of the store? If customers only shopped during a sale? If customers found the location very inconvenient?

Illustrate which methods are more effective at different stages of the decision-making process. Why is advertising better than salespeople for creating awareness? Why are salespeople better than advertising for changing attitudes? How would

Chapter 18 - Customer Service an ad directed at building awareness differ from one directed at changing an attitude? See PPT 15-21

B. Determine the Communication Budget 

The second step in developing a retail promotion program is to determine a budget.



The economically correct method for setting the promotion budget is marginal analysis.



An important source of the communication budget is cooperative (co-op) advertising programs. A cooperative (co-op) advertising program is a promotional program undertaken by a vendor and a retailer working together.

Review the methods for setting a budget and illustrate the difference in the logic between marginal analysis and the rule-ofthumb methods.

1. Marginal Analysis Method 

Marginal analysis is based on the economic principle that firms should increase promotion expenditures so long as each additional dollar spent generates more than a dollar of additional contribution.



In most cases, however, it is very hard to do a marginal analysis because managers do not know the relationship between promotion expenses and sales.



Sometimes, retailers do experiments to get a better idea of this relationship.

Ask students where the estimates come from. Indicate they are judgments that the manager has now stated explicitly.

2. Objective-and-Task Method

See PPT 15-23



The objective-and-task method determines the budget required to undertake specific tasks for accomplishing communication objectives.



The retailer first establishes a set of communication objectives. Then the necessary tasks and their costs are determined. The sum total of all costs incurred to undertake the tasks is the communication budget.

As in the marginal analysis, the relationship between the expenditures and the objective realized is based on the manager's judgment. The method simply quantifies the manager’s judgment. By quantifying the judgments, people have a basis for discussing them.

3. Rule-of-thumb Methods

See PPT 15-25



Ask students why the marginal analysis and objective-and-task methods are more appropriate than the rules of thumb for setting

In the previous two methods the communication budget is set by estimating communication activities' effects on the firm's future sales or communication objectives. 18-311

Chapter 18 - Customer Service 

The rule-of-thumb methods use the opposite logic by using past sales and communication activity to determine the present communication budget.

advertising budgets? If the rules of thumb are not good methods, why do retailers use them so frequently?

a. Affordable Budgeting Method 

When using the affordable budgeting method, retailers first forecast their sales and expenses, excluding communication expenses, during the budgeting period. The difference between the forecast sales and expenses plus desired profit is then budgeted for the communication mix.

b. Percentage-of-Sales Method 

The percentage-of-sales method sets the communication budget as a fixed percentage of forecast sales. Retailers use this method to determine the promotion budget by forecasting sales during the budget period and using a predetermined percentage to set the budget.

The typical advertising expenditures for food stores are 1.4% of sales. Ask students whether they would expect the typical expenditures for an everyday low pricing supermarket to be above or below 1.4%. Why? What about a convenience store?

c. Competitive Parity Method 

Under the competitive parity method, the communication budget is set so that the retailer's share of communication expenses equals its share of market.

d. Relative Advantages and Problems with Rule-of-Thumb Methods 

The major problem with these methods is they don’t assume that communication expenses stimulate sales and profit.



When retailers use these methods, they typically cut “unnecessary” communication expenses if sales fall below the forecast rather than increasing communication expenses to increase sales.



None of these methods allow retailers to exploit the unique opportunities or problems they confront in the market.



One advantage of both the affordable method and the percentage-of-sales method for determining a communication budget is that the retailer won’t spend 18-312

Chapter 18 - Customer Service beyond its means. See PPT 15-27

C. Allocate the Promotional Budget 

After determining the size of the communication budget, the retailer decides how much of its budget to allocate to specific communication elements, merchandise categories, geographic regions, or long- and short-term objectives.



Retailers often can realize the same objectives by reducing the size of the communication budget but allocating it more effectively.



An easy way to make such allocation decisions is just to spend about the same in each geographic region or for each merchandise category.



Allocation decisions, like budget-setting decisions, should use the principles of marginal analysis. The retailer should allocate the budget to areas that will yield the greatest return. This principle for allocating a budget is sometimes referred to as the high-assay principle.

D. Implement and Evaluate Communication Programs—Three Illustrations 

See PPT 15-28

The final stage in developing a retail communication program is its implementation and evaluation.

1. Advertising Campaign 

A specialty import cheese shop decided to concentrate its limited budget on a specific segment and use very creative copy and distinctive artwork in its advertising.



The advertising program emphasized the store's distinctive image. The newspaper was the major vehicle.



An inexpensive tracking study was used to measure the campaign's effectiveness.

Review the communication program developed by the cheese shop in the text and how the retailer evaluated the effectiveness of the campaign.

2. Facebook Marketing Campaign

See PPT 15-30



How is developing a Facebook campaign similar to developing a traditional advertising campaign? How is it different?

To develop and evaluate a Facebook campaign, the following steps would take place: (1) establish objectives (who is the shop targeting?), (2) develop the budget (Facebook allows advertisers to set a daily budget), (3) allocate budget (images and messages need to be updated almost constantly), and (4) implement and evaluate the 18-313

Chapter 18 - Customer Service program (Facebook’s ad manager offers various metrics and reports). See PPT 15-32

3. Google AdWords Campaign 

Google AdWords is a search engine marketing tool offered by Google that allows advertisers to show up in the ad section of the search results page based on the keywords potential customers use.



Reach is estimated by the number of impressions (the number of times the ad appears in front of the user) and the click-through rate (CTR). The relevance of the ad describes how useful an ad message is to the consumer doing the search.



An ad’s return on advertising investment (ROAI) can be determined by the following formula: ROAI = Net sales – Advertising Cost/Advertising Cost.

V. Summary 

In the past decade or so, retailers have embraced several new media elements. The online elements include websites, e-mail, mobile, and social media. Examples of the social media elements embraced by retailers are YouTube, Facebook, blogs, and Twitter.



Retailers communicate with customers using a variety of traditional media elements. These include mass media advertising, sales promotions, in-store marketing/design elements, personal selling, and public relations.



Retailers go through four steps to develop and implement their communication program: establish objectives, determine a budget, allocate the budget, and implement and evaluate the program.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 143. INTERNET EXERCISE Go to The National Retail Federations’ Top 100 Retailers List for the current year at https://nrf.com/resources/top-retailers/top-100-retailers. On the basis of this ranking, list the top 20 global retail brands. In two or three paragraphs, describe what makes a strong retail brand. How were brand equity and financial performance used to measure brand value for these retailers? Answers will change each year. Results for the Top 20 Global Retailers 2021 are included. Business Total Company Ranking Retailer Home Country Foundations Revenues (B) 1 Walmart USA Mass/Hyper $519.93 2 Amazon.com USA Ecommerce $280.52 3 Schwarz Group Germany Discount Grocery $133.89 4 Aldi Germany Discount Grocery $116.06 5 Alibaba China Ecommerce $71.99 6 Costco USA Club $163.22 7 Ahold Delhaize Netherlands Grocery $78.17 8 Carrefour France Mass/Hyper $82.60 9 Ikea Netherlands Furniture $45.18 10 JD.com China Ecommerce $82.86 11 Walgreens Boots Alliance USA Drug $117.71 12 Auchan France Mass/Hyper $51.27 13 Seven & I Holdings Japan Convenience $60.95 14 Spar International Austria Grocery $41.53 15 The Home Depot USA DIY $110.23 16 Rewe Group Germany Grocery $70.22 17 Tesco UK Mass/Hyper $73.25 18 Inditex Spain Fashion $32.27 19 Intermarché France Grocery $52.83 20 Aeon Japan Mass/Hyper $78.92 https://nrf.com/resources/top-retailers/top-50-global-retailers/top-50-global-retailers-2021 144. INTERNET EXERCISE Retailers and manufacturers deliver coupons to shoppers through the Internet, by mail or as inserts. Visit the top coupon sites, https://www.coupons.com/, https://www.retailmenot.com/, and https://www.groupon.com/. How do these coupon sites compare to one another? Students should consider push vs. pull communication; reaching a wide target audience; and informing, reminding, and persuading customers with a consistent message no matter which media are used. Coupons.com This site is a great spot to find printable and digital coupons, promotional codes, and special deals. Shoppers can find coupons for both physical and online retailers through Coupons.com. The site updates its coupon selection monthly to encourage shoppers to check back on a regular basis. In 18-315 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service addition to coupons, customers can earn cash back on purchases by linking their debit card to the site. (https://www.quotient.com/) RetailMeNot RetailMeNot is another popular coupon site that offers coupon codes for thousands of online retailers. Each day, the site updates its homepage with deals that are trending that day. The site offers coupon codes, cashback opportunities and discounted gift cards. It is a great spot to check out before heading to the store or finalizing an online purchase. (About, https://www.retailmenot.com/corp/about/) Groupon Groupon is a useful coupon site to find deals for entertainment, services, and restaurants. Travel deals are also available through Groupon. (About Groupon, https://about.groupon.com/) 145. INTERNET EXERCISE Trader Joe’s is a gourmet grocery store offering items such as health foods, organic produce, and nutritional supplements. Go to www.traderjoes.com and see how the firm uses its Internet site to promote its retail stores and merchandise. Why does this retailer include recipes and a seasonal guide on its website? Does the information provided on the web page reinforce the store’s upscale grocery image? Explain why or why not. The website serves as a newsletter to increase store awareness, describe new products and seasonal merchandise, and provide health information. All of this information is consistent with the store image and atmosphere. The store has the look and feel of a neighborhood grocer that you know and trust. Trader Joe's does not offer a lot of branded items. Most products are the Trader Joe's private label. The employees wear Hawaiian shirt to reflect that shopping at Trader Joe’s will be a fun and unusual experience. Trader Joe’s also uses a podcast, Instagram, YouTube, and Pinterest to communicate and connect with customers. 146. INTERNET EXERCISE Go to the social media site for a retailer that you have shopped at during the last few weeks. How was social media used as an element in the retailer’s communication program? What audience is being reached with social media? Is the social media message consistent or inconsistent with other communication elements? Is this a strong or weak strategy? Please explain. Students’ responses here will vary. The population using social medial is growing so depending on the retailer chosen, the audience reached could span a range of possibilities (e.g., existing customers, fans who are not yet customers, Gen Z vs. Millennials). Some will say that social media should be different than traditional forms of advertising to reach different audiences. Others will say that the message should be consistent so that consumers receive a clear message regardless of media/outlet. A Social Media “How To” for Retailers from Nielsen Media is helpful for a full discussion. http://blog.nielsen.com Summary of this report: As social media continues its meteoric ascent, newly empowered consumers wield more control than ever before. Although retail sales are dominated by brick-and-mortar stores, 18-316 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service the influence of the Internet on offline purchases is becoming increasingly important. Retailers must listen to and engage their customers through social media by participating and encouraging conversations. The end result will improve customer service and will help turn loyal customers into passionate advocates. 147. INTERNET EXERCISE Go to the home page for Target’s Pressroom at http://corporate.target.com. How does this retailer use public relations to communicate with investors and customers? Is this an effective communication tool for this retailer? Provide support for your response. Target includes information about new stores, corporate information, merchandise, community and giving in its online press room. This is an effective communication tool to inform a wide variety of stakeholders such as consumers, investors, and employees. Examples of recent press releases can be pulled and reviewed with students. 148. INTERNET EXERCISE Go to www.facebook.com/business to see how to build pages, ads, and sponsored stories, as well as how to take advantage of mobile applications. What are some of the steps that Facebook suggests a person consider when marketing using ads? Facebook works with companies to help them build successful campaigns through its platform. Facebook uses a four-step strategy to help businesses achieve success. The steps include: ads based on goals Step 2: Find your target audience Step 3: Upload images and content Step 4: Set a duration and pick your budget

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS What are the positive and negative aspects of direct marketing from the customer’s perspective? Positives Can be delivered many ways Can identify and track consumers and their responses Understand customers’ purchases better Able to carefully target customers Multichannel personalized messages Can inform customers of new merchandise and special promotions, confirm the receipt of an order, and indicate when an order has been shipped. Negatives Can be ignored Expensive on a per customer basis Relatively low response rate For more information, students might explore the homepage of the Direct Marketing Association: http://www.the-dma.org/index.php 149. What types of sales promotions have been successful with you as a consumer? Which ones have not been successful? Explain your responses. Students’ answers will vary. Most students will likely not respond to traditional coupons. However, many students will respond to coupons delivered over e-mail or through mobile applications. Students might also reflect on how product placement impacts them. Does it seem authentic to them or is it too transparent? 150. What factors should be considered in dividing up the advertising budget among a store's different merchandise areas? Which of the following should receive the highest advertising budget: staple, fashion, or seasonal merchandise? Why? The basic principle that should be considered in allocating the advertising budget across merchandise categories is the marginal return -- the greatest bang per buck. The question that needs to be answered is: Which category will generate the most sales and profits from an additional dollar of advertising? Staple items are probably not good candidates for advertising expenditures. This merchandise is frequently bought on a regular basis. Consumers usually are not stimulated to visit a department store in response to ads for this merchandise. 18-318 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service In contrast, fashion items are good candidates for high advertising expenditures. Consumers will be motivated to visit a department store by ads for this type of merchandise. They typically buy this type of merchandise in a department store and visit department stores to see what the new fashions are. Seasonal merchandise should also be advertised early in the season, when the timing is right and consumers’ interests are high for merchandise related to the season. 151. Outline some elements in a communication program that can be used to achieve the following objectives: (a) Increase store loyalty by 20 percent. (b) Build awareness of the store by 10 percent. (c) Develop an image as a low-price retailer. How would you determine whether the communication program met each of these objectives? Objective Approach for Achieving Objective Technique for Measuring Objective Increase store loyalty by 20%. Frequent-shopper program where customers earn points for making more purchases. Introduce private-label merchandise only available at store. Telephone or mail survey taken before and after new program asking customers their degree of loyalty, percent of expenses in category bought from store, and measure of repeat purchases. Build awareness of the store by 10%. Install a large sign in front of store. Hold an event that generates publicity. Radio or billboard advertising emphasizing the name and location of the store. Use social media and guerilla marketing strategies to generate excitement about the brand. Conduct a pre and post survey to assess aided versus unaided recall. Measure site visit increases before and after communication campaign. Measure number of social media likes, hits, and views after campaign. Develop an image as a low-price retailer. 18-319 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service Undertake image advertising on TV or in magazines. Use sales promotion strategies like sales and coupons to create awareness and build excitement. Use keywords to increase visibility on web searches. Use a survey to evaluate how customers perceive the retailer. 152. A retailer plans to open a new store near a university. It will specialize in collegiate merchandise such as apparel, accessories, and school supplies. Consider the pros and cons of each of the following media: TV, radio, city newspaper, university newspaper, local magazine, website, blog and sponsoring an event for this retailer to capture the university market. While student responses will vary, some possible ideas are as follows: The new retailer may want to use newspapers to reach this market. Student newspapers usually have a high student readership and will probably be an excellent choice. The local newspaper may also be a good choice, since the professors, staff, and some of the students will probably read it. Magazines associated with the university may also be a good place to advertise. Special magazines devoted to alumni or athletic events probably will help to focus in on the university market. A direct mailing may be good especially if the store can take advantage of a free campus mail system. Even if a free campus mail system is not available, using the student directory may be a good way to develop a mailing list that specifically targets this population. Radio, especially stations that carry formats popular with college students, may be appropriate. If there is a university station, the store should look into purchasing advertising time, because university students probably constitute the majority of the audience, and the time on these stations is usually relatively inexpensive. In terms of television, if the university has its own station, it may be a good idea to investigate purchasing time. Unless a specific television event related to the university is shown (such as an athletic event), television is probably not the best way to reach this market. Finally, outdoor advertising such as signs and posters around campus may be effective. 153. Why do some online retailers include editorials and customer reviews along with product information on their websites? Explain how this may influence the consumer’s buying behavior. Many retailers offer websites to foster community building efforts. They offer an opportunity for customers with similar interests to learn about products and services that support their hobbies and share information with others. The community helps reinforce the retailer’s image. Retailers will hear from customers about what is working and what can be improved. This feedback is valuable. Also the retailer collects e-mail addresses and can stay in contact with customers through reviews. Future customers will read these reviews as a “trusted friend” as part of the information search in the buying process. These websites may also be used for social shopping, where consumers use the Internet to shop by engaging with other product users, family, and friends on product reviews, preferences, and opinions. Many retailers encourage customers to post reviews of products they have bought or used. Research has shown that this technique increases customer loyalty, providing a competitive advantage for sites that use them.

Chapter 18 - Customer Service 154. Assume you work for a large consumer-packaged goods firm that has learned its latest line of snack foods is selling very slowly in retail stores. Recommend a strategy for listening to what consumers are saying on blogs, review sites, and the firm’s website. Describe how your strategy might provide insights into consumers’ sentiments about the new product line. Customers are more willing to offer reviews on a product online when the context is seemingly anonymous. This is a great opportunity for firms to learn the “real” reason customers are buying or not buying a product. One strategy is to acknowledge customers’ reviews online. Many retailers often comment directly to customer reviews. In addition, retailers can use the information to tweak the product to respond to customer complaints or reviews. In many instances, this effort builds trust with customers because it indicates to them that retailers are really listening to their feedback. 155. As an intern for Dunkin’, you have been asked to develop a social media campaign for a new glazed muffin. The objective of the campaign is to increase awareness and trial of the new line of muffins. How would you go about putting together such a campaign on Twitter, Facebook, Pinterest, YouTube, and Instagram? Students’ answers will vary. There are several ways to increase awareness and trial of the new muffin. Some suggestions include: 1) Free samples- One tried and true way of selling a new food product is to offer free samples. This allows people to taste the product and decide if they want to buy an entire muffin. 2) Coupons- Coupons that offer a free muffin with the purchase of another item often drive traffic to the stores and encourage people to try the muffin along with the purchase of an item that they know they like. 3) Advertising- When companies like Dunkin’ introduce a new product, it is often accompanied by advertising, especially television commercials. 4) Message DD Perks customers and offer additional loyalty points for a limited time. 5) Include images of the new muffins on all social platforms.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Berton's BurgersRebuilding a Brand

Case Analysis

Communication Programs to Build Brand Images and Customer Loyalty

15-1 Identify the new media elements. 15-2 Identify the traditional media elements.

Communication Methods

Drag and Drop; Matching (accessible version)

Communication Programs to Build Brand Images and Customer Loyalty

15-2 Identify the traditional media elements.

New Media Elements

Matching

Communication Programs to Build Brand Images and Customer Loyalty

15-1 Identify the new media elements.

Planning The Retail Communication Program

Matching

Communication Programs to Build Brand Images and Customer Loyalty

15-3 List the steps involved in developing a communication program.

CHAPTER 16 HUMAN RESOURCES AND MANAGING THE STORE



ANNOTATED OUTLINE Retailers achieve their financial objectives by effectively managing their five critical assets: locations, merchandise inventory, channels, employees, and customers.



Human resource management (HRM) is responsible for aligning the capabilities and behaviors of employees with the short- and long-term goals of the retail firm.



Effective management of HRM can build a competitive advantage by lowering costs and/or increasing differentiation.



The differentiating advantages gained through HRM are

INSTRUCTOR NOTES

Chapter 18 - Customer Service difficult for competitors to duplicate. I. Acquire and Retain Human Resources 

The activities retail managers engage in to acquire and retain productive employees include recruit, train and acculturate, motivate, evaluate, and reward and compensate.



The recruiting step occurs only once with each employee; whereas the remaining activities are ongoing.

LO 16-1 Describe how to acquire and retain employees.

See PPT 16-3

A. Recruit Retail Employees 

Step 1 in the process for acquiring and retaining employees is to recruit competent employees.



This step entails preparing a job description, finding potential applicants with the desired capabilities, and screening the best candidates to interview.

Ask students if they think recruiting Millennials needs to be a different strategy than previous generational cohorts. Do Millennials have a different perspective on what employment should mean?

1. Develop the Job Description 

The job description identifies essential activities to be undertaken and is used to determine the qualifications of potential employees.



The job description includes specific activities the employee needs to perform and the performance expectations expressed in quantitative terms.



The skill level required for employees engaged in selling high-involvement merchandise such as jewelry or home entertainment systems is much greater than the skills needed for employees who have limited interactions with customers.

Ask students to discuss the skill level differences between selling jewelry in a high- end specialty store and selling costume jewelry in a full line discount store.

2. Locate Prospective Employees 

Some creative approaches being used by retailers to recruit applicants, in addition to placing ads on Craigslist and posting job openings on websites such as LinkedIn and TweetMyJobs, are working with the American Association of Retired Persons (AARP).



Retailers often ask their own employees if they know

Ask the students to comment on applications they have completed.

Chapter 18 - Customer Service someone the company could hire, and some employers provide employees rewards for referrals that are hired.

3. Screen Applicants to Interview 

The screening process matches the applicants' qualifications with the job description.



Many retailers use automated prescreening programs as a low-cost method for identifying qualified candidates.



Job application forms contain information about the applicant's employment history, previous compensation, reasons for leaving previous employment, education and training, and references.



This information enables the manager to determine whether the applicant has the minimum qualifications and provides information for interviewing the applicant.



Reference checking–most retailers verify the information given on an application form by contacting the applicant’s references and doing an online search.



Due to potential legal problems, however, many companies have a policy of not commenting on past employees.



A Google search can also be useful for finding out information that may not appear on the job application or emerge through contacts with references.



Retail managers generally expect to hear favorable comments from an applicant’s references or previous supervisors, even if they may not have thought highly of the applicant. One approach for reducing this bias is to ask the reference to rank the applicant relative to others in the position.



Social media such as Twitter, Facebook, and LinkedIn are great sources of information on prospective employees. These sites often reveal more about the person than a face-to-face interview. See PPT 16-5

4. Test Applicants 

Have students role-play a telephone conversation requesting references on a specific student being considered for a job. One student can play the employment manager and another can play the student's professor listed as a reference. Ask student how useful they feel references are.

Intelligence, ability, personality, and interest tests can 18-324

Chapter 18 - Customer Service provide insights about potential employees. 

It is illegal to use tests assessing factors that are not jobrelated or that discriminate against specific groups.



Many retailers require that applicants take drug tests. Some retailers also use tests to assess applicants’ honesty and ethics.

Should employers use a student’s grades when determining who to interview and selecting people to hire? Why or why not?

5. Preview the Job 

Turnover declines when the applicants understand both the attractive and unattractive aspects of the job.

6. Conduct a Personal Interview 

After screening applications, the selection process typically involves a personal interview.



Because the interview is usually the critical factor in the hiring decision, the manager needs to be well prepared and to have complete control over the interview.



The objective of the interview is to gather relevant information, not simply to ask a lot of questions.



The most widely used interview technique, called the behavioral interview, asks candidates how they have handled actual situations they encountered in the past, especially situations requiring the skills outlined in the job description.

Have students role play an employment interview. One student is looking for a management trainee position at Zara and the other student is looking for an ecommerce site management trainee position at Zappos.

See PPT 16-9

B. Train and Acculturate Employees 

Having hired employees with the required skills or potential to develop these skills, retailers need to train them to do their jobs and introduce them to the firm’s policies, values, and strategies.



The acculturation process affects the degree to which newcomers become involved, engaged contributors to the firm’s successful performance.



To be effective, new employee training should feature a blended approach that includes both structured and more informal, on-the-job lessons. Managers should continue to work with employees by helping them analyze their successes and failures.

Ask students if they think good employees are made or born. In other words, which is more important, recruiting (step 1) or training and acculturate, and motivation (steps 2 & 3)?

Chapter 18 - Customer Service

1. Provide a Structured Program 

A structured training program helps new employees acquire the basic skills and knowledge that they need to be able to do their jobs.



Some retailers find that providing structured training over the Internet offers benefits compared to the on-the-job training, such as greater consistency, lower costs, and the opportunity for employees to undertake the training whenever they want.



Many retailers are now using online training systems. These systems often combine one-way video with twoway audio and data exchange capability, which allows instructors to chat online with students during training programs.



Many retailers also now use training applications that employees can access on their smartphone or mobile device.

2. Offer On-the-Job Training 

Structured training programs need to be combined with on-the-job training in which new employees work in specific jobs under the direct supervision of their managers.



The best way to learn is to practice what is being taught.



New employees learn by engaging in activities, making mistakes, and then learning how not to make those mistakes again.

3. Use a Blended Approach 

Because of the relative advantages of structured and onthe-job training, many firms use a blended approach.

Ask students if they would rather work for a company that emphasizes on-the-job training versus classroom training. Why?

Ask students if a blended approach is best. Why or why not?

4. Analyze Successes and Failures 

Effective managers provide an atmosphere in which sales associates can try out different approaches for providing customer service and selling merchandise.



Managers should not criticize an individual salesperson for mistakes. Instead, they should talk about the situation, analyze why the approach did not work, and discuss how

Ask students if they analyze their successes and failures in classes. Why or why not? Have them describe a success and a failure and give the reasons for both. Use this to illustrate that people tend to blame failures on others

Chapter 18 - Customer Service the sales associate could avoid the problem in the future. 

Managers can help sales associates to constructively analyze their successes and failures by asking “why” questions that force them to analyze the reasons for effective and ineffective performance.

See PPT 16-10

C. Motivate Employees 

Motivating employees to perform up to their potential may be managers’ most important and challenging task.



The implementation of the retailer’s evaluation, rewards, and compensation schemes, together affect the motivation of employees and the effort they expend.

1. Set Goals to Motivate Employees 

To effectively motivate employees, managers need to set goals for their employees and provide feedback on the employees’ performance relative to those goals.



Employee performance improves when employees feel that (1) their efforts will enable them to achieve the goals set for them by their managers and (2) they’ll receive rewards they value if they achieve their goals.



Managers can motivate employees by setting realistic goals and offering rewards that employees want.



Goals are most effective at motivating employees when they’re based on the employee’s experience and confidence.



Young employees have traditionally made up the majority of the retail labor force and different goals and approaches are necessary to manage and motivate younger employees.



Younger employees want more flexibility, meaningful jobs, professional freedom, and a better work–life balance than older employees.

Ask students what motivates them to put forth their best efforts. What rewards would students like in recognition of work preformed?

Ask students what happens to motivation if goals are set too low or if they are set too high. How can managers make sure they are set at the right level? Should newly hired salespeople have the same sales per hour selling goal as more experienced salespeople? What are the advantages and disadvantages of having different goals for each employee? What are the advantages and disadvantages of having employees participate in establishing goals?

See PPT 16-11

D. Evaluate Employees 

and take credit for successes. What impact does this bias have on learning?

The objective of the evaluation process is to identify the employees who are performing well and those who are not meeting expectations. On the basis of the evaluation, high-performing employees should be rewarded and 18-327

Chapter 18 - Customer Service considered for positions with greater responsibility. 1. Who Should Do the Evaluation? 

In large retail firms, the evaluation system is usually designed by the human resource department. But the evaluation itself is done by the employee’s immediate supervisor—the manager who works most closely with the employee.

2. How Often Should Evaluations Be Made? 

Most retailers evaluate employees annually or semiannually. Feedback from evaluations is the most effective method for improving employee skills.



Effective managers supplement formal evaluations with frequent informal ones.

Ask students to discuss the advantages and disadvantages of having the employee's supervisor evaluate them versus a human resource specialist.

What problems arise if evaluations are done too frequently? Not frequently enough? Should newly hired salespeople be evaluated more frequently than experienced salespeople? Why? Should senior executives be evaluated more frequently than management trainees? Why?

3. What Format Should Be Used for Evaluations? 

Evaluations are meaningful only if employees know what they’re required to do, the expected level of performance, and how they’ll be evaluated.

4. How Can Managers Avoid Evaluation Errors?

See PPT 16-14



Managers can make evaluation errors when they first form an overall opinion of the employee’s performance and then allow this opinion to influence their ratings of each performance factor.

Review the evaluation errors. What can managers do to minimize the effects of these errors?



When making evaluations, managers tend to underemphasize effects of external factors on the department, such as merchandise and competitors’ actions.



To avoid bias when making subjective ratings, managers need to observe performance regularly, record their observations, avoid evaluating many salespeople at one time, and remain conscious of the various potential biases.

Chapter 18 - Customer Service 

Three measures that retailers frequently use to assess HRM performance are employee productivity, turnover, and engagement.



Productivity is the sales generated per employee.



Employee turnover is the number of employees voluntarily leaving their job during the year divided by the number of positions.



Engagement is an emotional commitment by an employee to the organization and its goals. Engaged employees are more motivated to support the retailer in its efforts to improve the satisfaction of customers and build customer loyalty. Retailers use employee surveys to measure employee engagement.

Ask students which types of retailers have low and high labor productivity.

See PPT 16-18

C. Reward and Compensate Employees 

Employees receive two types of rewards from their job: extrinsic and intrinsic.



The largest and typically most important form of extrinsic reward from both the retailer’s and employee’s perspective is monetary compensation.

Employees work for different reasons. They seek different rewards. Ask students what rewards they are seeking from their first job after graduation. What rewards might a part-time salesperson be seeking?

1. Extrinsic Rewards: Compensation Programs

See PPT 16-15



Extrinsic rewards are rewards provided by either the employee’s manager or the firm, i.e., external to the employee, such as compensation, promotion, and recognition.



Employees don’t all seek the same rewards. Some employees want more compensation; others strive for a promotion in the company or public recognition of their performance.



A compensation plan is most effective for motivating and retaining employees when the employees feel that the plan is fair and that their compensation is related to their efforts.

To illustrate the differences between intrinsic and extrinsic rewards have students discuss the rewards they get from attending a class. What are their intrinsic rewards? What are the extrinsic rewards? Are the intrinsic rewards affected when the extrinsic rewards (high grades) are reduced (pass-fail versus grades)?



With straight salary compensation, salespeople receive a fixed amount of compensation for each hour or week they

Discuss the advantages and disadvantages of using a straight salary compensation plan. How

Chapter 18 - Customer Service work. This plan is easy for the employee to understand and for the store to administer. 

Incentive compensation plans reward employees based on their productivity. With some incentive plans, a salesperson’s income is based entirely on commission— called a straight commission.



To provide a steadier income for salespeople who are paid by high-incentive plans, some retailers offer a drawing account. With a drawing account, salespeople receive a weekly check based on their estimated annual income, and commissions earned are credited against the weekly payments.



Quotas are often used with compensation plans. A quota is a target level used to motivate and evaluate performance.



A quota bonus plan provides sales associates with a bonus when their performance exceeds their quota; however, quotas should be developed for each salesperson based on their experience and abilities.



To encourage employees in a department or store to work together, some retailers provide additional team incentives. The group incentive encourages salespeople to work together in their nonselling activities and while handling customers so that the department sales target will be achieved.

would this type of plan benefit the retailer? How would this type of plan benefit the employee?

2. Intrinsic Rewards

See PPT 16-17



Intrinsic rewards are rewards that employees get personally from doing their job well. One approach to making work fun is to hold contests with relatively small prizes. Contests are most effective when everyone has a chance to win.



Another approach for motivating more experienced employees is providing intrinsic rewards through job enrichment. Job enrichment is the redesign of a job to include a greater range of tasks and responsibilities, including skill variety, task significance, autonomy, and job feedback. These could include giving employees responsibility for merchandising a particular area, training new salespeople, or planning and managing a special

Ask students why employees are motivated to learn and try new, creative approaches when they have a high level of intrinsic interest in their work. How can managers make work fun— intrinsically rewarding? Ask students to share experience when they have had fun doing a job.

Chapter 18 - Customer Service event. II. Leadership 

Leadership is the process by which a person attempts to influence others to accomplish a common goal or task.



Mangers are leaders of their group of employees.

Ask students: what are the characteristics of a good leader? See PPT 16-18

A. Leader Decision-Making Style 

Autocratic leaders make all decisions on their own and then announce them to employees.



Democratic leaders seek information and opinions from employees and base their decisions on this information.



Effective managers use different leadership styles, selecting the one that is most appropriate for each situation.



Transformational leaders get people to transcend their personal needs for the sake of the group or organization and create enthusiasm in their employees through their personal charisma.

Ask students to describe managers who they have worked for that were very effective and not very effective. When it is good for a leader to be task-oriented? Relations-oriented?

See PPT 16-18

B. Maintaining Morale 

Morale typically goes up when things are going well and employees are highly motivated. But when sales are not going well, morale tends to decrease, and employee motivation declines.



Effective managers build morale by doing small but meaningful things for employees

III. Controlling Costs 

LO 16-2 Illustrate effective leadership strategies of a retail manager.

Labor scheduling, store maintenance, and inventory shrinkage offer three opportunities to reduce store operating expenses.

LO 16-3 Explore the various strategies retail mangers can undertake to control costs.

See PPT 16-20

A. Labor Scheduling 

Labor scheduling determines the employees assigned to each area of the store during each hour.



Labor scheduling is difficult because customer traffic

Chapter 18 - Customer Service varies greatly during the day and the week. 

Complexities such as store hours, time of year, and promotional schedule drive many retailers to utilize computer software to schedule workers.



Retailers can control their costs, as well as improve their service provision, because they can match their staffing to customer demand on an hourly basis.



Although scheduling systems benefit both retailers and customers, they can have an adverse impact on employees, including irregular work hours or “on call” shifts. See PPT 16-21

B. Store Maintenance 

Store maintenance entails the activities involved with managing the exterior and interior physical facilities associated with the store.

C. Inventory Shrinkage 

Shrinkage is the inventory loss due to employee theft, shoplifting, mistakes, inaccurate records, and vendor errors.



Shrinkage is the difference between the recorded value of inventory (at retail prices) based on merchandise bought and received and the value of the actual inventory (at retail prices) in stores and distribution centers, divided by retail sales during the period.



Reducing shrinkage is an important store management issue because retailers’ annual loss from shrinkage averages about 1.4 percent of total sales.



The key to an effective loss prevention program is determining the most effective way to protect merchandise while preserving an open, attractive store atmosphere.



Loss prevention requires coordination among store management, visual merchandising, and store design.



Retailers with a highly committed workforce and low employee turnover typically have low inventory shrinkage.

Security measures reduce shoplifting. What negative consequences do they have?

Chapter 18 - Customer Service

IV. The Organization Structure for a Retail Firm 

The organization structure identifies the activities to be performed by specific employees and determines the lines of authority and responsibility in the firm.



The first step in developing an organization structure is to determine the tasks that must be performed.



These tasks are divided into four major categories: strategic management, administrative management (operations), merchandise management, and store management.

LO 16-4 Summarize how retailers are typically organized. See PPT 16-22 Before you begin this lecture, ask students to diagram how they think a retail organization is structured. Discuss the differences between their diagrams and the way that most retailers are actually structured. See PPT 16-25

B. Organization of a Single-Store Retailer 

Owner-managers of a single store may be the entire organization. Coordinating and controlling employee activities is easier in one store than in a large chain of stores.



Because the number of employees is limited, single-store retailers have little specialization.



When sales increase, specialization in management may occur when the owner-manager hires additional management employees.

Small stores typically violate the principles of organization --unity of command and specialization. Ask students why.

See PPT 16-27

C. Organization of a National Retail Chain 

In contrast to the management of small retailers, retail chain management is complex.



Managers must supervise units that are geographically diverse.



In a typical department store, the chief executive officer (CEO) is responsible for overseeing the entire organization.



Reporting to the CEO are the presidents of global operations, the Internet channels, and private-label management and the senior vice presidents of merchandising, stores, and administration.

The Mazur plan emphasized the separation of buying and store management functions. What are the advantages of different employees doing each of these activities? What are the disadvantages?

1. Merchandising 

The merchandise division is responsible for developing and coordinating the management of the retailer’s merchandise offering and ensuring that it is consistent

In discussing buyers and planners, mention the skills needed to be successful in each type of job. Ask

Chapter 18 - Customer Service with the firm’s strategy.

students in which division they would like to work. Why?



The senior vice president (SVP) of merchandising works with buyers and planners.



The buyers in the merchandise division are responsible for determining the merchandise assortment, pricing, and managing relationships and negotiating with vendors.



Merchandising planners are responsible for allocating merchandise and tailoring the assortment of several categories for specific stores in a geographic area.

2. Stores 

The senior vice president (SVP) of stores supervises all activities related to stores, including working with the regional managers, who supervise district managers, who supervise the individual store managers.



Store managers in large stores may have several assistant store managers who report to them. The assistant managers oversee administration, visual merchandising, human resources, and operations.



Each region often has regional planners who work as liaisons between stores in their region and the corporate planners to ensure that the stores have the right merchandise, at the right time, in the right quantities.

3. Operations 

The executive vice president (EVP) of operations oversees managers in charge of management information systems (MIS), supply chain, human resources, and visual merchandising.



The EVP of operations is also in charge of shrinkage and loss prevention and the operation and maintenance of the physical assets of the firm See PPT 16-29

4. Marketing 

The merchandising division has traditionally been most important. Why are store operations becoming more important?

The chief marketing officer (CMO) works with staff to develop advertising, promotion, and social media programs.

Chapter 18 - Customer Service 

The chief financial officer (CFO) works with the CEO on financial issues such as equity-debt structure and credit card operations. In addition, the real estate division and general counsel (legal) divisions, headed by vice presidents, report to the CFO.

6. Private Label 

The private-label president is responsible for the conceptualization, design, sourcing, quality control, and marketing of private-label and exclusive merchandise.



The managers involved with private-label merchandise work closely with buyers and planners to ensure that the merchandise offered in each category is coherent and meets the needs of the retailer’s target market. See PPT 16-30

7. Direct Channels 

The president of direct channels is responsible for the selection and pricing of the merchandise assortment offered through the Internet, mobile, social, and catalog and other nonstore channels, the maintenance and design of the retailer’s website, customer call centers, and the fulfillment centers that fill orders for individual customers.



However, many multichannel retailers are integrating the operation of the Internet, mobile, social, and catalog and other nonstore channels with their store channel.

8. Global 

The global operations president oversees retailing operations outside the home country.



Many of the functions performed by the home-country operation are duplicated in the global operations.

IV. Human Resource Management Legal Issues 

Managing in today’s complex regulatory environment requires expertise in labor laws, as well as skills in helping other managers comply with those laws.



The major legal and regulatory issues involving the management of retail employees are (1) equal employment opportunity, (2) compensation, (3) labor relations, (4) employee safety and health, (5) sexual

LO 16-5 Identify the legal issues involved with human resource management.

See PPT 16-31

Chapter 18 - Customer Service harassment, and (6) employee privacy. A. Equal Employment Opportunity 

The basic goal of equal employment opportunity regulations is to protect employees from unfair discrimination in the workplace.



Illegal discrimination refers to the actions of a company or its managers that result in members of a protected class being treated unfairly and differently from others.



A protected class is a group of the individuals who share a common characteristic as defined by the law.



Companies cannot treat employees differently simply based on their race, color, religion, sex, national origin, age, or disability status.



Title VII of the Civil Rights Act prohibits discrimination on the basis of race, national origin, gender, or religion in company personnel practices.



The Equal Employment Opportunity Commission (EEOC) allows employees to sue employers that violate the law.

Discuss the impacts of the equal employment opportunity law in changing the retail landscape. Do you think that these laws are effective? What are impacts of these laws on large retail chains versus small independent retailers?

See PPT 16-32

B. Compensation 

The Fair Labor Standards Act of 1938 set minimum wages, maximum hours, child labor standards, and overtime-pay provisions.



The Equal Pay Act, now enforced by the EEOC, prohibits unequal pay for men and women who perform equal work or work of comparable worth.

C. Labor Relations 

Labor relations laws describe the process by which unions can be formed and the ways in which companies must deal with the unions.

D. Employee Safety and Health 

he basic premise of health and safety laws is that the employer is obligated to provide each employee with an environment that is free of hazards that are likely to cause death or serious injury.

Chapter 18 - Customer Service 

Compliance officers from the Occupational Safety and Health Administration (OSHA) conduct inspections to ensure that employers are providing such an environment for their workers.

E. Sexual Harassment

See PPT 16-33



Sexual harassment includes unwelcome sexual advances, requests for sexual favors, and other inappropriate verbal or physical conduct.



Simply creating a hostile work environment can be considered sexual harassment

Should a manager avoid dating an employee? Based on the EEOC guidelines, when would such a behavior be interpreted as sexual harassment?

F. Employee Privacy 

Employees’ privacy protection is very limited.



Employers can monitor e-mail and telephone communications, search an employee’s workspace and handbag, and require drug testing.

Chapter 18 - Customer Service ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS 156. INTERNET EXERCISE Find an article or website that describes how artificial intelligence (AI) is facilitating pre-employment screening. Summarize the pros and cons of using this technology. How can retailers best use this technology, both effectively and ethically? AI For Recruiting: A Definitive Guide For HR Professionals, https://ideal.com/ai-recruiting/, is an example of an article that describes this technology. The article covers the following topics: Section 1: What is AI for recruiting? Section 2: The benefits of using AI for recruiters Section 3: The challenges of applying AI in recruiting Section 4: Innovations in AI for recruiting Section 5: How AI will change the recruiter role Section 6: A summary of using AI in recruiting

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS How do on-the-job, Internet training, and classroom training differ? What are the benefits and limitations of each approach? Classroom training might include lectures, audiovisual presentations, manuals, and correspondence distributed to the new employees. The initial structured program should be relatively short so new employees do not feel they are simply back in school. Effective training programs try to bring new recruits up to speed as quickly as possible and then get them involved in doing the job for which they've been hired. Use of the Internet for training store employees has become increasingly popular. The Internet provides a lower cost alternative, allowing employees a preparation phase before on-the-job training without the costs associated with classroom training. Benefits of training employees online include greater consistency, in that all employees are trained with the same program, as well as lower costs and the ability to launch significant programs over a large geographic area quickly. The next training phase emphasizes on-the-job training. New employees are assigned a job, given responsibilities, and coached by their supervisor. The best way to learn is to practice what has been taught. New employees learn by doing activities, making mistakes, and then learning how not to make those mistakes again. Information learned through classroom lectures tends to be forgotten quickly unless it's used soon after the lecture. The actual hands-on experience and getting feedback provides more complete and lasting knowledge. 157. Give examples of a situation in which a manager of a luxury fashion retailer should utilize different leadership styles. In the text, we discuss leadership styles in terms of type of leader behaviors, task performance and group maintenance, and two types of decision-making approaches, authoritative and participative. Task performance behaviors are the manager's efforts to make sure that the store achieves its goals. Group maintenance behaviors are activities undertaken by the store managers to make sure that employees are satisfied and work well together. Autocratic: When the manager makes all decisions alone and then announces the decision to employees. Democratic: When the manager seeks information and opinions from employees and bases decisions on this information. Effective managers use all styles, selecting the style most appropriate for each situation. For example, the luxury fashion retailer manager might be more autocratic with a new hire and more democratic and task oriented with an effective, experienced employee. The chapter also discusses another style, transformational leadership, which involves getting people to transcend their personal needs for the sake of the group or organization. This style might be very useful when the store manager is new and trying to turn around a poor-performing store—trying to generate excitement and revitalize the store's employees. 18-339 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 158. Using the interview questions in Exhibit 16-3, role-play with another student in the class as both the interviewer and the applicant for an assistant store manager position at a store of your choice. Students should be encouraged to select a variety of questions for their role plays. Additionally, encourage them to remember the following: (1) word questions to require longer responses, (2) avoid leading questions, and (3) be an active listener. Evaluate the information being presented to sort out important and unimportant points. 159. Name some laws and regulations that affect the employee management process. Which do you believe are the easiest for retailers to adhere to? Which are violated the most often? Title VII of the Civil Rights Act prohibits discrimination on the basis of race, national origin, sex, or religion in company personnel practices. Potential violations are investigated by the Equal Employment Opportunity Commission (EEOC). Sexual harassment includes lewd sexual comments and gestures, sexual joking, showing obscene photographs, staring at a co-worker in a sexual manner, alleging that an employee got rewards by engaging in sexual acts, and commenting on an employee's moral reputation. Managers must avoid such behaviors because they are both unethical and illegal. The Equal Pay Act, now enforced by the EEOC, prohibits unequal pay for men and women who perform equal work. Equal work means that the jobs require the same skills, effort, and responsibility and are performed in the same working environment. The Fair Labor Standards Act of 1938 set minimum wages, maximum hours, child labor standards, and overtime pay provisions. Employees’ privacy protection is very limited; theoretically, employers can monitor various activities such as email communications, require drug testing, and search workspaces. However, employers cannot discriminate among employees when undertaking these activities unless they have a strong suspicion that specific employees are acting inappropriately. Retailers may find that acts that are very specific, such as Employment Act and the Equal Pay Act, are more easily adhered to as compared with others that require detailed examination and assessment of each situation. Enforcement of the Fair Labor Standards Act is particularly important to retailers because they hire many low-wage employees and teenagers and have their employees work long hours. Some would argue that this Act may be violated the most. 160. What's the difference between extrinsic and intrinsic rewards? What are the effects of these rewards on the behavior of retail employees? Under what conditions, would you recommend that a retailer emphasize intrinsic rewards over extrinsic rewards? Extrinsic rewards are externally motivated rewards provided by the retailer. These rewards include financial compensation and recognition. Intrinsic rewards are internally motivated rewards (e.g., 18-340 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service positive feelings) that people get from doing their job well. For instance, retailers can help employees identify the intrinsic rewards of their jobs through contests, which emphasize the "fun" aspects of their jobs and through job enrichment programs. Retail employees feel a sense of fulfillment and motivation by these rewards. The employees in turn will work harder because they feel motivated. However, extrinsic rewards often make employees feel the only purpose of their job is to make money, and they lose sight of all intrinsic rewards. Intrinsic rewards should be emphasized over extrinsic rewards to avoid making the employees feel they only come to work to get a paycheck. Intrinsic rewards should be used when an employee feels his or her job is mundane and boring. These rewards can make the jobs feel rewarding and motivate employees to learn how to do their jobs better. For example, experienced employees often lose interest in their jobs. They no longer find them exciting and challenging. Extrinsic rewards, such as pay or promotion, might not be so attractive to them. They might be satisfied with their present income and job responsibilities. Intrinsic rewards should be emphasized in this case to motivate and inspire the employees 161. What are the advantages and disadvantages of the different forms of compensation programs described in this chapter? Considering the disadvantages only, how can department managers ameliorate lessen the effects of the disadvantages? A straight salary compensation plan is easy for the employee to understand and for the store to administer. Under a straight salary plan, the retailer has flexibility in assigning salespeople to different activities and sales areas. The major disadvantage of the straight salary plan is employees’ lack of immediate incentives to improve their productivity. They know their compensation will not change in the short run, regardless of whether they work hard or slack off. Another disadvantage is that a straight salary becomes a fixed cost that the firm incurs even if sales decline, which means a greater loss of profits during hard economic times. Incentive compensation is most effective when a salesperson’s performance can be measured easily and precisely. Salespeople who are compensated totally by commission generally are less willing to perform nonselling activities, such as stocking shelves, and they tend to concentrate on only the most expensive, fast-moving merchandise. For the retailer, another issue is that salespeople compensated primarily by incentives don’t develop loyalty to their employer. Incentives are less effective with inexperienced salespeople, who are less confident in their skills, because they inhibit learning and also can cause excessive stress. Because compensation plans based (almost) exclusively on sales incentives generally fail to promote good customer service, some plans include a fixed salary plus a commission on total sales or a commission on sales over quota. To encourage employees in a department or store to work together, some retailers provide additional team incentives. For example, salespeople might be paid a commission based on their individual sales and then receive additional compensation according to the amount of sales generated by all salespeople in the department. The group incentive encourages salespeople to work together in their nonselling activities and while handling customers so that the department sales target will be achieved. 162. When evaluating retail employees, some stores use a quantitative approach that relies on checklists and numerical scores similar to the form in Exhibit 165. Other stores use a more qualitative approach similar to the form in Exhibit 16-4, whereby less time is spent checking and 18-341 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service adding and more time is devoted to discussing strengths and weaknesses in written form. What are the advantages and disadvantages of quantitative versus qualitative evaluation systems? Each evaluation approach has its strengths. Quantitative methods are useful in that they provide a scale that can be utilized uniformly across departments and stores. This enables evaluators to get a more balanced appraisal of performance from a broad perspective. In addition, quantitative methods leave little question as to the relevant evaluative criteria, such as whether the salesperson made a set quota, or what the total sales for the individual were in a specific period. Qualitative methods allow the manager to give individual insight into strengths and weaknesses, along with suggestions to correct the weaknesses. The evaluator focuses on the salesperson as an individual and therefore provides a specific evaluation pertinent to each person. An effective evaluation system should probably use a combination of both. 163. Top retailers, including Walmart and Target, increasingly rely on self-checkout and other robotic technologies in stores. What are the benefits to the retailer of integrating these technologies instead of human employees? What are potential drawbacks linked to having fewer employees in the store? An online article, Self Checkout: Should You Implement It?, https://www.cardfellow.com/blog/selfcheckout-should-you-implement-it/, includes the following pros and cons. These responses can be compared to what students found in other sources. Self-Service Checkout Pros

Self-Service Checkout Cons

Quicker checkout

Increased risk of theft

Reduced labor costs

High upfront costs

Appeal to some customers

Less human contact Customer confusion Equipment issues

164.

Discuss how retailers can reduce shrinkage from shoplifting and employee theft.

An online article, 5 Efficient Ways to Reduce Shrinkage in Retail, https://www.cashtechcurrency.com/blog/5-efficient-ways-to-reduce-shrinkage-in-retail, lists the following strategies to address this issue. 1. Increase employee accountability. 2. Train staff to follow security policies and procedures. 3. Consider the store layout. 4. Develop a culture of loss prevention. 18-342 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service 5. Invest in automated cash management technology. 165. What are some similarities and differences with regard to how small retailers and large department stores are organized? The article, Organizational and Structural Differences Between Small and Large Businesses, https://smallbusiness.chron.com/organizational-structural-differences-between-small-large-businesses10678.html, points out several differences between large and small business organizational structures, as quoted here: “There are several different organizational structures big businesses use often, among them a hierarchical model with a board of directors at the top and technicians or line workers at the bottom. This hierarchical structure ensures that a dominant participant, the CEO, directs other C-suite executives, such as the chief operations officer, who, in turn, direct division heads. Instructions and commands pass quickly from top to bottom. In this way, the hierarchical organizational structure repurposes the structure of an entrepreneurial small business – one individual who makes the major decisions – but with the advantages of a large corporation: a clear chain of command with abundant expertise at every level. “There are many other organizational structures employed by big businesses, such as functional organization (divisions with different functions, each with their own executive who also reports to a CEO) or the "flatter" more loosely organized organizations that incorporate the capacity to change its structure in response to changing external conditions.”

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Jeremy's Jewelry

Case Analysis

Controlling Costs; Motivating, Evaluating, Rewarding, and Compensating Store Employees

16-1 Describe how to acquire and retain employees.

Controlling Costs,

16-1 Describe how to acquire and retain employees.

Store Management Responsibilities

Drag and Drop; Matching (accessible version)

Motivating, Evaluating, Rewarding, and Compensating Store Employees, Recruiting, Socialization, and Training of Store Employees

16-2 Illustrate effective leadership strategies of a retail manager.

16-3 Explore the various strategies retail managers can undertake to control costs.

The Container Store: Putting Employees First

Case Analysis

Motivating, Evaluating, Rewarding, and Compensating Store Employees

16-1 Describe how to acquire and retain employees.

Human Resources Management Legal Issues

Click and Drag; Matching (accessible version)

Objectives, Principles, and Practices of Human Resource Management for the Retail Environment

16-5 Identify the legal issues involved with human resource management.

Leadership Styles

Click and Drag; Matching (accessible version)

Leadership

16-2 Illustrate effective leadership strategies of a retail manager.

Hiring and Developing Employees at Hilton

Video Case

Recruiting, Socialization, and Training of Store Employees

16-1 Describe how to acquire and retain employees.

Chapter 18 - Customer Service

STORE LAYOUT, DESIGN, AND VISUAL MERCHANDISING



ANNOTATED OUTLINE Recognizing the significant impact of store environment on shopping behavior, retailers have devoted considerable resources to their store design and merchandise presentation.

I. Store Design Objectives 

Some store design objectives are to (1) implement the retailer's strategy, (2) build loyalty by providing a rewarding shopping experience, (3) increase sales on a visit, (4) control costs, and (5) meet legal requirements.

INSTRUCTOR NOTES

LO 17-1 Identify the critical issues retailers need to consider when designing a store.

See PPT 17-3 Pick a store the students know and have them evaluate the store based on these objectives.

A. Implement the Retail Strategy 

The primary objective for store design is to implement the retailer's strategy.



The design must be consistent with and reinforce the retailer's strategy by meeting the needs of the target market and building a sustainable competitive advantage.

For examples of retail store design strategies used abroad, see PPT 17-5 and 17-6

B. Build Loyalty 

When customers consistently have rewarding experiences when patronizing a retailer's store or website, they are motivated to visit repeatedly and develop loyalty toward the retailer.



Store design provides utilitarian benefits when it enables customers to locate and purchase products in an efficient and timely manner with minimum hassle.



Store design provides hedonic benefits by offering customers an entertaining and enjoyable shopping experience. 18-345

Chapter 18 - Customer Service See PPT 17-6

C. Increase Sales on Visits 

A third design objective is to increase the sales made to customers on any particular visit. Store design has a substantial effect on which products customers buy, how long they stay in the store, and how much they spend during a visit.



Retailers attempt to design their stores in a manner that motivates unplanned purchases..

D. Control Costs to Increase Profits 

The fourth design objective is to control the cost of implementing the store design and maintaining the store's appearance.



Store designs can also affect labor costs and inventory shrinkage.



Store designers attempt to design stores with maximum flexibility. As the merchandise mix changes, so must the space allocated to merchandise categories and the layout of the store.

E. Meet Legal Considerations—Americans with Disabilities Act 

A critical objective in any store design or redesign decision is to be in compliance with the 1990 Americans with Disabilities Act (ADA).



Besides providing for a nondiscriminatory work environment for the disabled, the ADA, calls for "reasonable access" to merchandise and services in a retail store that was build before 1993. Stores built after 1993 must be fully accessible.



Accessibility answers are not clear or easy; they are being considered on a case-bycase basis in federal courts around the

Discuss with students design elements of a luxury store as compared to a discount store and how the elements impact costs.

Ask students to identify a store that would be inaccessible to a disabled person.

Chapter 18 - Customer Service United States. F. Design Trade-Offs 

A store design rarely achieves all of the design objectives described above. Managers need to make trade-offs among them.



One common trade-off is between stimulating impulse purchases and making it easy to buy products.



Another trade-off occurs between making the shopping environment interesting and entertaining and making merchandise easy for customers to find.



One more trade-off is the balance between giving customers adequate space in which to shop and productively using the space for merchandise.

II. Store Design Elements 

Four elements in the design of stores are the (1) layout, (2) signage and graphics, (3) feature areas, and (4) store exteriors. Each of these elements is discussed in this section.

Ask students how often the design of a store influences their decision to shop there.

LO 17-2 List the advantages and disadvantages of alternative store layouts. See PPT 17-8 Ask students what stores seem to draw them around to view more merchandise than they expected to. Ask them if a store layout ever makes them feel too crowded.

A. Layouts 

Today's modern retailers use three general types of store layout design: grid, racetrack, and free-form. Each of these layouts has advantages and disadvantages. See PPT 17-9 for an illustration of the grid layout

1. Grid Layout 

The grid layout is best illustrated by most grocery and drug store operations. It contains parallel aisles with merchandise on shelves on both sides of the aisles. Cash registers are located at the

Ask students what is the best type of store for a grid design and why.

Chapter 18 - Customer Service entrances/exits of the stores. 

The grid layout is well suited for customers who are primarily interested in the utilitarian benefits offered by the store.



The grid is not the most aesthetically pleasing arrangement, but it is very good for shopping trips in which customers need to move throughout the entire store and easily locate products they want to buy.



The grid layout is also cost-efficient because space productivity is enhanced and fixtures are standardized.



One problem with the grid layout is that customers typically aren't exposed to a lot of the merchandise in the center store, which limits unplanned purchases. The center store refers to the middle of each aisle, where most grocers and other retailers using a grid layout stock seemingly less compelling or exciting products, though ones that consumers still require.

2. Racetrack Layout 



The racetrack layout (also known as a loop layout) is a type of store design that provides a major aisle to facilitate customer traffic, with access to the store's multiple entrances. This aisle loops through the store, providing access to all the departments.

See PPT 17-11 See PPT 17-12 for an illustration of the racetrack layout Ask students to give examples of different stores that have a "racetrack" design. What are the advantages and disadvantages?

The racetrack design encourages impulse purchasing.

3. Free-Form Layout 

A free-form layout (also known as boutique layout) arranges fixtures and aisles asymmetrically. It is successfully used primarily in specialty stores or within

See PPT 17-14 for an illustration of the free-form layout

Chapter 18 - Customer Service the departments of larger stores. 

In this relaxed environment, customers feel like they are in someone's home, which facilitates shopping and browsing.



Because there is no well-defined traffic pattern, as there is in the racetrack and grid layouts, customers aren't naturally drawn around the store or department, and personal selling becomes more important to encourage customers to explore merchandise offered in the store. In addition, the layout reduces the amount of merchandise that can be displayed.

Ask students why upscale specialty stores often use a free-form design.

B. Signage and Graphics 

Signage and graphics inside the store help customers locate specific products and departments, provide product information, and suggest items or special purchases.



Additionally, graphics, such as photo panels, can reinforce a store's image.



Some different types of signs are call-toaction, category. promotional and pointof-sale (POS).

Ask students to discuss ways to enhance the effectiveness of a retailer's signage. Can a retailer have too many signs?

See PPT 17-15

1. Digital Signage 

Many retailers are beginning to replace traditional signage with digital signage systems.



Digital signage includes signs whose visual content is delivered electronically through a centrally managed and controlled network, distributed to servers in stores, and displayed on flat-panel screens. The content delivered can range from entertaining video clips to simple price displays.



Digital signage provides a number of

Ask students to develop a list of the benefits of digital signage. Do students even pay attention to digital signs?

Chapter 18 - Customer Service benefits over traditional signage for the retailer. Digital signs are dynamic, can provide an appeling atmosphere, can be tailored to a store's market, and overcomes the time-to-message hurdle associated with traditional print signage. See PPT 17-16

C. Feature Areas 

Feature areas are the areas within a store designed to get the customer's attention. They include free-standing displays, mannequins, end caps, promotional aisles or areas, walls, dressing rooms, and cash wraps.

Ask students how often feature areas draw them into a retailer.

1. Free-standing Displays 

Free-standing displays are fixtures that are located on aisles and designed primarily to attract customers' attention and bring them into a department.



These fixtures often display and store the newest, most exiting merchandise in the particular department.

2. Mannequins 

A mannequin is a life-sized representation of the human body, used for displaying apparel.

3. End Caps 

End caps are displays located at the end of an aisle in stores using a grid layout



Due to their high visibility, end caps can also be used to feature special promotional items, like beer and potato chips before the Fourth of July.

See PPT 17-18 for an illustration of end caps.

4. Promotional Aisle or Area 

A promotional aisle or promotional area is a space used to display merchandise that is being promoted.

Chapter 18 - Customer Service

5. Walls 

Because retail space is often limited, many retailers increase their ability to store extra stock, display merchandise, and creatively present a message by utilizing wall space.

6. Dressing Rooms 

Today, retailers are recognizing the importance of dressing rooms as the critical space in which customers decide whether to make a purchase.

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Dressing rooms must be large, clean and comfortable. A dressing room that makes a person feel good also makes that shopper more likely to get in the mood to buy something.

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Many dressing rooms today are equipped with technology that enhances the buying experience. Shoppers can check in-stock items and view accessory options.

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Virtual dressing rooms are becoming more important and interesting to online shoppers. People cannot try on clothes displayed on a website, but the spread of webcams embedded in laptops, tablets, and desktop computers is making it possible for programmers to create "virtual dressing rooms" that could permit Internet customers to "try on" clothing and accessories, simply by standing in front of their webcams

7. Cash Wraps 

Cash wraps, also known as point-ofpurchase (POP) counters or checkout areas, are places in the store where customers can purchase merchandise.



These areas can be the most valuable piece of real estate in the store, because the customers often wait there for the 18-351

Chapter 18 - Customer Service transactions to be completed. D. Store Exteriors 

The exterior includes not just the physical store (e.g., windows, entrances) but also signage, parking, and landscaping.



Stores with varying types of locations face different opportunities and limitations on how they can use their exteriors.

See PPT 17-19

1. Windows 

Window displays draw customers into the store and provide a visual message about the type of merchandise offered in the store and the type of image the store wants to portray.



Effective window displays are not easy to achieve, however. They take time, creativity, and thought to be effective and coordinate with stores' current assortments.

2. Entrances 

The entryway also is critical because it determines whether consumers believe they can and should enter and affects the customer's image of the store.



Often referred to as the "decompression zone," the first 10 feet or so within the store allows customers to adjust to the new environment: escaping from the noisy street or mall, taking off their sunglasses, closing their umbrellas, and developing a visual impression of the entire store.

3. Exterior Singage and Store Design 

The signs that appear on the exterior are the primary means for shoppers to find the retail location

Chapter 18 - Customer Service

4. Parking 

Regardless of the design and image they choose, most stores must address the practical question of parking.



There must also be easy access from parking locations, and sufficient parking spaces to accommodate customers.

5. Landscaping 

Like so many retail decisions, whether, how much, and what kind of landscaping a retailer should seek depends on the type of store, its image, and in what type of location it has.



Stores located within regional malls, power centers, or strip centers have little control over external landscaping,

III. Space Management 

The space within stores and on the stores' shelves and fixtures is a scarce resource. Space management involves key resource decisions: (1) the allocation of store space to merchandise categories and brands, (2) the location of departments or merchandise categories in the store, and (3) the size of the store.

LO 17-3 Describe how to assign store floor space to merchandise departments and categories.

See PPT 17-21

A. Space Allocated to Merchandise Categories 

Retailers consider three factors when deciding how much floor or shelf space to allocate to merchandise categories and brands; (1) the productivity of the allocated space, (2) the merchandise's inventory turnover, and (3) the display needs for the merchandise.

1. Space Productivity 

A simple rule of thumb for allocating space is to allocate on the basis of merchandise sales. 18-353

Chapter 18 - Customer Service 

In practice, retailers should allocate space to a merchandise category based on its effect on the profitability of the entire store.



Two commonly used measures of space productivity are: sales per square foot (for retailers that display most of their merchandise on free-standing fixtures) and sales per linear foot (for retailers displaying most merchandise on shelves).



A more appropriate productivity measure, such as gross margin per square foot, would consider the contribution generated by the merchandise, not just the sales.

2. Inventory Turnover 

Inventory turnover affects space allocation in two ways.



First, both inventory turnover and gross margin contribute to GMROI. Merchandise categories with higher inventory turnover merit more space than merchandise categories with lower inventory turnover.



Second, the merchandise displayed on the shelf is depleted quicker for items with high inventory turnover so more space needs to be allocated to this fast-selling merchandise.

3. Display Considerations 

The physical limitations of the store and its fixtures affect space allocation.

B. Location of Merchandise Categories 

The location of merchandise categories also plays a role in how customers navigate the store.



By strategically placing impulse and demand/destination merchandise

Ask students to consider situations in which the retailer might strategically want to "over-allocate" space to certain merchandise categories. See PPT 17-22

Chapter 18 - Customer Service (products that customers have decided to buy before entering the store) throughout the store, retailers increase the chances that customers will shop the entire store and that their attention will be focused on the merchandise that the retailer is most interested in selling. 

The retailer's entry area is often referred to as the decompression zone because customers are making an adjustment to the new environment.



Next, customers often turn right into the area referred to as the strike zone, a critical area because it creates the customers' first impressions of the retailer.

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From here, the most heavily trafficked and viewed area is the right-hand side of the store.

1. Impulse Merchandise 

Impulse merchandise includes products that customers purchase without prior plans, like fragrances, cosmetics, and magazines.

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They are almost always located near the front of the store where they are seen by everyone and may actually draw people into the store.

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The prime store locations for selling merchandise are heavily trafficked areas such as 10 feet beyond the entrance on the right side of the store and areas near escalators and cash wraps.

2. Demand and Promotional Merchandise 

Demand merchandise and promotional merchandise are often placed in the back left-hand corner of the store. Placing highdemand merchandise in this location pulls customers through the store, increasing

Ask students where they would expect to find the travel and/or beauty salon (in an out-of-the-way

Chapter 18 - Customer Service the visibility of other products along the way.

location).

3. Special Merchandise 

Some merchandise categories, for instance expensive, fragile items or highly personal items like lingerie, involve a buying process that is best accomplished in a lightly trafficked area.



Categories like furniture and appliances that require large portions of floor space are often located in less desirable areas.

4. Category Adjacencies

See PPT 17-24



Retailers often put complementary categories next to each other to encourage unplanned purchases.



Another option is to contradict traditional placement schemes to surprise and excite shoppers.

Ask a student what he/she purchased on their last trip to a drug store. Assuming other customers purchase a similar market basket, the store could group these categories together.

5. Location of Merchandise within a Category 

Most purchases in food, discount, drug, and many category specialists are either based on limited problem solving or habitual decision making.



Retailers use a variety of rules to locate specific SKUs within a category.

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Some tools that retailers use to make decisions on the positioning of items in a category are planograms, virtual-store software, videotapes of consumers, and spatial recognition systems as they move through the store.

6. Planograms 

A planogram is a diagram that shows how and where where specific SKUs should be 18-356

Chapter 18 - Customer Service placed on retail shelves or displays to increase customer purchases. 

The locations can be illustrated using photographs, computer output, or artists' renderings.

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Planograms are also useful for merchandise that doesn't fit nicely on shelves in supermarkets or discount stores.

7. Virtual-Store Simulation 

Virtual-store simulations are another tool used to determine the effects of placing merchandise in different areas of a store and evaluating the profit potential for new items.



These virtual shopping trips allow retailers and their suppliers to develop a better understanding of how customers will respond to different planograms.

8. Videotapes of Consumers and Spatial Recognition Systems 

Retailers are utilizing consulting firms to videotape consumers as they move through the store. These videos can be used to improve layouts and planograms by identifying the causes of slow-selling merchandise, such as poor shelf placement.

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The videos allow retailers to learn where customers pause or move quickly. This information can help retailers decide whether the current layout is working or needing revision.

Chapter 18 - Customer Service C. Determining Store Size

See PPT 17-28



A key space management decision is deciding how big the store should be.

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With the rise of online shopping, the scarcity of prime retail real estate in some markets, especially urban locations, and the associated high rental costs, retailers are coming to find that bigger is not always better.

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There are also negative effects of smaller stores, and most of those focus on the customer. Customers face reduced selection, decreased comfort, and little entertainment.

IV. Visual Merchandising 

Visual merchandising is the presentation of a store and its merchandise in ways that will attract the attention of potential customers.

LO 17-4 Illustrate the best techniques for merchandise presentation.

See PPT 17-29

A. Fixtures 

The primary purposes of fixtures are to efficiently and attractively hold and display merchandise. At the same time, they must help define areas of a store and encourage traffic flow.

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Fixtures come in an infinite variety of styles, colors, sizes, and textures, but only a few basic types are commonly used.

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For apparel, retailers utilize the straight rack, rounder, and four-way. The principal fixture for most other merchandise is the gondola.

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The straight rack consists of a long pipe balanced between supports in the floor or attached to a wall. Often found in discount and off-price apparel stores. 18-358

Chapter 18 - Customer Service 

A rounder (also known as a bulk fixture or capacity fixture) is a round fixture that sits on a pedestal . Although smaller than the straight rack, it's designed to hold a maximum amount of merchandise. Rounders are found in most types of apparel stores.

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A four-way fixture (also known as a feature fixture) has two crossbars that sit perpendicularly on a pedestal. This fixture holds a large amount of merchandise and allows the customer to view the entire garment. Commonly used by fashionoriented apparel retailers.

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A gondola is an island type of self-service counter with tiers of shelves, bins, or pegs. Gondolas are extremely versatile and used extensively in grocery and discount stores to display everything from canned foods to baseball gloves. See PPT 17-31

B. Presentation Techniques 

Some presentation techniques are ideaoriented, item and size, color, price lining, vertical merchandising, and tonnage merchandising

1. Idea-Oriented Presentation 

Some retailers use an idea-oriented presentation - a method of presenting merchandise based on a specific idea or the image of the store.

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Individual items are grouped to show customers how the items could be used and combined.

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This approach encourages the customer to make multiple complementary purchases.

2. Item and Size Presentation 

Organizing stock by style or item is probably the most common presentation 18-359

Chapter 18 - Customer Service technique. 

Arranging items by size is a common method of organizing many types of merchandise, from nuts and bolts to apparel.

3. Color Presentation 

This is a bold merchandising technique where products in one color hue, especially seasonal fashion goods, are merchandised together.

4. Price Lining 

Price lining occurs when retailers offer a limited number of predetermined price points and/or price cateogories within another classification that are merchandised together.



Organizing merchandise in price categories is a strategy that helps customers easily find merchandise at the price they wish to pay.

5. Vertical Merchandising 

Another common way of organizing merchandise is vertical merchandising. Merchandise is presented vertically using walls and high gondolas.

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Customers shop much as they read a newspaper--from left to right, going down each column, top to bottom.

6. Tonnage Merchandising 

As the name implies, tonnage merchandising is a display technique in which large quantities of merchandise are displayed together to enhance and reinforce a store's price image.

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Using this display concept, the merchandise itself is the display. 18-360

Chapter 18 - Customer Service LO 17-5 Understand how retailers can create a more appealing shopping experience.

V. Creating an Appealing Store Atmosphere 



Atmospherics refers to the design of an environment by stimulation of the five senses.

See PPT 17-34

Retailers use lighting, colors, music, scent, and even flavors to stimulate customers' perceptual and emotional responses and ultimately affect their purchase behavior.

A. Lighting 

Lighting in a store is used to highlight merchandise, sculpt space, and capture a mood or feeling that enhances the store's image.



Lighting can also be used to downplay less attractive features that cannot be changed.

1. Highlighting Merchandise 

A good lighting system helps create a sense of excitement in the store. At the same time, lighting must provide an accurate color rendition of the merchandise.

2. Mood Creation 

Retailers use lighting to set the mood for their customers.

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Traditionally, U.S. specialty and department stores have employed incandescent lighting sources to promote a warm and cozy ambience

B. Color 

The creative use of color can enhance a retailer's image and help create a mood.

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Warm colors (red, gold, and yellow) are thought to attract customers and gain

Ask students if they have ever noticed dramatic mood changes in the ambiance of various departments in a department store, or going from one store to another in a mall.

See PPT 17-35

Have students choose two very different stores, like a men's and a women's clothing store, and

Chapter 18 - Customer Service attention, yet they can be distracting and even unpleasant. 

In contrast, research has shown that cool colors, like white, blue and green, are relaxing, peaceful, calm, and pleasant.

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Thus, cool colors may be most effective for retailers selling anxiety-causing products, such as expensive shopping goods.

compare the color schemes.

C. Music 

Music can either add to or detract from a retailer's total atmospheric package.

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Unlike other atmospheric elements, however, music can be easily changed.

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Research has shown that the presence of music positively affects customers' attitudes toward the store.

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Retailers can also use music to impact customers' behavior. Music can control the pace of store traffic, create an image, and attract or direct consumers' attention.

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Changing music in different parts of a store can help alter a mood or appeal to different markets.

Ask students if they are aware of stores that use music to their advantage/disadvantage.

D. Scent 

Many buying decisions are based on emotions, and smell has a large impact on our emotions.

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Research has shown that scent, in conjunction with music, has a positive impact on impulse buying behavior and customer satisfaction.

Ask students if they notice a scent in a store. Would they notice a pleasant scent or a foul scent more?

E. Taste 

It is a little more difficult to appeal subtly 18-362

Chapter 18 - Customer Service to consumers' taste buds. 

The option to grab a bite without leaving the store encourages customers to linger longer and enjoy their shopping experience more. See PPT 17-37

F. Just How Exciting Should a Store Be? 

The impact of the store's environment depends on the customer's shopping goals.

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The two basic shopping goals are task completion (utilitarian), such as buying a new suit for a job interview, and recreation (hedonic), such as spending a Saturday afternoon with a friend wandering through a mall..

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When customers are shopping to complete a task that they view as inherently unrewarding, they want to be in a soothing and calming environment.

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When customers are shopping for fun, they want to be in an exciting and engaging atmosphere.

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This means retailers must consider the typical shopping goals for their customers when designing their store environments.

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Retailers might vary the nature of their websites for customers depending on their shopping goals.

VI. Summary 

Some objectives for a store design are to: (1) implement the retailer's strategy, (2) influence customer buying behavior, (3) provide flexibility, (4) control design and maintenance costs, and (5) meet legal requirements. Typically a store cannot achieve all of these objectives, so managers make trade-offs among objectives such as providing convenience 18-363

Chapter 18 - Customer Service versus encouraging exploration. 

Regardless of the type used, a good store layout helps customers find and purchase merchandise.



Space management involves three decisions: (1) allocating store space to merchandise categories and brands, (2) locating departments or merchandise categories in the store, and (3) determining the appropriate store size.

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Signage and graphics help customers locate specific products and departments, provide product information, and suggest items or special purchases. Digital signage has several advantages over traditional printed signage, but the initial fixed costs have made its adoption slow.



Retailers employ various forms of atmospherics—lighting, colors, music, scent, and even taste—to influence shopping behaviors.

Chapter 18 - Customer Service ANSWERS TO SELECT "GET OUT AND DO IT!" QUESTIONS 166. INTERNET EXERCISE Go to the home page of CoolHunters (www.thecoolhunter.net). Look at examples posted in the store subpage (under the design tab). How can information about the latest trends assist with store layout, design, and visual merchandising? Depending on the date the student accesses the page, it will lead to different answers. The following are some examples of different article excerpts. Store Layout "The strong Japanese tea culture of the area, the minimalist, blue-glass-bottle dominated graphic language of the brand, and the desire to separate the two levels of the café, each with its own vibe – all of this influenced the clean, almost sterile feel of the café where the main materials are glass, stainless steel and concrete." "... the guests are inhaling the scents, admiring the displays, watching the demonstrations, tasting the samples, chatting with each other and with the team members." "The café was designed by Tokyo-based Studio I IN www.i-in.jp, who founded the studio in 2018, has created a minimalist fusion of many influences in the 345-square-metre (3,713 sq.ft) Osaka café." Design "Every detail in the Sydney boutique was thought through from the tiniest aspect of the interior to the super-exclusive selection of products, and to the elegant, attentive service." "This was sheer retail theatre but without the fake over-reaching theatrics so prevalent in retail then and even more so today." "Dramatic lighting, dark hues, and curving forms are also present in both stores." Visual Merchandising "Every detail in the Sydney boutique was thought through from the tiniest aspect of the interior to the super-exclusive selection of products, and to the elegant, attentive service." "The first level is open and spacious with wood and stainless steel dominating the otherwise sparse space that also has the obvious Blue Bottle brand accents of blue glass." "According to the designers, customers sitting in this upper-level area will encounter a "sensory experience where music and images' fall' from the ceiling." 167. INTERNET EXERCISE VMSD is the leading resource for retail designers and store display professionals, serving the retail industry since 1869 (then called Display World). Go to its web page at http://vmsd.com and develop a list of three or four items that describe the latest trends in visual merchandising.

Chapter 18 - Customer Service Depending on the date the student accesses the page it will lead to different answers. The following are some examples of latest trends (https://www.retaildoc.com/blog/9-new-visual-merchandising-trendsfor-your-store). 

Smart retail stores now design social media opportunities into their stores.

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Retailers are displaying small groups of shoes on a well-lit wall where customers can easily see and touch them draws shoppers to the shoes, more than any tabletop.

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New retailing means everything is on wheels, and no walls.

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Perfect sightlines are being implemented across apparel and other departments to make each different item stand out.

168. INTERNET EXERCISE Go to the home page of Enviro-sell (www.envirosell.com). How does this marketing research consulting firm support retailers by collecting consumer information to assist with store layout, design, and visual merchandising? Enviro-sell uses a holistic approach with both quantitative and qualitative tools, conducted in-person, online, or with mobile devices. The following is taken from https://envirosell.com/services/. STORE PERFORMANCE We combine comprehensive data about the customer journey with best practices and our industry benchmarks to provide actionable guidance. CATEGORY CONVERSION Our approach helps retailers and manufacturers optimize planograms, merchandising, and package design. SIGNAGE EFFECTIVENESS We understand how signage works in the real world and will improve your messaging strategy to maximize ROI. CUSTOMER EXPERIENCE Amenability equals profitability. We analyze all customer touchpoints to gauge and improve perceptions of the space and the brand.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS One of the fastest-growing sectors of the population is the over-60 age group. Customers in this group may have limitations in their vision, hearing, and movement. How can retailers develop store designs with this population's needs in mind? Four elements in the design of stores are the (1) layout, (2) signage and graphics, (3) feature areas, and (4) store exteriors. The grid layout with wide aisles is well suited for customers who are primarily interested in the utilitarian benefits offered by the store. They are not interested in the hedonic benefits provided by a visually exciting design. They want to easily locate products they want to buy, and they make their purchases as quickly as possible. The signage and graphics should consist of large letters with high contrast for easier recognition. The signs should be hung at lower levels to enhance their visibility. There should be minimal usage of graphics and icons to lessen misinterpretation. Feature areas should include free-standing displays, end caps, promotional aisles, and cash wraps. The free-standing displays, end caps, and promotional aisles should attract the customers' attention to important products. The cash wraps should include multiple locations that provide more purchasing options than on average. The store exteriors need to attract their attention with an appealing exterior that invites them in and leads them to access that particular retail location. The exterior includes the physical store (e.g., windows, entrances) and signage, parking, and landscaping. These elements need to be designed to accommodate customers with vision, hearing, and movement challenges. 169. Assume you have been hired as a consultant to assess a local discount store's floor plan and space productivity. Look back at Chapter 7 and decide which analytical tools and ratios you would use to assess the situation. Some factors that retailers consider when deciding how much floor or shelf space to allocate to merchandise categories and brands are (1) the productivity of the allocated space, (2) the merchandise's inventory turnover, and (3) the display needs for the merchandise. Two commonly used measures of space productivity are sales per square foot and sales per linear foot. From chapter 7, there are multiple measures for assessing the performance of retailers, including output measures, input measures, and productivity measures.

Chapter 18 - Customer Service

170. What are the different types of design that can be used in a store layout? How does the layout impact the types of fixtures used to display merchandise? Describe why some stores are more suited for a particular type of layout than others. Retailers use three general types of store layout design: grid, racetrack, and free form. Each of these layouts has advantages and disadvantages. Fixtures work in concert with other design elements, such as floor coverings and lighting and the overall image of the store. Apparel retailers utilize straight-rack, rounder, and four-way fixtures, whereas the key fixture for most other retailers is the gondola. The grid layout has parallel aisles with merchandise on shelves on both sides of the aisles. Cash registers are located at the entrances/exits of the stores. Customers can easily locate products they want to buy, and they make their purchases as quickly as possible. Most supermarkets and full-line discount stores use the grid layout because this design enables their customers to easily find the product they are looking for and minimizes the time spent on a shopping task that most don't enjoy. The racetrack layout, also known as a loop layout, is a store layout that provides a major aisle that loops around the store to guide customer traffic around different departments within the store. Point-of-sale terminals are typically located in each department bordering the racetrack. The racetrack layout facilitates the goal of getting customers to see the merchandise available in multiple departments and thus encourages unplanned purchasing. Low fixtures are used so that customers can see merchandise beyond the products displayed on the racetrack. A free-form layout, also known as boutique layout, arranges fixtures and aisles in an asymmetric pattern. It provides an intimate, relax-ing environment that facilitates shopping and browsing. It appears most commonly in specialty stores or as departments within department stores. Because there is no well-defined traffic pattern, as there is in the racetrack and grid layouts, customers aren't naturally drawn around the store or department, and personal selling becomes more important to encourage customers to explore merchandise offered in the store. In addition, the layout reduces the amount of merchandise that can be displayed. 171. A department store is building an addition. The merchandise manager for furniture is trying to convince the vice president to allot this new space to the furniture department. The merchandise manager for men's clothing is also trying to gain the space. What points should each manager use when presenting his or her rationale?

Chapter 18 - Customer Service Some factors that retailers consider when deciding how much floor or shelf space to allocate to merchandise categories and brands are (1) the productivity of the allocated space, (2) the merchandise's inventory turnover, and (3) the display needs for the merchandise. A simple rule of thumb is to allocate on the basis of the merchandise's sales. Two commonly used measures of space productivity are sales per square foot and sales per linear foot. But as the discussion of marginal analysis for advertising allocations in Chapter 15 indicated, retailers should allocate space to a merchandise category on the basis of its effect on the profitability of the entire store. Inventory turnover affects space allocations in two ways. First, inventory turnover contributes to GMROI —a measure of the retailer's return on its merchandise inventory investment. Thus, merchandise categories with higher inventory turnover merit more space than merchandise categories with lower inventory turnover. Second, merchandise displayed on the shelf is depleted more quickly for items with high inventory turnover. Thus, more space needs to be allocated to this fast-selling merchandise to minimize the need to re-stock the shelf frequently and reduce stockouts. The physical limitations of the store and its fixtures affect space allocation. Store planners must provide enough merchandise to fill an entire fixture dedicated to a particular item. But in addition, a retailer might decide it wants to use a merchandise display to enhance its image. 172. As an architect for retail space, you are responsible for Americans with Disabilities Act compliance. How would you make sure that a store's retail layout both meets accessibility requirements and enables the company to reach profitability objectives? All store design and redesign decisions must comply with the 1990 Americans with Disabilities Act (ADA) and its 2008 amendments. It affects store design because the act calls for "reasonable access" to merchandise and services in retail stores built before 1993 and full access to stores built after 1993. Retailers are typically required to (1) provide 32-inch-wide pathways in the main aisle, to bathrooms, dressing rooms, and elevators, and around most fixtures; (2) lower most cash wraps (checkout stations) and fixtures so that they can be reached by a person in a wheelchair; (3) create disability-accessible checkout aisles; (4) provide bathrooms with handrails or grab bars; and (5) make dressing rooms fully accessible. Additionally, the ADA does not stop at the store exit. Considering universal design tenants, retailers should design their stores to have products, environments, and services that are usable by all people, to the greatest extent possible, without the need for adaptation or specialized design. While a retailer could be worried about how accommodations could negatively impact merchandise layout or sales, it is more likely that doing some things when designing a store with accessibility in mind benefits all consumers and the retailer alike. 173. What are the advantages and disadvantages of offering virtual dressing rooms from the retailer's perspective? Virtual dressing rooms are becoming increasingly important to online shoppers. People cannot try on clothes displayed on a website, but the spread of webcams embedded in laptops, tablets, and desktop computers is making it possible for programmers to create "virtual dressing rooms" that can permit Internet customers to "try on" clothing and accessories, simply by standing in front of their webcams.

Chapter 18 - Customer Service Many shoppers are willing to pay more for a product and more willing to shop at a retailer if they could experience it through a virtual dressing rooms. There's no need to dedicate valuable retail space to dressing rooms. Instead, that space can be used to showcase stock and create visual merchandising displays. Virtual dressing rooms add convenience by allowing customers to quickly see what the clothing looks like. In addition, due to their ability to have customers make more informed choices, virtual dressing rooms will reduce the rate of product returns. Possibly the largest disadvantage of virtual dressing rooms is that they don't require customers to visit a physical store. Store, or foot, traffic is an important metric because higher foot traffic tends to lead to higher sales and revenue numbers. 174. Complete the following table by briefly describing how the different retail formats could use each of the areas listed to enhance the store's image and atmosphere. Area

Drugstore

Clothing Store

Music Store

Restaurant

Entrance

A large entrance with accessible features.

A good lighting system that helps create a sense of excitement.

Stylish entry with music playing.

An entry that highlights the theme of the restaurant.

Walls

Cool colors (white, blue, and green) have a peaceful, gentle, calming effect.

Colors that highlight the style of clothing sold.

Warm colors (red, gold, and yellow) produce emotional, vibrant, hot, and active responses.

Use low levels of light to coordinate with their overall ambience.

Windows

Minimal windows from outside.

Displays that highlight the style of clothing sold.

Displays that focus on the latest music stars.

Theme driven displays in window highlighting food.

Merchandise displays

Organizing stock by category and item.

A rounder fixture that's designed to hold a maximum amount of merchandise.

Organizing stock by category and item.

In store examples of ingredients and meals.

Cash wrap

Cash registers are located at the entrances/exits.

Multiple areas in store for customers.

Cash registers are located at the entrances/exits.

Self-service and located on dining table.

175. How can signage and graphics help both customers and retailers? Consider the following types of retail formats that you likely have visited in the past: discount store, department store, office superstore, and card and gift store. Describe which retail formats have implemented the best practices for coordinating signs and graphics with each store's image and which formats should improve this aspect of their store layout, design, and visual merchandising.

Chapter 18 - Customer Service Signage and graphics inside the store help customers locate specific products and departments, provide product information, and suggest items or special purchases. Graphics, such as photo panels, can reinforce a store's image. Signage is used to identify the location of merchandise categories within a store and the types of products offered in the category. The signs are hung typically from the ceiling to enhance their visibility. Frequently, icons rather than words are used to facilitate communication with customers speaking different languages. For example, a red and yellow circus tent icon identifies the area for children's toys more effectively than a black and white, worded rectangular sign. Smaller signs are used to identify sale items and provide more information about specific products. Finally, retailers may use images, such as pictures of people and places, to create moods that encourage customers to buy products.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Visual Merchandising at Vintage Treasures

Case Analysis

Creating an Appealing Store Atmosphere

17-4 Illustrate the best techniques for merchandise presentation.

Store Design Elements

Drag and Drop; Matching (accessible version)

Store Design Elements,

17-2 List the advantages and disadvantages of alternative store layouts.

Space Management

Click and Drag; Matching (accessible version)

Retail Space Management

17-3 Describe how to assign store floor space to merchandise departments and categories.

Visual Merchandising

Matching

Visual merchandising

17-4 Illustrate the best techniques for merchandise presentation.

Store Design Objectives

Matching

Store Design Objectives

17-1 Identify the critical issues retailers need to consider when designing a store.

Store Design Objectives

CHAPTER 18 CUSTOMER SERVICE ANNOTATED OUTLINE

INSTRUCTOR NOTES

Chapter 18 - Customer Service 

Customer Service is the set of activities and programs undertaken by retailers to make the shopping experience more rewarding. These activities increase the value customers receive from the merchandise and services they purchase. All employees of a retail firm and all elements of the retailing mix provide services that increase the value of the merchandise.

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Most of the services provided by retailers furnish information about the retailer's offering and make it easier for customers to locate and buy products and services.



Retailers can take advantage of the opportunities to develop strategic advantage by providing consistent highquality service.

I. Balancing Customer Service: Personalization Versus Standardization 



Personalized and standardized are two approaches retailers use to develop a sustainable customer service advantage. Personalized service requires that service providers tailor their services to meet each customer's personal needs. Successful implementation of the personalized service relies on sales associates or the "personalization" offered by the retailer's electronic channel. Standardized service is based on establishing a set of rules and procedures for providing high-quality service and ensuring that they get implemented consistently.

See PPT 18-3

Generate a discussion among students about their experience with customer service at various retailers. What were the possible reasons for good service at some retailers versus bad service at others? LO 18-1 Identify how retailers balance customer service through personalization versus standardization. See PPT 18-5 Ask students for examples of retailers that use personalized and standardized service approaches. What are the advantages and disadvantages of each of these approaches? What are the factors that retailers should consider when deciding which approach to use?

A. Personalized Approach 

Personalized customer service is less consistent than standardized service. The delivery of personalized service depends on the judgment and capabilities of each service provider.



The personalized approach typically results in customers receiving superior service. But the service might be inconsistent because service delivery depends on the judgment and capabilities of the service providers.



In addition, providing personalized service is costly since it requires more well-trained service providers or complex

Chapter 18 - Customer Service computer software. 

Another form of personalization relies on the combination of recommendation engines with a database of customer transactions.



Providing high quality service, particularly customized service, can be very costly.

B. Standardized Approach 

Standardized, particularly automated services improve the speed and reliability of the retail interaction for customers. But this form of customization is also distinctly impersonal.



Retailers standardize the service they offer to increase the consistency of their service quality and avoid the costs of paying the more skilled service providers required to effectively personalize customer services.



Store or website design and layout also play an important role in the standardization approach.

II. Customer Evaluations of Service Quality 



When customers evaluate retail service, they compare their perceptions of the service they receive with their expectations. Customers are satisfied when the perceived service meets or exceeds their expectations. They are dissatisfied when they feel the service falls below their expectations.

See PPT 18-6

LO 18-2 Explain how customers evaluate a retailer's customer service. Ask students to describe a situation in which they received good and poor service from a retailer. What factors influenced their perceptions?

See PPT 18-8

A. Perceived Service 

Customers' perceptions of a retailer's customer service depend on the actual service delivered. However, because services are intangible, it is difficult for customers to evaluate the service offered by retailers accurately.



Five customer service characteristics that affect perceptions of service quality are reliability, assurance, tangibility, empathy, and responsiveness. 1. Reliability is the ability to perform the service dependably and accurately, such as performing the service as promised or contracted or meeting 18-374

Chapter 18 - Customer Service promised delivery dates. 2. Assurance is the knowledge and courtesy of employees and their ability to convey trust and confidence. 3. Tangibility is associated with the appearances of physical facilities, equipment, personnel, and communication materials. 4. Empathy refers to the caring, individualized attention provided to customers. 5. Responsiveness means to provide customer service personnel and sales associates that really want to help customers and provide that service promptly. See PPT 18-10

B. Role of Expectations 

Customer expectations are based on knowledge and past experiences with a retailer and its competitors.



Customers are also interacting with companies using various technologies. Retailers that do not offer omnichannel services are not favorably viewed. Customers still expect good service, which is defined by companies' responsiveness, flexibility, dependability, ease of access, apologies, or compensation when necessary.

III. The Gaps Model for Improving Retail Customer Service Quality 

When customers' expectations are greater than their perceptions of the delivered service, customers are dissatisfied and feel the quality of the retailer's service is poor. Thus, retailers need to reduce the service gap – the difference between customers' expectations and perceptions of customer service -- to improve customers' satisfaction with their service.



Four factors affect the service gap:



Knowledge gap: The difference between customer expectations and the retailer's perception of customer expectations.



Standards gap: The difference between the retailer's perceptions of customer's expectations and the customer

Describe the role of expectations. Relate the role of expectations to the student descriptions of service encounters. Ask students what factors influence their expectations? Ask students if they have received unexpected services from a retailer. LO 18-3 Indicate the activities a retailer can undertake to provide high-quality customer service. See PPT 18-13 and 18-14

Chapter 18 - Customer Service service standards it sets. 

Delivery gap: The difference between the retailer's service standards and the actual service provided to customers.



Communication gap: The difference between the actual service provided to customers and the service promised in the retailer's promotion program.



These four gaps add up to the service gap. The retailer's objective is to reduce the service gap by reducing each of the four gaps.

A. Knowing What Customers Want: The Knowledge Gap 

The most critical step in providing good service is to know what the customer wants.



Retailers can reduce the knowledge gap and develop a better understanding of customer expectations by undertaking customer research, increasing interactions between retail managers and customers, and improving the communication between managers and employees who provide customer service.



Market research can be used to better understand customers' expectations and the quality of service provided by a retailer.



Methods for obtaining this information range from comprehensive surveys to simply asking some customers about the store's service.

1. Social Media 

Retailers can learn a lot about their customer expectations and perceptions of their service quality by monitoring what they say about the retailer's offering and the offerings of competitors on their social networks, blogs, review sites, and what they are posting on sites like YouTube and Flickr.



Numerous retailers have started to use a technique known as sentiment analysis to assess the favorableness (or lack of favorableness) in their customers' sentiments by monitoring these social media.

See PPT 18-15

Discuss with students how reviews on products could be a factor in understanding customer sentiment. Ask if bad reviews are always bad (or do they allow retailers to get first-hand information about product or service issues on a real-time basis and direct from the customer).

Work with students to develop a procedure for conducting a

2. Surveys, Panels, and Contests 18-376

Chapter 18 - Customer Service 

Many retailers survey customers immediately after a retail transaction has occurred.



Rather than surveying many customers, retailers can use panels of 10 to 15 customers to gain insights into expectations and performance.

3. Interact with Customers, Either Directly or through Observation 

Owner-managers of small retail firms typically have daily contact with their customers and thus have accurate firsthand information about them.



In large retail firms, managers often learn about customers through reports so they miss the rich information provided by direct contact with customers.

customer panel. How many customers? What types of customers? When and where would it meet? What specific questions would be asked?

Ask students what retail managers can do to improve communications with contact people.

4. Customer Complaints 

Complaints allow retailers to interact with their customers and acquire detailed information about their service and merchandise.



Handling complaints is an inexpensive means to isolate and correct service problems.



Although customer complaints can provide useful information, retailers can't rely solely on this source of market information.



Typically, dissatisfied customers don't complain. To provide better information on customer service, retailers need to encourage complaints and make it easy for customers to provide feedback about their problems.

Ask students what retailers could do to stimulate comments and complaints about service.

5. Feedback from Store Employees 

Salespeople and other employees in regular contact with customers often have a good understanding of customer service expectations and problems. This information can improve service quality if the employees are encouraged to communicate their experiences and the information is collected and analyzed in a systematic way that can be used by higher-level managers.

6. Using Customer Research in a Timely Manner 

The knowledge gap diminishes only when retailers use this

Ask students if retail managers really need to interact with customers to determine customer

Chapter 18 - Customer Service information to improve service. 

Feedback on service performance needs to be provided in a timely manner.



Feedback must be prominently presented so service providers are aware of their performance.

expectations and perceptions. Can't they learn this through talking with employees and looking at market research?

B. Setting Service Standards: The Standards Gap 

Service standards should be based on customers' perceptions rather than on internal operations.



To close the standards gap, retailers need to (1) commit their firms to providing high-quality service, (2) define the role of service providers, (3) set service goals, and (4) measure service performance.

See PPT 18-17 Ask students what a retailer can do to remind employees about the need to provide good customer service.

1. Commitment to Service Quality 

Service excellence occurs only when top management provides the leadership and demonstrates commitment. Top management must be willing to accept the temporary difficulties and even increased costs associated with improving service quality.



Store managers are the key to achieving service quality standards.

2. Defining the Role of Service Providers 

Managers can tell service providers that they need to provide excellent service, but not clearly indicate what excellent service means. Without a clear definition of the retailer's expectations, service providers are directionless.

3. Setting Service Goals 

Retailers often develop service goals based on their beliefs about the proper operation of the business rather than the customers' needs and expectations.



Employees are motivated to achieve service goals when the goals are specific, measurable, and participatory in the sense that they participated in setting them.

Ask students to give specific examples of services goals that might be set for a sales associate in a Gap store.

4. Measuring Service Performance 

Retailers need to continuously assess service quality to

Query students on the types of

Chapter 18 - Customer Service ensure that goals will be achieved. 

information that could be collected by mystery shoppers.

Retailers also use mystery shoppers to assess their service quality. Mystery shoppers are professional shoppers who "shop" a store to assess the service provided by store employees and the presentation of merchandise in the store.

C. Meeting and Exceeding Service Standards: The Delivery Gap 

To reduce the delivery gap and provide service that exceeds standards, retailers must give service providers the necessary information and training, empower employees to act in the customers' and firm's best interests, provide instrumental and emotional support, provide appropriate incentives, improve internal communications, and use technology.

See PPT 18-19 Ask students to indicate the kind of information a salesperson in the following departments of a department store should have: china, consumer electronics, men's ties, women's hosiery, and men's suits.

1. Give Information and Training 

Service providers need to know about the retailer's service standards and the merchandise it offers, as well as the customers' needs.



With this information, employees can answer customers' questions and suggest products. This knowledge also instills confidence and a sense of competence, which is needed to overcome service problems.



Service providers also need specific training in interpersonal skills. Dealing with customers is hard— particularly when they are upset or angry.

2. Empower Store Employees 

Empowerment means allowing employees at the firm's lowest levels to make important decisions regarding how service is provided to customers. When the employees responsible for providing service are authorized to make important decisions, service quality improves.



However, empowering service providers can be difficult, and the benefits may not justify the costs.

3. Provide Instrumental and Emotional Support 

Service providers need to have instrumental support (appropriate systems and equipment) to deliver the

Ask students what effects does empowering store employees have on the employees? On customers? Have students relate work experiences they have had in which their lack of empowerment reduced the quality of service they could provide. Ask students to give examples of emotional and instrumental service support they might have received when working in a retail

Chapter 18 - Customer Service service desired by customers. 

outlet.

In addition to instrumental support, service providers need emotional support from their coworkers and supervisors. Emotional support involves demonstrating a concern for the well-being of others. Dealing with customer problems and maintaining a smile in difficult and stressful situations can be psychologically demanding.

4. Provide Incentives 

Many retailers use incentives, like paying commissions on sales, to motivate employees.



But retailers have found that commissions on sales also can decrease customer service and job satisfaction. Incentives can motivate high-pressure selling, which leads to customer dissatisfaction.



However, incentives can also be used to effectively improve customer service when the rewards are tied to solving customer problems and the rewards are provided at about the same time the appropriate behavior occurred.

Ask students about the benefits and problems with offering incentives. Review the material on incentives in Chapter 17.

5. Improve Internal Communications 

When providing customer service, frontline service providers often must manage a conflict between customers' and their employer's needs.



Retailers can reduce such conflicts by issuing clear guidelines and policies concerning service and explaining the rationale for these policies.



Conflicts can also arise when retailers set goals that are inconsistent with the other behaviors expected from store employees.

D. Communicating the Service Promise: The Communications Gap 



The fourth factor leading to a customer service gap is the difference between the service promised by the retailer and the service actually delivered. Overstating the service offered raises customer expectations. Then, if the retailer doesn't follow through, expectations exceed perceived service, and customers are

See PPT 18-20 Discuss the paradox of wanting to tell customers about great customer service but not wanting to raise expectations too high.

Chapter 18 - Customer Service dissatisfied. 

The communication gap can be reduced by making realistic commitments and by managing customer expectations.

1. Realistic Commitments 

Advertising programs are typically developed by the marketing department, while the store operations division delivers the service. Poor communication between these areas can result in a mismatch between an ad campaign's promises and the service the store can actually offer.

2. Managing Customer Expectations 

Information presented at the point of sale can be used to manage expectations.



Communication programs can inform customers about their role and responsibility in getting good service, and can give tips on how to get better service, such as the best times of the day to shop and the retailer's policies and procedures for handling problems.

IV. Use Technology 

Varied technologies already in place, such as self-scan checkout stations, web-linked kiosks, service personnel equipped with iPads, various types of apps, digital displays, online agents, and QR codes, all help customers find and learn more about products and services offered.



For the service personnel, these technologies improve their ability to offer good service to customers, including up-to-date product information and access to merchandise available from an online channel if it is not in stock at the store.



Although convenience is certainly valued by customers, another facet also is becoming more relevant in technology-enabled service provision: social presence. Social presence means "the felt presence of others."

V. Service Recovery 

Rather than dwelling on negative aspects of customer problems, retailers should focus on the positive opportunities the problems generate.

Ask students to indicate some complaints they have made about service provided by a retailer. Use these situations in a role-playing exercise assigning one student to play the part of the customer and the other to be the retail employee receiving the complaint.

LO 18-4 Describe technology enhancement of social presence. See PPT 18-21 Discuss some of the advantages and disadvantages of selfcheckout from both a retailer and customer perspective.

See PPT 18-22 for a model of social presence and convenience.

LO 18-5 Articulate retailers' service failure strategies. See PPT 18-24 Have students relate service

Chapter 18 - Customer Service 

Service problems and complaints are an excellent source of information about the retailer's offering – its merchandise and service.



Armed with this information, retailers can make changes to increase customer satisfaction.



Service problems also enable a retailer to demonstrate its commitment to providing high-quality customer service.



Most retailers have standard policies for handling problems, however, in many cases, the cause of the problem may be hard to identify, uncorrectable, or a result of the customer's unusual expectations. In these cases, service recovery might be more difficult.



The steps in effective service recovery are: (1) listen to the customer, (2) provide a fair solution, and (3) resolve the problem quickly.

failures they have experienced and describe situations in which the retailer made a good recovery and a poor recovery.

See PPT 18-25

A. Listening to Customers 

Customers can become very emotional about their real or imaginary problems with a retailer. Often, this emotional reaction can be reduced by simply giving customers a chance to get their complaints off their chests.



Store employees should allow customers to air their complaints without interruption.



Customers want a sympathetic response to their complaints.



Employees also need to listen carefully to determine what the customer perceives to be a fair solution.

Ask students why it is important for an employee to listen carefully to the complaint. Why is the best policy always to give the complaining customer what he or she wants? Do customers always know what they want?

B. Providing a Fair Solution 

Favorable impressions arise when customers feel they have been dealt with fairly. When evaluating the resolution of their problems, customers compare how they were treated in relation to others with similar problems or how they were treated in similar situations by other retail service providers.



Customers' evaluations of complaints' resolutions are based on distributive fairness and procedural fairness.

Chapter 18 - Customer Service 

Distributive fairness is a customer's perceptions of the benefits received compared with his or her costs in terms of inconvenience or loss. Customers typically prefer tangible rather than intangible resolutions to their complaints.



Customers may want to "let off steam," but they also want to feel the retailer was responsive to their complaint. If providing a tangible restitution is not possible, the next best alternative is to let customers see that their complaints will have an effect in the future.



Procedural fairness is the perceived fairness of the process used to resolve complaints.



Customers typically feel they are dealt with fairly when store employees follow company guidelines.



But rigid adherence to guidelines can have negative effects. Store employees need some flexibility and empowerment capabilities to resolve complaints, or customers may feel they had no influence on the resolution.

3. Resolving Problems Quickly 

Customer satisfaction is affected by the time it takes to get an issue resolved.



Retailers can minimize the time to resolve complaints by reducing the number of people the customer must contact, providing clear instructions, and speaking in the customer's language.



Although resolving customer complaints promptly generally increases satisfaction, if the complaints are resolved too abruptly, customers might feel dissatisfied because of the lack of personal attention they received.

Ask Students: What is distributive and procedural fairness? Which one is more important? Why?

Ask Students: What can retailers do to resolve complaints quickly? Is it always best to resolve complaints as quickly as possible?

V. Summary 

Customer service provides an opportunity for retailers to develop a strategic advantage through two basic strategies: personalized or standardized customer service.



Customers evaluate customer service by comparing their perceptions of the service delivered with their expectations. If their perceptions are lower than their 18-383

Chapter 18 - Customer Service expectations, customers are dissatisfied. If their perceptions are better than their expectations, they might be satisfied or even delighted. 

To ensure excellent service, retailers need to close the gaps between the service they deliver and the service that customers expect.



An effective service recovery requires (1) listening to the customer, (2) providing a fair solution, and (3) resolving the problem quickly.

Chapter 18 - Customer Service ANSWERS TO SELECT "GET OUT AND DO IT!" QUESTIONS 176. INTERNET EXERCISE Scandit has created self- scanning apps for self-checkout. Visit the company's retail industry website at www.scandit.com/industries/retail to learn about this technology. How useful is this application for retailers? What sorts of retailers seem most likely to adopt it? Taken from the website: We help retailers automate end-to-end retail operations by moving routine processes and tasks onto mobile devices powered by our high-performance barcode scanning software. We also enable consumer self-scanning apps for self-checkout and Scan-and-Go shopping. Augmented reality (AR) feedback adds real-time information to users, blending digital technology with physical store environments. Put Simplicity and Speed in the Hands of Your Workers You'll be amazed how fast and easy it is to do retail operations tasks like shelf management and stock control, using mobile scanning. The effect on efficiency and cost control is significant. Capture Your Customers' Imagination with Convenience A great scan-and-go experience, instant access to product information and personalized promotions can bring a new level of engagement and convenience to shoppers in your retail aisles, boosting customer satisfaction and revenues. Reduce Costs with Future-Proof Software Solutions Replacing inflexible infrastructure with powerful mobile software solutions reduces hardware costs immediately. And new levels of efficiency and productivity go straight to the bottom line. 177. INTERNET EXERCISE Visit www.amazon.com and shop for a best-selling book. How does the website help you locate best sellers? How does the customer service offered by this website compare with the service you would get at another book retailer's website or in a brick-andmortar bookstore? Upon searching for "best selling book," the user will be presented with a banner stating, "Best selling books on Amazon. Discover best-sellers from Amazon Charts, the New York Times, and more." Buyers are presented with multiple options to narrow the choices. These options: 

Delivery



Deals



New Releases



Deliver Day



Book Format



Book Award Winners



Department



Book Language



Customer Reviews



Author

International Shipping



Book Series



Condition



Prime Reading



Amazon Global Store

Chapter 18 - Customer Service 

Availability

After selecting a particular book, users are presented with the following information: 

An option to preview the book



Information from the publisher



Availability Status



Editorial Reviews



Formats and Editions (Kindle, Audiobook, Hardcover, or Paperback



Product Details



Videos



Price



Other books the customer may like

Student comparison answers will differ based on the other book retailer's website or brick-and-mortar bookstore. 178. GO SHOPPING Go to a discount store such as Walmart, a department store, and a specialty store to buy a pair of jeans. After visiting all three, compare and contrast the level of customer service you received in each of the stores. Which store made it easiest to find the pair of jeans you would be interested in buying? Evaluate the perceived service experience in terms of reliability, assurance, tangibility, empathy, and responsiveness. Does the service quality match the store format? Explain your response. The students' perceptions of a retailer's customer service depend on the actual service delivered. However, because services are intangible, it is difficult for customers to evaluate the service offered by retailers accurately. They are often influenced by the way employees provide the service, not just the outcome. The specialty store would be the better known for its high levels of customer service and has salespeople who can assist each customer as they shop. The department store would likely have the next level of customer service, with the discount store offering little is any at all. However, the discount and department store are more likely to have a greater selection of jeans, in brand and sizzes, for the customer to choose from.

Chapter 18 - Customer Service ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS Both Zappos and McDonald's are noted for their high-quality customer service, but each approaches providing quality service differently. Describe this difference. Why has each of these retailers elected to use its particular approach? McDonald's develops and strictly enforces a set of policies and procedures to provide acceptable, consistent service quality. The food may not be considered gourmet, but it is consistently served in a timely manner at a relatively low cost throughout the world. McDonald's has also installed self-service kiosks and digital menu boards in many restaurants so customers can customize their orders to their preferences. Zappos provides employees with extensive, specific training to ensure they have the knowledge and skill to resolve any service issue. Then it empowers these well-trained employees to make management-level decisions that reflect a consistent, reliable determination to address each situation optimally. Zappos thus explicitly encourages employees to take as much time as is needed to help, connect with, and reassure every customer. In addition, Zappos encourages employees to engage autonomously with customers so that each experience is unique and personalized. 179. Have you ever worked in a job that required you to provide customer service? If yes, describe the skills you needed and tasks you performed on this job. If no, what skills and abilities would you highlight to a potential employer that was interviewing you for a position that included customer service in the job description? Student answers will vary based on where they were employed. Desirable skills and abilities for offering high levels of customer service may include: 

Active listening



Patience



Adaptability



Quick thinking



Attentiveness



Conflict resolution

Reading physical and emotional cues



Creativity



Responsiveness



Decision-making



Timeliness



Dependability



Effective communication



Empathy



Friendliness



Knowledge of your product or service



Open-mindedness 18-15

Chapter 18 - Customer Service Taken from https://www.indeed.com/career-advice/resumes-cover-letters/customer-service-skills. 180. Consider customer service at IKEA. How does this retailer utilize a self-service model to gain a competitive advantage over traditional furniture stores? IKEA uses a standardized, self-service approach with some unique elements to attract customers who expect the traditional personalized approach commonly used in furniture retailing. Every product available is displayed in more than 70 roomlike settings throughout the 150,000-square-foot warehouse stores. Customers do not need a decorator to help them picture how the furniture will go together. IKEA maintains a self-service focus: An app enables users to browse through IKEA products on their smartphones, download a store map, and locate items on their shopping list in the store, as well as input their own room dimensions and style preferences to see how their room might look with IKEA furnishings. 181. Assume you're the department manager for menswear in a local department store that emphasizes empowering its managers. A customer returns a dress shirt that's no longer in the package in which it was sold. The customer has no receipt, says that when he opened the package he found that the shirt was torn, and wants cash for the price at which the shirt is now being sold. The shirt was on sale last week when the customer claims to have bought it. What would you do? Different students will have a range of answers to this scenario. Here are some highlights about empowering service employees. Empowerment means allowing employees at the firm's lowest levels to make important decisions regarding how service will be provided to customers. When the employees responsible for providing service are authorized to make important decisions, service quality improves. However, empowering service providers can be difficult. Some employees prefer to have the appropriate behaviors clearly defined for them. In some cases, the benefits of empowering service providers may not justify the costs. 182. Consider a situation in which you received poor customer service in a retail store or from a service provider. Did you make the store's management aware of your experience? To whom did you relay this experience? Have you returned to this retailer or provider? For each of these questions, explain your reasons. Student responses will vary depending on their experiences. 183. Gaps analysis provides a systematic method for examining a customer service program's effectiveness. Top management has told an information systems manager that customers are complaining about the long wait to pay for merchandise at the checkout station. Taking the role of the systems manager, identify potential problems that may be occurring with each gap, and suggest how the gap should be closed. Student responses will vary. The following are the gaps that they should comment on. The knowledge gap reflects the difference between customers' expectations and the retailer's perception of those customer expectations. Retailers can close this gap by developing a better understanding of customer expectations and perceptions. 1-1 © MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC.

Chapter 18 - Customer Service The standards gap pertains to the difference between the retailer's knowledge of customers' perceptions and expectations and the service standards it sets. By setting appropriate service standards and measuring service performance, retailers can close this gap. The delivery gap is the difference between the retailer's service standards and the actual service it provides to customers. This gap can be reduced by getting employees to meet or exceed service standards through training and/or appropriate incentives. The communication gap is the difference between the actual service provided to customers and the service that the retailer's promotion program promises. When retailers are more realistic about their services they can provide, customer expectations can be managed effectively to close this gap. 184. How can retailers provide high-quality personalized service? Use an optometrist's office that also sells eyeglass frames and fills prescriptions for contact lenses as your example. How does this retailer's service compare with the service provided by 1-800 Contacts? Personalized service requires that providers tailor their services to meet each customer's personal needs. The delivery of personalized service depends on the judgment and capabilities of each service provider. Relatedly, providing consistent, high-quality personalized service is costly, because welltrained service providers or sophisticated computer software generally are needed to implement the service. Another version of personalization relies on the combination of recommendation engines with a database of customer transactions. The Internet has made vast amounts of information on products and retailers available to consumers, and recommendation engines offer a means to deal with the information overload. 185. Consider a recent retail service experience you have had, such as a haircut, doctor's appointment, dinner in a restaurant, bank transaction, or product repair (not an exhaustive list), and answer the following questions: (a) Describe an excellent service delivery experience. (b) What made this quality experience possible? (c) Describe a service delivery experience in which you did not receive the performance that you expected. (d) What were the problems encountered, and how could they have been resolved? Student responses will vary depending on their experiences. When customers evaluate customer service, they compare their perceptions of the service they receive with their expectations. Five customer service characteristics that affect perceptions of service quality are reliability, assurance, tangibility, empathy, and responsiveness. To provide service that exceeds their customer's expectations, retailers must provide the necessary information and training, empower employees to act in the customers' and firm's best interests, provide instrumental and emotional support, provide appropriate incentives, and improve internal communications.

Chapter 18 - Customer Service Service problems enable a retailer to demonstrate its commitment to providing high-quality customer service. By encouraging complaints and handling problems, a retailer has an opportunity to strengthen its relationship with its customers. Most retailers have standard policies for handling problems. The steps in effective service recovery are (1) listen to the customer, (2) provide a fair solution, and (3) resolve the problem quickly.

Chapter 18 - Customer Service CONNECT ACTIVITIES Activity Title

Activity Type(s)

Topic(s)

Learning Objective(s)

Gaps Model

Drag and Drop; Matching (accessible version)

Customer Evaluations of Service Quality,

18-3 Indicate the activities a retailer can undertake to provide high-quality customer service.

Service Recovery

Balancing Customer Service

Drag and Drop; Matching (accessible version)

Improving Retail Customer Service Quality

18-1 Identify how retailers balance customer service through personalization versus standardization.

Customer Service at the Coffee Shop

Drag and Drop with Video; Matching (accessible version)

Improving Retail Customer Service Quality

18-1 Identify how retailers balance customer service through personalization versus standardization. 18-2 Explain how customers evaluate a retailer's customer service.

Technology and Service Delivery

Matching

Improving Retail Customer Service Quality

18-4 Describe technology enhancement of social presence.

Service Recovery

Matching

Service Recovery

18-5 Articulate retailers’ service failure strategies.