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CHANNEL INSTITUTIONS: RETAILING

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Jan Vasil Moquera

on 1 March 2015

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Transcript of CHANNEL INSTITUTIONS: RETAILING

CHANNEL INSTITUTIONS: RETAILING
Learning Goals
1. To understand what retailing is all about
2. To understand some theories in retail
3. To visit the global retail scene and trends
4. To understand how relationships in retail work
5. To understand about trade and retail formats
6. To understand the type of retailers

Learning Goals
7. To learn about retail focus on categories
8. To understand retail strategy guidelines
9. To get a glimpse of retail management strategies
10. To understand about other retail performance measures
11. To look briefly at retail operations
12. To learn about efficient consumer response
13. To understand about some retailing initiatives in rural markets
14. To look at franchising and e-retailing
Retailing
According to English dictionary, 'retail' is derived from the term 'retaillier', which seems to be a French word meaning 'to break bulk'.

Being the last link in the distribution channel by which the manufacturer reaches the end-user consumer, the retailer has more knowledge of the customer's aspirations and needs and can influence the end user buying decisions.
Some of the other Characteristics of Retail Trade are:
1. The order sizes tend to be small but many.
2. The retailer caters to a wide variety of customers and hence has to keep a large assortment of goods.
3. A lot of the buying in the retail outlet could be on impulse and hence managing inventory is critical.
Some of the other Characteristics of Retail Trade are:
3. Retail store service personnel (in smaller stores) and the goods displayed (in major stores) are an important element of the selling process.
4. The retailer's strengths are in ensuring 'availability' and 'visibility' of the product he sells - true for the corner grocer or the supermarket.
5. The targeted customer mix decides the elements of the marketing mix so designed, gives the 'image' to the store.
Definition of Retailing
Retailing includes all the activities involved in selling or renting consumer products and services directly to ultimate consumers for their personal or home consumption.
How do Consumers Decide
Which Retailer to Buy From?
A consumer selects a retailer based on the following factors:
1. Price (value offered, credit, special discounts)
2. Location (convenience, parking, safety, stores nearby)
3. Product Selection (width and depth of assortment, brands, quality)
How do Consumers Decide
Which Retailer to Buy From?
4. Special Services (home delivery, special orders, gift wrap, valet parking)
5. Helpful Salespeople (courteous, knowledgeable, fast check-out)
6. Fairness in dealings (honesty, return privileges
What Does the Retailer Do to Ensure Stickiness in his Customers?
Functions of retailing include:
1. Performing marketing functions that enable them to make available a wide variety of products to the consumers.
2. Helping create time, place and possession utilities.
3. Adding form utility such as when a clothing retailer alters a trouser to fit a customer.
4. A retailer's services also help create an image for the products he sells.
Retailers add value to products through:
The services they offer such as credit, delivery, extended store hours.
The personnel they hire who help identify and solve customer problems.
The store's location, perhaps near other stores or in a bazaar to facilitate comparison shopping.
A retail firm can be classified according to:
1. Form of Ownership
2. Operational structure
3. Service and price orientation
4. Merchandise offering
5. Where the sales take place
Type of Retailers
1. Specialty Store
2. Department Store
3. Supermarket
4. Convenience store
5. Discount store
6. Corporate chains
7. Voluntary chains
8. Retailer coops
9. Consumer coops
10. Franchise organization
Types of Retailers in Western Context
1. Chain store
2. High street
3. Destination
4. Convenience store
5. Family store
6. Specialty store
7. Department store
8. Supermarket
9.Emporium
10. Superstore
11. Shopping mall
12. Shopping center
13. Hypermarket
14. Discount store
15. Everyday low price
16. Category killer
17. Factory outlet
18. Warehouse
Types of Retailers in Western Context
19. Sing price denomination
20. Stop-over store
21. Kiosks
22. Vending machines
23. Independent store
24. Franchise
25. Hawkers
Retail Focus on
Categories
Category has been defined as the 'basic unit' for making merchandising and buying decisions by a retailer. It can be broadly described as the product lines carried by the retailer - like men's apparel, women's apparel, kids wear, etc.
Category management focuses on three parameters:

1. Efficient introduction of new products into the stores.
2. Running product promotions effectively.
3. Optimum store assortment (the best product mix) reflecting trading area (catchment area from where the store's customers come) and customer needs.
Customer needs are obviously influenced by:

1. Characteristics of the consumers: age, occupation, location, economic status, etc.
2. Buying pattern of consumers in products, brands, variants, pack sizes preferred, etc.
3. How much time do consumers spend on shopping?
4. Do sales promotions, low prices, etc induce consumers to buy more?
5. Frequency of purchases by product categories.
For some categories consumer studies by experts have shown clear patterns, for example:

1. For staples, the penetration is high as also the frequency of purchase
2. For niche products, the penetration and frequency of purchases may be low.

These patterns of consumer buying will decide the route for category management.
Category Life cycles
A fad generates high sales for a short period of time. Fashions last longer (many seasons) but the sale in each season is likely to be different. Basic products (also called staples) reflect continuous demand over a long period of time. Seasonal products are only relevant in the appropriate seasons.
Category Types
Routine Categories: Customers use the retailer as the preferred vendor for these items - milk, bread, soft drinks from the closest convenience store for example.

Destination category: This is the customer's first choice for specific products - buying drapes from Drapes Avenue.
Category Types
Season categories: The retailer is
well-known for selling seasonal merchandise: buying mangoes in season from horticultural outlets.

Convenience categories

Retail experts have created further sub-categories in products like: transaction categories - products frequently purchased on impulse like soft drinks, traffic builders - products with high market share like milk or bread, cash generators - products with high stock turns and margins like seasonal fruits, image creating products - unique image projection like high-end watches, and excitement creators - high impulse products like video games for kids.
Category Management
In major retail organizations, individual category managers are responsible for their business and its profitability. This means several category managers compete for the limited resources and have to make their 'part of the business' profitable. Category management drives the 'success' of the retailer and his dependents like his suppliers.
Some of the relevant points on managing categories are highlighted below:

1. Should reflect the trading area of operation.
2. The survey of the trading area before setting up the store would have thrown up enough pointers to have decided the categories being offered.
3. Should be stocked on the shelves in an appealing manner as if the consumers had arranged it themselves.
4. The classification should clearly reflect the consumer preferences and the placing in the stores should demonstrate this well.
5. For the same categories between two retailers, the category management should show the differentiation between the two
6. The categories in the store have to be made available and visible to ensure multiple purchases and drive 'impulse' buying.
7. The decisions on category management need to be dynamic to reflect changing customer needs.
8. The major goal of category management is creating unique customer value and thereby ensure stickiness (the customers should keep coming back to the store for their purchases).
9. Ideally, all the categories should end up profitable through the manner in which they are managed .
Merchandise Buying Rule
Selection of Vendor

Price, quality, reliability, time for processing of orders, time for delivery from the time of order placement, terms and conditions offered (delivery time, credit, after sales support), advertising and promotion support, ethics in doing business and any exclusive rights provided to the buyer.
Merchandise Buying Rule
Selection of merchandise

Quality inspection by sampling, negotiated terms, order and delivery times, inventory holding rules, re-ordering costs, etc.
Building Competitive
Advantage
In order to build competitive advantage, a retailer has to focus on the following areas:

Location: convenient to the maximum number of target customers.
Customer service to build relationships - in order to increase the 'stickiness'. Retailers have started building databases of their customers so that they can track preferences and design store promotions of interest to the maximum number of customers.
Strong vendor relationships: to get preferential treatment.
Ability to manage information: about consumer preferences, trends, competition, regulations.
People management - as it is one of the three assets with which the retailer works. The people should feel 'ownership' of their stores and this should reflect in their interactions with customers.
Managing merchandise - most important aspect - what to buy and how to make it available and visible in the store.
Overall store management - ambiance, easy access to merchandise, quick check-outs, help in buying decisions, etc.
The Role of the Retailer
The retailer is able to provide the service to the customers by the following:

A. Merchandising
B. The service
C. The format used
D. The communication process used
Merchandising
The definition of merchandising is - 'a set of activities involved in acquiring goods and services and making them available at the places, times, and prices and the quantity that enable a retailer to reach his goals.

Merchandising directly affects the revenue and profitability of the store. Merchandising also takes into account the assortment of the goods and the quality. The merchandiser is the most important person in a modern retail store.
Some of the factors influencing the merchandising policy of the store are:

The aims and objectives of the retailer.
The demographic characteristics of the population the store is expected to serve.
The level of customer service the retailer is willing to provide.
Presence of competition in the location.
Width and depth of the assortment the retailer wants to provide.
Any other services (like home delivery, monthly running account) which the retailer wants to provide.
Merchandise Planning
Merchandise planning and control relates to merchandise variety and assortment.

Variety has been defined as the different kinds of goods (men's apparel, ladies garments) to be carried or services offered.

Assortment decisions relate to range of choice (like brands, styles, models, colors, sizes).
Merchandise Planning
One of the critical factors taken into account by merchandise planners is the stock turnover ratio. It is the cost of merchandise sold divided by the average inventory value at cost. The steps in merchandise budgeting include planning the stock levels at the beginning of the month by SKU, any stock losses, purchases for the month and profitability for the month.
Merchandising Strategy
A retailer following a wide merchandising strategy will stock different categories. For example, it may stock grocery, stationery, apparel, household appliances, books and electronic items. It will be positioned as one stop shop for the customer. Retailers following this strategy will attract high customer traffic and high loyalty. This strategy attracts customers who want to reduce their shopping trips.
Merchandising Strategy
In a deep assortment strategy, the focus is on stocking a wide variety from a specific product group. A deep merchandising strategy will involve stocking all the varieties of brands, at all price points, and a wide choice within the category.
Some of the factors which impact the width and depth of the goods stored are:

The company's strategic objectives in terms of its prospects, the service levels it wants to extend to them and the profitability target it has set for itself.
Expectations of the customers from the store. Local tastes and income levels affect what and how people buy.
The space availability. Obviously the wide strategy requires more space than the deep one.
Relationship with the suppliers.
Availability of trained personnel.
Type of product being sold. For mass based consumer products, a wide merchandising strategy is preferred. For a sophisticated item like cell phones, a deep merchandising strategy would be better.
Comparison of Wide and Deep Strategies
Wide Strategy

Loyal customer base easily built

Attracts a lot of impulse buyers
Depends on volume sales
Size of each bill generated by a
customer to be maximized
Lower margins
Cross merchandising - related
products stacked together on
nearby shelves
Requires more space
Suitable for mass based consumer
products
Deep Strategy

Take longer to build a loyal base but lasts longer
Depends on planned buying only
Depends on niche business opportunities
Wanting to sell more modern and upgraded product versions

Higher margins



Requires less space
Preferred for niche products.
Category Management
This is the management of the retail business by looking at the performance of the categories of products rather than the brands or models comprising the category.

Each category of products in the store can be treated as a strategic business unit (SBU) and its profitability is maximized.
For each category, depending on its take-off, the shelf space, the fill rates, and the display efforts are clearly defined to achieve a targeted level of profitability.

Some examples of categories could be: foods, detergents and soaps, personal care products, kitchen ware, cosmetics, jewelry, stationery, footwear.
The classification of a category is always done on the way the customers perceive the grouping.
The Merchandising
Function
This function in a retailer takes care of the purchase, storage, display, and sales of the goods. The merchandising decision is based on the requirements of the prospective customers.
The merchandising manager has the following functions to perform:

Making the products available in the store so that no point a customer goes back without buying his requirement as there was a stock-out.
Making the products available in the variety and assortment that the customer is accustomed to.
Taking the right decisions on introduction of new products and packs.
Getting the products at the right prices and taking advantage of all promotions that companies are willing to offer. This is part of the planning process.
Planning the shelf and other space to be allocated for the display of the goods in the store.
Making sure that all the products get the display they deserve so that the customer does not miss any product he wants to buy. Visibility of the products in the store is the job of the merchandising manager.
The steps to be taken in a merchandise planning process are listed below (as you can see, the steps are similar to operating a store in a factory or a distribution warehouse):

Start with the sales plan - this is the sales forecast by SKU.
Estimate the write-offs (covered by credit notes for losses) likely for the period - this is the estimate of any goods that may not get sold and must be heavily discounted or written off.
Develop an inventory holding plan - for the beginning and the end of the planning period.
Plan the merchandise required - is done using a simple formula of: total merchandise needed = sales plan + likely reduction or write offs + closing inventory planned.
Calculate the purchases required - again based on a simple calculation of: purchase quantity required = merchandise plan - opening inventory for the period.
Once the goods are in, define the mark up by SKU in line with the profitability target.
The retailer keeps track of two merchandising ratios to judge his performance. These are:

A. Stock turnover ratio and B. Gross Margin Return on Inventory
In essence, the merchandising manager manages both the front end of the store (which is exposed to the customers) and the back office operations (which is exposed to the suppliers). For providing both the availability and variety in the retail operations, the retailer incurs costs of holding inventory. The merchandising function has to ensure that this cost is also optimized.
The merchandising manager has to take a decision on:

Products to be sold
Variety of each category
Pack sizes and SKUs
Price points of the products
Quantity of each product, category, SKU to be carried at any point of time and the relevant price points.
Financial Aspects of Merchandising
Financial control of merchandising monitors the financial investment in merchandise over any period of measurement. It helps in defining the quantity of inventory to be permitted for each category or department of the retail operations.

The most important aspect of financial control in any retail operation is the stock and inventory valuation. This aspect can be measured by store to get an idea of individual store profitability.
Customer Service
Some of the factors affecting the customer service are:

The location of store and its working hours.
The assortment of the goods.
The prices at which the goods are made available.
Help and assistance within the store to support the selection of the goods by the customer.
Customer Service
Needs
Every customer who is a prospective buyer in a retail outlet has expectations of the store in terms of basic needs to be fulfilled (sometimes called as qualifying needs) and add-on, which the particular store may provide (also called as determining needs).
Customer Service
Needs
The basic requirements ensure that the customer at least visits the store. The add-on ensure stickiness with the store. The retailer has to provide for both these needs of the customer.

Retailing is an open marketing concept and it is easy for competition to understand how a retailer operates and copy good practices in not time.
Planning Customer Convenience
The retailer's choice of service levels determines the attractiveness of the retailer to his target market. As in any distribution channel, the service levels are directly related to the channel flows which the retailer participates in and a summary is given on the next slides:
The planning starts with the store ambiance. While shopping may still be an inevitable chore, the retailer can make the experience pleasant by creating the right ambiance - brightly lit, well displayed, clearly marked aisles and shelves, ready product information.
While manufacturers make their products in large batch lot sizes, the consumers may want to buy just one unit of the product.
The retailer has to be careful in planning the layout of the store in such a way that the consumer can find the product of his choice easily.
Customers expect their products to be available in their store of choice at all times.
Variety and assortment are normally used in place of each other but there is a subtle difference.
Focus on the customer starts with in-store sales personnel who assist the customer in his purchases.
Customer Communication
Communication refers to the manner in which the retailer makes himself known to his prospective customers.

Communication basically is used by the retailer to:
Announce the opening of the retail store
Tell customers about the promotions running
Inform customers about any additional facilities introduced in the store.
Communication forms the fourth part of the retailer's strategy after positioning, merchandising, and customer service. It is meant to create a preferred image of the store in the eyes of the customer. The communication strategy to a large extent is focused on the intended catchment or trading area of the store. The communication can have a long term objective of 'brand building' of the store or a short term objective could be to announce a promotion.
Steps in Retail strategy
1. Developing a mission statement of the organization: clearly defines the purpose of the firm and motivates the promoters and employees.
2. The ownership pattern has to be decided next as in any business.
3. The objectives of the retailer are to be clearly stated.
4. Segmentation and positioning of the retailer is the next step.
5. Develop the overall strategy for operating the business.
6. Plan the routine activities of the stores in terms of timings, the store layout, and check-out.
7. Next step defines the control mechanisms that will be put in place - these would relate to the merchandise carried, the inventory norms, the pricing system, the methods of handling any leakages, etc.
8. Last step is to define the parameters for measuring the performance of the stores and the frequency.
Retail Strategies
Some of the factors that should be considered in developing a retail strategy:
The markets and customers he is targeting
The location of the stores
The store 'image' to be created in the minds of the prospects
The store design aspects
The merchandise to be offered
The type of store personnel to be recruited and what is expected of them
The promotions to be ran to build footfalls initially and stickiness later on.
The supplier handling systems including credit and other terms.
Key Drivers of a Retail business
The number of footfalls each day into the store - the number of people visiting the store.
The number of footfalls converted into purchase.
Increase the depth of purchases of each customer.
Retention of the customers.
The modern store format has the additional task of getting customers and retaining them in different geographies where the consumers may not even think alike.
Positioning Strategy
This is the identity that the store develops for itself in terms of what is has to offer the customers.
Product Differentiation Strategy
Here the entire strategy is built around the products that the store or chain deals in
Operational Superiority
It is another strategy which the retailer can follow to provide long lasting value to the customer.
Store Location
The location of the stores could be used as an effective strategy to get the competitive advantage.
Retail Performance Measure
Gross Margin Return on Inventory Investment (GMROI)
Gross margin per full time equivalent employee
Gross margin per square foot

Other retail performance measures
Return on equity
Return on assets
Return on sales
Sales per transaction
Hourly customer traffic
Shrinkage to sales ratio
Aspect of Store Design
There are two important considerations in store design: functional and social. The functional aspects relate to convenience to the shopper and include protection, placement, easy access, information, and displays of the merchandise. The social aspects take into consideration the ambiance, the image, and the attractiveness. Together, the two aspects define the character of the retail store. The store design is a combination of the exterior and the interior of the store.
Efficient Consumer Response
Efficient Consumer Response originated in US when major grocery retailers felt the threat from alternate retail formats like discount stores, hypermarket, etc which offered specific highly discounted goods. ECR was developed as a grocery industry supply chain support system. The objective was to deliver better value to grocery customers by eliminating non-value adding costs and inefficiencies. ECR supports the pull system.
Franchising
Types of franchise operations:
Wholesaler sponsored voluntary chains
Retailer sponsored cooperative chains
Manufacturer sponsored franchising system
Service company sponsored franchising system
How Does a Franchise Operation Work?
The franchisor gives advice and help to the franchisees.
Franchisees own the business but must adhere to the franchisor's requirements on merchandising and operations to preserve uniformity and control
Benefits to franchisee:
Quick recognition among potential customers
Management training provided by the franchisor
Franchisor may buy ingredients, supplies, and parts and sell to the Franchisee at lower prices than the market.
Financial assistance where require
Promotional aids, in-store displays, and the like
Benefits to franchisor:
Expansion is possible much faster
Local franchisee pay lower rates for advertising than a national firm
Owners of the franchisee are motivated to work more than just employees
All local taxes and licenses are responsibility of the franchisees.
Electronic Retailing or E-tailing
Is shopping on the internet without the consumer having to visit a physical store.
Retailing on the Internet/e-tailing
In internet retailing, the seller and the buyer meet through the interactive electronic network of the world wide web. There are some advantages to the producer of selling his product or service on the net:
Creates a favorable image for the company
Reaches geographically dispersed consumers anywhere in the world
Provide all information about the product, choices available, price comparisons, answers to queries, details of loyalty programs, etc.
Promotion of new products or services and use demonstrations to highlight features.
Retailing on the Internet - Some Salient Points
Assortment can be unlimited
Items are not on hold
On the net, a consumer cannot touch or feel the product
Better information makes the consumer a better shopper
Internet makes it easier to do comparison shopping and to compare prices from different sellers
The consumer has to plan ahead when he buys on the internet
Disadvantages of
Online Retailing
Modern organized retail excites the customer because the pleasant ambiance it creates for shopping .
Modern retail formats make the shopping experience also entertaining.
In the physical shopping process there is a major see, touch, and feel factor which adds value to customer purchase process.
In the online version, there is no one to assist the customer in his purchases.
Most urban customers even are still reluctant to make payments using their credit cards online due to confidentiality and security reasons.
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