Chapter 2

Retail Strategic Planning and

Operations Management

What is Strategic Planning?

 Involves adapting the resources of the firm to the opportunities and threats of an ever-changing
retail environment.

Four components, or steps, involved in strategic planning:

 Mission statement

 Statement of goals and objectives

 SWOT analysis

 Strategy

What is a Mission Statement?

It’s a basic description of the fundamental nature, rationale, and direction of the firm.

Three elements necessary for a sound mission statement:

 How the retailer uses or intends to use its resources

 How it expects to relate to the ever-changing environment

 The kinds of values it intends to provide in order to meet the needs and wants
of the consumer.

Example of Mission Statement:

Starbucks’ Mission Statement

“ To inspire and nurture the human spirit – one person, one cup, and one neighbourhood at a
time ”

Goals and Objectives

Serve two general purposes:

1. Provide direction and guidance to the firm in the formulation of its strategies.

2. Establish a standard against which to measure and evaluate future firm performance.
Market Performance Objectives

Establish the amount of dominance the retailer seeks in the marketplace.

Two most common measures are:

1. Sales volume

2. Market share

- Refers to the retailer’s total sales divided by total market sales

Financial Performance Objectives

Analyze a retailer’s ability to provide a profit level adequate to continue future business.

Two general categories:

1. Profitability objectives

 Deal directly with the monetary return the retailer desires

from its business (profit)

2. Productivity objectives

 Deal directly with how much output the retailer desires for each unit of
resource input

Three common measures of productivity:

1. Space productivity

 Sales divided by total sq. feet of total retail selling space.

2. Labor productivity

 Sales divided by number of full-time-equivalent employees.

3. Merchandise productivity

 Sales divided by average peso investment in inventory (at cost).

Profitability

- Focus primarily on the monetary return that is desired from one’s business (i.e., profit).

But what is meant by profit?

Commonly means net profit after taxes, but can be expressed as a percentage of sales, or even
return on investment (ROI)

Elements of the Strategic Profit Model

 1. Net Profit Margin

- Ratio of net profit (after taxes) to net sales

- Shows how much profit a retailer makes on each peso of sales after all expenses and taxes have been
met.

1. Asset turnover

- computed by taking the retailer’s annual net sales and dividing by total assets.

- tells the retail analyst

3. Return on Assets (ROA)

- the net profit (after taxes) divided by total assets

4. Financial Leverage

- total assets divided by net worth or owner’s equity and shows how aggressive the retailer is in
its use of debt.

5. Return on net worth (RONW)

- is net profit (after taxes) divided by owner’s equity

What is a Strategy?

A carefully designed plan for achieving one’s goals and objectives (i.e., its “game plan”).

Retailers must have at least three general strategies in order to have a shot at success:

1. Get consumers into your store (traffic strategy).

2. Convert these consumers into customers by having them purchase something (conversion or closure
strategy).

3. Do so at the lowest cost possible consistent with the level of service your customers expect (cost
management strategy).

Differentiation Strategies

Possible areas for differentiation include:

1. Price

2. Product

3. Selling process

4. After-purchase support

5. Location

6. Service level
Developing a Differentiation Strategy

Retailers begin with a SWOT analysis.

Internally:

 What are the retailer’s relative strengths and weaknesses?

Externally:

 What potential threats and opportunities exist within the market?

Successful retailers will…

- Leverage strengths that minimize future threats, and

- Correct weaknesses that coincide with market opportunities

SWOT Analysis

Strengths:

 What major competitive advantage(s) do we have?

 What are we good at?

 What do customers perceive as our strong points?

Weaknesses

 What major competitive advantage(s) do competitors have over us?

 What are competitors better at than we are?

 What are our major internal weaknesses?

Opportunities

 What favorable environmental trends may benefit our firm?

 What is the competition doing in our market?

 What areas of business that are closely related to ours are undeveloped?

Threats

 What unfortunate environmental trends may hurt our future performance?

 What technology is on the horizon that may soon have an impact on our firm?
Strategy Checklist

A fully developed marketing strategy should include:

1. Target market(s)

 Group of customers that the retailer is seeking to serve.

2. Location(s)

 Geographic space or cyberspace where business is conducted.

3. Retail mix

 The merchandise, price, advertising and promotion, location, customer

service and selling, and store layout and design.

4. Value proposition

 A statement of the tangible and/or intangible results one receives from

shopping at and using the retailer’s products or services.

What is Operations Management?

- The day-to-day management of retailer activities directed at maximizing retailer efficiency.

Most common activities evaluated include:

1. Buying & handling of merchandise

2. Pricing

3. Advertising & promotion

4. Customer services & selling

5. Facilities

6. People
 Chapter 3
Retail Customers

Competition for a Differential Advantage

Easiest way to gain a differential advantage is by, first, understanding and addressing one’s
customers’ needs/wants better than the competition.

What is Customer Satisfaction?

- Occurs when the total shopping experience of the customer has been met or exceeded.

It’s a function of…

1. The Product

- Specifically what is purchased

- Can be a tangible product or intangible service

2. Customer services (3 categories)

 Pre-transaction – affect the ease with which a potential customer can shop and/or learn
about the store’s offerings

 Transaction – enhance the ease with which a transaction can be completed once the
customer attempts to do so.

 Post-transaction – focus on maintaining/enhancing one’s satisfaction with the

transaction.

Competition for a Differential Advantage

Easiest way to gain a differential advantage is by, first, understanding and addressing one’s
customers’ needs/wants better than the competition.
Generating Satisfaction to

Increase Revenues & Profitability*

- Any customer can be satisfied by any retailer, But doing so is often unlikely to be

- Retailers must go after only those customer groups whose needs/wants can be addressed
profitably…

Who is your customer?

Market segmentation

- Dividing of a heterogeneous consumer population into smaller, more homogeneous groups

based on their characteristics.

Understanding the Customer*

- By answering three questions, retailers can better plan their offerings in order to increase customer
satisfaction.

1. When does the customer buy? (Time of day, Consistency, etc.)

2. Who buys? (Purchaser vs. User, the Family-Buying-Unit, etc.)

3. Where and How do they buy? (Location, Three-tailing ( Showrooming ), Size, Use, etc.

Grouping by Population Variables

* 4 Most Common Population Variables:

1. Growth trends

2. Age distributions

3. Ethnic makeup

4. Geography

Useful for two reasons:

1. Often linked to marketplace needs.

2. Data is readily available.

Population Growth*

- Growth in domestic population means increased demand for goods and services. Even minimal
growth provides opportunities for retailers.

- Trend: Steady decline (Three-decade decline in growth, Projected 1% annual growth, Majority
due to immigration)

Implications of Declining Growth

* Must focus on:

1. Stealing market share

2. Controlling costs to enhance gross margins

3. Enhancing productivity

• Growth is possible by:

1. Expanding internationally

2. Leveraging changes in demand for particular products

Age Distribution*

- The age distribution of the Philippine population is changing

Implications of a Changing Distribution

Successful retailers will:

1. Understand the various needs of each age segment and know what motivates those segments
to spend money.

2. Speak older consumers’ language, avoid talking down to or patronizing them, and alter store
layouts and location of merchandise for easy access.

3. Remember GenX and GenY are significant segments that cannot be overlooked.

4. Tailor services offered by targeted segment’s wants and needs.

5. Use the Internet to reach out to young consumers since most of them are technology savvy
Ethnic Makeup*

Movement towards Emerson’s “Melting Pot”

Non-Hispanic whites

-Today: 68%; Projected 2050: 46%

Hispanics

- Today: 15%; Projected 2050: 30%

African-American

-Today: 13%; Projected 2050: 15%

Asian

-Today: 5%; Projected 2050: 10%

Implication of Ethnicity Changes

Given shrinking growth, successful retailers will:

1. Understand Hispanic shoppers

2. Understand that Hispanic shoppers are not homogeneous

3. Remember that African-Americans represent a significant population base, and the Asian-
American population is expected to double by 2050.

Shifts in Geographic Centers *

-Location of consumers will often affect how they buy

-Convenience is crucial, especially as one ages

- Access to transportation may expand one’s shopping radius

- Geographic mobility can erode one’s customer base over time

Implication of Shifts in Geography

Successful retailers will realize:

1. Growth opportunities are slowing in the Northeast and Midwest

2. Adding distribution centers in the South and West may be advantageous for national chains

3. Shopping habits of all consumers in a certain geographic area are not always the same

Micromarketing – tailoring merchandise in each store to the preferences of one’s neighborhood or

community

4. Recent trends towards higher education will likely increase job variations and thus heightened
consumer mobility

Societal Trends

1. Education

2. State of marriage

3. Divorce

4. Makeup of American households

5. Changing nature of work

Education

- Educational level of the average American is increasing particularly for women

- Single most reliable indicator of a person’s income potential, attitudes, and spending habits.

Implication:

Educated consumers are:

1. More alert to price, quality, and advertising

2. Increasingly sophisticated, discriminating, and independent in their search for consumer

products.

3. More likely to use the Internet for shopping

State of Marriage

Average age when people marry is increasing

1970 -less than 10% of males & 6% of females not married

2007 -32% of males & 24% of females not married

Implication:

Single-person households

1. Increase the need for smaller homes complete with furnishings

2. Later hours of operation

3. Increase the need for understanding of the “male shopper”

Divorce

- 250% increase in divorce rates since 1960

- Average divorce occurs approximately 7.2 yrs. after marriage

Implication:

Divorcees often need:

1. New homes complete with furnishings

2. Expanded hours of operation with child services (e.g., daycare or supervision), particularly for
the working women

3. Convenience

4. Expanded shopping assistance and services (e.g., meal ideas)

Changing American Household

-Retailers commonly study the household to understand a given market, but what’s the “typical”
household?

1. More than 55% of all families are DINKS

2. Boomerang effect is increasing When children return to live with their parents after having
already moved out.
 3. Sandwich generational, or trigenerational, families on the rise

-When three generations (parents, grandparents, and children) live together in the same
house.

Changing Nature of Work

- Individuals are less loyal to their employers.

- 25% have held their job for less than 1 year

- Many hold multiple jobs to pay for expensive collections.

Implications:

1. Focus on ways to enrich job experiences and lower turnover. One opportunity is employing
home-based & disabled workers.

2. Given many hold multiple jobs, pool of part-time workers exists

Economic Trends

 Income growth

 Personal savings
Women in the labor force

 Widespread use of credit

Income Growth

 The distribution of wealth is non-uniform.

African-American: $38,200

Hispanic: $40,000

White: $61,200

Asian-Pacific Islander: $74,600

Personal Savings

Many criticize the U.S. economic system as not rewarding personal Yet government reporting neglects
to account for:

1. Investment in the stock market

2. Investment in the housing market

Women in Labor Force

 Women are a dominant factor in the labor force.

 They have protected many households from inflation and recession.

Widespread use of Credit


Credit card usage has increased as a result of active promotional campaigns and low interest
rates.

 Retailers benefit from credit cards. Customers spend more when they use a credit card than
cash.

 However, a rise in liquidity concerns will leave little income for future retail purchases.

Chapter 4
Evaluating the Competition in Retailing

Models of Retail Competition

 The competitive marketplace

 Market structure

 The demand side of retailing

 Nonprice decisions

 Competitive actions

 Suppliers as partners and competitors

The Competitive Marketplace

Retailers compete for target customers on five major fronts:

 The price for benefits offered

 Service level

 Product selection

 Location or access

 Customer experience
Market Structure

Economists use four different economic terms to describe the competitive environment in the
retailing industry:

1. Pure Competition – is rare in retailing and occurs when a market has homogeneous products
and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for
both buyers and sellers.

2. Pure Monopoly – occurs when there is only one seller for a product or service.

3. Monopolistic Competition – occurs when the products offered are different, yet viewed as
substitutable for each other and the sellers recognize that they compete with sellers of these
different products.

- Retailers in monopolistic competition attempt to differentiate themselves with the products or

services they offer.

4. Oligopolistic Competition – occurs when relatively few sellers, or many small firms who follow
the lead of a few larger firms, offer essentially homogeneous products and any action by one
seller is expected to be noticed and reacted to by the other sellers.

-Oligopolies are likely to end up selling at a similar price since everybody knows what others are
doing

Outshopping

- Occurs when a household travels outside their community of residence or uses the Internet to
shop in another community.

The Demand Side of Retailing

-In a monopolistically competitive market, the retailer will be confronted with a negatively
sloping demand curve.

- caused by ―the law of diminishing returns

Nonprice Decisions

 Price is the easiest variable for competitors to copy.

 Ways of using nonprice variables to achieve a protected niche:

Store positioning - Identifying a well-defined market segment using demographic or lifestyle

variables and appealing to this segment with a clearly differentiated approach.

Offering private-label merchandise that has unique features or offers better value than do
competitors.
 Providing additional benefits for the customer.

Mastering stock keeping with its basic merchandise assort me

Competitive Actions

 Overstored - Condition in a community where the number of stores in relation to households is

so large that to engage in retailing is usually unprofitable or marginally profitable.

 Understored - Condition in a community where the number of stores in relation to households

is relatively low so that engaging in retailing is an attractive economic endeavor.

 Competition is most intense in overstored - markets because many retailers are achieving an
inadequate return on investment.

Suppliers as Partners and Competitors

 Suppliers as competitors – Suppliers compete for gross margins throughout the supply chain.
The retailer must develop a loyal group of patrons that encourages the supplier to
accommodate the needs of its retail partner.

 Suppliers as customers– Suppliers can be a critical competitive advantage to retailers when they
provide a unique product or promotion.

The Retail Life Cycle

 Introduction - Begins with an aggressive, bold entrepreneur who is willing and able to develop a
different approach to retailing of certain products. During this stage profits are low, despite
increasing sales levels.

 Growth - Sales and profits explode. New retailers enter the market and begin to copy the idea.
Late in this stage, both market share and profitability approach their maximum levels.

 Maturity - Market share stabilizes and profits decline due to:

-shift in type of establishment

-over expansion

-competition

 Decline - A major loss of market share will occur, profits will fall, and the once-promising idea
will no longer be needed in the marketplace.
Future Changes in Retail Competition

 Nonstore retailing (e-tailing, direct selling, catalog sales)

 New retailing formats

 Heightened global competition

 Integration of technology

 Increasing use of private labels