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Chapter 16 – Managing Retailing, Wholesaling, and Logistics

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Introduction
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In the previous chapter, we examined marketing intermediaries from the viewpoint of manufacturers who wanted to build and manage marketing channels. In this chapter, we view these intermediaries—retailers, wholesalers, and logistical organisations—as requiring and forging their own marketing strategies in a rapidly changing world. Intermediaries also strive for marketing excellence and can reap the benefits like any other type of company. While innovative retailers such as Zappos, Sweden’s H&M, Spain’s Zara and Mango, and Britain’s Topshop have thrived in recent years, others such as former U.S. stalwarts Gap, Home Depot, and Kmart have struggled. The more successful intermediaries use strategic planning, advanced information systems, and sophisticated marketing tools. They segment their markets, improve their market targeting and positioning, and aggressively pursue market expansion and diversification strategies. In this chapter, we consider marketing excellence in retailing, wholesaling, and logistics.
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In This Chapter, We Will Address the Following Questions
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1. What major types of marketing intermediaries occupy this sector? 2. What marketing decisions do these marketing intermediaries make? 3. What are the major trends with marketing intermediaries? 4. What does the future hold for private label brands?
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RETAILING
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Retailing – includes all the activities in selling goods or services directly to final consumers for personal, non-business use. Retailer or Retail Store – is any business enterprise whose sales volume comes primarily from retailing.
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Types of Retailers
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Consumers today can shop for goods and services at store retailers, non-store retailers, and retail organisations. STORE RETAILERS Specifically, they position themselves as offering one of four levels of service: 1. Self-Service – Self-service is the cornerstone of all discount operations. Many customers are willing to carry out their own “locate-compare-select”process to save money. 2. Self-Selection – Customers find their own goods,although they can ask for assistance. 3. Limited Service – These retailers carry more shopping goods and services such as credit and merchandise-return privileges. 4. Full Service – Salespeople are ready to assist in every phase of the “locate-compare-select” process. NON-STORE RETAILERS Non-store retailing falls into four major categories: direct selling, direct marketing (which includes telemarketing and Internet selling), automatic vending, and buying services: 1. Direct Selling – multilevel selling and network marketing. These direct-selling firms, now finding fewer consumers at home, are developing multidistribution strategies. 2. Direct Marketing – direct-mail and catalog marketing 3. Automatic Vending – vending machines. 4. Buying Service – is a storeless retailer serving a specific clientele—usually employees of large organizations—who are entitled to buy from a list of retailers that have agreed to give discounts in return for membership. CORPORATE RETAILING AND FRANCHISING Corporate Retailing Organisation – These organisations achieve economies of scale, greater purchasing power, wider brand recognition, and better-trained employees than independent stores can usually gain alone. The major types of corporate retailing—corporate chain stores, voluntary chains, retailer and consumer cooperatives, franchises, and merchandising conglomerates. In a franchising system, individual franchisees are a tightly knit group of enterprises whose systematic operations are planned, directed, and controlled by the operation’s innovator, called a franchiser. Franchises are distinguished by three characteristics: 1. The franchiser owns a trade or service mark and licenses it to franchisees in return for royalty payments. 2. The franchisee pays for the right to be part of the system. 3. The franchiser provides its franchisees with a system for doing business.
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The New Retail Environment
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After 2008 some retailers adopted a cautious, defensive response, cutting stock levels, slowing expansion, and discounting deeply. Others were more creative about managing inventory, adjusting product lines, and carefully avoiding over-promoting. Although many of these short-term adjustments were likely to remain longer-term,a number of other long-term trends are also evident in the retail marketing environment. Here are some that are changing the way consumers buy and manufacturers and retailers compete: – New Retail Forms and Combinations – Growth of Intertype Competition – Competition between Store-Based and Non-store-Based Retailing – Growth of Giant Retailers – Decline of Middle-Market Retailers – Growing Investment in Technology – Global Profile of Major Retailers – Growth of Shopper Marketing
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Marketing Decisions
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With this new retail environment as a backdrop, we will examine retailers’ marketing decisions in the areas of target market, channels, product assortment, procurement, prices, services and store atmosphere, store activities and experiences, communications, and location. We discuss the important topic of private labels for retailers in the next section. TARGET MARKET Until it defines and profiles the target market, the retailer cannot make consistent decisions about product assortment, store decor, advertising messages and media, price, and service levels. Mistakes in choosing or switching target markets can be costly. To better hit their targets, retailers are slicing the market into ever-finer segments and introducing new lines of stores to exploit niche markets with more relevant offerings.
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Channels
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Based on a target market analysis and other considerations we reviewed in Chapter 15, retailers must decide which channels to employ to reach their customers. Increasingly, the answer is multiple channels. channels should be designed to work together effectively. PRODUCT ASSORTMENT The retailer’s product assortment must match the target market’s shopping expectations in breadth and depth. Identifying the right product assortment can be especially challenging in fast-moving industries such as technology or fashion. The real challenge begins after defining the store’s product assortment,and that is to develop a product-differentiation strategy. To better differentiate themselves and generate consumer interest, some luxury retailers are making their stores and merchandise more varied. Here are some other possibilities: – Feature exclusive national brands that are not available at competing retailers. – Feature mostly private-label merchandise. – Feature blockbuster distinctive merchandise events. – Feature surprise or ever-changing merchandise. – Feature the latest or newest merchandise first. – Offer merchandise-customising services. – Offer a highly targeted assortment. PROCUREMENT After deciding on the product-assortment strategy, the retailer must establish merchandise sources, policies, and practices. In the corporate headquarters of a supermarket chain, specialist buyers (sometimes called merchandise managers) are responsible for developing brand assortments and listening to salespersons’presentations. Retailers are rapidly improving their skills in demand forecasting, merchandise selection, stock control, space allocation, and display. They use computers to track inventory, compute economic order quantities, order goods, and analyse dollars spent on vendors and products. Stores are using direct product profitability (DPP) to measure a product’s handling costs (receiving, moving to storage, paperwork, selecting, checking, loading, and space cost) from the time it reaches the warehouse until a customer buys it in the retail store. PRICES Prices are a key positioning factor and must be set in relationship to the target market, product-and-service assortment mix, and competition. SERVICES Retailers must decide on the services mix to offer customers: – Prepurchase Services. include accepting telephone and mail orders, advertising, window and interior display, fitting rooms, shopping hours, fashion shows, and trade-ins. – Postpurchase Services. include shipping and delivery, gift wrapping, adjustments and returns, alterations and tailoring,installations,and engraving. – Ancillary Services. include general information, check cashing, parking, restaurants, repairs, interior decorating, credit, rest rooms, and baby-attendant service. STORE ATMOSPHERE Atmosphere is another element in the store arsenal. Every store has a look, and a physical layout that makes it hard or easy to move around. Retailers must consider all the senses in shaping the customer’s experience.Varying the tempo of music affects average time and dollars spent in the supermarket. STORE ACTIVITIES AND EXPERIENCES In addition to their natural advantages, such as products that shoppers can actually see, touch, and test; real-life customer service; and no delivery lag time for most purchases, stores also provide a shopping experience as a strong differentiator. The store atmosphere should match shoppers’basic motivations — if customers are likely to be in a task-oriented and functional mindset, then a simpler, more restrained in-store environment may be better. COMMUNICATIONS Retailers use a wide range of communication tools to generate traffic and purchases. They place ads, run special sales, issue money-saving coupons, and run frequent-shopper-reward programs, in-store food sampling, and coupons on shelves or at checkout points. They work with manufacturers to design point-of-sale materials that reflect both their images. Retailers are also using interactive and social media to pass on information and create communities around their brands. LOCATIONS Retailers can place their stores in the following locations: – Central Business Districts. – Regional Shopping Centres. – Community Shopping Centres. – Shopping Strips. – A Location within a Larger Store. – Stand-Alone Stores. In view of the relationship between high traffic and high rents, retailers must decide on the most advantageous locations for their outlets, using traffic counts, surveys of consumer shopping habits, and analysis of competitive locations.
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PRIVATE LABELS
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Private Label Brand – (also called a reseller, store, house, or distributor brand) is a brand that retailers and wholesalers develop.
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Role of Private Labels
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Why do intermediaries sponsor their own brands? First, these brands can be more profitable. Other costs,such as research and development, advertising, sales promotion, and physical distribution, are also much lower, so private labels can generate a higher profit margin. Generics – are unbranded, plainly packaged, less expensive versions of common products such as spaghetti, paper towels, and canned peaches. They offer standard or lower quality at a lower price.
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Private-Label Success Factors
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Although retailers get credit for the success of private labels, the growing power of store brands has also benefited from the weakening of national brands. Many consumers have become more price sensitive, a trend reinforced by the continuous barrage of coupons and price specials that has trained a generation to buy on price.
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WHOLESALING
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Wholesaling – includes all the activities in selling goods or services to those who buy for resale or business use. Major Types of Wholesalers: – Merchant Wholesalers – Independently owned businesses that take title to the merchandise they handle. They are full-service and limited-service jobbers, distributors, and mill supply houses. – Full-Service Wholesalers – Carry stock, maintain a sales force, offer credit, make deliveries, provide management assistance. Wholesale merchants sell primarily to retailers. – Limited-Service Wholesalers – – Brokers and Agents – Facilitate buying and selling,on commission of 2 percent to 6 percent of the selling price; limited functions; generally specialise by product line or customer type. – Manufacturers’ and Retailers’ Branches and Offices – Wholesaling operations conducted by sellers or buyers themselves rather than through independent wholesalers.Separate branches and offices are dedicated to sales or purchasing. – Specialised Wholesalers – Agricultural assemblers (buy the agricultural output of many farms), petroleum bulk plants and terminals (consolidate the output of many wells), and auction companies (auction cars, equipment, etc., to dealers and other businesses). Wholesalers (also called distributors) differ from retailers in a number of ways. 1. Wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers rather than final consumers. 2. Wholesale transactions are usually larger than retail transactions, and wholesalers usually cover a larger trade area than retailers. 3. The government deals with wholesalers and retailers differently in terms of legal regulations and taxes. In general, wholesalers are more efficient in performing one or more of the following functions: – Selling and Promoting – wholesalers’ sales forces help manufacturers reach many small business customers at a relatively low cost. They have more contacts, and buyers often trust them more than they trust a distant manufacturer. – Buying and Assortment Building – wholesalers are able to select items and build the assortments their customers need,saving them considerable work. – Bulk Breaking – wholesalers achieve savings for their customers by buying large carload lots and breaking the bulk into smaller units. – Warehousing – wholesalers hold inventories, thereby reducing inventory costs and risks to suppliers and customers. – Transportation – wholesalers can often provide quicker delivery to buyers because they are closer to the buyers. – Financing – wholesalers finance customers by granting credit, and finance suppliers by ordering early and paying bills on time. – Risk Bearing – wholesalers absorb some risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence. – Market Information – wholesalers supply information to suppliers and customers regarding competitors’ activities, new products, price developments, and so on. – Management Services and Counselling – wholesalers often help retailers improve their operations by training sales clerks, helping with store layouts and displays, and setting up accounting and inventory-control systems. They may help industrial customers by offering training and technical services.
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Trends in Wholesaling
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MARKET LOGISTICS
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.Physical distribution has now been expanded into the broader concept of Supply Chain Management (SCM). Supply chain management starts before physical distribution and means strategically procuring the right inputs (raw materials, components, and capital equipment), converting them efficiently into finished products, and dispatching them to the final destinations. An even broader perspective looks at how the company’s suppliers themselves obtain their inputs. Market Logistics – includes planning the infrastructure to meet demand, then implementing and controlling the physical flows of materials and final goods from points of origin to points of use, to meet customer requirements at a profit. Market logistics planning has four steps 1. Deciding on the company’s value proposition to its customers. (What on-time delivery standard should we offer? What levels should we attain in ordering and billing accuracy?). 2. Selecting the best channel design and network strategy for reaching the customers. (Should the company serve customers directly or through intermediaries? What products should we source from which manufacturing facilities? How many warehouses should we maintain and where should we locate them?). 3. Developing operational excellence in sales forecasting, warehouse management, transportation management, and materials management . 4. Implementing the solution with the best information systems, equipment, policies, and procedures.
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Integrated Logistics Systems
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The market logistics task calls for Integrated Logistics Systems (ILS) – which include materials management, material flow systems, and physical distribution, aided by information technology (IT). Information systems play a critical role in managing market logistics, especially via computers, point-of-sale terminals, uniform product bar codes, satellite tracking, electronic data interchange (EDI), and electronic funds transfer (EFT). Market logistics encompass several activities: 1. Sales Forecasting on the basis of which the company schedules distribution, production, and inventory levels. 2. Production plans indicate the materials the purchasing department must order. These materials arrive through inbound transportation, enter the receiving area, and are stored in raw-material inventory. 3. Raw materials are converted into finished goods. 4. Finished-goods inventory is the link between customer orders and manufacturing activity. 5. Customers’ orders draw down the finished-goods inventory level, and manufacturing activity builds it up. 6. Finished goods flow off the assembly line and pass through packaging, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing, and customer delivery and servicing. Even though the cost of market logistics can be high, a well-planned program can be a potent tool in competitive marketing. Many firms are embracing Lean Manufacturing.
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Market-Logistics Objectives
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Many companies state their market-logistics objective as “getting the right goods to the right places at the right time for the least cost”. Given that market-logistics activities require strong trade-offs, managers must make decisions on a total-system basis.The starting point is to study what customers require and what competitors are offering. The company must then research the relative importance of these service outputs. The company must also consider competitors’ service standards. The company ultimately must establish some promise it makes to the market. Given the market-logistics objectives, the company must design a system that will minimise the cost of achieving these objectives. Each possible market-logistics system will lead to the following cost: M = T + FW + VW + S where M = total market-logistics cost of proposed system T = total freight cost of proposed system FW = total fixed warehouse cost of proposed system VW = total variable warehouse costs (including inventory) of proposed system S= total cost of lost sales due to average delivery delay under proposed system Choosing a market-logistics system calls for examining the total cost (M) associated with different proposed systems and selecting the system that minimises it.If it is hard to measure S,the company should aim to minimise T + FW + VW for a target level of customer service.
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Market-Logistics Decisions
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The firm must make four major decisions about its market logistics: (1) How should we handle orders (order processing)? (2) Where should we locate our stock (warehousing)? (3) How much stock should we hold (inventory)? and (4) How should we ship goods (transportation)? ORDER PROCESSING Companies today are trying to shorten the order-to-payment cycle—that is, the elapsed time between an order’s receipt, delivery, and payment. This cycle has many steps, including order transmission by the salesperson, order entry and customer credit check, inventory and production scheduling, order and invoice shipment, and receipt of payment. The longer this cycle takes, the lower the customer’s satisfaction and the lower the company’s profits. WAREHOUSING Storage Warehouses – store goods for moderate to long periods of time. Distribution Warehouses – receive goods from various company plants and suppliers and move them out as soon as possible. Automated Warehouses – employ advanced materials-handling systems under the control of a central computer and are increasingly becoming the norm. Some warehouses are now taking on activities formerly done in the plant.These include assembly, packaging, and constructing promotional displays. Postponing finalisation of the offering to the warehouse can achieve savings in costs and finer matching of offerings to demand. INVENTORY As inventory draws down, management must know at what stock level to place a new order. This stock level is called the order (or reorder) point. An order point of 20 means reordering when the stock falls to 20 units. The order point should balance the risks of stock-out against the costs of overstock. The other decision is how much to order. The company needs to balance order-processing costs and inventory-carrying costs. Order-processing costs for a manufacturer consist of setup costs and running costs (operating costs when production is running) for the item. If setup costs are low, the manufacturer can produce the item often, and the average cost per item is stable and equal to the running costs. If setup costs are high, however, the manufacturer can reduce the average cost per unit by producing a long run and carrying more inventory. Order-processing costs must be compared with inventory-carrying costs. The larger the average stock carried,the higher the inventory-carrying costs. This means that marketing managers who want their companies to carry larger inventories need to show that the larger inventories would produce incremental gross profits to exceed incremental carrying costs. Companies are reducing their inventory costs by treating inventory items differently, positioning them according to risk and opportunity. They distinguish between – bottleneck items (high risk, low opportunity), – critical items (high risk,high opportunity), – commodities (low risk,high opportunity), and – – nuisance items (low risk, low opportunity). They are also keeping slow-moving items in a central location and carrying fast-moving items in warehouses closer to customers. The ultimate answer to carrying near-zero inventory is to build for order, not for stock. TRANSPORTATION Transportation choices affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affect customer satisfaction. For speed, air, rail,and truck are the prime contenders. If the goal is low cost,then the choice is water or pipeline. Containerization – consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Each coordinated mode offers specific advantages.
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Organisational Lessons
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Market-logistics strategies must be derived from business strategies, rather than solely from cost considerations. The logistics system must be information-intensive and establish electronic links among all the significant parties. Finally, the company should set its logistics goals to match or exceed competitors’ service standards and should involve members of all relevant teams in the planning process. Smart companies will adjust their offerings to each major customer’s requirements. The company’s trade group will set up differentiated distribution by offering different bundled service programs for different customers.
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Chapter Summary
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1. Retailing includes all the activities involved in selling goods or services directly to final consumers for personal, non-business use. Retailers can be understood in terms of store retailing, non-store retailing, and retail organisations. 2. Like products, retail-store types pass through stages of growth and decline. As existing stores offer more services to remain competitive, costs and prices go up, which opens the door to new retail forms that offer a mix of merchandise and services at lower prices. The major types of retail stores are specialty stores, department stores, supermarkets, convenience stores, discount stores, extreme value or hard-discount store, off-price retailers, superstores, and catalogue showrooms. 3. Although most goods and services are sold through stores, non-store retailing has been growing. The major types of non-store retailing are direct selling (one-to-one selling, one-to-many party selling, and multilevel network marketing), direct marketing (which includes eCommerce and Internet retailing), automatic vending, and buying services. 4. Although many retail stores are independently owned, an increasing number are falling under some form of corporate retailing. Retail organisations achieve many economies of scale, greater purchasing power, wider brand recognition, and better-trained employees. The major types of corporate retailing are corporate chain stores, voluntary chains, retailer cooperatives, consumer cooperatives, franchise organisations, and merchandising conglomerates. 5. The retail environment has changed considerably in recent years; as new retail forms have emerged, intertype and store-based versus non-store-based competition has increased, the rise of giant retailers has been matched by the decline of middle-market retailers, investment in technology and global expansion has grown, and shopper marketing inside stores has become a priority. 6. Like all marketers, retailers must prepare marketing plans that include decisions on target markets, channels, product assortment and procurement, prices, services, store atmosphere, store activities and experiences, communications, and location. 7. Wholesaling includes all the activities in selling goods or services to those who buy for resale or business use. Wholesalers can perform functions better and more cost-effectively than the manufacturer can. These functions include selling and promoting, buying and assortment building, bulk breaking, warehousing, transportation, financing, risk bearing, dissemination of market information, and provision of management services and consulting. 8. There are four types of wholesalers: merchant wholesalers; brokers and agents; manufacturers’ and retailers’ sales branches, sales offices, and purchasing offices; and miscellaneous wholesalers such as agricultural assemblers and auction companies.