RETAILING MANAGEMENT RETAILING MANAGEMENT 5th Edition

Buying Merchandise Chapter 14 McGraw-Hill/Irwin Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Merchandise Management Planning Merchandise Assortments Retail Communication Mix Buying Merchandise Buying Systems Pricing

Merchandise Branding Strategies Manufacturer (National) Brands Designed, produced, and marketed by a vendor and sold by many retailers Private-Label (Store) Brands Developed by retailer and only sold in retailer’s outlets Licensed Brand Developed by licensee and right sold to either manufacturer or retailer

Spectrum of National vs. Private Label National Brands % Store Brands Wal-Mart Home Depot The Gap Limited Marks & Spencer IKEA Macy’s Target

Relative Advantages of Manufacturer versus Private Brands Type of Vendor Impact on Store Manufacturer Private-Label Brands Brands Store loyalty ? + Store image + + Traffic flow + + Selling and promotional + - expenses Restrictions - + Differential advantages - + Margins ? ?

Private Labels Advantages Unique merchandise not available at competitive outlets Difficult for customers to compare price with competitors Higher margins Disadvantages Need to develop expertise in developing and promoting brand Unable to sell excess merchandise Typically less desirable for customers

Manufacturer (National) Labels Advantages More desired by customers Resell excessive merchandise Don’t need skills and people to develop and promote merchandise Disadvantages Lower margins Vulnerable to competitive pressures

Most Recognized Apparel and Accessory Manufacturer Brands

Most Recognized Apparel and Accessory Private Label Brands

Examples of Private-Label Brands

Examples of Private-Label Brands

Examples of Private-Label Brands

Examples of Private-Label Brands

Private Label Options Bargain Branding Copycat Branding no-frills product at a discount price. Copycat Branding imitates the manufacturer brand in appearance and trade dress Premium Branding private label at a comparable manufacturer-brand quality. Parallel Branding private labels that closely imitate the trade dress and product attributes of leading manufacturer brands.

Issues in International Sourcing of Private Label Merchandise Country of Origin Effects Costs Foreign Currency Fluctuations Tariffs Supply Chain Efficiency and Inventory Carrying Costs Transportation costs Quality Control

Regulations Affecting the Costs of Importing Goods World Trade Organization NAFTA Maquiladores Free Trade Zones

Managing International Sources Quality Control More difficult to maintain quality standards Human Right Issues Need to Build Strategic Partnerships

Domestic vs. International Sourcing Higher cost of merchandise Shorter lead times – easier to use quick response systems Easier to control human rights issues and quality control Customer preferences for domestic manufactured products International Lower cost Longer lead times More control problems

Connecting with Vendors Going to Market Internet Exchanges Wholesale Market Centers Trade Shows Resident Buying Offices Meeting Vendors at Your Company

Functions Provided by Internet Exchanges Product Directories Use of Reverse Auctions Collaboration in Planning – CPRF Software General Information about Trends

Types of Exchanges Consortium Exchanges Private Exchanges Transora Worldwide Retail Exchange GobalNetXchange Private Exchanges Independent Exchanges

Online Reverse Auctions A market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from market participants. Why reverse? Vendors bid for buyer’s business Price falls One buyer, multiple vendors Sealed vs. open bid auctions

Reverse Auctions B S B Reverse Auction B S Traditional Auction B S S

Reverse Auctions in Retail Buying Online vs. physical differences Reduced contact cost Instant feedback Bidder anonymity The retailer’s goals Gain competitive pricing Open vendor base Improve negotiation process Maintain valuable relationships V is straddled w/old Ford supply base, has not kept up with mkt pricing Open – English Auction, common value, downward

Price Path on Open-Bid Auction

Issues in Using Reverse Auctions to Buy Products Private vs. Collaborative Auctions/Exchanges Fixed Cost High for Software Standardized Software  Less Need for Collaborative Exchanges Collusion Consideration of Quality Differences from Bidders Impact on Supplier Relationships Used Primarily for Non-Resale Products – Carpet, Fixtures

Negotiating with Vendors Two-way communication designed to reach an agreement when two parties have both shared and conflicting interests.

Planning Negotiations Consider prior history Assess current situation General market conditions Vendor’s position Power of vendor Set goals Be aware of vendor’s goal’s Number of people involved Select an advantageous place Be aware of deadlines

Issues to Negotiation Markup opportunities from excess from vendor’s excess merchandise Purchase terms Transportation costs Delivery times Exclusivity Advertising allowances

Types of Negotiations Vendor Win Lose Win Buyer Lose

Win - Lose Negotiation Can be good in the short run and bad in the long-run Short-term solution-- person you are negotiating with can’t lose all the time Might degenerate into LOSE - LOSE

Lose - Lose Negotiation Wastes time and energy No relationships established Objectives not met

Win - Win Negotiation Collaboration Doesn’t mean “giving-in” Cooperation Enhances vendor trust Long-term relationship

Guidelines for Negotiations Separate people from problem Insist on objective criteria to evaluate performance Invent options for mutual gain Let the other party do the talking Know how far to go

Negotiating Tips Be aware of time Location -- comfortable Keep negotiating participants even Be patient Let him/her mention a figure Don’t be afraid to say “no”

Negotiating Tips Don’t over negotiate Don’t assume Visualize the negotiation Timing is everything Always leave the door open Maintain self-esteem

SUMMARY Planning is critical Knowledge is power A person will only do what is right for him/her

Strategic (Partnering) Relationships Retailer and vendor committed to maintaining relationships over the long-term and investing in mutually beneficial opportunities

Strategic Relationships Win – Win --Concerned about expanding the pie, not how to divide the pie vs. Vendor Retailer

Building Blocks for Strategic Partnerships Mutual Trust Open Communications Common Goals Credible Commitments

Developing Trust: Capability or Competence Salespeople demonstrate competence when they can show that they know what they are talking about. Requires knowledge of: The customer The product The industry The competition

Stages in Building Strategic Relationships Awareness Exploration Expansion Commitment

Legal and Ethical Issues Contractual Disputes Chargebacks Commercial Bribery Slotting Allowances Buybacks Counterfeit Merchandise Gray Markets and Diverted Merchandise Exclusive Territories Exclusive Dealing Refusal to Deal Tying Contracts

Chargebacks A practice used by retailers in which they deduct money from the amount they owe a vendor. Two Reasons: merchandise isn’t selling vendor mistakes Can be a profit center one senior executive at a large department store chain was told to collect $50 million on chargebacks

Commercial Bribery A vendor or its agent offers to give or pay a retail buyer “something of value” to influence purchasing decisions. A fine line between the social courtesy of a free lunch and an elaborate free vacation. Rule of thumb - accept only limited entertainment or token gifts.

Slotting Allowances Fees paid by a vendor for space in a retail store. Currently aren’t legal. Retailers argue that they are a reasonable method for ensuring that their valuable space is used efficiently. Manufacturers view them as extortion. $9 billion or 16% of all new product introduction costs in grocery industry.

Buybacks Used to get products into retail stores. Two scenarios: Retailer allows a vendor to create space for its goods by “buying back” a competitors inventory and removing it from a retailer’s system. Retailer forces a vendor to buyback slow-moving merchandise.

Counterfeit Merchandise Goods made and sold without the permission of the owner of a trademark, a copyright, or a patented invention that is legally protected in the country where it is marketed. Major problem is counterfeiting intellectual property.

What to do About Counterfeiters Trademark,copyright, and/or patent products in the countries in which they’re sold. US government is engaged in bilateral and multicultural negotiations and education to limit counterfeiting. (WTO) Take steps to protect yourself.

Gray-Market and Diverted Merchandise Gray- Market Merchandise possesses a valid U.S. registered trademark and is made by a foreign manufacturer but is imported into the United States without permission of the U.S. trademark owner. Not Counterfeit. Is legal. Diverted Merchandise is similar to gray-market merchandise except there need not be distribution across international boundaries.

Gray-market and Diverted Merchandise: Taking Sides Discount stores argue customers benefit because it lowers prices. Traditional retailers claim important service after sale will be unavailable May hurt the trademark’s image.

Avoiding the Gray-Market Problem Require customers to sign a contract stipulating that they will not engage in gray marketing. Produce different versions of products for different markets.

Exclusive Territories Granted to retailers so no other retailer in the territory can sell a particular brand. Benefits vendors by assuring them that “quality” retailers represent their products. Assure retailers adequate supply. Grants retailers a monopoly. Illegal when they restrict competition.

Exclusive Dealing Agreements Occur when a manufacturer or wholesaler restricts a retailer into carrying only its products and nothing from competing vendors. Illegal when they restrict competition.

Tying Contracts An agreement that requires the retailer to take a product it doesn’t necessarily desire to ensure that it can buy a product it does desire. Illegal when they lessen competition. Ok to protect goodwill and quality reputation of vendor.

Refusals to Deal Suppliers and retailers have the right to deal or refuse to deal with anyone they choose. Except when it lessens competition.

Terms of Purchase Discounts Shipping Terms and Conditions Trade (Functional) Discounts Chain Discounts Quantity Discounts Seasonal discounts Cash discounts ROG and EOM dating Anticipation discounts Shipping Terms and Conditions

A Sample Price List Price to Wholesaler Price to Retailer Quantity per Order Discount Price Discount Price 1 - 10 40 - 5% $57* 30% $70 11 - 25 50 - 10 45 40 60 26 + 50-10-5 42.75 40-10 54 * Based on a $100 suggested retail price.

Example of a Cash Discount Nov 1 Dec 1 Jan 1 Date of Invoice 30 days 60 days 1% discount Full amount Due

Example of ROG Dating ROG Dating Nov 1 Nov 15 Dec 15 Jan 15 Date of Merchandise 30 days ROG 60 days ROG invoice arrives 1% discount Full amount due

Example of EOM Dating EOM Dating Nov 1 Dec 1 Jan 1 Feb 1 Date of 30-day discount 30 days EOM 60 days EOM invoice period begins 1% discount Full amount due

Example of EOM Dating, Grace Period Oct 25 Nov 1 Dec 1 Jan 1 Feb 1 Date of 30-day 30 days EOM 60 days EOM invoice discount 1% discount Full amount period due begins

Example of Extra Dating Nov 1 Dec 1 Jan 1 Feb 1 Mar 1 Apr 1 Date of 30-day 60-day 60 days Full invoice discount Extra Extra amount period discount 1% discount due begins period begins

Alternative Shipping Terms and Conditions Owns Merchandise Pays Freight in Transit and Charges Files Claims (If Any) F.O.B. origin, freight collect Retailer Retailer F.O.B. origin, freight prepaid Supplier Retailer F.O.B. destination, freight collect Retailer Supplier F.O.B. destination, freight prepaid Supplier Supplier