Retailing and Wholesaling

1. Marketing Principles Session 11 Retailing and Wholesaling Jeffrey E. Newcomb Red Widget Strategies for Hosei University

2. Looking Forward:Where are we going? Session 11, Retailing and Wholesaling, will help you to: • Explain the roles of retailers and wholesalers in the distribution channel • Describe the major types of retailers and give examples of each • Identify the major types of wholesalers and give examples of each • Explain the marketing decisions facing retailers and wholesalers

3. Whole Foods [Case Story] an alternative retail grocer • Committed to quality • Value Proposition: Whole Foods, Whole People, Whole Planet. • Sales = $700/sq foot, nearly twice the yield of traditional grocers • Profit margins: 2.9%, 2.5 times the industry average; sales and profits continue to increase by substantial double digits • Products are differentiated: organic, 100% natural, no additives • Shopping environment is warm, friendly and information-rich • Customers are affluent, liberal, educated; median household income of shoppers exceeds the US average Whole Foods’ Vision of a Sustainable Future: Our children and grandchildren will be living in a world that values human creativity, diversity and individual choice. Business will use resources without de-valuing the integrity of the individual or the planet’s ecosystems.

4. Definitions Retailing • All activities involved in selling goods or services directly to final consumers for their personal, non-business use • For products Example: World-class fashions on the Ginza • For services Example: The veterinarian for your pet Retailer • A business organization whose sales come primarily from retailing to final customers

5. Specialty Stores Department Stores Supermarkets Non-store retailers Discount Stores Convenience Stores Off-Price Retailers Superstores Shaping Retail Strategy Types of Retailers: • Key Factors in Consumers’ Retail Choices: • Convenience • and…. As a consumer, what other factors do you consider in making a retail choice? Consider as many factors as you can. Compare with the following list of key factors.

6. More Key Factors in Consumers’ Retail Choices • Product Selection • Fairness • Useful Information • Prices • Image • Shopping Atmosphere • Others?

7. Self-service retailers Customers are willing to self-serve to save money Convenience stores and fast moving shopping goods -Example: 7-Eleven Limited-service retailers Most department stores Full-service retailers Salespeople assist customers in every aspect of shopping experience High-end department stores and specialty stores -Example: Buying a new chair to be custom–fitted with matching fabric Types of Retailing Retailers can be classified by…. Amount of service:

8. Specialty stores Narrow product lines with deep assortments Department stores Wide variety of product lines Supermarkets Convenience stores Limited line Superstores Food, nonfood, and services Category killers Giant specialty stores -Example: Toys R Us Types of Retailing Retailers can be classified by…. Product lines:

9. Discount stores Low margins are offset by high volume Off-price retailers Independent off-price retailers -Clothing stores which buy off-season or excess production of brand names Factory outlets -Example: Levi Strauss Warehouse clubs -Example: Costco Types of Retailing Retailers can be classified by…. Relative prices:

10. Started in 1962 by Sam Walton in Bentonville, Arkansas Current annual sales approximately $300 billion Value proposition: Always Low Prices. Always! EDLP: Every Day Low Prices Wal-Mart executives spend at least two days a week visiting stores to stay close to customers The first to call employees “associates” Wal-Mart maintains low prices through tight controls on costs, and aggressive buying practices Technological advances in distribution and communications systems help increase efficiency and lower costs Less advertising as a percentage of sales helps keep costs low 70% of goods carried by Wal-Mart originate in China Challenged to enter markets in Japan and Germany Wal-Mart As market leader, Wal-Mart is a learning opportunity in retailing:

11. Corporate chain stores Commonly owned and controlled -Examples: Home Depot, Staples, Gucci Voluntary chains Wholesaler-sponsored groups of independent retailers Retailer cooperatives Groups of independent retailers who buy in bulk Franchise organizations Based on differentiated offers -Examples: McDonald’s, Burger King; travel agencies Merchandising conglomerates Diversified retailing lines with central ownership -Examples: Macy’s, Sears Types of Retailing Retailers can be classified by…. Organizational approach:

12. Franchises Franchise: a contractual association between a manufacturer, wholesaler or service organization (the franchiser), and independent businesspeople (franchisees), who own or operate one or more units of the franchise system • Successful franchises are based upon a unique product, service or business process • The franchiser develops marketing strategy • The retail franchisees implement the marketing strategy • Legal contracts govern the relationship • Franchisers have been successful with newcomers • Franchise sales continue to grow, but slower than 1980s • Franchising represents 40% of all retail sales in US

13. Retailing Retailer Marketing Decisions • Target marketing and positioning • Product and service mix • Price • Promotion • Place Food retailer Whole Foods is a useful example of effective target marketing and positioning

14. Retail Business Typical Gross Margin (percent) Custom tailors, monuments, florists and nurseries, bakery shops, furs 50% or more Garages, jewelry, restaurants, furniture, undertaking 40-50% Instruments, furnishings, gifts, books, bars, shoes, appliances 35-40% Paint, glass, drugs, fuel, clothing, auto parts 30-35% Hardware, dry goods 20-30% Source: US Retailing Industry Alcoholic beverage package stores, motor vehicles, groceries Less than 20% Illustrative Gross Margins in Selected Retail Trades for Recent Years

15. Less than $50,000 Less than $50,000 $50,000 – $99,000 $50,000 – $99,000 $100,000- $249,999 $100,000- $249,999 $250,000 – $499,999 $250,000 – $499,999 $500,000- $999,999 $500,000- $999,999 $1million – $2.5 million $1million – $2.5 million $2.5 million -$5 million $2.5 million -$5 million Over $5 million Over $5 million Retailer Size and ProfitsThe largest retailers in the US have the highest percentage of total retail sales Percent of Stores 9.1% 2.1% 65.6% Smaller stores Bigger stores Percent of Total Retail Sales Source: US Retailing Industry .03%

16. Comparisons of In-Store and Online Shopping CharacteristicsOnline ShoppingIn-Store Shopping Day-of-week emphasis: Higher percentage Higher percentage of purchases weekdays of purchases weekends Product availability: Not accessible for Usually accessible for inspectionor inspection and immediate immediate useuse Entertainment value: A media experience Often a social experience Shopping hours: 24/7: all the time Varies; typical “business hours” ….

17. Retailing The Future of Retailing • New retail forms and shortening retail life cycles • Growth of non-store retailing • Mail-order, television, phone, online shopping • Examples: Home Shopping Network, Rakuten, Google, Yahoo, eBay, Amazon; traditional “bricks n mortar” retailers; catalog retailers • Retail convergence • Merging of consumers, products, prices, and retailers • Example: Options for buying a recently-published history book to read for pleasure…. • Greater competition among retailers creates greater difficulty in differentiating offers

18. Retailing The Future of Retailing • Rise of mega-retailers • Growing importance of retail technology Examples: software for connecting with distributors, monitoring stockouts, consumer trends; use of handheld scanners • Global expansion of major retailers Examples: 13 of top 30 retailers are US based -- but only 2 US-based retailers have stores outside North America Examples of top retailers who have become global: France’s Carrefour, Germany’s Metro, Britain’s Tesco, Sweden’s IKEA, and from Japan, Yaohan supermarkets • Retail stores as “communities” or “hangouts”Examples: Starbucks coffeehouses; Sony’s Metreon retail complex in San Francisco

19. How Retailers Adapt to Change • The Wheel of Retailing • helps to explain the early success and later troubles of • many department stores, supermarkets and discount stores • New retailers often begin as low-margin, low-price operations • These retailers compete successfully, grow and evolve • They become higher-priced, higher-service operations • Then these retailers are challenged, and • often replaced by new retailers.... • who are low-margin, low-priced operations! • And the Wheel of Retailing turns again Keeping close to the customer, while controlling costs and building operational efficiencies, are proven solutions to slow the Wheel of Retailing. Example: Cabela’s for the Outdoors enthusiast – a differentiated, niche-driven retailer!

20. Definitions Wholesaling • All activities involved in selling goods and services to those buying for resale or business use Wholesaler • An organization engaged primarily in wholesaling activity

21. Wholesaling Wholesalers add value in the following functions: • Selling and promoting • Buying and assortment building • Bulk-breaking • Warehousing • Transportation • Financing • Risk bearing • Market information • Management services and advice

22. Full-service wholesalers Wholesale merchants Examples: health foods; seafood Industrial distributors Example: Grainger Maintenance Repair - operating supplies Limited-service wholesalers Cash-and-carry wholesalers Example: Lumber yards for construction Truck wholesalers or jobbers Drop shippers Rack jobbers Producer’s cooperatives Example: In California, SunMaid Raisins; Diamond Walnuts Mail-order wholesalers Wholesaling Merchant Wholesalers

23. Wholesaling Brokers and Agents Different from Merchant Wholesalers, • Brokers and agents do not take ownership of the goods • Brokers and agents have only a few specialized functions Brokers Bring buyers and sellers together and assist in negotiation Agents Represent buyers longer-term • Manufacturers’ agents: most common • Selling agents • Purchasing agents • Commission merchants

24. Sales branches and offices Branches carry inventory: lumber, auto equipment, parts Offices do not carry inventory: dry goods Purchasing officers Perform roles similar to brokers and agents Purchasing officers are employees of the organization Wholesaling Manufacturers’ and retailers’ branches and offices

25. Wholesaling Trends in Wholesaling • Price competition is still intense • Successful wholesalers must add value by increasing efficiency and effectiveness • The distinction between large retailers and wholesalers continues to blur • More services will be provided to retailers • As in retail, many wholesalers are seeking global markets

26. Markups and Markdowns Markup and Markdown are tools for analysis to help retailers and wholesalers manage pricing Markups • Markup is the difference between merchandise cost and the selling price for a channel member • Markup is typically expressed as a percentage: a. Markup % on selling price = Selling price – Merchandise cost Selling price b. Markup % on cost = Selling price – Merchandise cost Merchandise cost c. Selling price = cost 1- markup % Organizations use markups to cover operating expenses and net profit

27. Markups and Markdowns Markdowns • Markdown is a reduction in the original selling price of a product or service by a retailer or wholesaler, in order to sell • Markdowns result from poor sales, inventory clearances, model changes, business liquidation or other factors • Markdowns, like markups, are expressed as percentages: Markdown %= Original selling price – Reduced selling price (off-original price) Original selling price Markdown %= Original selling price – Reduced selling price (off-sale price) Reduced selling price Lower markups and higher markdowns usually result in higher unit sales. Higher markups and lower markups usually result in lower unit sales

28. Markups and Markdowns 1. A carpenter’s tool with a selling price of Y1,000 has a merchandize cost to Hiro’s Hardware store of Y700. What is the markup based upon the… • selling price (Y1,000)? Markup = 30% • the merchandise cost (Y700)? Markup = 43% 2. Hiro’s Hardware has a new mechanic’s tool he wants to distribute. His merchandise cost is Y1,200, and his desired markup based on selling price is 25%. What should be Hiro’s selling price? • Selling price = Y1,600

29. Markups and Markdowns Midori’s Bakery has some cakes not yet sold, left over from over-production yesterday. Midori would like to make the cakes available at a discount, before they spoil. Originally, each cake would sell for Y2,000. If Midori reduced the price today to Y1,500, what would the markdown be…. • off - original price? (Y2,000 – Y1,500)/Y2,000 = 25% • off - sale price? (Y2,000 – Y1,500)/Y1,500 = 33% For purposes of planning and budgeting the “off-original price” method is preferred. The “off-sale price” method is sometimes used to create greater awareness with customers

30. 3QQ 3 Question Quiz • The ________ concept suggests that many • new forms of retailing begin as low-margin, low-price, low-status operations, which take the place of other such retailers who have, over time, added services and moved upscale. • 1. retail life cycle  • 2. merchant wholesaling   • 3. scrambled merchandising  • 4. wheel-of-retailing • 5. “1” and “3” are correct

31. 3QQ 3 Question Quiz 1. The ________ concept suggests that many new forms of retailing begin as low-margin, low-price, low-status operations, which take the place of other such retailers who have, over time, added services and moved upscale. • value delivery network  • merchant wholesaling   • scrambled merchandising • wheel-of-retailing • “1” and “3” are correct The wheel-of-retailing explains the initial success and later problems of many department stores and supermarkets

32. 3QQ3 Question Quiz 2. Retailers are increasingly selling the same products at the same prices to the same customers, as are their competitors. This situation is an example of: • Retail convergence  • Growth of non-store retailing  • Global retailing by major retailers • The rise of superstores • None of the above

33. 3QQ3 Question Quiz 2.Retailers are increasingly selling the same products at the same prices to the same customers, as are their competitors. This situation is an example of: • Retail convergence • Growth of non-store retailing  • Global retailing by major retailers • The rise of superstores • None of the above Retail convergence is the merging of shoppers, goods and prices. Distinctions between discount, specialty and department stores are losing significance

34. 3QQ3 Question Quiz 3. Which of the following is a trend likely to continue in the wholesaling industry? • Vertical integration  • Increase in services • decrease in the number of wholesalers • Geographic expansion of operations to the global market • All of the above

35. 3QQ3 Question Quiz 3. Which of the following is a trend likely to continue in the wholesaling industry? • Vertical integration  • Increase in services • decrease in the number of wholesalers • Geographic expansion of operations to the global market • All of the above Growth in wholesaling revenues will depend on vertical integration, increase in services and globalization. Resistance to price increases eliminates wholesalers who cannot add value for their customers

36. Your TOP TEN Terms • Agent • Broker • Category killer • Convenience store • Discount store • Franchise • Markdown and Markup • Retailer • Wheel-of-retailing concept • Wholesaler

37. Looking Back:Where have we been? You should now be able to.… • Explain the roles of retailers and wholesalers in the distribution channel • Describe the major types of retailers and give examples of each • Identify the major types of wholesalers and give examples of each • Explain the marketing decisions facing retailers and wholesalers