Answers to Problems for Retailing Management 10th Edition by Levy & Weitz

Table of Contents
Instructor Manual - Chapter 1 2
Instructor Manual - Chapter 2 24
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Chapter 01 - Introduction to the World of Retailing
1-1
CHAPTER 1
INTRODUCTION TO THE WORLD OF RETAILING
ANNOTATED OUTLINE INSTRUCTOR’S NOTES
I. Introduction
 Retailing is a common part of our everyday lives. For most
people, retailers simply are places to buy things.
 However, behind the stores, websites, sales associates,
and cashiers are an army of managers responsible for
making sure that the products and services that people
want are available when they want them, where they
want them, and at a fair price.
 Working in this highly competitive, rapidly changing retail
environment is both challenging and exciting, and it offers
significant financial rewards.
 Knowledge of retailing principles and practices will help
you develop management skills for many business
contexts
Ask students about where they
bought their school supplies. One
will likely get a mix of responses,
including the college bookstore or
the downtown store, in addition
to online or even from another
student. Question students on the
pros and cons of each type of
transaction.
II. What Is Retailing?
 Retailing is the set of business activities that adds value to
the products and services sold to consumers for their
personal or family use.
 Not all retailing is done in stores. Examples of nonstore
retailing include ordering a T-shirt on your mobile phone
app, buying cosmetics from an Avon salesperson, ordering
hiking boots from an L.L.Bean catalog, and streaming a
movie through Amazon Prime.
LO 1-1 Identify retailing activities.
See PPT 1-3, 1-4.
Ask students to give examples of
retailers. One ice-breaking activity
is to ask each student to list as
many retailers as they can think
of in a specified period of time.
Ask the student with the most
listed retailers to read his or her
list to the class.
Generally, the student will think of
traditional retailers that sell
through stores. Be sure to discuss
the many other examples such as
Amazon, QVC, Avon, Jiffy Lube,
Pizza Hut, and airlines.
Certainly students should be

1-2
encouraged to consider Internet
retailers and multichannel
retailers like Amazon.com or
Delta.
A. The Retailer's Role in a Supply Chain
 A retailer is a business that sells products and/or services
to consumers for their personal or family use. Retailers are
a key component in a supply chain that links
manufacturers to consumers.
 A supply chain is a set of firms that make and deliver
goods and services to consumers.
 Retailers typically buy products from wholesalers and/or
manufacturers and resell them to consumers.
See PPT 1-8, 1-9, 1-10.
A typical supply chain network is
illustrated in PPT 1-10.
B. Retailers Create Value
 Retailers undertake business activities and perform
functions that increase the value of the products and
services they sell to consumers.
 The value-creating activities undertaken by retailers
include (1) providing an assortment of products and
services, (2) breaking bulk, (3) holding inventory, and (4)
providing services.
PPT 1-5, 1-6, 1-7 illustrate the
value question for retailers.
.
1. Providing Assortments
 Offering an assortment enables customers to choose from
a wide selection of brands, designs, sizes, colors, and
prices in one location.
 Conventional supermarkets typically carry about 30,000
different items made by more than 500 companies.
Ask students to describe the
difference in the assortments of
bicycles provided by Walmart and
the local bike shop. What is the
difference in assortment of body
lotions and creams provided by
Bath and Body Works and CVS?
2. Breaking Bulk
 To reduce transportation costs, manufacturers and
wholesalers typically ship cases/cartons of products to
How many students have made
purchases at Sam’s
Club/BJ’s/Costco? What items
have the students or their family
members purchased in bulk?

1-3
retailers.
 Retailers then offer the products in smaller quantities
tailored to individual consumers’ and households’
consumption patterns—an activity called breaking bulk.
Discuss the advantages of buying
in bulk. For what purchases and
what types of consumers does
buying in bulk make sense?
3. Holding Inventory
 A major value-providing activity performed by retailers is
to keep inventory so that products will be available when
consumers want them, reducing the consumer’s cost of
storing products.
Discuss product categories for
which holding inventory is
particularly appealing (e.g.,
holiday decorations, seasonal
gear).
4. Providing Services
 Retailers provide services such as credit, product displays,
salespeople, and websites to make it easier for customers
to compare, buy, and use products.
Ask the students what kind of
services retailers provide. Some
services are: acceptance of credit
cards, alteration of merchandise,
assembly of merchandise, bridal
registry, check cashing, child-care
facilities, credit, delivery to home,
demonstrations of merchandise,
displaying merchandise, dressing
rooms, gift wrapping, lay-away
plans, parking, personal
assistance in selecting
merchandise, personal shoppers,
play areas for children,
presentations on how to use
merchandise, provisions for
customers with special needs
(wheelchairs, translators), repair
services, rest rooms, special
orders, and warranties.
Which of these services do
students believe offer the greatest
value to the consumer? Do their
opinions differ for different
retailers?
C. Costs of Channel Activities
 While the value-creating activities undertaken by channel
members provide benefits to customers, they also
increase the cost of products and services.
 These costs include the design, raw materials, labor,
production equipment, transportation to the wholesaler,
Exhibit 1–2 illustrates the supply
chain costs of getting a T-shirt
from the manufacturer to the
consumer.
Discuss with students the various
contributors of cost in each aspect

1-4
and so on.
 Costs are justified by the considerable value added by the
wholesaler and retailers to the product, including
providing assortments, breaking bulk, holding inventory,
and providing services,
of supply chain. Ask why retailers
have the highest added costs?
D. Retailers Perform Wholesaling and Production Activities
 Wholesalers buy and store merchandise in large quantities
from manufacturers and then resell the merchandise
(usually in smaller quantities) to retailers or industrial or
business users.
 Some retail chains are both retailers and wholesalers.
They’re performing retailing activities when they sell to
consumers and wholesaling activities when they sell to
other businesses like building contractors or restaurant
owners.
 In some supply chains, manufacturing, wholesaling, and
retailing activities are performed by independent firms.
 But most supply chains have some vertical integration.
Vertical integration means that a firm performs more than
one level of activity in the channel. For example, most
large retailers—such as Safeway, Walmart, and Office
Depot—do both wholesaling and retailing activities
 Backward integration occurs when a retailer performs
some distribution and manufacturing activities, such as
operating warehouses and/or designing private-label
merchandise.
 Forward integration occurs when a manufacturer
undertakes its own retailing activities, such as Apple
opening its own retail stores.
Discuss the advantages and
disadvantages of being vertically
integrated.
Advantages:
Develop unique merchandise only
sold in your stores
Better coordination between
manufacturing and retailing
Faster speed to market
Better control of product
distribution
Disadvantages:
Higher costs because retailer
might not be an efficient
manufacturer
More complex infrastructure
required
The cost of being vertically
integrated is typically higher.
E. Differences in Distribution Channels around the World
 Compared with distribution channels in the European
Union, China. and India, the U.S. retail industry has the
greatest retail density (retail stores per person) with the
greatest concentration of large retail firms. The
combination of large stores and large firms results in a
very efficient distribution system.
 The Chinese and Indian distribution systems are
PPT 1-11, 1-12, illustrate these
different distribution channels.
Ask students to consider several
reasons for differences in
distribution systems in various
nations.
How do differences in distribution

1-5
characterized by small stores operated by relatively small
firms and a large, independent wholesale industry. As a
result, a larger percentage of labor is employed in
distribution and retailing than in the U.S.
 Northern European retailing is most similar to the U.S.
system. Southern European retailing is more fragmented
across all sectors. Central European retailing has changed
from a highly-concentrated structure to one of extreme
fragmentation (involving small family owned stores).
 Factors that have created differences in distribution
systems include: (1) social and political objectives, (2)
geography, and (3) market size.
systems lead to differences in
retail experiences for consumers?
III. Economic and Social Significance of Retailing
 Realize the importance of retailing in the U.S. and world
economies.
LO 1-2 Realize the importance of
retailing in the U.S. and world
economies.
See PPT 1-14
A. Role in Developed Economies
 Consumer spending plays a critical role in the economies
of the United States and other developed countries. When
consumers spend more money buying goods and services
from retailers, a country’s economy flourishes.
 However, if consumers feel uncertain about their financial
future and decide to refrain from buying new refrigerators
or blue jeans, the economy slows down.
 More than 14 million people were employed in retailing in
2015—approximately 10 percent of the U.S. workforce—
and an additional 15 percent work for companies that
either provide services to and/or sell products through
retailers.
B. Role in Developing Economies—The Bottom of the Pyramid
 Retailers need to also focus on opportunities available by
serving the needs of the 3 billion people living at the
lowest end of the income distribution.
 Consumers in this low-income consumer segment (about
40 percent of the world’s population), referred to as the
base of the pyramid or bottom of the pyramid (BoP), still
have significant spending power.
 Undertaking retailing activities for BoP markets is
Discuss technologies that are in
abundant supply in developed
markets and how those may
impact retail at BoP markets.
What can be done to lessen this
gap?

1-6
challenging due to lack of communication technologies
and access, and markets that are often in rural areas,
limiting local demand and making the cost of transporting
goods higher.
C. Role in Society
 In addition to providing goods and services to their
customers, some retailers are realizing that their
responsibility includes considering the needs and
objectives of all its stakeholders.
 Stakeholders are the broad set of people who might be
affected by a firm’s actions, from current and prospective
customers, to supply chain partners, to employees, to
shareholders, to government agencies, to members of the
communities in which the firm operates, and to a general
view of society.
 Retailers are socially responsible businesses. Corporate
social responsibility (CSR) describes the voluntary actions
taken by a company to address the ethical, social. and
environmental impacts of its business operations and the
concerns of its stakeholders.
 Conscious marketing entails a sense of purpose for the
firm higher than simply making a profit by selling products
and services and encompasses four overriding principles:
Ask students which retailers are
actively engaged in CSR.
1. Recognition of the retailing firm’s greater purpose.
 Retailers recognize that its purpose should be more than
just making profits.
2. Consideration of stakeholders and their
interdependence.
 Retailers that embrace the notion of conscious marketing
consider how their actions will affect the expansive range
of potential stakeholders.
 Retailers consider the broad implications of their actions.
By considering these impacts as a foundation for any
decision, these retailers achieve the most benefits for the
largest numbers of stakeholders,

1-7
3. The presence of conscious leadership, creating a
corporate culture.
 A conscious marketing approach implies that the firm’s
leaders are dedicated to the proposition of being
conscious at all levels of the business, throughout its
entire culture.
4. The understanding that decisions are ethically based.
 Retailers that are engaged in conscious marketing make
decisions that are based on sound business ethics.
 Business ethics is concerned with distinguishing between
right and wrong actions and decisions that arise in a
business setting, according to broad and well-established
moral principles.
IV. The Growing Importance of Retailers and Retailing LO 1-3 Analyze the changing
retail industry.
See PPT 1-17
A. Evolution of the Retail Industry
 Fifty years ago, the retail industry consisted of small,
independent, local retailers competing against other small,
independent retailers in the same community.
 Today, the retail industry is dominated by large, national,
and even international retail firms.
 Nine of the top 20 retailers are headquartered in the
United States; Germany has five.
 The development of information systems is one of the
forces facilitating the growth of large retail firms—the shift
from an industry dominated by small local retailers to
large multinational chains.
 Retailing is becoming a global industry as more retailers
pursue growth by expanding their operations to other
countries.
 Large retailers in particular are becoming increasingly
international in geographic scope.
 Exhibit 1-4 lists the 20 largest global retailers.
The largest retailers in the world
are shown in Exhibit 1–4
Are students surprised by any
companies on the list? Why or
why not?
Ask what companies will be in the
top five in five years.
Why?
Discuss how some companies are
doing a good job of dealing with
changing customer needs and
others are not.
What global retailers have
students experienced while
traveling abroad? How do these
experiences compare to the
students’ experiences in the local
marketplace?

1-8
 The exhibit includes companies that compete on the basis
of price (such as Wal-Mart), firms that are known for
specific categories (such as Kroger for groceries and CVS
for drugs), and firms that sell a wide variety of
merchandise through different retail formats (such as
Target).
 Though 2014 revenues for 250 of the world’s top retailers
approached $4.5 trillion, an estimated $100 billion of that
amount went to just four massive retailers. About one-
quarter of the retailers included in the top 250 list actually
account for less than $5 billion in revenues total.
B. Role of Information Systems
 Retailers are inundated with data about the thousands of
transactions that take place each day. The challenge for
retailers is to convert these raw data into information that
managers can use to make better decisions.
Ask students what type of
information may be found on the
transactional data (receipts). How
could retailers use this
information to improve the
customer experience?
V. Management and Entrepreneurial Opportunities
 Retailing provides personal opportunities to work for a
company in an exciting, challenging environment or to
start an entrepreneurial venture.
LO 1-4 Recognize the
opportunities for you in
retailing.
A. Management Opportunities
 Retailers employ people with expertise and interests in
finance, accounting, human resource management, supply
chain management, and computer systems, as well as
management and marketing.
 Retail management is also financially rewarding. Starting
salaries are typically between $35,000 and $65,000 for
college graduates entering management trainee positions.
 Senior buyers and others in higher managerial positions
and store managers make between $120,000 and
$300,000.
See PPT 1-18, 1-19, and 1-20 for
more information and examples
of opportunities in the retailing
field.
Ask students what they think of
retailing as a career. If there are
many opportunities and they
seem to pay well, why do most
students think that retailing is not
a good job to get after
graduation?
B. Entrepreneurial Opportunities
 Retailing provides opportunities for people wishing to start
their own business. Many retail entrepreneurs are among
the wealthiest people in the United States.
 The successes of Jeff Bezos (Amazon.com), (Sam Walton
(Walmart), Do Won and Jin Sook Chang (Forever 21),
Examples of entrepreneurs in
retail are shown in PPT 1-21 and
1-22.
What are some ideas that a retail

1-9
Ingvar Kamprad (IKEA), and Howard Schultz (Starbucks)
show how each capitalized on entrepreneurial
opportunities.
entrepreneur might consider now
near the campus or in the
students’ hometowns?
VI. The Retail Management Decision Process
 The book is organized around the management decisions
retailers make to provide value to their customers and
develop an advantage over their competitors.
LO 1-5 Understand the strategic
retail management decision
process.
Use this to discuss the
organization of the course and the
book
A. Understanding the World of Retailing (Section I)
 Retail managers need a good understanding of their
environment, especially their customers and competition,
before they can develop and implement effective
strategies.
 The critical environmental factors in the world of retailing
are: (1) the macroenvironment, and (2) the
microenvironment. The impact of the macroenvironment
includes technological, social and ethical/legal/political
factors on retailing. The retailer’s microenvironment
includes the retailer’s competitors and customers.
See PPT 1-23 for the Retail
Management Decision Process
Ask students about some changes
occurring in the environment now
that will affect retailing in general
and specific retailers. Corporate
Social Responsibility may come up
as an answer and the impacts of
CSR on the practice of retailing
could be discussed in detail.
1. Competitors
 A retailer’s primary competitors are those with the same
format. Thus, department stores compete against other
department stores and supermarkets compete with other
supermarkets. This competition between retailers with the
same format is called intratype competition.
 To appeal to a broader group of consumers and provide
one-stop shopping, many retailers are increasing their
variety of merchandise. Variety is the number of different
merchandise categories within a store or department. The
offering of merchandise not typically associated with the
store type, such as clothing in a drug store, is called
scrambled merchandising.
 Competition between retailers that sell similar
merchandise using different formats, such as discount and
department stores, is called intertype competition.
 Increasing intertype competition has made it harder for
retailers to identify and monitor their competition. In one
See PPT 1-25
In going through this section, you
might pick a specific local retailer.
Ask students to identify the
retailer’s customers, intratype
competitors, intertype
competitors, and environmental
trends affecting the retailer.
Ask students to give an example
of intratype competition – local
department store competing
against another department store
in the same mall.

1-10
sense, all retailers compete against each other for the
dollars consumers spend buying goods and services.
 Since convenience of location is important in store choice,
a store’s proximity to competitors is a critical factor in
identifying competition.
 Management’s view of competition also can differ,
depending on the manager’s position within the retail
firm.
 The CEO of a retail chain may view competition from a
much broader geographic perspective as compared to a
specific store's manager or a departmental sales manager
within the store.
Ask students to compare the
different types of merchandise
offered at Walmart to those
offered at, say, Bath and Body
Works or McDonald's.
Ask students to give an example
of intertype competition – drug
store and discount store that sell
the same brand of cosmetics.
2. Customers
 Retailers are responding to broad demographic and life-
style trends in our society, such as the growth in the
elderly and minority segments of the U.S. population and
the importance of shopping convenience to the rising
number of two-income families.
 To develop and implement an effective strategy, retailers
need to know why customers shop, how they select a
store, and how they select among that store’s
merchandise.
Query students on the specific
impacts of an aging population or
dual-income households on
retailing, including retail location,
store layout, etc. What needs for
specific types of merchandise and
services do these markets create?
B. Developing a Retail Strategy (Section II)
 Understanding of the macro- and microenvironments is
needed to formulate and implement a retail strategy.
See PPT 1-32.
1. The retail strategy indicates how the firm plans to focus
its resources to accomplish its objectives.
 The retail strategy identifies: (1) the target market, (2) the
nature of merchandise and services to be offered, and (3)
how the retailer will build a long-term advantage over
competitors.
How can one retailer gain long-
term competitive advantage over
competitors in the marketplace?
(Potential areas for discussion
may include: location, customer
relationships, technology,
merchandising, etc.)
2. Strategic Decision Areas
 Key strategic decision areas include the determination of
market strategy, financial strategy, location strategy,
organizational structure and human resource strategy,

1-11
information systems and supply chain strategies, and
customer relationship management (CRM) strategies.
 When major environmental changes occur, the current
strategy and the reasoning behind it are reexamined. The
retailer then decides what, if any, strategy changes are
needed to take advantage of new opportunities or avoid
new threats in the environment.
 The retailer’s market strategy must be consistent with the
firm’s financial objectives. Location decisions are
important for both consumer and competitive reasons. A
retailer’s organizational design and human resource
management strategies are intimately related to its
market strategy. Retail information and supply chain
management systems will be significant opportunities for
retailers to gain strategic advantage in the coming decade.
 Retailers, like most businesses, want to develop repeat
purchases and loyalty in their best customers. Customer
Relationship Management (CRM) is a business philosophy
and set of strategies, programs, and systems that focus on
identifying and building loyalty with the firm's most valued
customers.
C. Implementing the Retail Strategy (Sections III and IV)
 To implement the retail strategy, management develops a
retail mix that satisfies the needs of its target market
better than its competitors.
 Elements in the retail mix include the types of
merchandise and services offered, merchandise pricing,
advertising and promotional programs, store design,
merchandise display, assistance to customers provided by
salespeople, and convenience of the store’s location.
See PPT 1-33 for Key Decision
Variables for Retailers.
Ask students what McDonald’s
needs to do to implement its
strategy effectively. Have them
discuss each of the elements of
the retail mix used by
McDonald’s. Compare the retail
mix elements used by McDonald’s
to the retail mix elements used by
an upscale restaurant in town.
Why are the retail mixes of these
two types of restaurants
different? [They have different
target markets with different
needs.]
VII. Summary
 Retailing provides considerable value to consumers while

1-12
giving people opportunities for rewarding and challenging
careers.
 The key to successful retailing is offering the right product,
at the right price, in the right place, at the right time, and
making a profit. To accomplish this, retailers must
understand what customers want and what competitors
are offering.
 Retailing plays an important role in the U.S. economy. One
out of four workers in the United States works for a
retailer or for a company selling products to a retailer.
 The retail industry has changed dramatically over the past
50 years.
 The retail management decision process involves
developing a strategy for creating a competitive advantage
in the marketplace and then developing a retail mix to
implement that strategy.
VIII. Appendix 1A: Careers in Retailing
 Retailing offers exciting and challenging career
opportunities. Few other industries grant as many
responsibilities to young managers.
 Retailing offers a variety of career paths such as buying,
store management, sales promotion and advertising,
personnel, operations/distribution, loss prevention, and
finance in several different corporate forms, such as
department stores, specialty stores, food stores, and
discount stores.
 In addition, retailing offers almost immediate
accountability for talented people to reach key
management positions within a decade. Starting salaries
are competitive, and the compensation of top
management ranks among the highest in any industry.
See PPT 1-32, 1-33, and 1-34.

1-13
A. Career Opportunities
 Career opportunities in retail firms occur in
merchandising/buying, store management, and corporate
staff functions.
 Primary entry-level opportunities for a retailing career are
in the areas of buying and store management. Buying
positions are more numbers-oriented, whereas store
management positions are more people-oriented.
1. Store Management
 Successful store managers must have the ability to lead
and motivate employees. Store management involves all
the disciplines necessary to run a successful business:
sales planning and goal setting, overall store image and
merchandise presentation, budgets and expense control,
customer service and sales supervision, personnel
administration and development, and community
relations.
2. Merchandise Management
 Merchandise management attracts people with strong
analytical capabilities, an ability to predict what
merchandise will appeal to their target markets, and a skill
for negotiating with vendors as well as store management
to get things done. Many retailers break the
merchandise/buying function into two career paths:
buying and merchandise planning.
3. Corporate Staff
 Corporate staff opportunities include positions in MIS,
operations/distribution, promotions/advertising, loss
prevention, finance/control, real estate, store design, and
human resource management.
 Career opportunities for corporate staff positions are
more difficult to break into.
B. Attractiveness of Retailing Careers

1-14
1. Immediate Responsibility
 Management trainees in retailing are given more
responsibility more quickly than their counterparts in
other industries.
2. Financial Rewards
 Compensation varies according to the amount of
responsibility.
 Because information systems enable retailers to assess the
sales and profit performance of each manager, and even
each sales associate, the compensation of retail managers
is closely linked to objective measures of their
performance.
 In retailing, the benefits package is often substantial and
may include a profit-sharing plan, savings plan, stock
options, medical and dental insurance, life insurance, long-
term disability protection and income protection plans,
paid vacations and holidays, and discounts on
merchandise.
3. Opportunities for Advancement
 While the growth rate of retail parallels the growth rate of
the overall economy, many opportunities for rapid
advancement exist simply because of the sheer size of the
retail industry.

1-15
ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS
3. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the Census
Internet site at: www.census.gov/retail/index.html. Under the heading "Monthly Retail
Trade Report" there is a file titled "Retail and Food Services Sales" that lists sales by type of
retailer (view “Not Adjusted Sales”). In which months are sales the highest? Which kinds of
businesses experience the greatest fluctuations in monthly sales? List reasons that help
explain your findings.
Students should notice the importance of the 4th quarter for retail sales during the winter
holiday season. Many types of U.S. retailers posted their highest sales in the 4th quarter,
including Home Furnishings Retailers, Electronics and Appliances Retailers, and Jewelry
Stores. If students looked at the breakdown of the retailer type, e-com/mail order, jewelry
would have a significant percent of sales in November and December.
Some students may see a difference in March and April where Easter may fall in either
month depending on the year.
4. INTERNET EXERCISE Go to the home pages of Macy’s, Target, Walmart, Toys ‘R’ Us, and the
National Retail Federation Retail Careers Center (www.nrf.com/RetailCareers) to find
information about retail careers with these companies/organizations. Review the
information about the different positions described. In which positions would you be
interested? Which positions are not of interest to you? Which employer would interest you?
Why?
Students’ answers will vary considerably here. Some students may take a more long-term
view looking to Buyer or Planner positions which call for a variety of skills including strong
organizational and analytical skills, excellent verbal and written communication skills and
extensive computer experience. These positions also require several years of prior
experience in lower-level buying positions. Other students may find these positions to be
more quantitative or analytical than their interests lie.
Students looking at entry-level positions, as well as those seeking more creative positions
or those with a broader focus, may be attracted to the entry-level Fashion Assistant or
Product Assistant positions. These positions request a less comprehensive skill set as well as
less emphasis on prior job experience.
5. INTERNET EXERCISE Choose one of the top 20 retailers (Exhibit 1-4). Go to the company’s
website and find out how the company started and how it has changed over time.
From the Exhibit of the Top 20 retailers, students can see that in general, European
retailers have been more successful in expanding to more countries as compared to U.S.
retailers. In general, given smaller sizes of the countries in which these retailers originated,
they had to expand to other country markets to sustain their growth strategies. By
contrast, the U.S. retailers have enjoyed a larger market size within the U.S. alone, thereby

1-16
rendering global expansion less of a priority for them. Students will also note that food
retailing dominates among the largest retailers.
6. INTERNET EXERCISE Go online to the websites of Whole Foods or The Container Store. In a
brief paragraph, describe how this retailer is taking steps to contribute to a social or ethical
cause.
Whole Foods “[creates] economic partnerships with the poor in developing-world
communities that supply our stores with product” through its Whole Planet Foundation.
The company also runs the Whole Kids Foundation (“supporting schools and inspiring
families to improve children’s nutrition and wellness”) and the Whole Cities Foundation
(“bringing fresh, nutritious food and broader access to healthy eating education to
underserved communities”). The Container Store’s website states: “The Container Store
gives back to the community with a focus on nonprofits that promote women’s and
children’s health and well-being – organizations that our customers support and are
passionate about. From product and gift card donations to cash sponsorships and
employee volunteer time, we believe it’s important to be a good corporate neighbor.” The
Container Store runs the Organized Teacher discount program, which offers special
discounts to educators.

1-17
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. How do retailers add value to the products bought by consumers?
Retailers add value in several ways. First, retailers provide an assortment of products and
services. Second, retailers break bulk to enable customers to buy smaller quantities. Third,
retailers hold inventory so that products will be available when consumers want them.
Finally, retailers provide services like alterations, financing, and sales associate assistance.
2. What is your favorite retailer? Why do you like this retailer? What would a competitive
retailer have to do to get your patronage?
Students may choose an example from a wide variety of retailers. Answers will likely range
from national chains including but not limited to Zara, Urban Outfitters, Bloomingdale's,
McDonald's, CVS, Sephora, Starbucks, Kohls, to online retailers like Amazon.com and eBay
to favorite local shops and hangouts.
Whatever selection is made, ask students to concentrate on the specific aspects of retail
strategy, such as: (1) intended target market of the retailer; (2) nature of merchandise and
services and the specific consumer needs sought to be satisfied; (3) product variety and
assortments carried; (4) store location strategy; (5) pricing strategies; (6) specific service
strategies; (7) strategies designed to attract and retain customers; and, (8) strategies
specifically designed at gaining a long-term advantage over competitors.
3. What are the benefits and limitations of purchasing a home entertainment system
directly from a number of component manufacturers rather than from a retailer?
Students may indicate benefits typically associated with “removing the middleman” such as
reduced price and effort in completing the transaction.
While these benefits will occur in specific cases, it must be noted that the average
consumer engages in buying dozens of items on a regular basis. Even if all manufacturers
were to offer their products directly to consumers, it can be readily noted that the
consumer would now have to spend an extraordinary amount of time each day ordering
directly from each manufacturer. This should lead to discussion of the limitations of
purchasing directly from the manufacturer rather than a retailer.
Here, the various functions performed by retailers, such as bulk-breaking, holding
inventories, and providing information, service and assortments can be brought to bear on
overcoming the limitations discussed above for the consumer. Bulk-breaking enables
consumers to buy only the specific amount they would need. Retail inventory helps
eliminate the need for consumers to hold their own inventory, since they could simply
satisfy their needs for a specific and immediate time-period, such as buying one unit of dish
washing detergent that would last the next two months. Retailers provide valuable

1-18
information and services that save consumers time and effort as compared to when
consumers attempt to obtain such information by themselves or serve themselves. By
providing an assortment of products and brands in one location – in some cases of
scrambled merchandising, a very wide assortment of products and brands – retailers help
consumers engage in one-stop shopping, thereby saving them the time and effort for other
productive and leisure activities.
Further, it would be uneconomical for most manufacturers, especially those selling low-
priced items, such as toothpaste directly to each consumer or household. In general, even if
retailers are eliminated from the supply chain, their functions remain. Often these
functions would be distributed between the manufacturer and consumers. For example,
manufacturers would now have to produce a wider variety of products (in order to offer an
assortment) and consumers would have to carry greater amounts of inventory (to buy a
case-load of toothpastes!). The distribution of retail functions would increase manufacturer
costs as well as consumer costs and efforts. One may argue that "buying cheaper from the
manufacturer" is, in a vast majority of cases, a myth.
4. What retailers would be considered intratype competitors for a convenience store chain
such as 7-Eleven? What firms would be intertype competitors?
Discussion should lead to those convenience stores in the local market offering the
traditional convenience store retail mix including gasoline, snacks, newspapers, coffee, and
a limited variety of grocery items.
Ask students to discover intertype competitors for 7-Eleven by focusing on a particular
merchandise offering such as a gallon of milk, a fountain soda, or a candy bar. This
discussion will illustrate that intertype competition for 7-Eleven may come from a number
of retailers offering similar merchandise through different formats, such as supermarkets,
fast-food restaurants, or discount stores.
5. How does Walmart contribute to and/or detract from the communities in which it
operates stores?
Students may argue either in favor of or against the large discount stores, such as Walmart.
The arguments against may include:
(1) Smaller family-owned firms may not be able to compete on the basis of price with
Walmart and hence would have to close down, resulting in loss of entrepreneurial
opportunities within the community;
(2) The personal service of a Mom-and-Pop store is now replaced by an impersonal cash
register clerk and very few employees offering information and service within the store;
and,
(3) Over a period of time, there may be no competition for the larger store, which may
begin to charge higher prices, from a monopoly position.

1-19
On the other hand, the arguments in favor include:
(1) greater product assortment and choice for the consumer at lower prices;
(2) one-stop shopping convenience for the consumer, freeing up the consumer's time for
other productive and leisure activities;
(3) immediate increase in employment at various levels of the local, large store
organization; and,
(4) greater opportunities at the supply level, since the large store would have to rely on
local supply sources for a variety of products, especially perishables.
In general, students would see both the arguments for and against the large store.
However, one could also add that smaller firms providing superior service or other forms of
consumer value apart from price would prevail despite the presence of a large store
competing on the basis of price. Examples include electronics stores that provide greater
consumer information and expertise, or customized services such as portrait framing, etc.
Given that modern retailing has seen several different types of retailers emerge and
compete successfully, it is debatable if the large store would ever actually become a
monopoly. As long as some consumers continue to seek a wide variety of retail offerings
beyond price, other retailers or retail formats will emerge to challenge the growing
monopolization by the larger store.
6. The same brand and style of men’s suits are sold at different prices at a department store
like Macy’s and at a specialty store like Men’s Wearhouse. Why would a customer
choose to buy the suit from one store rather than the other?
There are many different reasons why customers choose one retailer over another. Some
customers might choose a department store if they have other shopping needs besides the
men’s suit. Also, department stores often offer services like alterations. If a customer has
never purchased a suit before, he might choose the Men’s Wearhouse because of its
expertise in the area and the hands-on attention he will get from the sales associate.
7. Compare and contrast the retail mixes of department stores and full-line discount stores.
Use bullet points or a table to list the similarities and differences.
A department store’s retail mix would include:
 Customer Service- Department stores provide a higher level of customer service
with increased sales associate interactions and add-on services like alterations,
shipping and gift wrapping.
 Store design and display- Department stores are organized by departments. For
example, Macy’s might have a children’s department, women’s department, men’s
department, shoe department, and cosmetics department. Each department is
merchandised differently.

1-20
 Communication mix- Department stores use advertising, social media, personal
selling and loyalty programs to reach customers.
 Locations- Department stores are typically in malls and act as anchor stores for the
mall.
 Merchandise management- Department stores offer customers a wide variety of
merchandise.
 Pricing- Department stores have higher prices than discount stores. Some
department stores, like Saks Fifth Avenue and Neiman Marcus, have significantly
higher prices, other department stores, like Macy’s and Dillard’s, are more
moderately priced.
A full-line discount store’s retail mix would include:
 Customer Service- Discount stores have less customer service than department
stores as they are more focused on keeping the price point down.
 Store design and display- Discount stores optimize display areas to showcase
merchandise. The display may not be as organized as a department store.
 Communication Mix-Discount stores communicate with their customers through
advertisements, social media and sales promotions.
 Location- Full line discount stores are usually in strip malls or free-standing
locations.
 Merchandise management- The merchandise offered by full line discount stores is
usually a wide variety that is constantly changing depending on the inventory that is
available.
 Pricing- Full-line discount stores are less expensive than department stores. These
stores compete primarily on price.
8. An entrepreneur approaches you about how to sell her new writing pens to consumers.
The pens have a unique benefit-they are more comfortable to use than traditional pens.
The entrepreneur is concerned the retailers she has approached want to buy the pens
from her at $10 a piece and then sell the pens in their stores for $18 to consumers. The
entrepreneur is dismayed at the extra $8 the retailers are getting and has decided to sell
the product directly to consumers for $10. She wants to know your opinion. What do
you think? Why?
Students’ answers may vary on this question. Traditionally, the entrepreneur would be
better off selling the pen through the retailer because the retailer already has a client base
and can absorb the cost of promoting the pen. In addition, retailers add value by providing
assortment to the customer and the pen might be a great purchase along with other items
the retailer offers. However, with the increased use of the Internet, entrepreneurs are able
to reach audiences more directly. She may be able to sell her pen to customers directly,
but she has to build the client base on her own. She might not be guaranteed the sales if
she sells directly, vs. selling in bulk to the retailer.

1-21
9. From a personal perspective how does retailing rate as a potential career compared to
others you are considering? Why?
After reading the chapter, some students may already be attracted to retailing as a career,
since they would now have realized the wide variety of opportunities provided in the retail
sector. At the same time, some may compare retailing less favorably to other potential
career paths, such as advertising, or more immediately lucrative endeavors, such as the
stock market. Ultimately, all students should have recognized that retailing is not simply
being a store associate, greeting the customer and making a sale. Those students
interested in the technology field should see a variety of opportunities to make a career in
retailing, as should those with interests in finance, accounting, or human resource
management.
10. In this chapter, some socially responsible activities engaged in by retailers are described.
Take the perspective of a stockholder in one of these companies. What effect will these
activities have on the value of its stock? Why might they have a positive or negative
effect?
Sometimes CSR initiatives are expensive for a company, making the value of the stock drop.
However, some CSR initiatives, like building greener buildings and reducing the carbon
footprint, have long-term implications that add value to a retailer. For example, engaging
in CSR activities can attract new customers as well as increase loyalty with current
customers. Furthermore, some of these activities might be required of retailers in the
future, so it might be best, and more cost-effective, to implement them now.

1-22
CONNECT ACTIVITIES FOR CHAPTER 1
Activity Title Activity Type(s) Topic Learning Objective
The Supply Chain Drag and Drop;
Matching (accessible
version)
Understanding supply
chains
1-1 Identify retail
activities.
Physical Retail Case Analysis The importance of
retailing
1-3 Analyze the
changing retail
industry.
The Retail Industry Video Case Retailing as a career 1-4 Recognize the
opportunities for you
in retailing.
Top Global Retailers Drag and Drop;
version)
The importance of
retailing
1-3 Analyze the
changing retail
industry.

Chapter 02 - Types of Retailers
2-1
CHAPTER 2
TYPES OF RETAILERS
ANNOTATED OUTLINE INSTRUCTOR NOTES
I. Retailer Characteristics
 The 1.1 million U.S. store-based retailers range from street
vendors selling hot dogs to omnichannel retailers that
offer thousands of products in their stores, through catalog
and Internet channels.
 The retail industry is always evolving. As consumer needs
and competition within the industry change, new retail
formats are created to respond to those changes.
 The most basic characteristic of a retailer is its retail mix –
the elements used to satisfy its customers’ needs.
 Four elements of the retail mix that are particularly useful
for classifying retailers are: (1) the type of merchandise
sold, (2) the variety and assortment of merchandise and/or
services sold, (3) the level of customer service, and (4) the
price of the merchandise.
LO 2-1 List the different
characteristics that define
retailers.
Ask students to compare the four
elements of the retail mix -- the
type of merchandise sold, the
variety and assortment of
merchandise and/or services sold,
the level of service provided to
customers, and price -- of two
women's specialty stores. Now
compare the retail mixes of one of
the specialty stores and the local
discount store (e.g., Walmart).
Use this comparison to illustrate
how the competition between the
two specialty stores is stronger
than the competition between the
specialty store and the discount
store.
PPT 2-5 illustrates classification of
retailers by merchandise offering
and by variety and assortment.
A. Type of Merchandise
 The United States, Canada, and Mexico have developed a
classification scheme, called the North American Industry
Classification System (NAICS), to collect data on business
activity in each country.
B. Variety and Assortment
 Variety is the number of merchandise categories a retailer
offers. Assortment is the number of different items in a
merchandise category. Each different item of merchandise
is called a SKU (stock-keeping unit).
See PPT 2-7
local retailers with low variety and
high assortment, and retailers
with high variety and low
assortment.

2-2
 Variety is often referred to as the breadth of merchandise
and assortment is referred to as the depth of
merchandise.
What benefits does high variety
offer to customers? What is the
benefit of high assortment?
Ask student to give an example of
an SKU.
C. Services Offered
 Retailers also differ in the services they offer customers.
Customers expect retailers to provide some services--
accepting credit cards, displaying merchandise, providing
parking, and being open long and convenient hours.
 Some retailers charge customers for other services, such as
home delivery and gift wrapping, although upscale
retailers offer customers these services at no charge.
See PPT 2-9
Discuss the different customer
service policies of a specialty store
like Apple and a local department
store or an Internet retailer.
Discuss how customers’
expectations differ at each type of
store.
D. Prices and the Cost of Offering Breadth and Depth of
Merchandise and Services
 Stocking a deep and broad assortment is appealing to
customers but costly for retailers. When a retailer offers
many SKUs, inventory investment increases because the
retailer must have back-up stock for each SKU.
 Similarly, services attract customers to the retailer, but
they are also costly.
 To make a profit, retailers that offer broader and deeper
assortments and services need to charge higher prices.
 A critical retail decision involves the trade-off between
costs and benefits of maintaining additional inventory or
providing additional services.
See example in PPT 2-10 for
illustration
Customers like wide variety, deep
assortments, and a lot of service,
though some customers
appreciate having the retailer edit
the assortment for them. Ask
students why all retailers don’t
have this type of offering.
(Retailers have constraints of
money, size of store, and limited
number of employees.)
Why don't discount stores offer
more services? (They appeal to a
target segment that does not
want to pay the cost for more
service options.)
PPT 2-12 shows a comparison of
sales and growth rates in various
retail sectors

2-3
II. Food Retailers
 Twenty years ago, consumers purchased food primarily at
conventional supermarkets. Now conventional
supermarkets account for less than 65 percent of food
sales.
 Supercenters, warehouse clubs, convenience stores, and
extreme-value food retailers are significantly changing
consumers' food purchasing patterns because they too sell
food. At the same time, traditional food retailers carry
many nonfood items.
 The world's largest food retailer is Walmart with
supermarket-type sales of more than $485 billion.
LO 2-2 Categorize the various
types of food retailers.
See PPT 2-13
Where do students make the
majority of their off-campus food
purchases? What are the pros and
cons of these different food
retailer formats?
Ask students where they see the
direction of food retailers going in
the next 20 years. Will customers
use more online grocery food
retailers?
A. Supermarkets
 A conventional supermarket is a self-service food store
offering groceries, meat, produce, and limited nonfood
items.
 A limited-assortment supermarket (also called an
extreme-value food retailer) only stocks about 1,500 SKUs.
The two largest US examples of these stores are Save-A-
Lot and ALDI.
 Limited-assortment supermarkets are designed to
maximize efficiency and reduce costs through limited
assortment and service offerings. These cost savings and
efficiencies allow the stores to charge significantly lower
(40% lower) prices than conventional supermarkets.
See PPT 2-14
Ask students to consider the retail
mixes of the major supermarkets
in the area surrounding campus.
Which compete on price? On
merchandise? On service? A
combination?
Do students have concerns about
the quality of items at
conventional supermarkets versus
limited-assortment supermarkets?
1. Trends in Supermarket Retailing
 Today, conventional supermarkets are under substantial
competitive pressure on multiple sides: from supercenters,
online retailers, warehouse clubs, extreme-value retailers,
convenience stores, and even drugstores. All these types
of retailers have increased the amount of space (virtual or
physical) that they devote to consumables.
 Low-cost competitors are especially challenging for
conventional supermarkets because of their superior
See PPT 2-17
Ask students about why they
would continue to shop at
conventional supermarkets.
Alternatively, why would they
shop for food at supercenters,
warehouse clubs, or convenience
stores? What types of needs are
fulfilled by conventional
supermarkets that can’t be filled
through other food retailing

2-4
operating efficiencies.
 To compete successfully with intrusions by other types of
retailers, conventional supermarkets have taken steps to
differentiate their offerings by (1) emphasizing fresh
perishables; (2) targeting green, ethnic, and Millennial
consumers; (3) providing better value with private-label
merchandise; (4) adding new value-added services such as
online ordering; and (5) providing a better shopping
experience, such as by adding restaurant options or
hosting social events.
formats? Based on these
discussions, will conventional
supermarkets be driven out of
business by competing formats?
2. Fresh Merchandise
 Fresh-merchandise categories are located in the areas
around the outer walls of a supermarket, known as the
power perimeter, and include the dairy, bakery, meat,
florist, produce, deli, and coffee bar.
 Conventional supermarkets are building on their strength
in fresh-merchandise categories and devoting more space
and attention to them as they attract customers and are
very profitable.
3. Green Merchandise
 Conventional supermarkets are offering more fair trade,
natural, organic, and locally sourced foods for the growing
segment of consumers who are health and
environmentally conscious.
 Fair trade is the practice of purchasing from suppliers that
pay workers a living wage, considerably more than the
prevailing minimum wage, and offer other benefits such as
onsite medical treatment.
 The locavore movement focuses on reducing the carbon
footprint caused by the transportation of food throughout
the world. Traditional supermarket chains are offering
more locally grown products.
Discuss if students would pay
more for local produce, and if by
doing so, it would improve the
carbon footprint in the world.
Does paying more for fair trade
make students feel like they are
contributing to the betterment of
society? By marketing these
efforts, does it make food retailers
less genuine in their approach?
4. Ethnic Merchandise
 Retailers are adding more ethnic merchandise in
conventional supermarkets, and opening supermarkets
targeting certain ethnic markets.

2-5
5. Private-Label Merchandise
 Conventional supermarket chains are leveraging their
quality reputation to offer more private-label merchandise
which helps build store loyalty, earn higher margins, and
differentiate stores from their competitors.
 Benefits to customers include having more choices and
finding the same ingredients and quality as in national
brands at a lower price or higher quality at a similar price
to the national brands.
Ask students to think about what
products they purchase at food
stores that are “private label.”
Discuss if quality or price plays a
greater role in their decision to
purchase these products.
6. Improving the Shopping Experience
 Creating an enjoyable shopping experience through better
store ambience and customer service is used to
differentiate supermarket chains from low-cost, low-price
competitors.
 Supermarkets are increasingly incorporating “food as
theater” concepts, such as in-store restaurants, open-air
market designs, cooking and nutrition classes,
demonstrations, baby-sitting services, food and wine
tasting, and self-service kiosks.
Ask students to list what types of
experiences they have seen in the
food retailers they visit. Discuss if
these experiences motivate them
to continue to shop there.
B. Supercenters
 Supercenters are the fastest growing retail category. At
160,000 to 20,000 square feet, these stores offer a wide
variety of food and non-food merchandise. The largest
supercenters are Walmart supercenters, Meijer, Super
Kmart (Sears Holding), Fred Meyer (a division of Kroger),
and SuperTarget.
 By offering broad assortments of grocery and general
merchandise under one roof, supercenters provide a one-
stop shopping experience.
 General merchandise items are often purchased at
supercenters. These items have higher margins, which
allows supercenters to offer food items at a more
aggressive price.
 However, since supercenters are very large, some
customers find them inconvenient because it can take a
long time to find the items they want.
 Hypermarkets are also large, about the same size as
See PPT 2-18 for an illustration of
the characteristics of supercenters
and warehouse clubs.
The supercenter is one of the
fastest growing retail formats.
Why is the supercenter more
attractive than a hypermarket in
the U.S., but not in Europe? What
are benefits to consumers
shopping in supercenters versus
conventional supermarkets?
What are the disadvantages?
Ask students if they prefer the
supercenter model to a traditional
supermarket. How do students
feel about the growth of
Walmart? Do students prefer
Walmart’s format over Target?
Why?

2-6
supercenters, and have a combination of food and general
merchandise. Hypermarkets typically stock fewer SKUs
than supercenters.
 Popular in both Europe and South America, hypermarkets
are not common in the United States. Located in large,
warehouse-type structures with large parking facilities,
hypermarkets typically carry a larger selection of food
items than supercenters and have a greater emphasis on
perishables.
 Supercenters place greater emphasis on general
merchandise and dry grocery items such as breakfast
cereals and canned goods.
 Although supercenters and hypermarkets are the fastest
growing categories in global retailing today, these retailers
do face challenges in finding and acquiring appropriate
land for building (particularly in Europe and Japan), along
with backlash against these large stores, particularly in the
U.S.
C. Warehouse Clubs
 A warehouse club is a retailer that offers a limited and
irregular assortment of food and general merchandise with
little service at low prices to ultimate consumers and small
businesses.
 Stores are large (at least 100,000 to 150,000 square feet)
and located in low-rent districts.
 Warehouse clubs reduce prices by using low-cost locations
and inexpensive store designs, and offering little customer
service. They reduce inventory holding costs by carrying a
limited assortment of fast-selling items and buying
merchandise opportunistically.
 Warehouse clubs accordingly have had substantial
influences on retailing and its structure. Between 1992 and
2013, warehouse club sales increased from $40 billion to
$420 billion.
 Most warehouse clubs have two types of members:
wholesale members who own small businesses and
individual members who purchase for their own use.
Typically, members must pay an annual fee.
See PPT 2-18 for an illustration of
the characteristics of supercenters
and warehouse clubs.
Ask students to give local
examples of warehouse clubs.
What is the target market for
warehouse clubs? (Consumers
with larger families and small
businesses.)
Are warehouse clubs wholesalers
or retailers? (When they sell to
small businesses they are
wholesalers. When they sell to
individual members for personal
or household use, they are
retailers.)
Ask students if they are members
of a warehouse club. Do they
prefer warehouse clubs to
supercenters?

2-7
D. Convenience Stores
 Convenience stores provide a limited variety and
assortment of merchandise at a convenient location in a
3,000-to-5,000-square-foot store with a speedy checkout,
with higher prices than supermarkets. They are a modern
version of the neighborhood mom-and-pop
grocery/general store.
 Convenience stores enable consumers to make purchases
quickly without having to search through a large store and
wait in long checkout lines.
 Convenience stores generally charge a higher price than
supermarkets for staple items like milk, eggs, and bread.
 Convenience stores are facing increasing competition from
other retail formats, especially from supercenters and
supermarket chains who have added gasoline to their
merchandise offerings, often tying gasoline sales to their
frequent-shopper programs.
 In response to these competitive threats, convenience
stores are taking steps to decrease their dependency on
gasoline sales by tailoring their merchandise assortments
to local markets, making their stores even more
convenient to shop, and adding new services.
 To increase convenience, some convenience stores are
opening smaller stores close to where consumers shop and
work. Others are exploring the use of technology to
increase shopping convenience such as self-service kiosks.
See PPT 2-19 for an overview of
the characteristics of convenience
stores
local convenience stores.
Which products do they tend to
buy most often at convenience
stores?
What do they like/dislike about
them? In general, what is so
"convenient" about convenience
stores?
What services do students believe
would make a convenience store
more “convenient”?
E. Online Grocery Retailers
 Time-poor customers are willing to pay more to access
options for ordering groceries online and having them
delivered.
 Consumers thus rely on online grocers for lower-profit-
margin nonperishable items, rather than higher-margin
fresh fruit or meats. Therefore, slim margins continue to
be a problem for both retailers and delivery services.
 Delivery costs are also a factor that might reflect a barrier
to the industry’s growth.
III. General Merchandise Retailers LO 2-3 Identify the various types

2-8
 The major types of general merchandise retailers are
department stores, full-line discount stores, specialty
stores, drugstores, category specialists, extreme-value
retailers, off-price retailers, and outlet stores.
of general merchandise
retailers.
See PPT 2-20
PPT 2-20 compares the various
types of general merchandise
retailers along several
characteristics.
A. Department Stores
 Department stores are retailers that carry a broad variety
and deep assortment, offer some customer services, and
are organized into separate departments for displaying
merchandise.
 The largest department store chains in the U.S. are Macy’s,
Sears, JCPenney, Kohl’s, and Nordstrom.
 Today, most department stores focus almost exclusively
on soft goods. The major departments are women’s,
men’s, and children’s clothing and accessories; home
furnishings; cosmetics; and kitchenware and small
appliances.
 Each department within the store has a specific selling
space allocated to it as well as salespeople to assist
customers, often resembling a collection of specialty
shops.
 Department store chains can be categorized into three
tiers: (1) upscale, high-fashion chains with exclusive
designer merchandise and excellent customer service
(Neiman Marcus, Nordstrom, Bloomingdale’s, Saks); (2)
traditional chains with more moderately priced
merchandise and less customer service (Macy’s and
Dillard’s); and (2) value-oriented chains catering to price-
conscious consumers (Sears, Kohl’s and JCPenney).
 Today many customers question the benefits of shopping
at department stores due to: (1) lack of convenient
locations, (2) decreases in customer service, and (3)
relatively high prices.
 To deal with their eroding market share, department
stores are (1) increasing the amount of exclusive
merchandise they sell, (2) increasing their use of private-
label merchandise, and (3) expanding their omnichannel
See PPT 2-21, 2-22, 2-23
local department stores. Why do
customers go to department
stores? What do they like/dislike
about them?
examples of specialty stores.
What are the differences between
specialty stores, department
stores, and discount stores?
Where do students buy business
suits, dresses, jeans, computers,
and electronics? Why do they go
to that type of store?
Which department stores do
students prefer? Which tier do
they shop most often? Discuss
differences in these responses.

2-9
presence.
B. Full-Line Discount Stores
 A full-line discount store is a retailer that offers a broad
variety of merchandise, limited service, and low prices.
They offer both private and national brands.
 The big three full-line discount store chains are Walmart,
Target, and Kmart (Sears Holding).
 A significant trend in this sector is Walmart’s conversion of
discount stores to supercenters because of increased
competition faced by the full-line discount stores, as well
as the significant operating efficiencies realized by
supercenters.
 Target is becoming one of the most successful retailers in
terms of sales growth and profitability, succeeding because
its stores offer fashionable merchandise at low prices in a
pleasant shopping environment.
See PPT 2-24
Discuss the target markets of the
three largest full-line discount
store chains (Walmart, Target,
and Kmart). How will the category
specialists (Staples, Best Buy,
Home Depot) affect the retail
strategy of full-line discount store
chains? What about Internet only
retailers? Are discount stores
going to succeed in the “clicks”
environment?
In general, what are the factors
that contribute to the success of
discount stores despite increasing
competition from other formats?
C. Category Specialist
 A category specialist is a big-box discount store that offers
a narrow variety but deep assortment of merchandise.
These retailers predominantly use a self-service approach,
but they offer assistance to customers in some areas of the
store.
 By offering a complete assortment in a category at low
prices, category specialists can "kill" a category of
merchandise for other retailers and thus are frequently
called category killers.
 Because category specialists dominate a category of
merchandise, they can use their buying power to negotiate
low prices, and are ensured supply when items are scarce.
 One of the largest and most successful types of category
specialist is the home improvement center. A home
improvement center is a category specialist offering
equipment and material used by do-it-yourselfers and
contractors to make home improvements.
 While merchandise in home-improvement centers is
displayed in a warehouse atmosphere, salespeople are
available to assist customers in selecting merchandise and
See PPT 2-25
examples of category specialists.
How are they similar to specialty
stores? Discuss the differences
and similarities with discount
stores.
Ask students to describe an
experience at a home
improvement center such as
Home Depot or Lowe’s in terms of
merchandise, atmosphere, and
customer service.

2-10
to tell them how to use it.
 Competition between specialists in each category is very
intense (Staples vs. Office Depot; Home Depot vs. Lowe’s)
as firms expand into the regions originally dominated by
another firm. Direct competition focuses on price,
resulting in reduced profits because the competitors have
difficulty differentiating themselves on other elements of
the retail mix.
 In response to this increasing competitive intensity, the
category killers continue to concentrate on reducing costs
by increasing operating efficiency and acquiring smaller
chains to gain scale economies, although some category
killers, like Home Depot and Lowe’s, are attempting to
differentiate themselves with service through licensed
contractors or providing classes to home owners to give
shoppers the confidence to tackle do-it-yourself (DIY)
projects.
D. Specialty Stores
 A specialty store concentrates on a limited number of
complementary merchandise categories and provides a
high level of service in a relatively small store.
 Specialty stores tailor their retail strategy toward very
specific market segments by offering deep but narrow
assortments and sales associate expertise.
 Specialty retailers have such great appeal that they rank
among the most profitable and fastest-growing firms in the
world. These stores earn an average of $1,675 per square
foot, compared to the $200 per square foot averaged by
department stores.
 Many manufacturers have opened their own specialty
stores. Consider, for instance, Levi’s (jeans and casual
apparel), Godiva (chocolate), Cole Haan (shoes and
accessories), Lacoste (apparel), Coach (purses and leather
accessories), Tumi (luggage), Wolford (intimate apparel),
Lucky Brand (jeans and casual apparel), Samsonite
(luggage), and Polo/Ralph Lauren (apparel and home).
 Another growing specialty store sector is the resale store.
See PPT 2-26
Why do customers go to specialty
stores? What do they like/dislike
about them?
Manufacturers are also opening
their own specialty stores (Levi’s,
Godiva, Cole Haan, Coach, etc).
What are the implications for
other retailers like department
stores who also sell these brands?

2-11
Resale stores are retailers that sell secondhand or used
merchandise and include thrift stores or consignment
shops. The best-known and most widely expanded thrift
shop is Goodwill Industries.
E. Drugstores
 Drugstores are specialty stores that concentrate on health
and beauty care (HBC) products. Many drugstores have
steadily increased the space devoted to cosmetics, but
prescription pharmaceuticals still represent a substantial
and growing portion of drugstore sales.
 The largest drugstore chains in the United States are CVS
and Walgreens, Boots.
 Drugstores are also being squeezed by competition from
pharmacies in discount stores and supermarkets, as well as
prescription mail-order retailers.
 In response, drug store chains are building larger stand-
alone stores offering a wider assortment of merchandise,
more frequently purchased food items, drive-through
windows for picking up prescriptions, in-store medical
clinics, and even makeovers and spa treatments.
Although drugstores thus offer major advantages,
especially in terms of convenience, they suffer from a price
comparison when it comes to their grocery merchandise
See PPT 2-27
Ask students if they have shopped
online for drugstore products.
What has been their experience?
Do they think the Internet is a
viable channel for drugstore
merchandise?
F. Extreme-Value Retailers
 Extreme-value retailers, such as Dollar Tree (which
purchased the Family Dollar chain) and Dollar General, are
small discount stores that offer a broad variety but shallow
assortment of household goods, health and beauty care
(HBC) products, and groceries..
 By offering limited assortments and operating in low-rent
locations, extreme-value retailers can reduce costs and
maintain very low prices.
 Despite some of these chains’ names, few just sell
merchandise for $1. Rather, the names imply a good value
but do not limit prices to the arbitrary dollar price point.
 The growing popularity of extreme-value retailers has led
See PPT 2-28 for a summary of
issues facing extreme-value
retailers.
Ask students to name the
extreme-value retailers in the
local marketplace. How many
have shopped at one of them? For
what types of merchandise? What
is the primary appeal of these
retailers?

2-12
some vendors to agree to create special, smaller packages
just for them.
 Once considered low-status retailers catering to low-
income consumers, extreme-value retailers have
broadened their appeal to higher-income consumers by
offering exciting bargains and unique merchandise.
G. Off-Price Retailers
 Off-price retailers, offer an inconsistent assortment of
brand-name merchandise at low prices.
 America’s largest off-price retail chains are TJX Companies
(which operates TJ Maxx, Marshalls, Winners [Canada],
HomeGoods, HomeSense [Canada]), Ross Stores,
Burlington Coat Factory, Big Lots, and Overstock.com.)
 Off-price retailers can sell brand name and even designer-
label merchandise at low prices due to their unique buying
and merchandising practices. Most merchandise is bought
opportunistically from manufacturers or other retailers
with excess inventory at the end of the season.
 End-of-season merchandise that will not be used in
following seasons is called close-outs. The merchandise
may be in odd sizes or unpopular colors or styles, or it may
be irregulars, merchandise that has minor mistakes in
construction.
 Typically, merchandise is sold at prices that are20 to 60
percent lower than the manufacturer’s suggested retail
price. Off-price retailers can buy at low prices because
they do not ask suppliers for advertising allowances, return
privileges, markdown adjustments, or delayed payments.
 Due to this pattern of opportunistic buying, customers
can't be confident that the same type of merchandise will
be in stock each time they visit the store.
 Outlet stores are off-price retailers owned by
manufacturers, or by department or specialty store chains.
 Outlet stores owned by manufacturers are frequently
referred to as factory outlets.
 Manufacturers view outlet stores as an opportunity to
improve their revenues from irregulars, production
local off-price retailers. What do
consumers like about off-price
retailers? What don't they like?
See PPT 2-29 for a summary of the
issues facing off-price retailers
Ask students which type of off-
price retailer offers consumers
truly the best value. Why?

2-13
overruns, and merchandise returned by retailers. Outlet
stores also allow manufacturers some control over where
their branded merchandise is sold at discount prices.
 An online twist to off-price retailing comes from flash sale
sites such as Gilt, Rue La La, and HauteLook.
IV. Service Retailing
 Service retailers, or firms that primarily sell services rather
than merchandise, are a large and growing part of the
retail industry.
LO 2-4 Explain the differences
between service and
merchandise retailers.
PPT 2-30
A. Differences between Service and Merchandise Retailers
 Four important differences in the nature of the offerings
provided by service and merchandise retailers are (1)
intangibility, (2) simultaneous production and
consumption, (3) perishability, and (4) inconsistency of the
offering to customers.
1. Intangibility
 Services are generally intangible -- customers cannot see,
touch, or feel them. Services are performances or actions
rather than objects.
 Intangibility introduces several challenges for service
retailers. It is difficult for customers to evaluate services
before they buy them, or even after they buy and consume
them. Service retailers often use tangible symbols to
inform customers about the quality of their services.
 Service retailers also have difficulty in evaluating the
quality of services they are providing. To evaluate the
quality of their offering, service retailers place emphasis on
soliciting customer evaluations and complaints.
Ask students how customers can
evaluate the quality of an
intangible service offering. What
problems does intangibility cause
for the services retailer?
Ask students how online reviews
and ratings influence their
decisions to use service retailers.
2. Simultaneous Production and Consumption
 Service providers create and deliver the service as the
customer is consuming it. The simultaneity of production
and consumption creates some special problems for
services retailers.
 First, the customers are present when the service is
produced, may have an opportunity to see it produced,
and in some cases, may be part of the production process.
What problems does simultaneous
production cause for the service
retailer?

2-14
 Other customers consuming the service at the same time
can affect the quality of the service provided.
 Finally, the service retailer often does not get a second
chance to satisfy the needs of their customers. While
customers can return damaged merchandise to a store,
customers that are dissatisfied with services have limited
recourse. Thus, it is critical for service retailers to get it
right the first time.
 Because services are produced and consumed at the same
time, it is difficult to reduce costs through mass
production.
3. Perishability
 Because the creation and consumption of services is
inseparable, services are perishable. They can't be saved,
stored, or resold. This contrasts with merchandise, which
can be held in inventory until a customer is ready to buy it.
 In addition, the demand for a service varies considerably
over time. Thus, service retailers often have times when
their services are underutilized and other times when they
have to turn customers away because they cannot
accommodate them.
 Service retailers use a variety of programs to match
demand and supply. They also attempt to make customer
waiting time more enjoyable.
Give examples of retailers for
which perishability is a real
problem. (movie theaters,
airlines, cruise lines, public golf
courses) What do these retailers
do to minimize the problem?
What actions have students seen
service retailers take to make
waiting time more enjoyable for
customers?
4. Inconsistency
 Merchandise is often produced by machines with very
tight quality control. Because services are performed by
people, no two services will be identical.
 Thus, an important challenge for service retailers is
providing consistently high-quality services.
What problems does inconsistency
cause for the service retailer? Are
there service retailers whose
inconsistency is acceptable?
(Custom designers, hair “artists”)
V. Types of Ownership
 Another way to classify retailers is by their ownership. The
major classifications of retail ownership are: (1)
independent, single-store establishments, (2) corporate
chains, and (3) franchising.
LO 2-5 Explain the types of
ownership for retail firms.
See PPT 2-34

2-15
.
A. Independent, Single-Store Establishments
 Retailing is one of the few sectors in our economy in which
entrepreneurial activity is extensive. Many of these retail
start-ups are owner managed which means management
has direct contact with their customers and can respond
quickly to those customers’ needs.
 While single-store retailers can tailor their offering to their
customers' needs, corporate chains can more effectively
negotiate lower prices for merchandise and advertising
due to their larger size.
 To better compete against corporate chains, some
independent retailers join a wholesale-sponsored
voluntary chain. A wholesale-sponsored voluntary
cooperative group is an organization operated by a
wholesaler offering a merchandising program to small,
independent retailers on a voluntary basis.
local independent, single-store
retailers. Do they shop at
independents? Why or why not?
Do students believe national
chains will drive all independents
out of business?
B. Corporate Retail Chains
 A retail chain is a company operating multiple retail units
under common ownership and usually having some
centralization of decision making in defining and
implementing its strategy.
Walmart has pursued a strategy
of opening stores on the outskirts
of small rural towns with
populations between 25,000 and
50,000. These stores offer
broader selection of merchandise
at much lower prices than
previously available from local
retailers. Discuss the pros and
cons of this strategy in class.
What ramifications may result?
(Monopolizing market, demise of
small stores, potential to become
major employer in rural area).
C. Franchising
 Franchising is a contractual agreement between a
franchisor and a franchisee that allows the franchisee to
operate a retail outlet using a name and format developed
and supported by the franchisor. Approximately 40
percent of all U.S. retail sales are made by franchisees.
 In a franchise contract, the franchisee pays a lump sum
plus a royalty on all sales for the right to operate a store in
a specific location. The franchisee also agrees to operate
local franchises. If they wanted to
own a retail business, would they
want a franchise or their own
store? Why? What are the
advantages of being a franchisee?
PPT 2-35 provides a brief
introduction to the Franchising

2-16
the outlet as per the procedures prescribed by the
franchisor. The franchisor provides assistance in locating
and building the store, developing the products and/or
services sold, management training, and advertising.
 The franchise ownership format attempts to combine the
advantages of owner-managed businesses with efficiencies
of centralized decision-making in chain store operations.
form of retail ownership.
VI. Summary
 Over the past 30 years, U.S. retail markets have been
characterized by the emergence of many new retail
institutions. Traditional institutions have been joined by
category specialists, hypermarkets and superstores,
extreme-value retailers, and nonstore retailers among
others.

2-17
ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS
2. GO SHOPPING Go to an athletic footwear specialty store such as Foot Locker, a
department store, and a discount store. Analyze their variety and assortment of athletic
footwear by creating a table similar to that in Exhibit 2–2.
Students should be able to fill in this type of table and explain their findings.
Variety of Athletic Footwear
Breath of Merchandise
Assortment of Athletic
Footwear
Depth of Merchandise
Foot Locker
Department store
Discount Store
3. GO SHOPPING Keep a diary for two weeks of where you shop, what you buy, and how
much you spend. Get your parents to do the same thing. Tabulate your results by type of
retailer. Are your shopping habits significantly different from or are they similar to those of
your parents? Do you and your parents’ shopping habits coincide with the trends discussed
in this chapter? Why or why not?
Students should keep a list of places shopped. Results can be compared to a parent or
another classmate. This assignment should give students insight into their own
consumer buying behavior and how they select merchandise and retail formats. Ask
students to discuss the managerial implications of their findings. How should retailers
with differing target markets communicate with the different audiences based on the
differences in buying behaviors?
4. GO SHOPPING Describe how the supermarket where you shop is implementing organic,
locally grown, ethnic, and private-label merchandise. If any of these categories of
merchandise are missing, explain whether you believe it could be a potential opportunity for
growth for this supermarket. Then describe any strategies or activities that you believe are
providing a better shopping experience than its competition. If you believe that competing
stores are providing a better shopping experience than your store, explain what they are
doing, and evaluate whether or not these activities would benefit your supermarket.

2-18
Responses here will vary. Some stores have a big commitment to organic, locally grown,
ethnic, and private-label merchandise. Students should consider the demographics of
the store’s customers to evaluate the potential demand for these categories.
5. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the Census
Internet site at www.census.gov/retail. Look at the unadjusted Retail and Food services
monthly sales by NAICS (found in the Monthly Retail Trade Report section). Which categories
of retailers have the largest percentage of sales in November and December (the holiday
season)? Do your findings make sense to you? Why or why not?
Students will notice that many retail categories generate their largest percentage of sales in
the fourth quarter. Some are:
(443) Electronics and Appliance Stores
(44312) Computer and Software Stores
(4453) Beer, Wine and Liquor Stores
(44812) Women’s Clothing Stores
(45111) Sporting Goods Stores
(454) Nonstore Retailers
The higher level of sales in the last quarter of the year are likely due to holiday sales. Do these
categories make sense to students? Are there other categories in which students would expect
to see similar sales?
6. INTERNET EXERCISE Three large associations of retailers are the National Retail Federation
(www.nrf.com), the Food Marketing Institute (www.fmi.org), and the National Association of
Convenience and Petroleum Stores (www.nacsonline.com). Visit these sites and report on
the latest retail developments and issues confronting the industry.
Information on these sites will change daily. The National Retail Federation will likely have
information on trends in retailing like showrooming and omnishopping. Similarly, the NRF will
also report on federal regulations, like taxes and swipe fees, that impact retailing. The Food
Marketing Institute will provide information on trends in food retailing and manufacturing as
well as legal and economic concerns. For example, the FMI may report on information about
changes in regulations regarding the definition of “organic.” The NACS will report on
regulations as well, such as debit card swipe fees, as well as information on oil prices and
petroleum.
7. INTERNET EXERCISE Go to Entrepreneur franchise zone web page at
http://www.entrepreneur.com/franchise500 and view the top 500 franchises for the past
year. How many of these retailers in the top 10 have you patronized as a customer? Did you
know that they were operated as a franchise? Finally, what is the nature of the business that
seems to lend themselves to franchising?

2-19
The Top 10 Franchises for 2017 include many familiar names. Students will likely report having
visited a 7-Eleven, McDonald’s, or Dunkin’ Donuts. The web site notes that the list of the Top
500 franchises is based on quantifiable measures such as financial strength and stability,
growth rate, size of the system, and number of years in business. Students will likely notice
that service-based retailers tend to lend themselves best to the franchise system, particularly
those services that allow for standardization of business practices and retail operating formats.
8. Best Buy is a category specialist with more than 1,400 store locations. It sells appliances
(refrigerators, washers and dryers, small household appliances) and electronics (televisions,
computers, cell phones, car electronics, wearable technology). What are the SIC and NAICS
codes used by this retailer? What other retailers compete against Best Buy, and which store
format is implemented by each competitor?
PRIMARY SIC AND NAICS CODES
Primary Industry Consumer Electronics &
Appliances Stores
Primary SIC Code 57310000: Radio, television,
and electronic stores
Primary NAICS Code 443142: Electronics Stores
ASSOCIATED NAICS CODES
443141 Household Appliance Stores
443142 Electronics Stores
ASSOCIATED SIC CODES
5722 Household appliance stores
5731 Radio, TV, & electronic stores
5734 Computer and software stores
5946 Camera & photographic supply stores
Top Best Buy Competitors
Company Format

2-20
Company Format
Best Buy Category Killer
Wal-Mart Discount Store
Apple Inc. Specialty
Amazon.com Electronic Retailer
Other Best Buy Competitors
Company Format
Costco Warehouse Club
Target Discount Store
Sony Specialty
Dell Specialty

2-21
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. Distinguish between variety and assortment. Why are these important elements of retail
market structure?
The main difference between variety and assortment is that variety refers to the number of
different merchandise categories a retailer sells, whereas assortment is the number of
different items or SKUs in a merchandise category. In addition, variety is often referred to
as the breadth of merchandise carried by the retailer, and assortment is referred to as the
depth of merchandise. These elements form an integral part of the retail market structure,
since it is the retail offering that ultimately distinguishes one retailer from another.
2. What sorts of competitive pressures are confronting traditional grocery stores? What
options do these stores have to ease these pressures?
Supermarkets are under competitive pressures from supercenters, warehouse clubs,
extreme-value retailers, convenience stores, and even drug stores. These retailers have
increased the amount of space that they provide for consumables. In addition, these
competing retailers offer food merchandise to build the traffic in their stores and increase the
sales of more profitable nonfood merchandise. To compete against these stores, supermarkets
are offering more fresh merchandise, green merchandise, ethnic merchandise, and private-
label merchandise. In addition, supermarkets are also working on ways to enhance the store
ambience and customer service to provide a more enjoyable shopping experience.

2-22
3. What do off-price retailers need to do to compete against other formats in the future?
The main competitive weapon for the off-price retailers is their low price. While they may
not directly compete with higher service formats, such as department and specialty stores,
they do face increasing competition from discount stores. Here, the off-price stores may be
at a relative disadvantage since their merchandise is based upon opportunistic buying,
while discount stores offer a relatively stable mix of merchandise at stable prices (everyday
low pricing).
Since the option of improving service may increase costs and weaken their only source of
competitive advantage, low price, off-price retailers should focus on strategies to keep
their costs and prices low and explore low cost methods of attracting and retaining
customers. In terms of keeping operational costs low, they can locate in lower cost urban
and rural areas (note that outlet stores are more clustered within outlet malls located
farther from the city but near major highways). They can also implement more efficient
inventory and merchandise management systems (note that for a discount store, such as
Walmart, operational efficiency and costs reductions are crucial to offering lower prices to
customers). Also, they can expand their sourcing to include imports from low cost
international markets.
Another threat for off-price retailers may be from Internet stores. Often several stores
publicize their low prices and also attempt to match consumer price preferences through
reverse bidding and auctions (sites such as Priceline and eBay). Off-price retailers can
explore the possibility of using the Internet for relatively low-cost advertising about current
merchandises (since their merchandise stocks fluctuate more rapidly due to opportunistic
buying). Factory outlet stores, on the other hand, can compete more directly over the
Internet.
4. Compare and contrast the retail mixes of convenience stores, traditional supermarkets,
superstores, and warehouse stores. Can all of these food retail institutions be successful
over the long run? How? Why?

2-23
Element of
Retail Mix Convenience Store
Traditional
Supermarket Superstore Warehouse Store
Location Typically
freestanding, easily
accessible sites
Typically in strip
shopping centers
Typically in strip
shopping centers
Typically in strip
shopping centers
Merchandise
Assortment
Limited variety and
assortment
Average variety and
assortment
Greater variety with
deeper assortment
than supermarket
Greater variety with
about the same
assortment as
supermarket. Primary
difference is that
merchandise
assortment varies
because of
opportunistic buying.
Pricing Higher pricing than
supermarkets
Average pricing.
Some chains have
constant (every day)
pricing and others
have special sale
(high-low) pricing.
Lower pricing than
supermarkets.
Typical every day
pricing.
Lower pricing than
supermarkets. Pricing
depends on cost of
merchandise bought on
special buys.
Advertising and
Promotion
Personal selling
Limited advertising,
frequent shopper
programs tied to
gasoline sales.
Minimal
High-low pricing
chains advertise
weekly specials.
Minimal
Limited advertising
since most have
everyday pricing.
Minimal
Minimal promotion
since all merchandise is
basically on sale.
Minimal
Store design and
display
Designed for quick
and easy
merchandise
selection and
checkout
Typically use a grid-
iron with cross-hatch
aisles, extensive
signs.
Same as
supermarket.
Same as supermarket. A
bit more disorganized
to give the customers
the feel of searching for
a bargain.
Service Minimal Some services for
produce, bakery,
meat and fish
categories.
Some services for
produce, bakery,
meat and fish areas.
Minimal
All four types will persist because they appeal to different customer needs. The warehouse
stores typically have larger pack sizes that are very attractive to customers with large
families and to small business owners like local restaurants. In addition, due to the varying
assortments, customers who are brand loyal might not want to shop in these stores.
Convenience stores are located and designed to offer customers a snack, quick meal, or
minimal grocery/general merchandise purchase along with their gasoline. These retailers
offer easy in and out access and speedy transactions. In response to competitive pressures
from other food retailers, as well as dependency on gasoline sales, many convenience
stores are now offering consumers fresh food and healthy fast-food choices to reduce
dependency on fuel sales while maintaining on-the-go ease and convenience.

2-24
The superstores are low in price but more inconvenient to shop in because of the large size.
Thus they appeal to customers who are very price conscious and are willing to drive a
longer distance and spend more time shopping in a larger store.
Conventional supermarkets are the most convenient. In major metro areas, there is a
conventional supermarket two to three miles from everyone’s home. They also provide
more services for customers such as cutting meat to order. Conventional supermarkets
appeal to customers who value service and convenience and are not as price conscious.
Note that the same consumer may shop at all four types of food retailers depending on the
nature of the shopping trip. For example, a consumer might stock up on basic such as toilet
paper, soft drinks, and can goods at a warehouse or superstore and then go to a
supermarket to buy meat, produce, and gourmet food.
5. Why is Walmart, the largest retailer in the world, facing slower growth than in the past?
What can it do to accelerate its growth?
Full-line discount stores, like Walmart, face challenges from category specialists that
dominate specific product categories. In response to this pressure, Walmart has converted
many of its stores into supercenters that are more efficient and generate higher traffic. In
addition, Walmart is expanding to more urban locations using smaller storefronts.
6. Why are retailers in the limited-assortment supermarket and extreme-value discount
store sectors growing so rapidly? From which retailers are they getting these additional
sales?
Both limited-assortment supermarkets and extreme-value discount stores focus on
relatively limited merchandise offerings at highly appealing (low!) prices. The retail formats
are able to offer their extremely low prices through maximizing efficiency. By reducing
extras and service offerings, as well as managing a relatively low merchandise assortment,
these retailers are able to provide consumers with the “thrill of the hunt” for amazing
deals. Extreme-value retailers are attracting customers away from supermarkets and
supercenters.
7. The same brand and model of tablet is sold by specialty computer stores, discount stores,
category specialists, online retailers, and warehouse stores. Why would a customer
choose one retail format over the others?
Each type of retail store provides a unique combination of price and services tailored to the
needs of different types of customers. The specialty store typically will have higher prices,
but will offer more services. It will have salespeople with technical expertise available to
provide information to customers and answer questions. This service is particularly valuable
to customers who do not know much about tablets.

2-25
On the other hand, discount stores, category specialists, and warehouse stores have lower
prices and do not offer much personalized service. These stores are more attractive to
customers who have more expertise and do not need personalized service.
Due to the greater assortment in category specialists, customers are able to compare the
prices and features of different brands in one store visit. Warehouse and discount stores
have limited assortments and thus customers can only see a limited set of brands and
models. But they can also buy merchandise in different product categories at the same
time they are buying a tablet.
Some customers will prefer the convenience and selection offered online. The Internet may
also be used to collect information and compare features and prices prior to shopping in a
store location.
8. Choose a product category that both you and your parents purchase (e.g., business
clothing, casual clothing, music, electronic equipment, shampoo). In which type of store
do you typically purchase this merchandise? What about your parents? Explain why
there is, or is not, a difference in your store choices.
Students may emphasize specialty stores such as H&M, Old Navy, Forever 21, , and Best
Buy, etc. for their purchases for clothing, or electronic equipment, while mentioning that
their parents favor traditional department stores such as Macy's or Sears for the purchase
of such product categories. If price is a major factor, there may be some similarities
between the students and their parents; both may shop at discount stores.
The merchandise, service, and prices for the various retail formats stocking different
product categories are different. In general, stores deliberately targeting a younger
population will be favored by students since these stores would better match their
expectations of merchandise (such as fashion clothing), prices, and services (students may
consider themselves savvy customers for certain products, such as music and electronic
equipment, and may not need the type of service demanded by their parents, for instance
in purchasing business clothing).
9. At many optical stores you can get your eyes checked and purchase glasses or contact
lenses. How is the shopping experience different for the service as compared to the
product? Design a strategy designed to get customers to purchase both the service and
the product. In so doing, delineate specific actions that should be taken to acquire and
retain optical customers.
Optical stores present an interesting mix of service and related merchandise. On one hand,
the eye examination is usually done by a trained and licensed eye doctor and here the
service experience is often very professional and similar to a visit to any physician or
hospital. On the other hand, the glasses or contact lenses are displayed in a retail store
setting with the service being mostly oriented toward helping the customer try out various

2-26
options. The contrasts between the service and retail environments may be unnerving for
some customers.
One strategy to reduce the gap is to ensure that the retail setting is very professional and
courteous. Since the problem has been detected and identified by the eye doctor, the sales
staff in the retail setting could engage and interact more directly with the customer with
more of a problem-solving approach. This would involve educating consumers on various
issues, including the benefits/costs of using glasses or contact lenses, the types of lenses
and coatings, proper care of glasses and contact lenses, etc.
It must also be recognized that most customers who are prescribed glasses for the first
time are likely to continue wearing glasses or contact lenses for the rest of their lives. Thus,
it is important to start building consumer trust and confidence through professional service
and expertise. One strategy would be to encourage customers to return for an eye
examination every year and also have their current prescription for the glasses or lenses
checked. Another is to provide free repair service for the frames.
10. There are services and products involved when buying or renting a car, and in both cases,
the customer drives away in a car. But buying a car focuses more on the product,
whereas renting involves the service. Explain four ways in which marketing for a rental
car company differs from marketing for an automobile dealership.
The differences in offerings provided by service retailers include (1) intangibility, (2)
simultaneous production and consumption, (3) perishability, and (4) inconsistency of the
offering to customers. Although the automobile at the rental car company is tangible, the
experience of renting is an intangible offering. The services surrounding the accessibility of the
car rental or what is most important to the customer. Similarly, the service is consumed at the
same time it is being produced. This differs from the experience of purchasing a car. The
rental car service is also perishable. If a day goes by and a car is not rented, the revenue from
renting the car for that day is gone forever, making the rental car service perishable. Finally,
the experience with the rental car company may be inconsistent. As personalities and training
programs might differ by location, the experience the consumer has with a rental car provider
at different locations may vary significantly.

2-27
ANCILLARY LECTURE
LECTURE # 2-1: FRANCHISING
--------------------------------------------------
Instructor’s Note: Franchising is one of the most popular and successful ways for individuals to start
their own business. The growth in franchising as a retail format will probably continue in the near
future. Many students who take a retailing course have intentions of someday starting their own
business and this lecture may provide them with an interesting possibility to consider. Instructors might
want to use this lecture as a stimulus to a class discussion on the topic. PowerPoint slides 2-59 to 2-67
can be used with this lecture.
--------------------------------------------------
Introduction
Franchising is the licensing of an ENTIRE business format by a parent company
(FRANCHISOR) to a number of outlets (FRANCHISEES) to market a product or service and
engage in a business developed by the FRANCHISOR using the FRANCHISOR’S trade names,
trademarks, know-how, and methods of doing business.
In 2016, sales of goods and services by all franchising companies exceeded $890 billion,
approximately 50 percent of all U.S. retail sales.
There are over 780,000 franchise businesses that directly employ over 8.8 million people.
The growth of franchising
Franchising has had a steady stream of growth. Some of the reasons include
1. Technological advances,
2. Profitable utilization of capital resources,
3. Attainment of the American dream,
4. Demographic expansion, and
5. Product/service consistency.
Technological advances
Equipment and systems--reduce product variability and more efficient marketing and
distribution systems.
For example: Electronic Data Interchange
Profitable utilization of capital resources
Can tap savings and credit capacity of individuals to realize national product/service
saturation
Attainment of the American dream
Owning your own business.

2-28
Demographic expansion
Urban “sprawl” creates need for more small retail establishments.
No longer just downtown locations.
Product/service consistency
Due to geographic mobility, franchises have provided a level of homogeneous (boring)
quality in its product or service.
For example: A Big Mac tastes the same everywhere.
Types of franchise systems
There are various types of franchise systems including
1. Territorial,
2. Operating,
3. Mobile,
4. Distributorship,
5. Co-ownership,
6. Co-management,
7. Leasing/Licensing,
8. Manufacturing, and
9. Service.
Territorial franchise
The franchise granted encompasses several counties or states.
The holder of the franchise assumes the responsibility for setting up and training individual
franchisees within his territory and obtains an ”override” on all sales in his territory.
For example: McDonald’s and Burger King Regional franchises.
Operating franchise
The individual independent franchisee that runs his own franchise.
He deals either directly with the parent organization or with the territorial franchise holder.
For example: McDonald’s and Burger King individual locations.
Mobile franchise
A franchise that dispenses its product from a moving vehicle, which is either owned by the
franchisee or leased from the franchisor.
For example: Snap-On Tools and Chem-Dry Carpet Cleaning.
Distributorship

2-29
The franchisee takes title to various goods and further distributes them to sub-franchisees.
The distributor has exclusive coverage of a wide geographical area and acts as a supply
house for the franchisee that carries the product.
For example: Texaco gasoline supply centers.
Co-ownership
The franchisor and franchisee share the investment and profits.
For Example: Denny’s Restaurant.
Co-management
The franchisor controls the major part of the investment.
The partner-manager shares profits proportionately.
For example: Travelodge and Holiday Inn.
Leasing/Licensing
The franchisor leases/licenses the franchisee to use his trademarks and business
techniques.
The franchisor either supplies the product or provides franchisees with a list of approved
suppliers.
For example: Sheraton Hotels.
Manufacturing
The franchisor grants a franchise to manufacture its product through the use of specified
materials and techniques.
The franchisee distributes the product, utilizing the franchisor’s techniques.
This method enables a national manufacturer to distribute regionally when distribution
costs from central manufacturing facilities are prohibitive.
For example: Sealy.
Service
The franchisor describes patterns by which a franchisee supplies a professional service, as
exemplified by employment agencies.
For example: Personnel One.
Why franchises fail
Individuals who are interested in franchising need to recognize that there is risk despite the
high potential for success.
Franchises can fail for several reasons including
1. Inept management,

2-30
2. Fraudulent activities, and
3. Market saturation.
Inept management
Poor finances, product/service mix rejected, grew too quickly.
Fraudulent activities
The selling of unsound or unproven franchises to ignorant buyers, unfair contracts, etc.
Market saturation
Too many franchises of same type, e.g., chicken fast-food.
Franchisors and the marketing channel
A franchisor may occupy any position in the marketing channel.
Manufacturer-retailer franchise
Automobile dealers and service stations.
Manufacturer-wholesaler franchise
Coca-Cola, Pepsi, Seven-Up, etc. sell syrup they manufacture to franchised wholesalers who
bottle and distribute to retailers.
Wholesalers-retailer franchise
Rexall Drugs and Sentry Drugs.
Service Sponsor--Retailer franchise
Avis, Hertz, and National, McDonald’s, Chicken Delight, KFC, Howard Johnson’s and Holiday
Inn, Midas and AMCO, Kelly Girl and Manpower
Franchisor benefits
Franchisees (the store) provide benefits for the franchisor (the parent company).
Continuous market
Insured through consistent quantity and quality and strong promotion.
Market information
Information such as sales, local advertising, employee turnover, profits, etc. is usually
provided.
Money
Principal sources of franchise company revenue.
Royalty fees

2-31
Royalties provide continuous income although often the rate may decrease as sales volume
increase.
Sometimes a flat rate is established regardless of level of sales.
Sales of products
Often the franchisor supplies raw materials and finished products to the franchisee at a profit.
For example, Coke supplies syrup, Holiday Inn supplies furniture and carpeting.
Rental and lease fees
The franchisor may lease buildings, equipment, and fixtures.
License fees
There may be special fees that allow the franchisee to use and display the franchisor’s
trademark.
Management fees
Franchisor can charge for consultant fees, management reports, training, etc.
Franchisee benefits
Franchisors provide benefits for the franchisee through initial and continuous services. .
Initial services
There are a number of initial services that franchisors provide for franchisees including
1. Market survey and site selection,
2. Facility design and layout,
3. Lease negotiation advice,
4. Financing advice,
5. Operating manuals,
6. Management training programs, and
7. Employee training.
Continuous Services
There are also a number of continuous services that franchisors offer to franchisees
including
1. Field supervision,
2. Merchandising and promotional materials,
3. Management and employee retraining,
4. Quality inspection,
5. National advertising,

2-32
6. Centralized purchasing,
7. Market data and guidance,
8. Auditing and record keeping,
9. Management reports, and
10. Group insurance plans.
Franchisor advantages/disadvantages
Depending upon which viewpoint one takes (the franchisor or franchisee) there are many
advantages and disadvantages of franchising.
From the perspective of the franchisor, the advantages include
1. Rapid expansion,
2. Highly motivated franchisees do a good job, and
3. Additional profits by selling franchisees products and services.
The disadvantages include
1. Company-owned units may be more profitable,
2. Less control than independent retailers over advertising, pricing, personnel practices, etc. (e.g.,
can’t fire franchisee).
Franchisee advantages/disadvantages
From the viewpoint of the franchisee the advantages include
1. Established/proven product/service,
2. Business and technical assistance, and
3. Reduction in risk.
The disadvantages include
1. Loss of control -- are really only semi-independent business people,
2. Many franchisors own a number of their outlets which may compete with those owned
by franchisees, and
3. High royalties, fees, costs of equipment, supplies, merchandise, rental or lease rates and
mandatory participation in promo and support services.
Franchising trends
Most of the growth of franchising has occurred in the retailing of goods and services.
However, there are two basic types of franchising that merit consideration.
The first, product and trade franchising, a common form of retailing in the automobile and
petroleum industry, focuses on what is sold.
Examples include brands like Ford, Honda, and Texaco.

2-33
The second, business format franchising, sells the right to operate the same business in
different geographic locations.
The emphasis here is on how the business is run.
Examples include KFC, McDonald’s and Burger King.
The major franchising trends are
1. Sustained growth,
2. Enduring plus unimagined applications,
3. International expansion,
4. Increased tensions, and
5. Greater emphasis on financial returns.
Sustained Growth
It is perceived that franchising will continue to grow steadily.
One of the possible explanations for this growth is that franchising offers franchisors rapid
expansion as well as highly motivated owner-managers.
Also, annual growth in franchised sales volume will exceed the inflation rate by several
percentage points.
Enduring plus unimagined applications
Today, such things like travel planning, pet-sitting services, and house calls by doctors may
be owned by franchises.
With the applications such as these, the possibilities are certainly diverse.
For example, in the future, franchisees will come from three main sources, which include
middle managers, women, and independent small-business owners.
International expansion
Franchisors are currently exploring foreign markets.
In addition, this trend has also been reciprocated by foreign franchisors as well.
However, non-U.S. franchisors have had a more difficult time in the U. S. due to stiff
competition.
Increasing tensions
Despite the overwhelming of franchisors on the whole, there is still a major source of
contention.
That is, franchisor-franchisee relations have witnessed a rise in class-action suits and
arbitration hearings.
Dissatisfaction among franchisees could originate from various sources.

2-34
First, perceived inequity among this group regarding mandated or proposed changes may
be a major source of conflict.
Also unsatisfactory financial performance may be another cause of discord.
Greater emphasis on financial returns
The main sources of financial returns include: dual operations in which a franchisee may be
permitted to run two or more franchises from a common or adjacent area; reduced costs
due to downsizing; and incentives for ownership.
[Source: This lecture was adapted from Gerald Pintel and Jay Diamond, Retailing, 4th ed.
(Englewood Cliffs, NJ.: Prentice-Hall, 1987), pp. 73-76. in El-Ansary and Stern’s book, Marketing
Channels, Prentice-Hall, 3rd. ed. , 1988, p. 333); Bruce J. Walker, “Retail Franchising in the
1990s,” Retailing Issues Letter, Published by Arthur Andersen & co, in conjunction with the
Center for Retailing Studies, Texas A&M University, Vol.; 3, No.1, January 1991, pp. 1-.
Additional information obtained from
https://www.trade.gov/topmarkets/pdf/Franchising_Executive_Summary.pdf

2-35
CONNECT ACTIVITIES FOR CHAPTER 2
Activity Title Activity Type(s) Topic Learning Objective(s)
Types of Retailers Drag and Drop;
version)
Categories of food
and general
merchandise retailers
2-1 List the different
characteristics that
define retailers.
2-3 Identify the
various types of
general merchandise
retailers.
Types of Ownership Drag and Drop;
version)
Types of ownership
for retail firms
2-5 Illustrate the
types of ownership
for retail firms.
Services Retailing
versus Merchandise
Retailing
Drag and Drop;
version)
Retailing 2-4 Explain the
differences between
service and
merchandise
retailers.
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