Retail Management What Is Retailing?

I. INTRODUCTION WHAT IS RETAILING? Definition: Sale of final goods and services from a business (the retailer) to consumers for their own use (private consumption) → B2C (business-to-consumer) Final products: ready for consumption / immediate use, ready to use in the planned way by the consumer e.g. - grocery store selling groceries, food items, vegetables, fruits, … - home improvement /DIY, precut wood, individually cut shelf to the measurements given by consumer = service Here service some deviation from definition, simple, minor changes to the product Standard definition of retailing: items are not changed by the retailer, items remain inchanged during retail process (=sourcing, buying/contracting, ordering, warehousing, presenting, promoting, selling, helping the consumer, advising, managing complaints, taking back items/returns, …) > difference to manufacturing, where items are changed, transforming raw materials, parts, to products → But minor changes (e.g. adjusting suits or clothes in general, bake-up oven for bread in grocery store) are still retailing and not manufacturing break bulk: retailer buys in large amount (products by pallet) and sell item by item > economies of scale (profit potential), e.g. fixed cost, by increasing number of activities/repetition/units/volume the calculated cost by unit decrease > sale same type of items to many customers Volume helps retailers to profit - Selling activity: rent of the store - warehousing, logistics - promotion, brand building, .. - buying, bargaining on buying price with appliers provide goods (material, physical) and services (not material, quite important to success of retailer, integrated into retailing definition) to consumers Goods = good to evaluate, you can compare prices, easy to copy. If we just sell goods, consumers start to compare prices and buy lower price offer. This, retailers try to avoid > offer services combined with products, sell private label brands (Eigenmarken) Examples of services: - assistance to the consumer, help in selection of products, answer questions, … - create atmosphere (convenient, enjoyable) in store - deliver to consumers’ home - finance consumption - guarantee availability of items (risk of stock-out vs. risk of overstock) - showing large variety of products/brands, so that the consumer finds the “best” product, e.g. making available regional, international brands/items services: we are able to increase consumer satisfaction, create experiences; consumer likes! It’s a value for him, willingness to pay increases. So, we are able to sell at higher price, retailers profit Create uniqueness in the marketplace: scarce combination of products & services MARKETING CHANNEL (MANY TO MANY BUSINESS) Retailer: creates assortment by combining products and services to create shopping experiences, profits from economies of scale by increasing volume Consumers: creating baskets with different goods, shop according to need (brand, quality, time, volume, price, …). Each consumer selects some of the brands/items offered. Needs: shopping experiences, social/environmental needs, price budget, time spent for shopping activity Marketing channel … spans from raw material to final product … generating and fulfilling demand of consumers. … Marketing and sales activities … logistics (combining, consolidating flows of products) … manufacturing (change the products a little bit) > product innovation, e.g. establish new ranges.. own brand? → retailer is able to design the marketing channel (product, brand, ranges, services, organization) Related Activities Manufacturer (single) narrow offering, single product a) direct selling to consumers = 1-to-many Having direct contact to consumers and controlling branding activities in their retail activity (without any independently acting retailer) b) selling via retailers > Do we get enough market coverage? How to reach many consumers? > cost (transportation, inventory, outlet/store, online (low cost of acquiring consumers?), ...) > positioning / branding, e.g. luxury, premium, … > exclusive offering distributor usually holds a long-term contract with one or few manufactures to sell/supply into a distinct market (geographical, type of costumers) → exclusive selling right Retail wholesale, e.g. importer: > distributor: selling, marketing, logistics, warehousing, transport, … > set own prices, carries risks > agent (Handelsvertreter): connect to customers, i.e. retailers “selling”: arrange sales contracts between manufacturer and customer/retailer, receives provision from manufacturer Related Business Models Online price search engines (PSE) like check24, idealo, They are not selling, but offering products from retailers, direct sellers… to consumers and informing about price and product Paid by click, commission, transaction, listing/ positioning on list Delivery services: Picking up from restaurants and bringing to consumers Delivery fulfilment, arrange selling On restaurants site: high fixed cost >problem to get enough sales On consumers site: profit from internet marketing, selling platform Many-to-many business models: e.g. ebay, social media (insta → supplier → consumer) II. RETAIL INSTITUTUIONS BY OWNERSHIP In this chapter: how are the stores organized? How are activities designed? (selling, promotion, assortment) - organizational form of a retailer - organization of the retail marketing channel Hypothesis: - impact on performance of retail activity - enables business model Here: store-based retailers (brick-and-mortar retailers) > classification by organization form 1. RETAIL ORGANIZATION IN ONE SINGLE COMPANY All retail activities within one company, also: several legal units belonging (ownership!) to one head company → decides on all strategic issues: sourcing, warehousing, logistics, managing assortment, branding, reaching consumers, … “monolithic retailer”, e.g. Lidl, Aldi, Metro, IKEA, H&M, … HQ = Head quarter (centralized strategy under control of HQ, authority by hierarchy/ownership) Stores of same appearance (layout, assortment, …) within a generation of stores -> Consumers get used to stores, recognize the stores easier and feel more comfortable -> volume: number of stores – can gain from economies of scale Question: How stores (marketing channel) are organized? Design of retail activities? Insert: store format / retail format Physical stores of same store format are of same design (i.e. monolithic retailer) e.g. size (m^2), layout, orientation within store, same assortment, advertising, name, branding, atmosphere, staffing, service, … → attract consumers by decision of management Store format: summary characteristics of a set of stores > applied to describe retail outlets, categorize retail outlets Examples: Supermarkets, e.g. Rewe, Edeka Groceries: fruits and vegetables, processed and pre-packed food items, daily needs like personal care, detergents for home cleaning, … = FMCG (fast moving consumer goods) (selling > reduces stock-level > item is refilled) Items are picked up by consumers (self-service). Latest: self-check-out size: > 1200 sqm, definition depends on objective of market research Discounters, e.g. Aldi, Lidl, Penny, … FMCG groceries, similar to supermarkets, but: pricing: low prices due to low costs (low labor costs, reduced services, avoid handing within store), reduced assortment, variety (focus on low-price items, lowest price in category, typically not the branded item!), generic item (not branded), low-price image in order to attract consumers basic item → high turnover per item → reduce cost per unit sold Hypermarkets, e.g. Real, Globus, food, non-food Department stores (fashion) e.g. Galeria Kaufhof DIY- stores > home improvement, like Bauhaus, toom, … convenience stores (Kiosk): e.g. in gas station, railway station, airport. Consumers need to pass by, wait, traffic generated by other operation consumers use Boutique Car repair: manufacturer branded repair, “free” car repair & service like ATU, pitstop, … MONOLITHIC RETAILER Decides on / selects specific store format, afterwards no re-design required (for a longer period) > this point not specific to monolithic retailers, but also to franchise Advantages: + Multiple activities, e.g. open same type of store at other geographic locations > local retail markets (separated by distance, consumers do not travel too far to shop) + easy to coordinate activities in stores as they are similar > same processes, initiated by centralized decisions Hierarchy: monitor, control decisions, top management > regional management > district management > store management > employee + consumers become familiar with stores (layout, assortment, …) wherever location store they shop → duplicating format leads to same appearance of stores. + similar / consistent operations of stores will support creating image of the retailer > consumers experience the same service wherever/whenever they shop + some activities are centralized: buying, advertising, creation of assortment, merchendizing, … → economies of scale → cost↓ + training and development of emloyees due to size of operation, offer spezialized jobs to highly & specialized applicants, specialized training in own training centers, tailored to own company specific requirements > no outflow of information + large market coverage attainable > more volume, more market power vs. suppliers (being preferred retail chain, buying) and vs. consumers (selling prices) Disadvantages: - requires managerial control > needs to be organized and managed, e.g. reporting (regarding type of assortment), procedures handbooks (for same service level in any store) > strict managerial control, motivation? (not only by order, how to implement new ideas/ innovations? How to gain from creativity/knowledge/experience of individuals?) but: no individual activities within stores. Good ideas should be implemented in all stores >> needs to have a procedure in place how to bring up good ideas in hierarchy (staff in store > central management). Also: consumer questions… - once established the chain retailer has low flexibility, difficult to adjust to changes, e.g. high investment to redesign stores due to new categories of products - “expensive” organization (which organization isn’t expensive?) raise capital to finance stores (building, inventory, …), labor intense - difficult to brand the retail activity (especially when operating many physical stores), e.g. service branding (consumers experience services within store), services need to be of same good quality all the time everywhere 2. FRANCHISING – FRANCHISED CHAIN Contractual agreement between the franchiser (head owns something he can offer) and a retail franchisee, which allows the franchisee to conduct a business under an established brand and according to a given set of rules that are proven to be successful. “rules”: procedures, operational processes, use of specific equipment, products to be sold / assortment, layout of store, training, hiring of staff → how to operate a store > knowledge to be obeyed by franchisee Brand: attractive for consumers, leads to traffic on first day Authority/hierarchy: franchiser > franchisee by contract. Franchisor = the owner of the brand/system, gives power to the franchisee by contract. But does not own the assets of the franchisee, but controls them (by rules Reminder: Monolithic = control by ownership Franchisee operates own business > entrepreneur within system (bound by rules) > physical outlet, local geographic market, sales vs. cost of outles, wages, profit… > franchisee brings in own assets, local investment in store > carries business risks, but enjoys chances and profits Types of franchising: - product franchising / trademark franchising: franchisee agrees to sell products (assortment) supplied by franchiser, e.g. franchisor is a manufacturer - business format franchising: franchisor provides a “business model/idea” to the franchisee that encompasses a system of activities to run a business, i.e. all aspects of a retail and service operation: supply of products, equipment, site selection, quality control, training, procedures to operate a retail &service facility Examples: McDonald’s, Burger King, restaurants like enchilada, Extrablatt, mcfit, intersport How the profits distributed/shared within the franchise system? Between franchisor and franchisee? Franchiser receives: > initial / entrance fee > upfront payment paid by franchisee to franchisor to become member of the system > ongoing payments: royalties on sales of the franchisee = percentage of revenues Cost of goods / equipment supplied (including some profit ???) Service fees on services supplied to fee, promotions Franchisees profit: revenue – % royalties on sales* (variable costs) – cost of goods sold (buying price)* (variable costs) – cost of business services the franchiser provides to franchisee (advertising, IT support, training, quality audit) * (variable costs) – cost of equipment* (variable/fixed costs) – rent of the store (fixed costs) – personnel cost (staff) (fixed costs) – costs for electricity, water, … (variable/fixed costs) *(brand) value of franchise system franchiser extracts profits from the fee → Franchisor extracts profits from the franchisee, Franchisee takes over risk by incurring fixed cost compared to monolithic system: franchiser reduces own business risk at the cost of the franchisee. But also: franchiser lets profit of the system to franchisee Profit of the franchiser: sum of initial fee (from the new franchisees) + sum of all royalties (= from the franchisees, margin earned by franchisor due to brand value of the franchising system) + sum of goods and equipment sold to franchisees (margin due to selling to the franchisees) - franchisers buying costs of goods and services (= margin due to services provided by the franchisor to the franchisees) + sum of service fees – cost of creating services (= margin due to services provided by franchiser) Brand value of the franchise system: Add to brand value by service quality of franchisees operation, by quality of the goods they sell, innovations i.e. new products, marketing/advertising > value to consumer break even point = franchisee profits are > 0, further to the right, if high fees are charged by franchiser cost of goods sold, royalties, service fees reduce revenues = proportional / variable cost of operating franchisees outlet → franchiser extracts profits from the franchisee > “economic rent of the franchiser” “profit-sharing scheme” > extent of extracting profits depends on the power of franchiser, power given by brand value Question of marketing channel design, example: profit by monolithic chain vs. franchise chain Why are some retailers organized by franchising, others like a monolithic system? No clear answer - Need to build up a system to a large size for total profit and economies of scale Availability of capital Availability of fee bring in Availability in knowledge, working power, time, capital, carry risk -type of services provided to the consumer, e.g. large portion of individual services Performance of local servide, employees > franchisee will manage &monitor - franchising itself is widely known - entrepreneur franchisor likes to reduce the burden to monitor widely spread stores, franchisees are self-motivated to deliver good performance in store Benefits to the franchisee: + able to use a well-known brand, acquire well-known goods and services and a proven business model > franchisee does not need to create on his own > reduces risk (entrepreneurial risk) of failure + own a retail operation: “owner” > entrepreneur, not employee + trained in operating procedures and skills > reduces risk to franchisee, reduces time-to-market (time to build up a profitable business, reach break-even point) + cooperative marketing: each franchisee contributes & gains from other franchisee > total marketing investment of the franchise system + exclusive selling rights for a specific region/territory (exclusive selling right guaranteed to the franchisee within contract??) Conflict of interest between franchiser and franchisee: e.g. 1 store in PF > 10% share 2 stores in Pf > 17% share for franchiser, but only each 7,5% for franchisee Problem: online store by franchiser > franchisees: lost scales? Lower profits? Will franchisees be compensated for lost scales? Percentage of online revenues for franchisee? + merchandise is sourced via franchiser > quality standards, assurance of quality > lower buying prices due to combined volumes of franchise system > buying power Disadvantages to franchisee: - competing franchisees in the trading area, oversaturated market? - locked into the contracts (franchise contract, buying contract, rental contract, services contract, labor contracts …) - franchiser may quit contract if provisions, i.e. quality standards are not satisfied - royalties & fees are calculated as percentage on sales/revenues, and not on franchisees profit > franchiser does not cover business risk of franchisee, that is determined by franchisees fixed cost, because the franchiser will not cover the fixed costs Franchiser: power of negotiation of contractial terms is with the franchiser (as owner of brand) Franchisors benefits: (comparing with monolithic system) + quick growth of the system with “low” investment by franchisor (other by franchisee, compared to monolithic system) + franchisees solve many managerial problems of operating local stores, e.g. hiring and training local employees + franchisees must obey to the stringent operating rules set by the franchisor > power/authority without too high investment and risk > mimic monolithic chain in the way it appears to consumer > brand building + franchisee is the owner of the outlet and works at own risk and chance: profit > incentive to work hard (hours & quality) > franchising is common in services retailing, marketing channel with high emphasis in services supplied to consumers + uniformity of services among outlets > uniform appearance of service quality > consumers enjoy same experience wherever they buy > may help to build brand Problems of the franchise system - any franchisee can harm the overall reputation of the firm (> distributed responsibility compared to monolithic system) e.g. Yi Ko case of Burger King GER: franchisee operated 89 outlets, problems appeared regarding quality 3. INDEPENDENT RETAILER > Operating one or few outlets > span of control by owner > one owner (individual, often family business), carries name of owner/family > grows to a monolithic chain, e.g. store managers with wide responsibilities, regional managers overseeing a number of outlets Benefits: + flexibility (format, location), realize own ideas how to create best service to consumers + niche (compared to formats operated by chain stores), adapted to the local market, focus on local consumers, service oriented, also individual services, specialized, e.g. assortment (regional), personal, comfortable atmosphere Disadvantages: - low bargaining power to suppliers, i.e. national brands. Sometimes: buy not directly at manufacturers but via wholesalers. Very often: independent retailers become members of “buying operation” e.g. Firma Mustering - low economies of scale - higher business risk > smalltrading area - offer high service level > labor intense 4. COOPERATIVE RETAIL SYSTEM - co-operating retailers - retailers (“independent”) are owners of their retail business (local store) as well as owners of a central organization - activities are centralized to support the business of the local retailer (they sell/interact with consumer) - activities relevant to operating local store, not directly linked to consumers (e.g. sourcing/buying of goods, retail assortment, logistics, warehousing, advertising, brand building) Shareholder: authority/power is with the owner operators Supporting activities: sourcing/buying of goods, retail assortment, logistice, warehousing, … Benefit: + incentive of owners/local operators to run a good retail organization Examples (similar to cooperative retail system): Edeka, Rewe (independent retailer run up to 40 stores) Other: consumer cooperative firm (consumer are the owner of central organization, like Coop) McDonald’s: 31.000 + franchised restaurants, 5.700 + company operated restaurants > Main difference to franchise: owner of outlet is owner of central organization Vertikal Marketing How to organize the marketing channel? e.g. how to reach consumers? Organization very important in terms of ownership within channel, products & services supplied to consumers Manufacturers → wholesalers → retailers → consumer. Every stage is independent Alternative: Manufacturer → chain retailer → consumer Retailer buys directly from manufacturer, distributing to many stores = 1 retail system, 1 economic unit Alternative: Manufacturer with retailing activities interpreted e.g. own retail outlet = direct selling Comparison: manufacturing vs. retailing Manufacturer: Materials (input) → manufacturing process = value creating change the physical appearance) → product & service (brand) > helps to differentiate Retailer: Buys products → retailing process → sell (baskets of) products Value creation only by services to the consumer, e.g. assortment, convenient opening hours, delivery, friendly, … Problem of retailers: > identical products (competition offers same products) > no value creation by product itself > danger of competition by lowering prices > margin shrinks Problem solving by creating private label products (not sold by other retailer), start creating a retailer´s brand (brand of retail firm) Some more terms: > marketing channel design: how to reach consumers, arrange sales contracts? > supply chain design: focus on logistics & manufacturing activities > value chain design: asking which activities contribute to the value? Origin of value, e.g. service experience in store? … so far: offline retailing Organization Forms of Online Retailing: > monolithic online retailer > online platform retailer: online store brings together sellers (wholesale, manufacturer) and buyers (consumers) Platform operator creates attractive homepage Examples: > eBay, private (one time offer) / business seller (permanent offer) → private consumer/ business > amazon: standard retailing activity, but also “amazon marketplace” offers 3rd party sellers to sell via its platform, Store-based “amazon-go” III. DEVELOPING A STRATEGIC PLAN IN RETAILING overall planning process: 1. situation analysis (market research, …) > what kind of products consumers like? e.g. founding a retail business 2. mission statement > basic description of the fundamental nature, rational and direction of the firm → “we would like to…” 3. objectives of the retailer regarding > market (consumer segment, …) > financial (profitability, productivity, …) > peoply (employee, consumers, …) > societal goals (sustainability, …) 4. analyse consumers > market to serve, e.g. mass market vs. niche > problem of the consumers we solve and how? (what is my problem? Business starts often with your own problem) 5. develop strategies to enable, assure our objectives > e.g. sustainable competitive advantage > service-oriented? Low cost/price? > new solution to some problem? > maintain advantage, i.e. strategies to be implemented that are not easy-to-copy by competitors 6. implementation of strategy & perform daily operations > assortment > carrying for availability of items > promotion 7. control The process of planning is valuable: - through analysis (market, consumers, sourcing, …) > explain why! > understand (think, then spending money on resources) - specify goals > control - how to differentiate our business from competitors? - What offering will be appealing to a group of consumers? > who is the consumer? > who should not be our consumer? - assortment, prices, services -competitive environment > main competitor? Not all! - crisis to be anticipated, threats to be circumvented? Starting your own new business - personal abilities > individual preferences, competences, partner? - financial ressources > at the beginning many expenses/cash outflow(/maybe investments) > inflow of capital quite slow at the beginning > payback period: first point in time when cumulative expenses < cumulative sales > if expenses are bigger than sales, difference has to be financed with personal savings, …> initial funding needed! > expenses: “fixed” > postpone? > sales: you never know exactly! Uncertainty – consumer behaviour > sales are subject to larger uncertainness compared to investments and other cash outflows > your decision > change plan! - personal activities & availability > time pattern of demand > shopping patterns (steady? Seasonal? Volatile?) - monthly, weekly or daily base? > correspond to personal availability to serve the consumer > quality: me + employees – are they able to serve at high quality? 2 founders = team? Complementary competences? > growing business – change/adapt business model when company grows? - analyse consumer behaviour > consumer spending, in retail: product category - retailers by industry: food, … IV. CONSUMER BEHAVIOUR →Identify consumer (who?) target market, strategy! Some retailers want to be “all things to all people” (easy to be implemented within retailing process – but dangerous) > No differentiation, no clear image, not consistent > what does xy retailer means to you?” consumers will not be able to answer Instead, carefully select assortment and promotional items (not part of regular assortment) Strategy: everyday operational decisions, otherwise image will be blurred → understand consumer (why shop with us?) strategy! Market/consumer research → appeal to the consumer (e.g. promotion) activities! 4.1 CONSUMER DEMOGRAPHICS & CONSUMER LIFESTYLE Consumer demographics = objective, quantifiable, easily identifiable and measurable population data > data on gender, age, job, income, education, family status, number of children within household, size of household (living on one or more incomes?) > widely used in marketing research, but not perfectly suited to fully explain individual buying behaviour Income (households’ income) gross income – taxes – expenses on social securities, health insurance (given by law, cannot be avoid) = net income = disposable income (consumers decision, long or short term) - fixed expenses (rent, electricity, water, heating, TV, mobile phone, …) = discretionary income (leftover for daily decisions on consumption, can generate retail sales, i.e. groceries, clothes, travel,…) If prices for fixed expenses are increasing, people buy more private labels than brands at grocery store, … Application of demographics Example: (explain “aggregate” behaviour > estimate) For a given location of a store and a given business model (i.e. store format) we have to identify the characteristics of the trading area (potential customers within a trade area) Describe trading area: size, number of consumers living there, demographics →forecast consumer behaviour → x% share in relevant category, forecast sales by share of disposable income of a potential store location→ profitable location? Are consumer demographics sufficient to fully explain consumer behaviour? NO, more detailed concepts needed → consumer behaviour research Psychological determinant of behaviour - personality: individual traits which make the individual unique, e.g. self-confidence, autonomy, emotional stability - class consciousness > pursue social statu by consumption behaviour, e.g. prestige purchases goods, services, retailer > promote prestige purchases > shopping at this retailer is a proof of status? - attitudes: i.e. do retailers activities match my attitudes? > quality of goods, protect the environment, social responsibility, … - perceived risk > belief about risk > is there a risk regarding the purchase of a specific good retailer? > types of risk perceived by consumer: - functional risk: will good/service fulfil its function? Perform well? - physical risk: can the good/service hurt me? - social risk: what will peers think about my shopping gear? - financial risk: can I afford to buy? Failure? Loss? e.g. discount, guarantee to refund if returned, payment methods - psychological risk: am I doing the right thing? E.g. consumer has little experience > help to solve problem - time: how much effort must I spend in shopping? Online offering? → observations regarding perceived risk: consumer judges the purchase to be more important > perceived risk appears to be higher. Consumer spends more time & effort on search & evaluation. Consumer will stick with known brand, search more information (ask friends), Consumer may not buy/postpone > communicate! Give information, show examples, let consumer try out, … - culture: beliefs, norms and customs shared by a group of people, to some extent passed from generation to generation - social class: informal ranking mainly based on income occupation, education, … - reference groups/peers > opinion leaders - family/household situation, e.g. buying behaviour may vary according to position in life-cycle (student, young family,…) - lifestyle = summarizes aspects how individuals spend time and money > segmentation of consumers (similar behaviour within segment) - consumers time utilization > how is time allocated (work/transportation/eating/recreation/entertainment/sleeping, …shopping) all things having impact on consumer behaviour > selling opportunities. But online shopping? No extra time needed Other factors having impact of buying behaviour: - gender roles: proportion of working women higher, increasing households’ income > retail sales - shoppers are more knowledgeable, e.g. education, more info access > aware of trends, quality, price, available choices > search and decision behaviour Webrooming: search online, buy offline (click and collect) Showrooming: search offline, buy online - lack of time: time for shopping? Online? Product selection: well-known brand? Standard item? - component lifestyles: consumers follow several life styles instead of one Other explanation: “hybrid consumer”, shopping decisions are situation-based, they don’t behave the same all the time → market/ consumer behaviour research: aggregate consumers to segments, describing consumers´ behaviour > consumers within segment behave very similar > consumer profile → select one or few segments, define target market, design marketing activities to reach target market leads to shaping retailers profile/image 4.2 CONSUMER DECISION PROCESS Idea: model individual buying behaviour > process (steps, sequenced in time), how consumer takes decisions “standard” decision process: Extended model regarding store-based retailing (offline) Stage 1(selecting retailer): Need recognition -> search info about retailer -> select retailer -> visit store > design marketing activities to reach consumer, to support, to guide consumers behaviour within process Stage 2 (selecting product): search for info about merchandise -> evaluate products -> select item/brand -> purchase Post-purchase behaviour Assumptions: - 2-stage process > verify this assumption! - are these two decisions really separated? E.g. consumer decides regarding “expected” offering in store. Advertising? Experience? - parallel decision? Loop - brand > store, e.g. online search - post-purchase behaviour - repeat store patronage (store loyalty) - repeat-buy of brand (brand/product loyalty) Other decision models: Digital decision process: Some ideas to create such a model: - customer journey: channels visited online/offline before visit in online store - “first click”/”last click wins” > attribution model, which keyword cause the conversion? - variety of info sources, e.g. online sources - sufficient vs. too information - lengthy search process > no decision? - influencers role? - consumer decided on brand before visiting store? Vs. buy/pay by click > impulsive decision - start search in some large online store, e.g. amazon, then selecting some other retailer? - online buying process (according to german law): Consumer may withdraw from online (phone) contract within 14 days Online: Need > info search > evaluation > buying decision (select product & order/ sign contract) > receiving > re-evaluate, keep or withdraw > post-purchase behaviour → Impact of this freedom to choose on consumption, competition (online/offline) Attract consumers to buy online, e.g.”no risk”, push consumers to buy online? > too high consumption? Advantage / disadvantage for online/offline retailing? > competition between online /offline channel, e.g. disadvantage for offline channel Further assumptions regarding decision process: - rational decision making: economic man assumption -having all information - all alternatives - perfect evaluation with a concise utility function in order to maximize utility > but: no emotions, not rational?! No situation specific factors > adjust model -extent to which the stages of the decision process are followed, e.g. “new consumption problem” in-depth evaluation vs. “routine decision”, abbreviate steps skip, consider known brands only, … Steps in decision process: - stimulus: > commercial by advertising, store display, price discount > designed by retailer > social by consumers reference group → initiates and motivates the individual to act - problem awareness: > retail can solve the problem of shortage/unsatisfied need By a good, wide offering and services > address consumers’ needs (which are individual), e.g. individual personal Help by employee in store, retail advises on (technical solution, proposes best alternative), adjust assortment - information search: > determination of alternatives that will solve the problem (what product, where to buy) > extent of info search will depend on consumers perceived risk e.g. retailer assists the consumer: provide relevant information to the consumer, at store’s display: technological/functional info is given - Evaluation of alternatives: to be able to select best product e.g. multiple criteria to evaluate alternatives (design, brand, color,…). > behavioural assumption of “rational decision” > attach weights to the criteria > represent relative importance of a criteria > calculate the best alternative Max ∑ aj x cij cik= value of criterion j of item i aj = weight of criterion j Retailer: understand/ knowledge of consumer needs, how does consumer evaluate? (criteria, weights) Assist the consumer in evaluation, help of sales assistant, sample ranking - Purchase act: good and service <-> money > place of purchase (POP): characteristics of the store availability of item: stock-on-hand , store-based: physical store , online: available stock / notify consumer upon availability / purchase & ship upon availability Purchase terms: methods of payment (cash, bankcard, mobile payment methods) > safety of payment perceived by consumer Online: payment in advance before receiving product vs. payment upon delivery Return terms: Online: withdrawal from contract? Extended return time guarantee? Offline: ? different Delivery time: reduce, food: new business model Post purchase behaviour: > covers a long / infinite time span, not clearly defined in the literature, needs to be further analyzed Concepts: e.g. loyalty: buying decision will affect future behaviour: will the consumer re-buy? In general: “total consumer behaviour” – look at all (new) aspects that have impact on consumer behaviour (pre and post buying decision) Otherwise, we are restricted to standard ideas / methods/ business models e.g. enrich model by - life style concepts: decision oriented at lifestyle - situational factors, environmental factors, … - other: pandemic situation, how to design advertising? How to advice sales staff, communicate with consumer So far: “standard” decision process > can vary by situation Extended decision-making process: Consumer decides to spend more afford and time during some phases of the buying process, e.g. collection of information, evaluation of alternatives > importance of need – expensive item > requires a large portion of budget, item will be used for a longer time (will bind the consumer for a long time) Risk: poor quality, not able to re-buy due to budget restriction Retailer: assistance, test the item, no pressure to decide limited decision-making process Less effort and time on some steps, e.g. low price, low involvement, regular/repeated decision > draw on experience with product/brand/category/retailer e.g. routine decision – re-decision, steps were completed before (search, evaluation,…), i.e. daily need > food, personal care items, … urgent decision: “emergency need” decision process is strictly limited by time, e.g. retailers: limited offer by time (discount) impulse purchase consumer buys a product that was not planned to buy before, e.g. retailer initiates impulse buy, retailer appeals to the consumer. Display products in special location like entrance idea: retailers can generate extra sales types of impulse items: - ready for immediate consumption, e.g. sweets - small > easy to carry - low price > low risk - known brand > low risk - “general need” / seasonal need > e.g. multiple power socket - not too specific > need, target group > restricts potential volume “planned decision” Completely unplanned: consumer did not think about buying anything Partially unplanned: decision to buy was taken before regarding category (type of item, brand undecided) Unplanned substitute: planned items brand > decision is changed e.g. unavailable, promotion V. SELECTING STORE LOCATION (STORE-BASED RETAILING/OFFLINE) How will the consumer react on stores location? > effects of stores location > consumer evaluates: … easy access – convenient, close to bus station, availability of public transportation, parking lot … low travel time/distance /cost … Attractiveness of store: assortment available, atmosphere, services … Attractiveness of showroom, building … attractiveness of neighbouring stores/business district > combine activities (shopping, other services) Compare assortments of various stores “comparison shopping” … stores rating /consumers reviews, i.e. provided by internet store research, Click&collect, … … → consumers expectations, shopping experience > consumer behaviour > impact on sales at specific location Cost: locational cost - rent > depending on location (availability of retail space) > duration of contract, e.g. typical contract duration for a new building 15 years + 5 years option Long term contract binding the retailer > chances and risks - Long term contractional agreement: new store will be built according to the significations of retailer (size, shape, layout, design) > dedicated to store format > specific investment > highest value/return in its planned use (retail market) Real estate firm investing into building > need to have long term contract to recover investment Retailer owns building > long term effect on cost, cash-flow Also note: chance of long term contract: retailer invests in developing a local, geographic market > market share secured, build image, reputation to consumers, loyalty New local competitors? Available locations? Authorities regulate access - energy: heating, light, air-conditioning Other utilities (water, polluted water, garbage collection, cleaning,…) - equipment, built-in equipment, shelves, displays, checkout cashier, refrigeration, … - personal cost of sales staff to run store These costs are to some degree location specific Location specific cost: size and shape of store > sales and cost e.g. 1 floor (preferred) vs. 2 floor store (retail space required, higher cost to survey) e.g. store in a main street > more contact to consumer, visibility of store from outside evaluation of a site/store location: profit contribution of the store = sales – cost sum(t) profit(t) = sum(t) (sales - cost) t= duration of contract cost: rent/lease (contract/offer), equipment (total cost/depreciation> supplier), utilities (contract), maintenance (historical experience, sales staff > tariffs) additional problems not included in the following - shape/layout of store > evaluate separately - retail chain > market share of retailer, impact on selling prices to consumers (larger > higher selling prices), buying prices Textbook models of store location > sales forecasting a) comparison method compare the characteristics of the new location to existing stores with known sales data (e.g. chain store retailer) sales (new store) =! Sales (similar store) characteristics: - type of store: stand alone, main street, including parking lot, … - size, shape, … - assortment to be offered - frequency, traffic, - trading area (number of consumers living close to store) - competing retailers in trading area (distance, …) … > check and estimate, e.g. district manager (responsible to oversee the stores operated in a defined region) Method: + quick, simple, low effort, low cost, provide sales estimate b) profile method characteristics of store/location relevant to sales e.g. scoring method to evaluate a number of alternative locations > receive some ranking of locations, select the best characteristics 1. size (qm) 2. … 3. … … sum Weights of characteristics (relative importance) 10% 12% 4% Store A (score 1-5) 5 3 100% 10% * 5 +12%*3 + … = weighted sum regarding criteria of store A Store B (potential, alternative locations to evaluate) … characteristics found by researcher > subjective method + suggests best location out of a set of given locations (decided by researcher) + a number of characteristics are evaluated + knock-out criteria may be set, e.g. number of parking lots - does not generate a sales estimate (by comparison? profitable if total score >…) - disadvantages of general scoring method apply! > subjective? > effort! > draw upon district managers experience c) statistical method to estimate the effects of store´s/location´s characteristics on sales: > regression method Sales (new store) = a + b1*x1 + b2*x2 + … + bn*xn a= Xi … value of characteristics i of that location > relevant variable to explain sales, e.g. x1= size of trading area estimated by the number of consumers within 5 min walking distance to the site x2 = qm bi … weight associated to characteristic i > importance of xi to sales > explanatory power of i j (existing stores) = 1, …, m of our retail chain > quite similar stores operated under same strategy (assortment, prices, advertising, branding, …) > fit the model (in box) > estimate a, bi by regression method from available sales data of existing stores of the chain (quite similar stores operated under same strategy, brand, store format) Existing store salesj = a + b1*x1j + b2*x2j + … + bn*xnj >> fit data > run regression (minimize sum of squares of existing data to regression line)> estimate a, bi If new point is on Right site of point cloud: out of range > new site is different from existing ones > sales estimate is not supported by existing data, e.g. large store What are the significant variables that can explain sales? i=1,…,n > drop/add variables to fit the model – relevant? > sparge model (low number of explanatory variables – avoid overfit!) > sales forecast of new store sales(new)= a + b1*x1new + … + bn*xnnew > look at data before fitting > plot the data > transform data (Wurzel ziehen) > log + delivers a sales forecast + weights bi > economic interpretation > marginal effect of characteristics i on sales (if within range of values of existing stores) - forecast out of range > look for other method - historic sales data > future sales? - forecast horizon > several years ahead break even!?! - data intense, expertise to fit model Other, simplified methods to evaluate store location: d) “law of gravity”: KA(spend s1) S(spend s2) Consumer consumer is attracted to shop in S Method assumes that the consumer will spend (relevant) budget(s1+s2, sales spending on different locations) according to: s1/s2 = A1/A2 (di2/di1)lamda di1 = travel distance /travel time/cost > disutility to consumer i to travel to location Ai1 = “attractiveness” of location 1 to the consumer i > number of stores in KA, total selling space of stores in KA, number of residents, … > consumer utility The further location 2 the higher the burden of travelling > the lower the portion of total budget that is spent at location 2 > Attractiveness of location 2 ↑ > portion of total budget spent at 2 ↑ > lambda weighing disutility from travelling > parameter that needs to be pre-specified Numerical example: Di2/di1 = 10/20 = ½ > proportional s1/s2 If lambda=1 > (½)1 = ½ If lambda=2 > (½)2 = ¼ > disutility from travelling will rise Higher lambda: s2 grows relatively to S1 > consumer prefers to shop at location 2 > consumer prefers closer location > lambda = disutility from travelling > select high lambda if consumer would not like to travel, e.g. type of goods like food, fast moving consumer goods FMCG Low lambda: expensive, important goods: furniture, relevant situation to consumer + quick, low data requirement > given the location of the consumer. The method indicates the most attractive out of 2 potential locations > estimates share of sales - provides no sales forecast > just calculates the division of budget of a consumer/consumers within a small region - only 3 explanatory variables: distance, attractiveness (compound of several factors) = d, type of need, category of goods, situation specific = lambda - compares just two given locations (need to be pre-specified to run the method, method does not provide hints where to find an attractive location) > repealed pairwise comparison to evaluate more than 2 locations e) extension of model d) apply “law of gravity” to define “trading area” location 1 consumer → location 2 separation line/indifference line assumes consumers living here, completely spend their budget at location 2 (area of location 2) identifying trading area of location 1: problem: how to define reference location/city to run method? assume: consumers within trading area will spend their total budget at stores within location 1. S1/s2 = A1/A2 (di2/di1)lambda > separation point/line 1/1 = A1/A2 (di2/di1)lambda = budget is equally divided between 2 locations > consumers indifferent spending at 1 or 2 A1/A2 and lambda are known Example: A1= A2 > 1/1 = 1/1 (di2/di1)lambda > di2 = di1 > separation line is half way from 1 to 2 Other methods to find out trading area: - e.g. asking consumers about their postal code at check-out (analyse loyalty card use) - application: sales estimate Sales estimate from trading area: S(Dach) = (sum of budgets of all consumers living in trade area spent on category)*market share of our store > number of consumers is estimated by separation line, budget is estimated general value by market research Market share estimated, e.g. 1 out of 10 stores > market share 1/10 f) Huff´s model calculates probability Aj = attractiveness of site j > location to be evaluated, e.g. measured by selling space assigned to category (i.e. groceries) dij = distance: consumer i to location j lambda = distance parameter wij = probability that consumer i (of trading area i) will shop at site j (it holds sum of wij = 1 for each i) model assumes: - each consumer i will spend total budget (category budget) at all potential sites! > all competing stores j are known, need to be pre-specified (decision!) by the researcher before applying the model > decides what stores will be considered as relevant store by consumers = list of stores relevant set for consumers Sale estimate: Sj = sum (wij * Ei) = sum of (probability consumer i shops j: proportion of budget spent at j * consumer i´s budget) All consumers within some area under study, e.g. trading area Example: Consumer1 shops at 10 stores, probability of shopping in shop 2 is W 12, shopping at store 3: w13*E1 = spend by consumer 1 at store 3 overall trading area: prespecified in advance by researcher – relevant set of stores j - consumers i shopping in j Remark: Total budget of consumers is divided up … Model f To the weights wij > different from consumer to consumer (Aj, dij) Trading area defined (implicitely) by the researcher >> differing assumptions /models > different sale estimates Model e Equally to any store > constant, uniform weight per store Aj, dij used to define trading area g) estimate sales based on various types of trading areas primary, secondary, tertiary trading area decide upon new site > attracts a large portion of consumers within primary trading area compared to secondary… total budget (category specific) is divided among competitors Process of choosing store location 1. Analysis of broad geographic area > consumer demographics of different regions therein Vs. > competitive situation, i.e. compare number of consumers vs. number of stores > high / low density of store? Oversaturated? <-> under-supply? > top 3 regions having lowest density of stores Competitive situation problem: relevant competitors? Retailers sell various categories > e.g. personal care: “specialized store”: dm, Rossmann, … grocery stores: supermarkets, discount stores department stores hair stylist … e.g. survey consumers, market share within category > decide, which competitor is relevant! 2. Selecting type of location - freestanding site/ isolated location - within central business district, e.g. pedestrian area, large number of stores, competitors & stores selling complementary offerings & services > “convenient: shopping trip”, all this generates traffic - planned shopping mall: single, large site one owner/single operator > maximize profit of mall > max. rents optimal mix of stores? Total attractivity of mall to consumers property is managed as one unit, i.e. promotions to increase malls traffic - “store within store” e.g. within a department store - stores at airports, railway station, bus station, … > “traffic”, specific type of consumption/consumers situation 3. Selecting the particular site Evaluate each location available by methods (a-g) Collect data: pedestrian traffic vehicular traffic parking facilities (number and quality of parking lots) distance: parking – store (carry purchased items) transportation available: by car/mass transportation >> number of potential shoppers? size of store/layout/shape cost visibility of store (e.g. visible from main street vs. advertising) local retailers/services established: competitors? Traffic attractors (1-stop-shopping) Example: grocery: Edeka next to Aldi. Will consumers visit both stores (which order?) or select one? define trading area to estimate demand (see models above) Geographic characteristics, detail: areas separated by large roads/railway > visit area/location: quality of services/competitors > ask consumers! Special problems: - forecast horizon: need to estimate demand for several years is future > forecast errors increase with larger time horizon (i.e. duration of rental contract) > reliability of profit forecast goes down > store-based retailers have more serious problem forecast sales (compared to online) as their market is restricted to small geographic trading area > high market-risk - types of leases vs. ownership Leases Long-term contract > long term commitment Fixed rent to pay, monthly > Cash outflow Other costs: maintenance, cleaning, electricity, … > cash outflow Ownership Long term commitment Large Initial investment (construction) > needs to be financed! Depreciation (Abschreibung) over time > reduces accounted profit in the following years > reduces income tax Depreciation: built-in-equipment > no cash outflow - types of leases - fixed monthly lease (regular case) - variable leases e.g. fixed percentage regarding revenue of store. Lease = x% of revenues (given by contract) common: store-in-store, example: retailer A lets a portion of its selling space to retailers/service operator B. Retailer B pays percentage lease to A, A holds rental contract of total property > B is required to report sales data to A, reduces risk to retailer B (low revenues > low rent) > easy to calculate: x% on revenues (but this is not profit-sharing(based on B´s profit) A does not carry B´s operational risk die to cost of B) > incentives? A decides on contract/B, incentive to A to “help” B to increase B´s sales?! But: bakery “store-in-store” within Edeka/Rewe,… (sell both the same) Similar: “profit sharing agreement”, “rent-extracting scheme” Choosing a store location - chain store: many stores, (e.g. > 5 stores) Operated according to a single strategy > similar in appearance, assortment, service, … > uniform store format, supports building a uniform brand image, consumer become familiar no matter where they shop >> reduces cost, same processes > economies of scale Though operated under same format - chain stores may differ in performance due to local competition, demographic situation, … > revenues, cost, profit contribution by store differs! - even intended to operate under the same strategy, chain stores appear not the same: due to year of opening/ year of remodelling (physical investment)> life cycle of stores → portfolio of stores (>max. total profit, reducing risk) > manage the portfolio of stores, e.g. use insights from one store to manage the other one - sales potential of a store - right level of cost - service level (compare result of consumer surveys regarding their opinion on stores performance) > develop or close underperformance store - relocate within city/district - open new stores - location within shopping mall Managed by owner > selects retailers and service operators Conflict between operator/owner of shopping mall and many retailers within mall Owner: max (sum of leases of retailers) – cost (building) Each retailer i: max (revenuei – costi) Store´s location within mall, e.g. max. traffic: - main floor/ground floor close to main entrance - close to parking lot - close to popular store which generates traffic - close to escalators, visibility - not too close to fast-food Sample layout: (one floor) Traffic attractors: - anchor retailer, position in order to “pull” consumers through mall - online retailing Remark: physical stores, markets are separated by distance, local geographic markets > trading area. E.g. select good location such that travelling burden is reduced. Online: no separation of consumers /markets by consumers´ travelling burden, no disutility of travelling > no separation of markets > but “national market”, “international market” Consumer: next retailer is just a “click away”, comparing and selecting lowest price Online retailer: national competition, no local competition Plan market coverage - by selection of distributor system i.e. selling within Germany - distribution logistics, i.e. 3rd party logistics to fulfil delivery (DHL, UPS) or own delivery to control quality/delivery time, example: groceries (shelf life is restricted, freshness, temperature,…) or amazon as 3rd party > own location problem of online retailer: = location problem of distribution center/warehouse > delivery time (distance) to consumer - close to highway - delivery within short response time (next day, by 12, …) - cost of delivery - cost of operating warehouse Online retailing in general: + large reach (at low cost) > able to specialize, specific assortment & potential to generate profitable volume - no face-to-face contact to consumers > consumers cannot evaluate products, example: brands are important?! VI. MERCHANDISE & ASSORTMENT PLANNING Merchandising consists of activities involved in acquiring goods and services and making them available to the consumer → buying and sourcing + servicing + selling = merchandising looks at value chain (= value to the consumer) how to best organize offering Aspects that need to be taken into account when planning the assortment: - consumer needs > target market - retailer´s format (type of organization/institutional type) & store format (type of store) - structure of marketing channel - positioning / image of the retailer - availability + capability of suppliers, e.g. response time, product innovations, co-operation in product development - responding to competitors´ activities - picking up trends: products, technology, consumer behaviour, … - cost: variable (outsourced processes, refilling process? Refill by retailer or 3rd party) vs. fixed (own investment) >> merchandising strategy Merchandising strategy decides on - product lines/categories to offer - shelf space allocated to products (offline). Online: e.g. what show on landing page? - pricing (e.g. new prices in 2022 > price surge > how to position the generics vs. branded items) - changes in assortment - permanent assortment - promotional assortment - seasonal assortment - customized assortment to local market (local-regional-national-… assortment) Retailers merchandising process Parallel to physical flow of products of items (≈ supply chain, value chain) Suppliers buying - selecting suppliers - monitoring suppliers - quality control/auditing* regarding products and processes * - co-innovating, e.g. private label Management of assortment - selecting categories and items/brands* Share of private label vs. branded products - pricing - manage sales > analyse sales data/data warehouse > consumer behaviour (baskets) - retail logistics e.g. warehouse > consolidation of flows Many manufacturers → warehouse → many stores Or direct delivery to store: supplier → store - inventory management > availability of items in store Consumers store management - servicing consumers - availability of services / ready-toservice? e.g. motivation? Staffing level/cost? - selling e.g. designing promotion, closing the sale - store logistics ** ** example on store logistics: 1) refill process within store: labor intense > costly Store´s warehouse Items delivered in boxes on pallet (box: 6 units) > going with box to shelf And refill selling space * * sequence products on incoming pallet so that they are arranged on the pallet like they are located on shelf (similar: central warehouse) Leftover stock in shelf? E.g. 6 units/box will not fit on shelf > back to warehouse > store > refill from warehouse – problem! 2) shelf placement 4 items of brand 1 in first position of shelf > visibility to consumer > maximum inventory on shelf > safety-stock Shelf from the side: 3*6 = maximum capacity/inventory level assigned to brand > SKU (stock keeping unit) Inventory on shelf should cover demand occurring between 2 refill processes > reduce risk of stock-out vs. - cost of carrying inventory - number of brands carried on store´s restricted shelf space 3) case size products come in / transported by case, e.g. 6 units per case > will these 6 units fit onto shelf? Yes? No problem No? e.g. buffer left-over stock in store´s warehouse Example: Case 1: 6 units on shelf: 4 items are sold, so 2 items are left on the shelf. The product comes in units of 6 products per pallet. I refill 4 on the shelf, so 2 units have to be buffered in the store`s warehouse -> not good Case 2: adjust assigned shelf space? We have 6 units on the shelf and adjust the shelf space per 3 units (now we have 9 units shelfspace). And then we re-order at 3 units left on the shelf 4) case size and shelf size example: “DM” project on case size > adjust case sizes of private label + adjust shelf size (depth), e.g. re-order if stock on shelf is 2, reorder: 1 case Even if “last 2 items” are not sold within replenishment time (time: order > refill) the total case of 5 will fit onto shelf > “optimal case size” Impact on competition? If dm would require national brand suppliers to adjust case sizes to the need of dm it may not be beneficial to competitors > new case size standard Assortment Describes selection of items/products/brands/merchandise to be sold by the retailer > described by overview (manage assortment – plan, decide, …) -Width of assortment: measures number of distinct categories > distinct consumer needs > take consumer´s view in order to select/define categories - Depth of assortment > describes the variety offered within some goods/service category > i.e. number of different products/ branded products / variants (size, color,…) within category Application: - compare stores of different format > analyse width and depth - analyse parts of assortment by w/d How to build categories? → criteria, how products may be grouped - type of good – function of product – consumers need, e.g. sports equipment, tools, furniture, food/groceries, … Subdivide: sports equipment – running, swimming, cycling, etc. - brand: - suppliers brand (=national brands) > available at many retailers - retailers brand (=store brand, private label) Example: selling space/shelf reserved for presentation and promotion > adidas / nike Also shop-in-shop - origin of product (country, region, …) e.g. wine (French, italian) - price level, e.g. budget level/low price – value /medium – premium (high, e.g. national brands) Definition budget item: “generics”: fulfils generic needs, fulfil some function (not more, not less) > lowest price in category Very often: sold under private label (brand owned by retailer) ”JA” in Rewe, “gut und günstig” in Edeka Low price/generics > need to cut costs! - simple packaging and design (e.g. restricted use of color) > lower cost, signal/communication (easily recognized as low cost item), i.e. same budget brand applied across all categories - product itself: ingredients (reduce content of expensive ingredients) - process: economies of scale (logistics: case size increase > help to reduce handling costs), low price will increase demand strongly > impact on handling/shelf replenishment/… > average cost shrink Note: very often generics have much lower (average) percentage margin compared to remaining assortment! e.g. groceries/supermarkets - budget item: 15-20% margin > drastic price increases in 2022 > consumers prefer budget items? Margin for supermarket drops - branded: 30-40% margin Why do they sell budget items/generics at below average percentage margin? - full assortment retailers introduced generics to “fight” discounters (having reduced assortment at low prices) - time line: permanent assortment/seasonal assortment/ promotional assortment (regular assortment on Promotion or short period offering) Example: regular item sold at reduced price on a promotional display> 2 presentations: regular + promotion Products on display – regular item / specific promotional items (not within regular assortment or non-regular variant) > offering to the consumer “new” product > consumer like this, for retailer problematic (needed new product code, left-over stock…) - Type of packaging: box, bottle, bag, can, foiled, … > logistics, handling, transportation > presentation in store > communication > brand (color/shape) > value (PET/glass) > protection > storage condition / transportation - ambient temperature (able to be stored at variable temperature > has not to be controlled) - chilled food (regulation: < 6°C like yoghurt, … ; <2°C fresh meat) - frozen food - explosive e.g. fireworks - adjacency, e.g. odour, smell, detergents <-> food > turnover (volume) > high/ low e.g. FMCG fast moving consumer goods > high inventory turnover, re-ordered very often example:pre-packed processed food items - others: Impulse category > impulse buying. These are placed separately in store. i.e. at check-out in waiting line – every consumer needs to pass check-out > high traffic, waiting-line lows speed of movement. e.g. immediate use/consumption, universal need, small packaging, low price: chewing gum, cigarettes, … then: plan structure > products to be offered by retailer >> structural decision, long-term decision/long-term impact, because not easy to change, change would require re-investment. Use of structure: - decisions on assortment > manage assortment (set objectives, devising a plan, defining the role of categories like turnover, margin, profile) Structure helps to oversee the assortment, simplify activities regarding the assortment, e.g. changes within assortment by category > review by category e.g. “larger variety within cereals” since we lost market share compared to main competitor e.g. rework assortment during year jan: cat a, feb: cat b - retailer´s organization reflects the structure of assortment - Buying department > category “cereals” is assigned to buyer … - sales department > HQ > sales management, designing promotions, defining category and sales objectives - Store management: category assigned to sales people in store, e.g. responsible for “fresh category”, responsibility by category, responsible for presentation, re-ordering, shelf-layout, restocking shelf, customer support -Store manager - manager department a “fresh items” - manager department b “regular” - manager department c “service” - “category management” (Nielsen) > organization/strategy. Idea: develop strategies to improve the performance of categories–category = business unit > setting “category role”, sales, margin, market share, targets, consumers reached, traffic goals,… - layout of store: Items belonging to a category are grouped/placed together on shelf (online: drop-down menu) - internal reporting and accounting - reports by category (sales, revenues, cost, margin) - reports by store >> the way we structure the assortment is the way we think about assortment > about consumer´s needs > retailer´s activities are parallel to category organization > decisions are “bound” to structure Example: new products/innovations How to intergrate new items into assortment? > category? Like vegan products: - integrate into existing “traditional” categories (spread over shelf, all over store) - create a new separate category (placed separately in store) - visible to consumers? If not, then low sales > de-list! - traffic attractors? - set separate (lower) sales targets to new items? Lower hurdle compared to established brands? - consumers shopping behaviour - Vegan consumer: decides to buy vegan - decision to buy vegan or not is taken by item in store 1. decide in depth of assortment/category How many different products do we offer to satisfy a specific need? - variety, e.g. number of variants (size, taste, color, …), brands, price-level > optimal variety within category Large variety: cover all kinds of consumer needs Restricted variety: restricted by space restriction, cost > optimal number of variants & best selection of variants. Optimality criteria regarding variety *will increase if we increase variety - customer´s utility (standard observation > hypothesis) * - sales/turnover of category * - margin/profit contribution (absolute) * - consumer´s perception of store*: store image > differentiate - market share * (regarding category) > attract more consumers, larger trading are, total sales/basket Will a larger variety confuse consumer? Increased effort to shop: searching, comparing, selecting e.g. interrupts buying process in store consumers chooses not to buy – walk away, postpone, … consumer feels uncertain, afraid of taking mis-choice *- (opposite) variety = number of stock-keeping units (sku) > what is the impact on inventory level? Example: in store - 1 SKU includes 6 units in stock, max. inventory level, 2 facings Average demand of 4 units within replenishment cycle > guarantees same inventory service level Now: 1+1 facing (2 Produkte nebeneinander) How many units to keep in stock to have the same inventory service level? – same chance to serve consumers’ demand Higher stock is required ! instead of 3a + 3b we need 4a + 4b to cover the same > 8 units (assumption: guarantees same inventory service level > e.g. 95%) Variety ↑ → number of SKU ↑ What is the impact on inventory level? > inventory level increase > space required to stock inventory increase > Cupital board in inventory increases > Cost of handling increases, time to refill shelf > Complexitiy of managing a larger variety, i.e. analysis of assortment, market research, sales promotion, … >> all effects have to be evaluated > trade-off Here: simple decision model on depth of assortment Analyses the impact of variety on sales (no cost-related issues are considered) Procedure: generate a list of SKU belonging to same category, sorted by number of units sold (or by turnover/value per SKU) ranking 1. Top seller of category 2. … … n. lowest selling SKU of that category graphical representation of ranking 1) new SKU/brand to be integrated > forecast: sales performance of new brand, sales performance of existing brand > substitute or complementary item? > observe additional sales 2) delist a brand forecast: lost sales, sales partially switch to other brands, consumer refuses to shop at our store >lost basket, lost consumer → out-ofcategory effects are not considered within this model 1+2: standard situation of a store-based retailer due to scarce shelf space Remark: offline-retailer Ein Produkt Im Regal wird entfernt (das 2 mal platziert ist) und durch ein anderes ersetzt. From 2 facings of product a → 1 facing of product a and 1 facing of product b visibility of brands? ↯ may. Inventory level (product a) to cover sales until shelf is refilled next time is reduced consumer confusion by too large variety online: will consumer scroll down? Continue on model: idea – look at the pattern of the curve (ranking) > draw conclusions: we will not expect: Diagramm, in dem alle Balken gleich hoch we will expect: graph as above (verschiedene Steigungen) a) small slope: (kleine Steigung, compared to other categories) hypothesis: consumers have no clear preference for some brand (almost evenly distributed) > consumers are likely to substitute brands, consumers look for variety, diverse buying behaviour, not bound to specific brand suggestion: try to add brands/variants, extend variety > additional sales potential b) large slope (große Steigung, e.g. 1/2/.. high performing brands, other are low) single brands are dominating the category. Often generic item, e.g. private level > lowest price observation: majority of consumers prefer a specific brand hypothesis: consumers do not expect a large variety, reason: strong brand dominates the category, low priced brand (generic) > price appears to be more important than image, new category/new trend suggestion: reduce variety, delist low-selling brands, reduce shelf space required in favor of some other category comments: here: ranking by units-sold. Alternative ranking: establish other type of rankings to generate more insights like revenue/sales value (EUR), margin/profit contribution (total EUR), popularity of brands (market research data) → do we have all popular, major brands integrated within assortment? Attractive assortment for consumer? - Problems of the model: availability of data: > historic sales data (like units sold) > maybe it is a historic, old trend? Best: Sales have to be forecasted > own, current assortment, include additional info: market data, competitors activities, info provided by suppliers, collect consumers´ responses → look-out-of-the-box - not included: consequences regarding other categories forecast: complementary effects in other categories - promotional sales: increased sales of some brands by promotional activities? (shelf-space decision based on promotions?) 2. width of assortment Select categories to offer number of different categories Problem: space to represent products and categories is restricted (reduce size/number of other categories? ↯) How to solve? Trial and error: test individual products/brands/categories “test shelf” combining products of several categories, also new categories > width, depth > ie. Is a separate shelf, rearranged every 3 months (supermarkets) > We need an effective procedure compared to direct integration into the “regular shelf” (regular shelf is left unchanged vs. rearranging) until a good candidate is found Visibility of “test-shelf” to the consumer > communication “NEW”, retailers generate funding from suppliers Test-shelf within all stores of chain? (small and large stores) Test categories i.e. within some selected larger stores of chain Tests deliver reliable sales dara within short period > consumers buy! Other: try new products by promotions (i.e. weekly) how long does it take to sell 70% of promotional stock? - Mathematical, statistical methods Interrelation of sales: what to offer within one store? Products, categories the consumer likes to shop within 1 vist Analysis of association between products/brand and/or categories > Scope depends on level of detail under study Research on: brands/categories shopped together within a single shopping trip/store visited Consumers basket > complementary products example Product 1 2 3 4 5 Basket 1 0 1* 1 0** 1 2 0 0 3 1 0 … 0 1 * item 2 is within basket 1 ** item 4 is not within basket 1 General idea: items selected within basket should be part of the assortment > “complementary” If we look at all baskets - what is a good, average selection of brands to carry in assortment? “most common” e.g. core assortment and additional assortment Determine association between items: (following a brief sketch of procedure Müller-Hagedorn) For each pair of items (i,j) count the number of observations regarding all baskets i/j Selected/bought Not selected A: both items selected Selected/bought A B B&C: one of the items selected D: none of the two selected Not selected C D Vi,j = a/ (a + b + c) oben: how many times both items were selected Unten: how often at least one item was bought in example: V1 2 = 2/9 Vi,j = TANIMOTO-coefficient, tries to estimate the association of the pair (i, j) Vi,j – matrix: symmetric matrix i/j 1 2 3 … 1 1 2/9 2 2/9 1 3 … … N N Informs about the association between i & j by the number of occurrences i & j bought together V1,2: if any of the items (1,2) is bought, the probability that both items are selected is 2/9 ≈ 23% -> good sign if products are complementary or not … 1 1 1 Next step in procedure: →Analysis of association matrix, of probabilities > Find “related” products, “closeness” -> “distance” Find large set of related items (= clusters) by some algorithm Example: set 1: 1,2,6 (related products) set 2: 5 ,7, 9 conclusion: this set of items/categories should be offered together > assortment! concluding remarks on procedure: - Data availability: our data warehouse contains consumers` responses (baskets, transactions) to our given, current assortment > integrate more data: - test new brands (e.g. test shelves) - external data regarding total market, competitors, consumer surveys - online sales data - statistical method: What is a good method? What is the right research question? - Find simple, effective methods to test new items in order to get reliable data (process, cost of rearranging test-shelf/leftoverstock/unsold items within test period/leftover-stock of delisted items) - analyse assortment at different levels of aggregation (item-category, e.g. variants) - Online retailer > No cost of operating physical stores > Low cost of adding new brands to assortment (vs. online) > “1 warehouse” vs. many stores “long tail theory” numerous SKU without “too high” cost > platform: analyse sales of platform members > track consumer behaviour, i.e. “clicks”, keywords typed in, … Vs. returns still a problem VII. PRICING OF GOODS AND SERVICES Observation: receipt: store´s name/brand, address, opening hours, store´s tax ID, items, item´s price, VAT (19%/7%) time & date, cashier´s number, name of checkout operator, payment method (cash, credit card, …), loyalty card, discount (> saved amount), voucher (e.g. for next shopping trip) in detail: item 1 0,99 item 2 1,49 item 3 … __________________ Sum 20,71 brand name, size, … (clear, precise to identify? Abbreviations?) sum of items bought, but: no price is given for service. Appears: services are free > no cost of service for consumer?! No communication regarding services provided, value of services. How can the consumer know about value of service? > competition value store vs. discount store Item´s price: cost of retailing activity, i.e. services, is included in item´s selling price (by some accounting procedure) Selling price is somehow calculated by = buying price + surcharge for service (cost of retail process like handling, room, …) + surcharge for profit Setting prices a) demand oriented pricing: information on demand > demand function > reflects consumer behaviour, willingness-to-pay (wtp), set the price to consumer´s wtp, set the price to the value of the product zo the consumer Example: Store-based retailer (supermarket), price tag: item is sold at same price to any shopper (offering a “uniform price”) Retailer sets price to an “average” wtp to maximize results (sales, revenue, margin, profit, …) sales demand curve x* e.g. p* is uniform price max p* * x* (= revenue) P* Price differentiation; wtp is different from consumer to consumer > set prices in order to “extract” consumers wtp x consumer segment 1, 2 and 3 p* * x* <= sum of pi * consumer segment I consumers need to be separated into segments > consumer segments 1supposed to buy p1 p2 p* p3 p at p1, cs 2 at p2, cs 3at p3. Otherwise, they shop at price p1 → price differentiation is a separation of consumers/markets > different price for each segment, “exploit” wtp by segment > increase value* to consumer * problem: consumer reaction: unfair practise to set different prices > increase profit* to retailer * introducing price differentiation takes resources > cost ! Examples of price differentiation: Prices differentiated by - Store´s location (relevant for chain retailers) - (online retailer: different prices according to access point/device used by consumer) - Buying Volume: large volume > lower price (Mengenrabatt, e.g. size of packaging, bundle, …) - Time: “end of season sale”, last-minute offer, … - Brand: - generic items (standard, low price, i.e. private label), -value private label, - national/manufacturer´s brand - Type of consumer: discount for students, … - Service: offering special extended warranty b) cost-oriented pricing: prices need to cover cost > profit “markup” pricing: selling price = buying price (suppliers invoice) + markup (50% of buying price) Problem percentage markup: higher cost item´s (brand, special value like sustainable) need to carry higher absolute markups c) competition-oriented pricing: consumer will choose lowest price?! Above ↓ Price at > “market price” > main competitor Below ↑ (higher volume) Summary: set items price by priority: a-c