Amity Business School

Channel Institutions
 Retailing Amity Business School

Retailing consists of activities involved in selling goods services

to ultimate consumers for personal consumption.
• Buyer is the ultimate consumer unlike an institutional or
business purchaser.
• Buying motives for a retail sale is always personal or family
consumption
• One needs to understand the differences in serving these
different segments even though they are served out of the
same retail establishments.
• Retail success comes in many shapes, sizes & cultural origins.
• Most of the top retailers are transnational, crossing country
borders to expand business.
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Choosing a retail positioning strategy

• The retailer’s positioning strategy significantly affects its
competitiveness & performance.
• Retailers make choices about cost-side & demand side
characteristics of their businesses.
• On the cost side, the focus can be margin & inventory turnover
goals.
• On the demand side ,the retailers choose what service outputs
to their shoppers.
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Financial & Cost- side Positioning: Margin

& inventory turnover goals
• Traditional retailing (of high margin-low turnover)has
transformed to modern retailing systems of low margin & high
inventory turnover & minimal service levels.e.g Home Depot,
an advanced retailer is able to combine low margin & high
turnover with excellent personal service.
• A low margin- high turnover model orients towards generating
higher operational efficiencies and then pass on the savings
generated to the customers.
• A typical retail package of low margin – high turnover format
involves reduction in service output levels
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Economic & operating drivers of various retail chain types

Chains Operating drivers
Economic drivers
Apparel speciality (e.g. The High gross margin Merchandise
Limited) management,markdown
control
High inventory turnover
Merchandise management
Discount. E.g Wal mart Low operating expense Low cost, high sales
productivity
High fixed asset productivity Low investment ;high sales
productivity
Category killer Low operating expense Low cost, high sales
e.g Home Depot productivity

Departmental store e.g. High gross margin Merchandise management

Federated

National Chain High gross margin Merchandise management

e.g. JC Penney
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• One of the key decisions to take in a retail format is on which

path to follow –low margin- high turnover or high margin- low
turnover?
• This plays a key role in making the company achieve its
financial target.
• This appropriate pathway is guided through SPM i.e. strategic
profit model
• The same influences margin & turnover dimensions of retail
strategy
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Some ratios used in SPM

Net profit margin/profit margin/net margin :-This ratio is the percentage of
sales dollars left after subtracting the Cost of Goods sold and all expenses,
except income taxes.
                                        Net Profit Before Tax
Net Profit Margin Ratio = _____________________
Net Sales
• Asset Turnover :- This ratio is useful to determine the amount of sales
that are generated from each dollar of assets.
Asset Turnover = Revenue
Total Assets

• Financial leverage :- gives an idea of the company's methods of

financing or to measure its ability to meet financial obligations
Financial leverage = Total assets
Net Worth
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• In a scenario of a slowdown wherein there is a huge pressure on margins,

the company tends to pursue asset turnover.
• Consequently, the emphasis comes more on sales per square foot ( reflects
space & location productivity) , sales per employee ( reflects labour
productivity) & sales per transaction ( reflects merchandising program
productivity)
• Based on the same there are three interrelated measures of performance
that help retailers determine profitability, GMROI, GMROL, GMROS
• GMROI – Gross margin return on inventory investment- the same is gross
margin percentage times the ratio of sales to inventory ( at cost)
i.e GMROI = Gross margin * sales to inventory ratio
• Helps the retailer to evaluate inventory on the return of investment it
produces & not just on the gross margin percentage
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• To enhance the GMROI ,ECR initiatives like JIT, EDI linkages b/w manufacturers
& retailers have been adopted with the aim of reducing average inventory levels
while maintaining sales.

• GMROL- gross margin per full time equivalent employee. Should optimize & not
maximize GMROL. An irrational increase in the average sales force reduces the
average GMROL

• GMROS- Gross margin per square foot- is basically a measure which indicates how
well the retailers are using their unique asset i.e shelf & floor space allotted for
supplier’s products.

• Measures like DPP & GMROI places pressure on suppliers to attend on issues like
1) gross margins their brands permit retailers to earn,
2) sales volume ( in units) their brand generate
3) amount of shelf space/ floor space their brands occupy &
4) costs incurred in storing handling & selling their brands.
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Demand side positioning

• The demand side positioning is essentially oriented on the SOD s which
the retailer is trying to address. Some of them are :-
-Bulk breaking
-Spatial convenience
-Waiting & delivery time
-Product variety
-Customer Service possibilities
• Bulk breaking -one of the classic functions of a retail intermediary, allows
the consumer the opportunity to purchase in small units- BO GO, pricing
of multiple units
• Spatial Convenience- products are generally classified as convenience ,
shopping,& speciality goods. The extent of search shopping activity varies
between the categories & the consumersegments.
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• In the current environment location decisions are slowly being overpowered by
convenience in terms of speed & the ease to access
• Waiting & delivery time : consumer differ in their willingness to tolerate out of stock
products when they shop.
• The same also varies across different purchase occasions
• Retailers can respond to the demand for low waiting time by holding extra safety stocks ,
but the same involves cost
• He needs to gauge how damaging to its business an out of stock occurrence will be
• Even the elapsed time in the store can be viewed as an element of total waiting &
delivery time.
• A classic no waiting outlet is the vending machine. Sophisticated technology allows the
vending machine operators to track what is sold & when the machines are out of stock,
thus maximising sales potential, given the inherent impulse nature of vending purchases
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• Product variety: In retailing the service output of products is

represented by two dimensions breadth & depth.
• Breadth represents different classes of goods making up the
product offering i.e the collection of product lines
• Depth or assortment refers to the extent of product brands or
models offered within each generic product category.
• Discount stores generally don’t stock all brands thus have low
assortment whereas a speciality store would have a complete
& deepest assortment of models , size, prices etc.
• The variety & assortment dimension of retailing operations
demands the attention of top management, because decisions
in this area colour the entire picture of the enterprise.
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Customer service
• All major retail innovations of this century have relied on manipulating the
customer service variable.
• Retailers can adopt “friendly” behind the counter sales assistant to help
locate & compare merchandise or offer an “ expert advice” enhancing the
whole locate- compare-select process
• At times the savings that can be passed on to the consumer by eliminating
certain kinds of in- store assistance or improving the productivity of a
downsized workforce are substantial.
• Customer service is a costly benefit to provide but retailers continue to
invest in it because of the substantial benefits it can generate.e.g. provision
of shopping carts in retail stores.
• Such investments made in customer service does involve an expenditure on
channel functions but does takes a cost from the customer’s shoulders
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Strategic issues in retailing

• There are some major strategic issues faced by the retailers
and the suppliers need to understand the same
• An important consumer trend in the current environment is
increasing importance of convenience.
• Some of the major issues are pertaining
-increased levels of retailer power
-increasing reliance on private labels
-emergence of power retailers ; category killers
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Importance of convenience to consumers

• Convenience is measured by the time required to make a purchase, getting
in & out of the store & wherever applicable getting delivery of the
purchase product.
• Shortage of time & increasing no. of working woman have fuelled an
intense demand for convenience
• In lot of surveys conducted, consumers are indicating that speed &
convenience are more important to them than price.
• When companies actually provide first rate service- bold, fast, unexpected,
innovative & customised they can achieve a remarkable differential
advantage
• The drive to make life simpler, has spawned all sorts of convenience
marketers.
• The time starved shopper prefers outdoor shoppingcentresanchored by
superstores such as Wal Mart or Sam’ s Club
• Delivering customer satisfaction at profit- the main goal of marketers is
becoming difficult to achieve.
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Increased power of retailers

• Earlier the suppliers had an upper hand on the retailers but
now the retailers tend to dominate them. The reasons for this
reversal are many & diverse
- The sales of most items normally sold through grocery, drug
& mass merchandising chains have not been growing rapidly.
Competition has evolved into a market share game. Better
prices coupled with excellent locations , appealing stores &
reasonable service have been the major route of survival &
success for the retailers.
- The supermarkets still remain the major outlets for packaged
goods. Lot of other alternative formats like warehouse clubs,
deep discount drug stores and mass merchandisers have been
expanding at the expense of supermarkets.
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• Secondly, retailers are continuously concerned about increasing their productivity.

Though it is virtually impossible for grocery retailers to raise prices, but it is not
impossible for them to reduce costs.
• Thirdly, they are under immense pressure to evolve into profit centres rather than
just being concerned about inventory management. Now they need to be
responsible for capital management, service levels, turnover, retail margins and
pricing, quality control, competitiveness and variety, operating costs, shelf space &
position & vendor float and terms .
• Fourthly, retailers have many products to choose when deciding what to stock on
their shelves.In the American market more than 30,000 new SKUs are introduced
each year
• Thus retailers have abundance of new products from which to choose but the store
sizes have not increased significantly. The manufacturers’ bargaining power is
further weakened because most new products do not succeed.
• Fifth, information technology has has diffused throughout retailing to a great
extent. It is now virtually possible to capture item- by –item data through scanning
devices, at their electronic point of sales terminal. E.g UPC code
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Use of UPC code in retail product replenishment :Wal Mart example
1. The UPC is scanned .
The SKU of the product is registered in Wal- mart’s data base,
along with a description of product.
2. Item locator program
If the store runs out of this UPC, wal-mart’s item locator
Can find the closest store which has that SKU, stock can the be
Ordered over phone.
3. Data transmission
Data is a shared multiple times per day with Wal mart HQ
Via satellite
4. Retail link
Wal mart’s database is shared with2500 of it’s 10,000 suppliers.
Sales history of the UPC is available with the manufacturer which helps
Him product rescheduling.
5. Forecasting
Collaborative forecasting & replenishment programs are carried out
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• Even suppliers have contributed to the influence of retail buyers. They

engage in many many allowances in “ bribing : their way to the retailers
shelves. Some of these allowances are :-
• Forward buying on deals
• Slotting allowances
• Failure fees
• Payment for participation in newspaper inserts
• Deepest case allowances
• Highest possible payments for displays & shelf placements
• Guaranteed returns at full retail
• Manufacturer supplied labor for shelf sets etc.
 Illustration of few Amity Business School

Forward buying on deals

• Manufacturers experience wide swings in demand for their products
from retailers when they use trade promotions heavily.
• Temporary wholesale price cuts of one sort or another cause the retailer to
engage in forward buying i.e buying significantly more products than the
retailer needs & stockpiling it until it runs down again.
• Although this strategy clearly increases the quantity sold but it plays havoc
with the cost prices & manufacturer’ marketing plans .
• The increasing use of EDI technology has decreased the problem of
forward buying somewhat. CRP ( continuous replenishment programs)
have been particularly useful to assess the reorder level.
• A related problem is diverting. When manufacturers offer a regional trade
promotion some retailers and wholesalers buy in bulk & then distribute it
in areas where the discount is not available. This severely upsets suppliers’
efforts on tailor made marketing efforts for different regions
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Slotting allowances
• Manufacturers pay retailers funds known slotting allowances
to receive space for new products
• Whenever a new product is introduced, the manufacturer pays
the retailer extra amount for a “ slot” for a new product.
• The manufacturers argue that slotting allowances are
deliberately kept high to prevent their access to store shelf
space, whereas the retailers argue that the manufacturers
should also share the risk of failure of new products.
Failure fees
Here the wholesaler usually imposes a fee whenever it has to pull
a failing product from its ware house. Generally a time period
is allotted to a new product, if the same fails to reach a
minimum sales target, the fee is imposed.
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Emergence of private branding

• Private labels also known as store brands have off late become
very popular. E.g Marks & spencer runs its own private brand
under the label of St. Michael.
• Private labels are a way of generating loyalty to their store
rather than to the manufacturer’s brands.
• It also helps them earn extra profits because private label
merchandise fetches higher gross margins as compared to the
branded merchandise.
• Increasingly “ private brands of large retailing companies are
being positioned as the leading brand in their assortment
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• Private brands are categorised into 5 basic types

a) Store name identification program ( Products bear the retailers store
name or logo. E.g Gap, Benetton
b) Retailers’ own brand name identity programs ( a brand image
independent of the store name that is available in only the company’s
store e.g. Kenmore & Craftsman [ Sears]
c) Designer-exclusive programs ( merchandise designed and sold under a
designer’s name in an exclusive arrangement with the retailer e.g
Halston III [ JC Penney]
d) Exclusive licensed name programs (celebrity-endorsed lines or other
signature label lines developed under exclusive arrangements with the
retailer.e.g Allen Solly [Federated department stores]
e) Generic programs ( goods that are essentially unbranded)
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• Private label goods typically cost 10 to 20% less than other brands, but their
gross margins are as much as twice as high for non store brands
• The use of private branding has resulted in even greater power for retailer in the
channel of distribution in the following ways
a) In this case there is more retailer’s initiative for fashion direction, trend setting
& innovation
b) Retailer is responsible for marketing to consumers as opposed to an orientation
as a distributing agent of the supplier
c) There is more strategic concern on the part of many suppliers with marketing to
important retailers as opposed to the direct concern with the consume market.
• But private label management is not trivial for retailers.
• Many of them are uninspired in design, mainly because retailers have little talent
on marketing process.
• However retailers can clearly target those customers who seek value for money
through private labels
• If done well, they are formidable competitors to national brands, however if not
executed properly, the product design may soon become obsolete & the retailer
may suffer.
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“Power retailing” & category killers

• Power retailing is not restricted to just one type of format. It incorporates speciality
stores, discount stores, electronc superstores etc.
• The attributes which make power retailing successful are :
- Willingness to take risks via market testing & trend forecasting
- Ordering early and selling merchandise in high volume with emphasis on
increasing GMROI
- Investing large sums in information systems that can deliver instant sales trend data
from multiple locations
- commitment to deliver value
- Commitment to make shopping easier
• The assortment of some private labels are so deep that they have become known as
category killers.
• The assortment is generally very deep and low priced relative to traditional
retailers.
• Customers don’t mind making special trips to purchase items and are overlooking
the benefit of one stop shopping convenience like Wal Mart, Target , Kmart etc.
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Retailing Polarity: Price sensitivity or flight to quality

• Some of the major trends in retailing have contributed to an increased polarity in the retail
trade .
• On one hand you have the emergence of tightly managed , limited line, highly focused
specialty chains like Gap, the body shop etc.
• On the other hand there is an aggressive growth of large discount stores happening which
are based on high turnover & low margins format.
• They rely on the state of art warehouse technology , EDI, SCM& self service to move
mass merchandise.
• Specialty stores are soon becoming classic examples of high touch marketing. e.g No
Kidding, Massachusetts based specialty toy store which is quite a contrast to mass
merchandiser Toys “ R” U.
• A successful example on the high tech, warehouse technology side of retail spectrum is
IKEA, the Swedish retailer that operates one of the world’s largest volume furniture chains.
It’s vision is to offer a wide range of home furnishings of good design and function at very
low prices so that majority of the population can afford to buy.Offers child playrooms,
baby changing rooms , Swedish restaurants.
• One of the main strategy of IKEA is that it sells furniture as unassembled in flat packs
which is able to reduce transport volume by 70 %
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Emergence of Global retailing

• Though retailers have traditionally lagged behind other industries in the
race to globalize however now they are increasingly choosing to globalize
their operations.
• The same is driven by factors such as slow growth in home markets &
overwhelming attractiveness of overseas markets that offer less intense
competition & weakening barriers of foreign market entry.
• However some difficulties do come up in expanding to foreign markets.
E.g.
- Need for quality real estate locations
- Need to develop physical logistics operations comparable to home country
- Need to develop supplier relationships in new markets
- Differences in zoning, pricing, taxation, labor laws, hours of operation
- Need to offer local attractive products, packaged and positioned in a
culturally sensitive manner.
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Strategic responses by suppliers to growing power of retailers
• Some steps which the manufacturers have taken are :-
- Have taken up more channel flows & developed new channel technologies. E,g. VF
corporation
- Change the role of price promotions in the total marketing mix to retailers &
consumers
- Expand the product line to counteract the popularity of ever more upscale store
brands
- Divest non marketing functions and redirect spending towards new product
development & marketing
- Expand the no. of channels used to distribute product in order to reduce dependence
on few retailers

All these steps are directed towards building& maintaining value of their core
brands. They use innovations , new product development, increased investments
towards brand equity rather than consumer promotions and are using multiple
channel judiciously in order to reach the market
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