RETAIL-MANAGEMEN1-LECTURE-NOTES.pdf

RETAIL MANAGEMENT RETAILING – consists of all activities involved in the sale of goods and services to the ultimate consumer. A retail sale occurs whenever an individual purchases groceries at a supermarket, a meal at McDonald’s, a haircut at a barbershop or a...

RETAIL MANAGEMENT RETAILING – consists of all activities involved in the sale of goods and services to the ultimate consumer. A retail sale occurs whenever an individual purchases groceries at a supermarket, a meal at McDonald’s, a haircut at a barbershop or a dress from a boutique. Retailing is part of the process of marketing. MARKETING – is defined by the American Marketing Association as the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives. Thus, by satisfying individual objectives, retailing is the final part of the marketing process. RETAIL STRUCTURE – comprises all retail outlets through which goods or services move to the ultimate consumer. CHANNEL OF DISTRIBUTION – is an inter-organizational system through which products or services are marketed. CLASSIFICATION OF THE RETAIL STRUCTURE A. Descriptive Classifications 1. Type of ownership 2. Type of merchandise carried 3. Kind of business 4. Location B. Strategic Classifications 1. Margin turn-over 2. Retail price/service strategy 3. Strategic group analysis A. Descriptive Classifications 1. Type of ownership – the most common classification is based on ownership. Trade associations and industry consultants typically report retail performance data (for instance, average store sales, sales per square foot and gross profit percentage). a. Independent – the independent operator with a single store dominates retailing in terms of number of outlets, accounting for approximately 80 percent of all establishments. b. Chain – a chain (or multiunit organization) is characterized by the sale of similar merchandise in more than one outlet, a similar architectural format, centralized buying and common ownership. c. Manufacturer-Owned – some manufacturers practice forward integration and operate their own retail outlets.  d. Government-Owned – Occasionally, governments operate retail establishments. State owned stores that sell agricultural products. e. Farmer-Owned – some farmers operate a limited number of retail outlets as seasonable roadside stands. More permanent farmer-owned retail outlets involve purchasing other producers’ output for resale to consumers. f. Public-Utility Owned – in USA for many years, public utilities have sold stoves, refrigerators and other types of appliances to boost the consumption of natural gas or electricity. g. Consumer-Owned – consumer cooperatives are retail stores owned by consumers and operated by hired managers. 2. Type of Merchandise Carried – retail establishments may be classified by the variety and assortment of their merchandise. Variety refers to the number of lines of merchandise carried; assortment refers to the choices offered within a line. Variety can be broad or narrow; assortment can be shallow or deep. Variety can also be thought as the width of a store’s merchandise offerings. Assortment, in turn, can be thought of as the depth of a store’s merchandise selection, including sizes, colors and type of material. 3. Kind of Business – Retail establishments can be classified by the kind of business they engage in, or by the merchandise group they belong to. For example, large supermarkets typically sell a broad mix of merchandise, including food, drugs, liquor and general merchandise. Also, each category may include retailers that follow different strategic formats, such as convenience food stores, conventional supermarkets, superstores, warehouse food stores and other types of food stores. 4. Location – it is limited to the following location alternatives: the Central Business District, shopping centers and stand-alone location B. Strategic Classifications – from the strategic classification schemes, retailers gain competitive insights that assist them in assessing market opportunities and in developing strategies. 1. Margin-turnover – the margin turnover framework for analyzing the retail structure, developed by Ronald Gist, may be applied to all types of outlets. Margin is defined as the difference between the cost and the retail selling price, or as the percentage markup at which merchandise is sold. Turnover is the number of times the average inventory is sold in a given year. 2. Retail Price and Service Strategy Classification – a second strategic classification utilizes two major value dimensions – price and service – to categorize firms. Examples – jewelry store, convenience food store or discount store. Retailers must monitor this strategy carefully as they reduce service in n attempt to be more price competitive. 3. Strategic Group Analysis - strategic classification formats can be applied to any line of merchandise and are flexible in terms of choice of classification dimensions. The dimensions used should be those that are important to consumers in deciding where to shop and the analysis should be based on shoppers’ perceptions of competitors along the relevant dimensions. THEORIES OF RETAIL INSTITUTIONAL CHANGE 1. The Wheel Of Retailing The wheel of retailing hypothesis, developed by Harvard University Prof. Malcolm McNair, is the best known explanation for changes in the retail structure. McNair’s theory states that new types of retail institutions enter the market as low-margin, low-price, low-status merchants (the entry phase). Gradually, during the trading-up phase, they provide new services and improve their facilities, a process that drives up expenses, margins and consequently prices. Eventually the innovator matures as a high cost, conservative merchant that is vulnerable to new types of institutions that enter the market as low-cost, low-price, no-frills competitors. 2. The Retail Accordion Alternative explanation for changes in the retail structure is the concept of the retail accordion. Proponents of the theory argue that changes in the merchandising mix, no price and margins, are a better explanation for change in the retail institutional structure than the wheel of retailing. This theory is based on the premise that retail institutions evolve over time from broad based outlets with a wide variety of merchandise to outlets offering specialized narrow lines. Eventually, outlets begin again to offer a wide variety, thus establishing a general- specific-general pattern. This evolution suggests the term accordion, which reflects a contraction and expansion of merchandise lines. 3. The Dialectic Process A third explanation for changes in the retail structure is the theory of the dialectic process, which is based on the premise that retailers mutually adapt in the face of competition from “opposites.” When challenged by a competitor with a differential advantage, an established institutional type will adopt strategies and tactics in the direction of the advantage, thereby negating some of the innovator’s attraction. 4. Adaptive Behavior and Natural Selection Adaptive behavior states that an environmental need that exists for a certain kind of retail institution will cause the institution to evolve. When the need ceases to exist, the institution will disappear. Adaptive behavior thus explains the inception of an institution. Shopping centers, for example, emerged to meet the needs of consumers moving from upland to lowland. The adaptive behavior theory can be used to explain the development and growth of health spas, diet centers and similar types of institutions that have emerged in response to Filipino consumers’ interest in health and physical fitness. STRATEGIC PLANNING – includes defining the overall mission or purpose of the company, deciding on objectives that management wants to achieve and developing a plan to achieve these objectives. MISSION STATEMENT – tells what the firm intends to do and how it plans to do it. A firm’s mission statement often reflects its corporate culture, which establishes the values of greatest importance to the organization. OBJECTIVES – are statements of results to be achieved. Objectives may include profit, sales volume, market share or expansion. SITUATION ANALYSIS – is the assessment of internal strengths and weaknesses and external threats and opportunities 3 APPROACHES IN SELECTING TARGET MARKETS Target Market – markets that management decides to serve 1. Aggregation – as an approach to target market selection assumes that most consumers are alike in their needs and wants. Retailers following such an approach do not recognize varying demand curves for different groups of consumers. Retailers attempt to attract the broadest possible number of buyers by relying on mass advertising and by appealing to the universal theme of low price. 2. Partial Segmentation – approach to target market selection, retailers offer goods and services to most segments of the market, but different versions of the same products or services are offered to each broad segment. Example: a department store may have separate clothing departments for juniors, budget conscious shoppers and high- income, fashion conscious consumers. Market segmentation is the process of taking a heterogeneous market and developing homogeneous groups (segments) on the basis of some kind of similarity among consumers such as demographic, buying behavior or psychological traits. 3. Extreme Segmentation – retailers concentrate on a very narrowly defined market segment; emphasis is on personalized service and depth of product lines. For example – wide selection of environmentally sound toiletries, stores that sells merchandise exclusively for southpaws POSITIONING STRATEGY – is a plan of action that outlines how the organization will compete in chosen markets and how the firm will differentiate itself from other organizations competing for the same customers. RETAILING MIX 1. Product 2. Price 3. Presentation 4. Promotion 5. Personal selling 6. Customer services STRATEGY IMPLEMENTATION IN RETAILING 1. Market penetration 2. Market development 3. Productivity improvement Market Penetration – retailers following a strategy of market penetration seek an advantage over competition by a strong market presence bordering on saturation. Such a strategy is designed to increase the number of customers, the quantity purchased by customers and purchase frequency. Example McDonald’s, supermarkets, department stores, high -impulse items Market Development – focuses either on attracting new market segments or completely changing the customer base. Market development normally involves bolder strategy shifts, more capital and greater risk than a market penetration strategy. Examples of market development efforts include reaching new segments and operational evolution. Reaching new segments – fast-food restaurants provide a good example of firms that have followed a strategy of attracting new segments in existing markets. Many fast-food chains have looked beyond that heavily saturated hamburger market and added such items such as salad bar, chicken sandwiches and breakfast items. Operational Evolution means changing competitive strategy over time by focusing on a new target market and developing a business concept different from existing one. This strategy is different from that of increasing the customer base because it involves changing the customer base, rather than adding customers to it. Productivity Improvement – focuses on improved earnings through cost reductions, increased turnover through an improved merchandise mix and increased prices and margins. Productivity improvement often occurs in firms in the mature or declining phase of their life cycles. Cost reduction – some companies concentrate on cost reductions as a competitive weapon in increasing productivity. A key to such a strategy often is to increase self-service and to hold down labor costs, reducing store hours, making better use of part-time and cutting back on customer services. Improved merchandising mix – many department stores have attempted to improve productivity by increasing their turn-over. Price and margin increases can be a key element in productivity-based strategies. Higher than normal prices may be possible on a low visibility items of infrequently purchased products. Once a strategy is implemented, managers need feedback on how the organization is performing. Information is needed on a routine basis to help management determine whether objectives are being met. However, the effectiveness of the long-term competitive strategy of the firm must also be periodically evaluated. LAWS AFFECTING THE RETAILING MIX The retailing mix component of retailing strategy includes decisions about price, promotion, distribution, the product, length of payment and methods of selling PRICE – is at the heart of a retailer’s marketing plan. Pricing decisions affect profitability and market share and can provide an advantage over the competition. Pricing decisions are monitored by a variety of agencies. a. Horizontal price fixing – occurs when management agrees with competitors on the price at which identical items will be sold. b. Vertical price fixing – is an illegal practice that occurs when manufacturers set minimum price at which their products must be sold by retailers. The practice is often referred to as resale price maintenance.  c. Predatory pricing – is the practice of setting prices in a deliberate effort to drive competitors from the market. Varying retail prices by community is illegal if management cannot cost justify the practice and management is trying to eliminate competition. d. Sales below cost – Several countries have laws that do not allow the sale of items at less than their cost to the retailer. These laws usually cover such product lines as milk and other dairy products, cigarettes and gasoline. e. Price discrimination – not all price discrimination is illegal but management should be prepared to justify price differences. The key issues are like grade and quality and the good faith defense. f. Like grade and quality – price differences on goods like grade and quality offered to various retailers are legal when differences exist in the cost of manufacturing or delivery, the price differences do not lessen competition or both. g. The good faith defense – a supplier can charge different prices to various retailers if it does so “in good faith to meet an equally low price of a competitor or the facilities furnished by a competitor. But services or facilities offered by a supplier must be available to all retailers on proportionally equal terms. Promotion – There are laws that help prevent misleading or deceptive promotion. There are also laws designed to ensure that distributors do not unfairly discriminate between retailers in the type and amount of advertising support that the distributors offer. a. False and misleading advertising b. Proportional availability c. Advertising substantiation Distribution regulations – are designed to ensure a strong and healthy commercial environment. They help prevent retailers from unfairly eliminating competition and keep manufacturers from providing some retailers with geographic monopolies that have the effect of eliminating competition. Other regulations are designed to provide a safe and healthy environment to retail employees and shoppers. a. Exclusive dealing – occurs when a supplier requires a retailer not to sell a competitor’s products. Exclusive territories are created by suppliers who limit the areas in which a retailer can sell a product. In return, the supplier agrees not to sell to any other retailer in the defined area. b. Gray market retailing – are outlets not authorized by the manufacturer to sell the merchandise they offer for sale. They obtain the merchandise from other larger authorized retailers or wholesalers and sell it at prices 30 to 40 percent below the prices available from authorized outlets. c. Dual distribution – in which wholesalers operate retail outlets, is not per se illegal. Manufacturers watch this type of distribution closely to make sure that wholesalers are not selling to independent retailers at high prices and then undercutting them by reselling the same merchandise at lower prices through their own retail outlets. d. Unfair elimination of competitors – retailers cannot try to unfairly eliminate competitors. Big anchor stores in shopping centers can no longer legally determine which other tenants may locate in the center for example.  e. Free speech issue – malls have become the free speech battleground of the 1990’s. Free speech provisions do not restrain private property owners from deciding which activities will occur on their property. f. Health and safety – retailers are required to educate and inform employees, they are also required to make their store accessible to disabled shoppers, parking space for them and the availability of handicap-accessible wheelchairs and restrooms. g. Environmental control regulations – various environmental control regulations affect retail location decisions. Examples are: The Clean Air Act, The Water Pollution Control Act, Coastal Zone Management Act, Noise Pollution Control Act, The National Environmental Policy Act Product – product tampering on supermarket shelves is a growing problem and consumers are often unable to guard themselves against the risk created y dangerous products. a. Warning requirements – retailers have a specific responsibility to monitor the safety of the products they sell b. Warranties – is a seller’s guarantee regarding the quality or performance of goods. Express warranties are given in writing and are part of the bundle of benefits consumers receive when a product is purchased. Extended warranties are purchased by consumer and cover parts and sometime labor for a period of time. c. Weights and measures seal – some businesses like supermarkets and gasoline stations are inspected by government representatives d. Fictitious trade name registration e. Truth in mileage act f. Trademark protection g. Labelling requirements h. Lemon laws – are designed to protect consumers from defective automobiles Credit – in its various forms is important to many consumers. Credit can also provide retailers with a competitive advantage. a. Consumer credit protection act b. Fair credit reporting act c. Fair credit billing act d. Equal credit opportunity act e. Consumer leasing act f. Fair debt collection practices act Methods of Selling – regulations exist to protect consumers against unscrupulous retailers who engage in such practices as shipping unordered merchandise or bait and switch selling. Regulations also affect the conditions under which direct sales are possible, days and hours of operation and door-to-door sales. a. Unordered merchandise – retailers are not allowed to ship merchandise that the consumer has not ordered. Consumers are not required to pay for items they did not order. b. Push money (PM) – encourages the sale of specified merchandise by paying salespeople a bonus to sell it. This practice is not per se illegal c. Hours and days of operation – some countries have so called “blue laws” which prohibit the sale of various types of merchandise on Sunday  d. Direct retailing – laws prohibit interstate liquor shipments through the mail. These laws keep liquor manufacturers and retailers from capitalizing on telemarketing or mail-order sales. e. Bait and switch advertising – management cannot employ bait and switch sales tactic. In the bait and switch tactics, goods are advertised at a very low price. The retailer then tries to switch customers to a higher priced item when they come to the store. SOCIAL RESPONSIBILITY 1. Economic responsibilities – reflect the profit motive as a primary incentive for entrepreneurship. The primary economic role is to offer goods and services that consumers need and to make an acceptable profit in the process. 2. Legal responsibilities – require the organization to conform to all laws and regulations 3. Ethical responsibilities – reflect those practices that are expected or prohibited by society, even though they are not reflected in law. They embody standards or norms that reflect a concern for what employees, the community, shareholders and consumers regard as fair and just. 4. Philanthropic responsibilities – accomplish action that reflect society’s expectations that retailers should be good corporate citizens ENVIRONMENTAL DYNAMICS What Are The New Consumer Demographics?  Smaller households  Two income households  Increase in suburban movement  Age mix changes  An older population  Regional growth  Growth in smaller communities  Increasing mobility  Growth in subcultures  An increasing number of male shoppers The MKS Report on the new Filipino consumer clusters amid a COVID scenario is a product of a duo research survey conducted between April and May 2020. The 500 sample study covers all income classes and five generations of consumers among them:  The Boomer Generation born between 1946 and 1964, ages between 56 to 74  The Generation X (Gen X) or sandwich generation born 1965 to 1976, now ages between 44 years old and 55 years  Generation Y (Millennial Generation) born between 1977 and 1994 and ages 26 to 43 years old  Gen Z – born between 1995 and 2020, the oldest being 25 years old THE MOOD OF THE CONSUMER The current consumer mood can be described as an age of creativity, self-expression and individualism. People are seeking a higher quality of life TYPES OF COMPETITION  Intratype Competition – is a competition between two retailers of the same type such as drugstore chains  Intertype Competition - is a competition between different types of retails outlets selling the same lines of merchandise in the same trade area  Corporate System Competition – this occurs when a single-management ownership links resources, manufacturing capability and distribution network. SM is an example of corporate system competition. They manufacture some of their merchandise, handle their own storage and distribution functions and perform all management activities necessary for the sale of goods and services at the retail level. Total systems networks can formed either FORWARD INTEGRATION or BACKWARD INTEGRATION. Forward Integration – a manufacturer establishes its own wholesale and retail network Backward Integration – occurs when a retailer or wholesaler performs some manufacturing functions THE NEW FACE OF COMPETITION  Secondary Market Expansion – these are usually communities of 200,000 or fewer and they are understored in terms of national competitors  Extremes in Establishment Types – the trend today can be described as diversity in retail outlets. Broad based merchandising firms such as Home Depot’s home improvement centers and discount pricing have made major inroads into the markets of traditional hardware stores.  Supermarket Retailing – the supermarket concept, long familiar in the food field, has been adopted by many other types of retailers. The key elements of this type of retailing are: - Self-service and self-selection - Large scale but low cost physical facilities - A strong emphasis on price - Simplification and centralization of customer services and - A wide variety and broad assortment of merchandise  Diversity In Formats – the accelerating diversity in formats can be illustrated in the context of food retailing - Superstores are 30,000 square feet or larger and have service departments not typically found in a conventional supermarket, including an on – premises bakery, service deli and a wine and cheese shop. - Hypermarkets such as SM have sales as high as 2B a year, they make heavy use of warehousing techniques, place strong emphasis on large product sizes and experience large average purchases. They are the largest of any of the food stores.  Combination stores – are a merger of two different types of retailing operations. They offer both food and pharmacy service. They also offer many health and beauty aids as well as other nonfood items   Warehouse markets – have a strong warehouse orientation, low prices, a limited selection of general merchandise, a low operating expense ratio compared to conventional supermarkets and limited customer service. - Limited-assortment stores – such as 7-Eleven are typically located near more conventional food stores. They have a merchandise assortment of less than 1,000 stock keeping units, feature discount pricing, have a heavy reliance on regional and house labels and carry only limited assortment of perishables.  Shortening Life Cycles – the life cycles of many types of retailing are becoming shorter  Escalation of Price Competition – some firms increasingly are buying a share of the market as a result of the intensified price competition emerging from the struggle for market share. However, retailers that project a strong price and value image are the ones most likely to increase their market share today.  Growing Importance of Power Marketing Programs – many manufacturers now offer comprehensive merchandising programs to merchants; these re known as power marketing programs. The manufacturers are seeking superior results by offering a complete merchandising program to the retailer. They handle everything from price to inventory to display.  Market Saturation – many people today believe that SM has too many stores. Sales per square foot, when adjusted for inflation are less than they were a decade ago. Most retailers can only look forward to stiffening competition and disappointing profits in this decade. Only the smartest merchandisers will be exceptions. Some retailers are achieving success. One category winner today are the power retailers. These retailers have such financial strength and marketing skills that they can bull their way into any market, however saturated and make a profit.  Designer – Owned Retail Outlets – a trend further accelerating retail competition is the increasing tendency of designers to open their own outlets. They do so to gain greater control over the way the merchandise is presented. Designers are attracted by the ability to control their presentation. They also contend that many department stores have poorly trained sales staff, unexciting in – store merchandising and excessive price cutting promotions, all of which can harm their image. EMERGING TECHNOLOGIES 1. Electronic Funds Transfer – most people have read newspaper articles that refer to a cashless and checkless society. Such a system is slowly becoming a reality. Automatic authorization of credit and electronic funds transfer from one account to another can eliminate float. Retailers would like to reduce their float (the lag between receipt of a customer’s check and deposit of the funds in the retailer’s account). Some banks are issuing a debit and credit card combination called a combo card or a debit card, whereby a purchase price is deducted electronically from a customer’s account. 2. Video Technology – home television shopping is generating million of pesos in annual sales 3. Video Mail Order Catalogs 4. Interactive In-Store Video Sales Aids – retailers often use in-store video to stimulate sales 5. Electronic Shelf Labels – allow price changes to be made electronically from a central location, rather than manually on each shelf. THE RETAIL DECISION SUPPORT SYSTEM Retail Decision Support System – is the structure of people, equipment and procedures to gather, analyze and distribute data for decision making. The data needed include internal data, secondary data and primary data. Data generated as a result of model building, as part of merchandise and management information systems are similarly important. Modeling Building – includes the application of statistical principles in the analysis of data important to management. The models use primary, secondary and internal data as inputs. Examples of model building include developing sales forecasting models, site evaluation models and performance effectiveness models. Computers are usually used to help generate these models. Merchandise Information Systems are computer-based systems that primarily emphasize improved merchandise information gathering and analysis. The product of a merchandise information system is a series of computerized reports that assists retailers with seasonal planning, order management, vendor analysis, price revisions, sales promotion evaluation and similar analyses. Management Information System – have a broader focus than merchandising issues. They are designed to provide information on operating and macro environment and to aid in evaluation and control. Operating environments include competitors, customers, suppliers, creditors and stakeholders. DATA SOURCES Internal data – help management determine what is going on in the firm. Examples include customer complaints, reports on out-of-stock items, information from warranty cards, and observations of customer traffic flow in a store. Internal data are the least expensive type of data to collect. Internal data can be developed from customer records, salespeople, an analysis of customer charge account and financial records. Secondary data – are gathered by external groups or organizations for purposes other than the issue at hand and are made available to the firm. An example is census data. Information published by various sources can help management determine what I going on inside and outside the firm. Information is available from (1) syndicated services; (2) government agency reports; (3) guides, indexes and directories; (4) trade associations and (5) computerized searches. Primary data collection – occurs when management must collect data unavailable from internal or secondary sources. Examples include analysis of the firm’s image, the effectiveness of promotion and a competitor’s merchandise assortment. When management cannot find what it needs to know from any existing source, it must generate first-hand information. Primary data collection can take many forms: observation, surveys, focus groups and consumer panels and test marketing. OPERATING ENVIRONMENT – consists of all organizations or groups that either directly affect or are affected by the retailer’s competitive strategy. Examples include customers, competitors, suppliers and shareholders. MACROENVIRONMENT – includes the larger forces beyond the control of the firm such as technology or social trends that can affect its future. The key to success is to recognize the implications of the identified factors to retail strategy. CUSTOMER ISSUES – include size of and trends in the market, key customer shopping strategies, the nature of customer buying decisions and factors affecting patronage. COMPETITOR ISSUES – include trends in the market shares of primary competitors; the strength of the competition; positioning strategies of the competition, unique cost advantages, if any, of competitors and which competitors are leaders and which are followers. SUPPLIERS – must be carefully evaluated. Suppliers can become powerful competitors if they engage in a process of forward integration. They can also be of critical importance if only few suppliers exist, giving them strong bargaining power with the retailer. SHAREHOLDERS – can be important in determining both short-term and long-term marketing plans. Managers of publicly help companies must always keep thr market value of the company stock in mind when developing corporate strategies. ECONOMIC AND RESOURCE ENVIRONMENT – consists of an assessment of trends in inflation, the nature of the business cycle, import quotas and tariffs and similar issues. SOCIAL AND CULTURAL ENVIRONMENTS – reflect the beliefs and values that guide the thoughts and actions of individuals and organizations. These beliefs and values change over time and can alter consumer preferences and marketing practices. LEGAL AND POLITICAL ENVIRONMENTS – affect every dimension of the retail firm from merchandising to promotion to location. Regulations may prohibit or discourage certain practices, permit previously prohibited practices or provide new and unique opportunities. TECHNOLOGICAL CHANGES – can significantly affect the relationship between customer and retailer. New and improved technologies can lead to dramatic shifts in customer preferences. Technology can also affect every dimension of the marketing mix. UNDERSTANDING THE CONSUMER TYPES OF CONSUMER DECISIONS 1. Consumers are problems solvers. The role of the retailer is to help them solve their buying problems. 2. Consumers try to lower their risk when buying merchandise by seeking information. They also seek information for reasons other than risk reduction. 3. Store choice and merchandise choice depends on variables such as location, image, hours and price which are under the influence of the retailer. 4. Many other factors, such as store atmosphere and courtesy of sales clerks, affect the in- store behavior of consumers. MOTIVES FOR SHOPPING Personal motives – include role playing, diversion, sensory stimulation, physical activity and self- gratification. Personal motives result from internal needs of the consumer which are distinct from the needs fulfilled in purchasing a good or service.  Role Playing – consumers often engage in activities that they perceive as associated with their role in life. Familiar roles include those of home-maker, student, husband or father. For example, a husband may perceive that in his role he should purchase only high-quality gifts from prestigious outlets for his wife.  Diversion – shopping often provides the opportunity to get a break from the daily routine. Walking through a shopping center can allow a person to keep up with the latest trends in fashion, styling or innovation. Knowing this, mall managers often schedule antique or auto shows in an effort to attract customers.  Physical activity – many people welcome the opportunity to walk for exercise in a safe, temperature controlled environment. Some malls have thus organized walking and health clubs in response to such needs. The malls are opened for walking before the shops are opened for business.  Sensory stimulation – shoppers often respond favorably to background music, scents and other types of sensory stimulation as part of the shopping process. Customers tend to feel more at ease, spend more time and shop more often in a store that plays background music  Self-gratification – shopping can alleviate loneliness or other emotional stress. Some also enjoy people-watching while shopping. Self-gratification helps explain the development of family amusement centers in shopping malls. Social motives – result from the desire for group interaction of one sort or another  Social experiences – for many people shopping has become a social activity. They take advantage of such opportunities to meet friends or to develop new acquaintances. Some malls feature special before noon promotions especially designed to serve older people. Others arrange cooking demonstrations and similar activities.  Hobbies – interest in a hobby may bring people together, as it is a common desire to meet people who are like oneself. Thus, retailers can provider a focal point for people with similar interests or backgrounds. Retail computer outlets sponsor hobbyist clubs for this reason.  Peer group attraction – individuals may shop to be with a peer or reference group. Patronage of elite restaurants reflects such behavior. Similarly, one will often find teenagers at a tea house or coffee shop that offers products appealing to their taste.  Status and power – some consumers seek the opportunity to be served and catered to as part of the shopping experience. Such an activity may be one of their primary ways to get attention and respect. A MODEL OF THE CONSUMER DECISION PROCESS 1. Problem Recognition – the decision process begins when the consumer realizes that a difference exists between the present and preferred state of affairs. 2. Search for Alternatives – the consumer seeks and evaluates information after problem recognition occurs. The search may be physical or mental. Mental search means drawing on past experience. The consumer may need up-to-date information about products, prices, stores or terms of sale. Physical or mental search may be required to obtain the needed information. - Problem solving behavior – depending on the consumer’s background and experience, he or she may exhibit extensive, limited or routinized response behavior. a. Extensive problem solving – consumers engage in extensive problem solving when faced with first time purchase in an unfamiliar product category, perhaps during the introductory or early growth stages of the life cycle of the product or service class. Examples include cellular phones and personal computers b. Limited problem solving – the consumer who is familiar with the class of product or service engages in limited problem solving; the decision becomes a choice between brands or outlets. An example for many of us would be small appliances. Shoppers evaluate bands by comparing prices, warranties, after-sale service programs, knowledge and friendliness of sales people or similar features. c. Routinized response behavior – many consumers reach a stage of routinized response behavior after they become familiar with a product class, the brands within the class or an outlet. - Information sources – the retailer can make information available to consumers in a variety of forms to help them in their search. Consumers are normally exposed to: a. Marketer dominated sources – marketer dominated information sources are the promotional component of the retailing mix. They include advertising, personal selling, displays and sales promotion. b. Consumer dominated sources – consumer dominated sources include friends, relatives and acquaintances. Consumer dominated information is normally perceived as trustworthy. Satisfied consumers are especially important because they tend to talk to others about their shopping experiences. c. Neutral sources – neutral sources of information tend to be perceived as accurate and trustworthy. Government rating agencies and state and local consumer affairs agencies also are viewed as neutral information providers. 3. Evaluation of Alternatives – after background information is acquired, the consumer evaluates the outlet and product attribute alternatives. - Risk reduction – a desire to reduce the risk of a poor decision influence the evaluation of alternatives. Six types of risk affect the choice of outlet and merchandise alternatives: a. Performance risk – the chance that the merchandise purchased may not work properly b. Financial risk – the monetary loss from a wrong decision c. Physical risk – the likelihood that the decision will be injurious to one’s health or cause physical injury d. Psychological risk – the probability that the merchandise or outlet will be compatible with the consumer’s self-image  e. Social risk – the likelihood that the merchandise or outlet will not meet with peer approval f. Time loss risk – the likelihood that the consumer will not be able to get the merchandise adjusted, replaced or repaired without loss of time and effort 4. The Purchasing Decision – choosing the outlet and the merchandise does not end the purchasing process. The consumer still has to decide on the method of payment, accessories (such as camera lens with a camera purchase), an extended warranty and method of delivery for bulky merchandise. Retailers have the opportunity for “plus” sales of merchandise and services at this point 5. Post-Purchase Evaluation – retailers need to reassure consumers after major purchases that they made the right decision. Consumers are often afraid that they may have spent their money foolishly. A follow-up letter or a phone call can help provide reassurance. Service providers such as walk-in medical clinics often call the day after seeing a patient as a way of showing concern for the patient’s welfare. The level of satisfaction influences whether a consumer will recommend an outlet or merchandise line to friends and family. Retailers need to be sensitive to consumer concerns and then work to alleviate them UNDERSTANDING THE HOW, WHEN, WHERE AND WHAT OF SHOPPING 1. Where Do Consumers Shop?  Shopping Centers  Downtown  Outshopping  Nonstore shopping Choosing A Store – consumers make decisions about specific outlets at which to shop after deciding the general area in which they will shop. The image of a retail outlet is important in such a decision. The store has become the brand in the current economic environment. The consumer’s perception of the retailer and what a retailer stands for has become the single biggest reason for selecting to shop a particular store. The major attraction characteristics include the merchandise, services offered, physical facilities and employees. All of these characteristics are under the direct influence of retailers. Image – is the way consumers feel about an outlet. The image is what people believe to be true about an outlet and how well those beliefs coincide with what they think it should be like. The image may be accurate or it may be quite different from reality. Why Think About Image? – the retailer should be concerned about image because the flow of customer traffic depends on it. Management may have what they think is the right merchandise at the right price in the right style in the desired size, color and quality. But it is what the customer thinks of the price, the quality and the service that is important. How Are Images Formed? – outlet attributes collectively make up the elements that comprise its image. Each attribute should be aligned with management’s positioning strategy for the outlet.  - Price policy – an outlet’s prices influence they way people think about its other dimensions. Therefore, prices must be consistent with the other elements of the retailing mix. - Merchandise variety – image improves when customers find a product that they like but cannot find in other outlets. - Employees – salespeople and other employees affect an outlet’s image. Customers may react negatively if the educational level of an outlet’s personnel is different from theirs. - Outlet appearance – what people see as they pass by an outlet is another important element in its image. Even people who never enter an outlet form an impression from its outside appearance. - Type of clientele – the image that people have of an outlet is influenced by the type of people who shop there - Advertising – advertising tells people whether the outlet is modern or old-fashioned, low price or high price, small or large. It also communicates other things of both a physical and psychological nature. Changing The Outlet’s Image An image is a complex affair and managers should not try to change an outlet’s image without careful thought and planning. However, if a retailer is dissatisfied with the image customers seem to have, it should ask three questions:  What kind of image will serve best in the existing market?  What kind of image does the store have now?  What changes can be made to improve the image Keeping the Image Sharp Like the human face, an outlet’s image does not stay bright by itself. It requires care and regular maintenance. Managers should review the image periodically just as they periodically review financial statements. Listen to Customers Management can ask customers what they like about an outlet and why they prefer it to others. Their answers give an idea of the strong points in the firm’s retailing mix and its image. They can also indicate what products and services should be advertised and promoted. Listen To Non-Customers Management often finds that there are more people in their neighborhood who don’t patronize them than who do, Why? Often only one or two aspects of an operation irritate people and keep them from having a good image of it. A grouchy cashier, for example,, can cause such potential customers to think poorly of the whole store.  2. How Do Consumers Shop? The way in which consumers select products and services and the distance they will travel to shop also affect merchandising decisions. - The Costs of Shopping – some consumers try to minimize the costs of shopping. The cost of shopping comprise money, time and energy. Money costs are the cost of goods purchased n the cost of travel. Time costs include the time spent getting to and from the store or stores, time spent in getting to and from. Energy costs include carrying packages, fighting traffic, parking, waiting in line and various other psychological costs Consumers are willing to travel farther for specialty goods than for either shopping or convenience goods because they believe the satisfaction they obtain from getting exactly what they want more than offsets the cost of the extra effort. Convenience goods are items for which consumers are indifferent to brand name and will purchase at the most accessible outlet. Shopping goods are products for which consumers make comparisons between various brands in a product class. A specialty good is one for which a consumer insists on a specific brand. How Far Are Consumers Willing To Travel? Most shoppers at grocery stores live within a half mile of the store. Shoppers usually will travel about 10 minutes to shop for higher priced merchandise. Typically, 75 percent of the people who travel to a large shopping center live within 15 minutes of the center. However, shoppers will travel much farther to purchase specialty goods 3. What Do Consumers Buy? Price and brand are two major attributes that affect consumer purchases. Price is important because it is often a measure of worth. Brand is often relied on as a measure of quality. Other factors that are important in merchandise choice include open-code(freshness) dating, unit pricing, shelf displays, shelf locations and coupons. Price – consumers ordinarily do not know the exact price of an item of merchandise, but they usually know within well-defined ranges. The higher income consumer usually is less price conscious than the lower income consumer seeking the same merchandise. Brands – some consumers purchase only well-known national brands of manufacturers such as Del Monte to help avoid the risk of bad purchase. Open-Code Dating – means that the consumer can tell the date after which a product should not be purchased. Unit Pricing – states price in such terms as price per pound or ounce. Shoppers use this information as a guide to the best buys. Again, younger, higher income consumers are more likely to use these data. Brand switching occurs often when prices are stated on a per-unit basis. Shelf Displays and Location – retailers tend to give the most shelf space to merchandise with the highest profit margins, often their private labels. Consumers are most prone to purchase merchandise displayed at eye level. Coupons – can be used to draw new customers to an outlet and to increase purchases made by regular customers. They can also be used to offset the negative features of a store by drawing customers to a poor location. 4. When Do Consumers Buy? Sunday and continuous store hours are attractive to many shoppers. Sunday is often the only time some families can shop together and working people are more likely to shop in the evenings and on Sunday. Many retailers do not like Sunday openings or long hours because they believe that long hours drive up costs without helping profits. However, consumer preference for these hours and competitive pressures are making the openings increasingly common. Consumers often turn to non-store retail shopping options. Many retailers experience wide seasonal variations in sales. Some retailers make one-third or more of their sales in November and December Responding to Consumer Dissatisfaction Consumer complaints are a signal that not all is well in the business. Retailers should not ignore people with complaints but should actively seek feedback – what they like and don’t like, how they can be better served, their satisfaction with store policies and so forth. Unfortunately, too few outlets do this. It is too simple to say that the customer is always right. Some customers do not pay their bills. They shoplift, switch price tags and so forth. Nor is the customer always wrong. Retailers sometimes use bad credit information, make errors in customers’ account and sell inferior merchandise. A Philosophy Of Action For Management The demands of consumers normally are not unrealistic. They simply want more, better and honest information. Most retailers do not want to make money by selling merchandise that may hurt customers or drive them away. Customers simply want such things as better labelling, honesty in advertising and full information on credit terms. THE EVOLUTION OF LIFESTYLE MERCHANDISING Lifestyle retailing has grown in importance over the past 5 decades. Until the mid-1960s, retailing was characterized by a sameness in operations. Managers could be shifted from one store to another across the country and would find new differences between the stores. Changes began to occur with the acceptance of the marketing concept in the 1960s and the positioning concept in the 1970s, forerunners of lifestyle merchandising. The Marketing Concept The marketing concept was developed in the early 1960s by packaged goods firms such as Procter & Gamble in response to the lack of attention to the needs of consumers in merchandising decisions. The marketing concept involves focusing on consumer needs and integrating all activities of the enterprise to satisfy the needs identified. Earlier strategies focused primarily on operations efficiency and not on responding to the needs of unique market segments. Retailers in the 1960s, even though they insisted that the customers is always right, often implemented the marketing concept only in the context of day-to-day operations, not in the context of the broader strategic dimensions of retailing. Policies relating to refunds, hours of operation and customer service were developed with a consumer focus. However, such issues as product lines, store location and merchandise lines still retained the sameness of earlier years. The Positioning Concept The concept of market positioning emerged during the early 1970s as an extension of the marketing concept. Positioning was the forerunner of contemporary lifestyle merchandising as retailers sought to capitalize on the strategic implications of the marketing concept. Retailers began to tailor merchandising strategies to specific consumer segments. The segments to be served were defined, however, largely in terms of demographics such as age, income and education. Wal-Mart was an early leader in positioning. The company experienced rapid growth by serving small town and rural markets. Each dimension of store operations was geared to serve these markets. Other chains, such as Toys ‘R’ Us, experienced equal success by using demographics-focused market positioning. WHY WORRY ABOUT LIFESTYLER MERCHANDISING? Management is better able to describe and understand the behavior of consumers when it thinks in terms of lifestyle. Routinely thinking in terms of activities, interests, needs, self- concepts and values of customers can help retailers plan merchandise offerings, price lines, store layout and promotion programs that are tightly targeted to core customer markets. However, lifestyle analysis only adds to the demographic, geographic and socio-economic information. What Shapes Lifestyles? We are all a product of the society in which we live. We learn very early concepts such as honesty and the value of money and these values stay with us throughout our lives. Cultural differences, plus individual economic circumstances, produce consumer lifestyles – traits, activities, interests and opinions reflected in shopping behavior. Individuals can be grouped into distinct market segments based on the similarities of their lifestyles. Where Do Lifestyles Come From? The lifestyles of consumers are rooted in their values. Values are beliefs or expectations or expectations about behavior shared by a number of individuals and learned from society. Some of these values do not change much over time and others can change quite rapidly. The major forces shaping consumer values include family influence, religious institutions, schools, the media and early life experiences. Values and Lifestyles Stanford and Research International has developed a trademarked program entitled VALS (values and lifestyles) that can help retailers understand the effect of consumer preferences and expectations on market planning decisions. The VALS program allows retailers to predict consumer responses to merchandise or to outlets based on the VALS categories established. For example, people who use yogurt regularly have been found to be societally conscious, as have the experiencers and achievers. Similarly, the experiencers are more likely to buy imported cheese that domestic cheese. Achievers, experiencers and societally conscious individuals shop kore frequently at supermarkets and convenience stores than other groups do and they also buy more on each trip to the store. Self-orientation – refers to the patterns of attitudes and activities that help people reinforce, sustain or modify their self-image. Principle-oriented consumers – are guided in their choices by the beliefs or principles rather than by feelings, events or desire for approval. Status-oriented consumers – are heavily influenced by the actions, approval and opinions of others. Action-oriented consumers – are guided by a desire for social or physical activity, variety and risk taking. 8 VALUES & LIFESTYLES (VALS) SEGMENTS 1. Actualizers are successful, sophisticated, active, take-charge people with high self- esteem and abundant resources. Their possessions and recreation reflect a cultivated taste for the finer things in life. 2. Fulfilleds are mature, satisfied, comfortable, reflective people who value order, knowledge and responsibility. Most are well-educated, and in, or recently retired from professional occupations. Although their income allows them many choices, they are conservative, practical consumers, concerned about functionality, value and durability in the products they buy. 3. Believers are conservative, conventional people with concrete beliefs and strong attachments to traditional institutions: family, church, community and the nation. They follow established routines, organized in large part around their homes, families and social or religious organizations. As consumers, they are conservative and predictable, favoring imported products and established brands. 4. Achievers are successful career-oriented people who like to and generally do, feel in control of their lives. They value structure, predictability and stability over risk, intimacy  and self-discovery. They are deeply committed to their work and their families. As consumers, they favor established products that demonstrate their success to their peers. 5. Strivers seek motivation, self-definition and approval from the world around them. They are striving to find a secure place in life. Unsure of themselves, and low on economic, social and psychological resources, they are deeply concerned about the opinions and approval of others. They emulate those who own more impressive possessions, but what they wish to obtain is generally beyond their reach. 6. Experiencers are young, vital, enthusiastic, impulsive and rebellious. Thy seek variety and excitement, savoring the new, the offbeat and the risky. Still in the process of formulating life values and patterns of behavior, they quickly become enthusiastic about new possibilities but are equally quick to cool. They are avid consumers and spend much of their income on clothing, fast food, music, movies and videos. 7. Makers are practical people who have constructive skills and value self-sufficiency. They live within a traditional context of family, practical work and physical recreation and have little interest in what lies outside that context. They experience the world by working on it (for example, building a house or canning vegetables) and have sufficient skill, income and energy to carry out their projects successfully. They are unimpressed by material possessions other than those with a practical or functional purpose. 8. Strugglers lives are constricted. Chronically poor, ill-educated, low-skilled, without strong social bonds, aging and concerned about their health, they are often despairing and passive. Their chief concerns are for security and safety. They are cautious consumers and although they represent a very modest market for most products and services, they are loyal to favorite brands. What Else Do We Know About Changing Cultural Patterns? 1. Parents are spending less time with very young children. 2. The separation rate remains high. More children are being raised with only one parent. 3. People move more often than in the past. 4. Religion is not important in many people’s lives 5. Schools are becoming more important in shaping values. 6. Individuals in each generation have different experiences. 7. Family size is decreasing and more single-person households are being formed. 8. The decline in the number of children is being accompanied by an increase in adult- oriented lifestyles. 9. The yuppies are getting older. 10. Families earning more than Php500,000 a year are rapidly increasing in number. 11. The roles of the male and the female in the household are no longer as clearly defined as in the past. 12. One of the most dramatic changes has been the effect of technology on consumer lifestyles. 13. Not all consumers are sharing in the affluence of some demographic segments. Some consumers, as part of their lifestyles are very responsive to coupons and other promotions. They use generic products, buy at flea markets and garage sales are willing to accept less service in return for low prices. 14. Health awareness continues to be important.  15. The more money people have to spend, the less time they have to spend it. The most affluent households typically have two salary earners who have little time for shopping. As a result, they will gladly pay for time-saving goods and services. SEGMENTING MARKETS BY LIFESSTYLE 1. Fashion consciousness 2. Price consciousness 3. Quality consciousness 4. Classic tastes 5. Fashion disenchantment 6. Advise-seeking tendency 7. Recreational shopping (shopping as fun) 8. Utilitarian shopping (shopping as a necessity) The Role of Ambience The essence of visual lifestyle retailing is reflected in the concept of ambience (or atmospherics). Ambience is a term loosely defined but critical to lifestyle merchandising. Adolph Novak, a leading store designer, defines ambience as “the general quality of design which expresses the character of a store, resulting in an institutional personality immediately recognized by the consumer public. Ambience is a lifestyle reflection of two elements (1) the interior décor, which includes everything within the store, such ad walls, ceilings, floor, lighting fixtures, customer services, signing and merchandise; and (2) exterior design. The interior and exterior designs should be in harmony. Exterior design often draws customers to the outlet by identifying the type or quality of the firm. Hedonic consumption – has been defined as those facets of consumer behavior that relate to the multisensory and emotional aspects of the shopping experience and product consumption. In other words, consumers may be attracted by sights, sounds, smells, color and displays as part of the retailing experience. Serving Customers With Unique Lifestyles Continuing market fragmentation has made lifestyle sensitivity even more critical to retail sources. Cultural differences require unique types of information for shoppers, as do pressures of time faced by professionals, exemplified by the need for longer store hours and personal shopping services. More knowledgeable salespeople are often required. 1. Information 2. Shopping services 3. Store hours 4. Effects on retail salespeople 5. Better promotion efforts 6. Visual merchandising UNDRSTANDING EMERGING GLOBAL LIFESTYLES Global telecommunications, frequent cross-border travel and a global economy are creating an international youth culture whereby fashion, music and food are becoming part of a universal, international lifestyle. ORGANIZING AND FINANCING THE RETAIL ENTERPRISE The Rewards of Ownership The chance to do things their way is what makes most entrepreneurs tick. Freedom of action for retail entrepreneurs is more important than prestige, power or money. Making the rules, as opposed to working for a boss, is a common dream. The retail owner’s vision can be as idealistic as combating environmental deterioration or a trivial as establishing and enforcing a dress code. Regardless, the attraction is that the owner is establishing the values, setting the agenda and defining the vision. The Risk of Ownership The risk of ownership is high. Going-out-of-business signs are part of every community. But aspiring entrepreneurs should discourage from starting their own businesses if they are willing to take a risk because the rewards can be great. THE ADVANTAGES AND DISADVANTAGES OF EACH FORM OF OWNERSHIP Sole Proprietorship Partnership Corporation Advantages Easy to operate Easy to organize Limited financial Easy to dissolve Greater capital liability Owner keeps all availability Easier to raise capital profits Combined Specialized management management skills experience Disadvantages Unlimited financial Unlimited liability Complex government liability Divided authority regulations Difficult to raise Hard to dissolve Expensive to capital organize Limited life of firm Various tax The business is disadvantages based on the heartbeat of one individual  The most common reasons for failure in retailing are management incompetence, unbalanced experience and lack of experience in the line of trade. Failure caused by neglect, fraud or disaster in unusual.  Many people enter retailing by buying an existing business. Such people have to decide on the type of business they want to buy based on their interests, skills and experience as well as the financing they can arrange.  Opportunities to buy a business can be discovered by working with business brokers, studying ads and contacting trade sources.  In deciding whether to buy a business, the potential buyer should determine why the business is for sale, whether a profit is being earned, what the operating ratios of the business are as compared to industry averages and what the worth of the business assets is.   Capital is needed for two categories of cost in starting a business; operating costs which are one-time costs and operating expenses which are the estimated ongoing expenses of running the business.  Sources of cash include owner’s equity, the credit available from suppliers, loans from financial institutions, government agencies and the sale of stock.  Retailers have the choice of forming a new business as a sole proprietorship, a partnership or a corporation. Alternatively, they can operate as an independent firm or become part of a marketing system.  Many retail organizations operate as family owned businesses. Problems can abound in such situations because of emotional conflicts, conflicts over who is really in control, different goals for the rate and amount of growth and ways that profits will be shared. MAKING THE LOCATION AND SITE DECISION Location decisions begin with an assessment of the retailer’s strategy, followed by market selection decisions, analysis of various urban areas and site selection. Matrix Of Consumer Goods and Stores Stores Convenience Shopping Specialty Convenience Consumers prefer to Consumers are Consumers prefer to buy the most readily indifferent to the buy at a specific store available brand and brand or product they but are indifferent to product at the most buy, buy shop among the brand or product accessible store different stores in purchased. order to secure better retail service or lower retail prices Shopping Consumers select a Consumers makeConsumers prefer to brand from the comparisons among trade at a certain assortment carried by both retail-controlledstore, but are the most accessible factors and factors uncertain as to which store associated with the product they wish to product or brand buy and examine the store’s assortment for the best purchase Specialty Consumers purchase Consumers have Consumers have their favored brand strong preference preference for both a from the most with respect to the particular store and a accessible store that brand, but shop specific brand has the item in stock among a number of stores to secure the best retail service or price for this brand Convenience goods – are often purchased on impulse at outlets such as 7-Eleven. Accessibility and the volume of traffic passing a site are the most important factors in selecting a site to sell convenience goods. Shopping goods – consumers purchasing shopping goods prefer to compare the offerings of several stores before deciding what to buy. Specialty goods – are items for which consumers will make a special effort to purchase a particular brand. LOCAL AREA ANALYSIS The next step is to assess the nature of the local retailing structure in the promising areas and to conduct a more intense analysis of the competition after the application of the previously described market screening criteria. The urban business pattern is constantly changing as new retail outlets are built, inner cities decay and are rebuilt and central business districts lose their attraction as magnets for major retailers. Understanding the shopping center structure, the dynamics of central business districts and the nature of stand-alone sites available is important at this state of the analysis. After establishing the size of the trade area, management must then determine the amount of business that can be done there. The amount of business is a function of the number of people in the trade area, the average household income, the amount of money spent each year by each household on the types of goods sold by the firm, the market potential and the share of the market that management expects to attract. Choosing a specific site involves assessing the size and mix of vehicular or foot traffic passing a site, the ability of the site to intercept traffic enroute from one place to another, the nature of adjacent stores, type of goods sold and adequacy of parking. DEVELOPING THE HUMAN RESOURCES PLAN  Staffing a store with the right people is a critical part of a retailer’s strategic plan. Staffing needs vary depending on the type of merchandise carried, services the store offer, the image management wants to project to customers and the way in which the firm wants to compete.  The initial step in developing a human resources plan is to develop descriptions of the jobs to be filled. Then, job analysis is undertaken to determine the skills needed for the job.  Recruiting to attract the right people is a critical element of the plan. Recruits may be sought either inside or outside the firm. Specific guidelines exist for administering selection tests and in otherwise screening employees and management must follow these guidelines.  An equitable employee pay plan is another important component of a personnel plan and it can contribute to higher employee productivity and satisfaction. Retailers should make sure that employees understand how the pay plan was developed, how it will be administered and how they will be evaluated for pay increase and promotions. Closely related to the pay plan is establishing the level and type of employee benefits.  Employee performance appraisal also needs to occur on a regular basis; normally employees are appraised annually. Standardized forms should be developed for this  purpose. Supervisors should discuss their ratings with the employees and give suggestions for performance improvement.  Employee motivation and job enrichment are also important elements of the personnel plan. Management must recognize that employees have such needs as the desire for recognition and achievement which cannot be satisfied by money alone.  Basic organizational principles are specialization of labor, departmentalization, span of control and unit of command.  The two functions that probably will first be organized in a retail store are merchandising and operations (store management). MERCHANDISE PLANNING AND CONTROL Merchandise planning – includes all the activities needed to balance inventory and sales. Merchandising – has been defined as offering the right merchandise at the right price at the right place in the right quantities at the right time. Merchandise management – is the management of the product component of the retailing mix; it comprises planning and control activities. Its purpose is to ensure that the inventory component of the mix supports the overall merchandising philosophy of the firm and meets the needs of target customers. Adding and Deleting Merchandise Retailers must evaluate their merchandise mi to determine whether they need to add or delete merchandise lines. Additions may be needed as a result of factors such as a change in the firm’s competitive strategy, customer needs or competitive conditions. Private brands – are owned by a retailer and sold only by that owner. Manufacturer brands – are owned by a manufacturer and can be sold by whomever the owner desires Licensing as Merchandising Issue Licensing is an arrangement in which the licenser or owner of a “property” (the concept to be marketed) joins with a licensee (the manufacturer of the licensed product) to sell retail buyers the licensed merchandise. Licensing is a key merchandise issue today because itr provides the opportunity to capture a market whose customer is younger, richer, better educated and willing to pay more than the average consumer for what he or she wants. International Dimensions As retailers move into international markets, they must decide whether their merchandise offering must be modified to appeal to foreign consumers and to compete effectively. Although making no changes is the most cost-efficient approach, modifications are often needed to tailor the offerings to consumers’ needs and to adjust to other environmental conditions. For example – fast food operations. Merchandise Planning Basic Terms Product Line - consists of all the products or services that his or her firm offers. Product lines are typically defined in terms of variety and assortment. Variety – also known as the number of classifications or categories) refers to the number of different lines or merchandise (or services) in a product line. For example, the product line of a superstore would include such as varieties of meat, bakery goods, dry groceries and frozen foods. Assortment – means the range of choices (selections) available for any given classification in a product line. Assortment can be defined as the number of stock keeping units (SKUs) in a category. For example, a one-pound can of Maxwell House coffee is one SKU; a two-pound pack of Nescafe is another SKU. However, do not confuse the number of items with an SKU. In other words, a food store might have 100 cans of one-pound Maxwell House coffee, but this represents only one SKU. Stock Balance – a balance between inventory and sales Width – (or breadth) refers to the assortment factors necessary to meet the demands of customers and to meet competition. Referring to the coffee example used earlier, the following might be the width plan: Brand Types Sizes Maxwell House Regular, instant 3 in each kind of coffee 3 SKUs X 3 X 3 = 27 SKUs Thus, 27 SKUAS are needed to meet customer wants and to compete effectively. Support or Depth – refers to the number of units of merchandise needed to support expected sales of each assortment factor. Merchandise Turn-over – is the number of times the average inventory of an item (or SKU) is sold, usually in annual terms. Merchandise Budget – is a plan of the peso amount of merchandise to buy, usually set up by merchandise classification and by month and based on sales and profitability goals. Leverage – is a situation in which a business unit acquires assets worth more than the amount of capital invested by the owners, the higher the ratio, the higher the amount of borrowed funds in the business. The Merchandise Budgeting Process 1. Sales – the starting point in developing a merchandise budget is the sales plan. Sales are first planned by season and then by month 2. Stock (inventory) – the next step in developing the merchandise budget is to plan stock (inventory) levels by month. Several different techniques can be used to find the amount of monthly stock that is needed to support monthly sales. Because the stock-to-sales  ratios is often used to plan monthly stock levels for fashion merchandise and for highly seasonal merchandise. 3. Reductions – reductions are anything other than sales that reduce inventory value. Reductions include employee discounts. Shortages (shrinkage) are also reductions. A shoplifter takes Php50,000 from a jewelry department, no revenues come from shoplifting. Markdowns are reductions. 4. Purchases – up to this point, the retailer has determined planned sales, stock and reductions. The next step in developing the merchandise budget is to plan the peso amount of purchases on a monthly basis. Planned purchases are figured as follows: Planned purchase = planned sales + planned reductions + planned EOM stock – planned BOM stock.  In addition to knowing ho much money to spend for stock, the retailer must also decide what to spend the money on (width) and in what amounts (support).  Planning is useless unless retailers monitor results to determine whether goals are being met. This monitoring process is the control element of merchandise management. Retailers need both peso and unit control systems.  Peso control is used to control peso investment in stock. To do this, the retailer must know what the beginning peso inventory is, what has been added to stock, how much inventory has moved out of stock and how much inventory is now on hand. Peso control systems can be maintained on a cost basis but retail peso control is more often used.  One of the most valuable outputs of a retail peso control system is open to buy (OTB), which exists to control the retailer’s utilization of the planned purchases figure. As with all budgets, flexibility is essential.  Unit control is simpler than peso control because price changes do not affect units. The two types of unit control are perpetual and non-perpetual systems, the latter can be either formal or less formal. PERFORMANCE EVALUATION  The balance sheet, the income statement and various ratios derived from them give management information needed to evaluate the effectiveness of strategy in financial terms.  The strategic profit model (SPM) emphasizes that a firm’s principal financial objective is to earn an adequate or target rate of return on net worth (RONW) and dramatizes three areas of decision making (margin management, asset management and leverage management) for improving RONW.  Gross margin return on inventory investment (GMROI) is a performance evaluation indicator that focuses on turnover and gross margin percentage.  Merchandise valuation is an important factor in performance evaluation. One of two methods – first in, first out (FIFO) and last in, first out (LIFO) – may be adopted to determine the cost value of inventory. According to the conservative rule, however, inventories should be valued at the lower of cost or market  In terms of accounting practices that assist management in inventory valuation decisions, retailers may use the cost method or the retail method. The cost method provides a book  evaluation of inventory in which only cost figures are used. However, because of the limitations of the cost method, the retail method is more widely used.  Individual departments within a retail firm must be analyzed to evaluate performance and to determine whether changes are needed in any aspect of the departments’ operations. In evaluating departments, management may use either the contribution margin approach or the full costing approach.  Effective use of space can translate into additional peso of profit. Thus, retailers must evaluate whether store space is being used in the most effective way. The gross margin per square foot method is one method retailers may use. BUYING AND INVENTORY MANAGEMENT The Buying Cycle 1. Determine needs – for each line of merchandise, the buyer must determine what will be needed until the next time the line is reviewed. Determining what is needed involves for some items, merely looking at inventory and past sales. For other lines, it involves risky decisions – which styles to select and how much of each to buy. One thing management does not want is a lot of merchandise in stock when a style is outmoded or the season is past. 2. Selecting the supplier – after determining the merchandise needs, the buyer must find one or more vendors who can supply the merchandise. Some merchandise can be bought only from one vendor; in this case, the only decision to be made is whether to carry the line. For most merchandise, several suppliers are available. In these instances the buyer must evaluate price as well as service, in terms of reasonable and reliable delivery, adjustment of problems and help in emergencies and other matters such as credit terms, spaced deliveries and inventory management assistance. 3. Negotiate the purchase – this crucial third step involve not only the purchase price but also quantities, delivery dates, single or multiple shipment deliveries, freight and packing expenses, guarantees on the quality of merchandise, promotion and advertising allowances, special offers on slightly damaged materials or sell-outs and so forth. 4. Follow up – finally, to improve service, the buyer must review the relationship with each vendor from time to time to determine whether changes should be made. As necessary, the buyer should search for alternate or new suppliers. Determining Needs Different types of merchandise require different techniques to determine what is needed. It is therefore important to recognize, for various merchandise lines, whether they are primarily staples, seasonal items or style or perishable items. The goal in each case, whether the merchandise is primarily staple, seasonal, style oriented or perishable is to establish or maintain inventory at the lowest possible level and still have a sufficient variety of colors, sizes or models available from which customers can choose. Such a practice will minimize losses caused by obsolescence and spoilage and free capital for other uses. Timeliness Progressive retailers continue to refine the buying process, shorten lead times in ordering merchandise, maintain the minimum inventory level needed to meet customer needs and have sufficient flexibility to quickly respond to changing customer tastes. Forecasting Sales The issues involved in sales forecasting vary, depending on whether the merchandise is primarily staples, seasonal items or style or perishable items. The issues to be considered and the complexity of the buying decision are different in each instance. Staples Staple or semi-staple merchandise is generally in demand year round, with little change in model or style. Basic appliances, hardware, housewares, books, domestics and basic clothing items such as underwear and pajamas fall into this category. Staples, even if the store is primarily focused on seasonal fashion, generate extra profit and bring customers into the store who may then purchase some of the primary merchandise. The important characteristic of staples is steady usage. Deciding how much to buy, therefore, depends primarily on the following factors: - Sales trends – taken from records showing how much of each staple sold during the past two or three months and also how much sold during the same period in the previous year. The buyer thus can tell whether the item has increased o decreased in popularity or has remained the same. They buyer then decides, if the trend is up, whether to increase average inventory or whether to assume the same sales trend without running out of stock - Profitability – items that bring a better return on investment in space and capital are the more desirable items to buy - Discounts – which are usually available for large-quantity purchases. The combination of these factors provides a general indicator of needs in staple merchandise Seasonal Merchandise Seasonal merchandise, as implied, is in demand only at certain times of the year. Examples include bathing suits, sun glasses, notebooks, plastic cover and some appliances. Although seasonal items can be reordered during peak demand to replenish inventory, many items are unavailable or cannot be obtained quickly enough to meet the demand. Therefore, sufficient levels of the merchandise is bought well in advance of the season. Forecasting needs for seasonal items depends primarily on knowing the past customer demand for the item or merchandise line. One method is to maintain a month-by-month tally of units sold, either by peso value or quantity. These records can then be examined on a yearly basis, enabling the buyer to identify selling trends and make the correct buying decisions. Style and Perishable Items Items of style or fashion include such merchandise as coats, jackets, apparel and sportswear. Stylish items are usually more expensive than staples and seasonals. Because the demand for any particular style tends to increase rapidly and then drop off just as quickly, overbuying can have a disastrous effect on profits. Once a style is out, it is often difficult to sell it at a profit.  Perishable merchandise has similar characteristics. If management buys more than can be sold, some of it will begin to spoil and bring only a fraction of the normal price. Establishing Buying Guidelines How much stock should be ordered? Why not enough merchandise for one month, or two months or even six months? In some cases, product shelf life may be the determining factor. If a grocer stocked more than two days’ supply of muffins, they would lose their freshness and the grocer would lose customers. Delivery is immediate. The grocer gives the order directly to the bakery truck driver and the driver fills the order in minutes. Lead Time – the length of time between order placement and receipt of goods Safety Stock – the size of the safety stock depends on the factors that could interrupt deliveries. Suitable guidelines can be developed based on experience in the industry. In addition, many items require a basic stock, an amount sufficient to accommodate regular sales, offering customers a reasonable assortment of merchandise from which to select. How Much To Buy The desired inventory level should be considered an order point. Whenever the stock of an item falls below this point, it should be ordered. The quantity of film purchased depends on the usual time between orders is called the ordering interval. Sufficient supplies need to be maintained so that inventories between orders average out to the desired level. A stock equal to expected sales during the camera shop’s two week order interval should be added to the order point to determine the order ceiling. The Economic Order Quantity Model The economic order quantity (EOQ) model is another method for calculating order quantity. It is most applicable when demand is known, continuous and constant as in the case of staple merchandise. The model reflects both the variable costs of ordering inventory and inventory carrying costs. Variable costs decrease with larger orders because the costs of ordering are spread over more units. Replenishment System Assistance Most computer manufacturers provide information on the inventory management systems available for their computers. In addition, computer service companies often have material available describing the use of their computer software programs for inventory management. These companies are a good source of information on inventory management techniques, as well as help on specific inventory management problems. Merchandise Control Systems To manage inventory successfully, management should maintain accurate and up-to-date records of sales and stock on hand for every item. Inventory records tell you what you have. Sales records tell you what you need. Inventory records are used for making the following decisions: - Purchasing items to replenish inventory - Clearing out obsolete items that are no longer in demand  - Adding new items to inventory Information Partnerships New partnerships are emerging between retailers and vendors that are making the buying and replenishment process more timely and cost effective. 1. Electronic data interchange - EDI consists of software systems that allow for direct communication of standard business documents between retailers and vendors. Electronic sharing of information enables retailers and vendors to reduce reorder cycle times and speed delivery of replenishing inventory. 2. Just-in-time – JIT systems are designed to allow delivery of only the quantity of a specific product needed at the precise time it is needed. Firms such as Wilcon Depot, for example, will provide manufacturers with a six month forecast of demand but a one-week lead time forecast of sizes, designs and colors. 3. Quick response – this is an information sharing partnership between retailers and vendors (often manufacturers) that provides retailers with timely replenishment of inventory sufficient to meet customer demand without the necessity of carrying high levels of inventory in anticipation of customer demand. These partnerships will not work without a strong alliance between the vendor and the retailer. The level of trust and information sharing required in such relationships is unprecedented. SELECTING SUPPLIERS Information Sources Information about merchandise lines can be developed in a variety of ways: 1. Salespeople 2. Trade magazines 3. Business contacts 4. Trade exhibits 5. Yellow pages Supplier Evaluation Criteria 1. Price and discounts 2. Reliability 3. Quality 4. Services 5. Accessibility 6. Brand name recognition 7. Psychosocial factors Methods of Buying 1. Group buying 2. Central buying 3. Committee buying 4. Consignment 5. Leased departments  NEGOTIATING THE PURCHASE The buyer should be prepared to sacrifice something during the negotiation. Buyers usually attempt to negotiate on the following elements: 1. Costs – one area of negotiation is the cost, or list, price of the merchandise. Certain laws, however, affect the amount of dealing that can be done to get a good price from a vendor 2. Discounts – even though identical list prices may be offered by various vendors, they may offer different discounts. An understanding of these purchase terms is necessary to negotiate the best price 3. Datings – the agreement between the vendor and the retailer as to the time the discount date will begin. Cash datings – technically, if the terms call for immediate payment, the process is known as cash dating and include COD (cash on delivery) or CWO (cash with order). Cash datings do not involve discounts. Future datings include end of month, date of invoice, receipt of goods and extra dating 4. Transportation charges – the final aspect of negotiation relates to who will bear the responsibility for shipping costs. The most favorable arrangement for the retailer is FOB (free-on-board) destination, in which the seller pays the freight to the destination and is responsible for damage or loss in transit. A more common shipping arrangement is FOB origin, which means that the vendor delivers the merchandise to the carrier and the retailer pays for the freight DETERMINING RETAIL PRICES A retail pricing plan should start from explicitly defined objectives. For example, management must decide whether financial goals will be achieved by higher margins on merchandise and thus perhaps lower turn-over, or lower margins and higher turn-over. One way of relating price to competitive strategy is to differentiate among retailers that price above the market level, at the market level and below the market level. 1. Pricing Above the Market Level Some firms price above the competition. Reasons that stores are able to follow this strategy include the following: they carry unique or exclusive merchandise; they cater to customers who are not price conscious and who want the highest quality and style goods; they provide unusual services; they have a prestigious image customers are willing to pay for; they create professional sales people who are customer oriented and knowledgeable and who wish to develop long-term customer relationships; and they offer conveniences such as location and time. 2. Pricing At The Market Level At the market pricers offers prices roughly the same as their competitors. When following such a strategy, the retailer tries to make the store different in ways other than price and thus competes on a nonprice basis. 3. Pricing Below The Market Level Below the market pricers offer acceptable quality merchandise at low prices. Examples include off-price retailers, warehouse grocery firms, warehouse clubs, factory outlet stores and discount houses. Competition in these operations is almost entirely on a price basis. Below-the-market-pricing is a difficult pricing strategy to carry out and maintain. To successfully implement such a strategy, the firm must focus on lowering the cost position of the firm. Many retailers have failed using this strategy because they have been unable to constantly monitor and adjust their cost components. To reduced costs, firms attempt to obtain the best prices possible for their merchandise; locate the business in an inexpensive location or facility; closely control inventory and limit the lines to fast-moving items; offer no or limited services and in general, monitor all costs components on a continuous basis to determine where cost savings can be realized. STORE POLICIES AFFECTING RETAIL PRICING A One Price versus A Flexible-Price Policy The majority of retail firms offer goods at one take-it-or-leave-it price. Bargaining with customers is unusual. In some product categories (for example cars, tires and batteries) the variable price may vary due to trade ins. If customers are good bargainers, the retailer may actually take a lower-price than desired. Thus, retailers who have a trade- in policy should plan their original prices carefully. Retailers can follow a variable price policy even when they do not negotiate with consumers on the price of the product itself. Negotiating over whether to charge for delivery and installation and varying the price of warranties can all result in a variable price policy Certain advantages exist in a store with a one-price policy. Customers do not expect to bargain, so salespeople and customers can save time. Furthermore, salespeople are not under pressure to reduce prices. Price-Line Policy Retailers practicing a price-lining strategy features products at a limited number of prides, reflecting varying merchandise quality. A price-lining strategy can be implemented with either rigid price points or more flexible price zones. Using suits as an example, a merchant might establish a limited number of price points to indicate quality differences between merchandise. The good suits might be priced at Php1,750, the better suits at Php2,250 and the best suits at Php3,000. Alternatively, the retailer may decide to use price zones instead of rigid price points. For example, prices for good suits might fall between Php1,750 and Php2,000. Price lining offers certain advantages. For example, some customers become confused and cannot make up their minds when