Retail Management

RETAIL STRATEGY AND PLANNING

MODULE II
 Retail Strategy

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 More attention to long-term strategic planning
than ever before
Due to the emergence of
⚫ New competitors
⚫ New formats
⚫ New technologies
⚫ Shifts in customer needs

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 Elements of Retail strategy
• A statement that identifying the retailers target market, the format the
Retail retailer plans to use to satisfy the target market needs and the bases upon
which the retailer plans to build sustainable competitive advantage
strategy
• The market segment towards which the retailer plans to focus its resources
Target market and retail mix

• The type of retail mix used by the retailer to satisfy the needs of the target
Retail format market

Sustainable • An advantage over competition that cannot be copied and can be

maintained over a long period of time
competitive
advantage
• A mgt orientation that focuses a retailer on determining the needs of its tgt
Retailing concept mkt and satisfying those needs more effectively and efficiently than its
competitors

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 Sustainable competitive
advantage
Customer Location HRM
loyalty

Distribution
and Info Unique Vendor
systems merchandise relations

Customer
service

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 Sustainable competitive
advantage

Customer loyalty Retail branding Positioning

• Customers are • Creates an • Involves design and

committed to buying emotional tie that implementation og
from a particular binds retailer and retail mix to create
retailer customer an image in minds of
• Branding,positioning • Eg Clean mate, consumer relative to
and emotional Croma pvt label its competitors
attachment add to • Eg Big bazaar- low
loyalty price

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 Sustainable competitive
advantage

Location HRM Distribution and

Information
• Critical factor • Labor intensive •system
Reduce operating
which cannot be industry, provide costs by
replicated service and build developing
• Eg Apple loyalty efficient systems
stores across • Knowledgeable • Eg Walmart and
employees are P&G
World
critical assets
• Eg M&S

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 Sustainable competitive
advantage
Unique Vendor relations Customer
merchandise service
• Develop • Develop strong • Offer
private label relations with excellent
brands which vendors to buy customer
they sell exclusive service
exclusively merchandise • Difficult to
market • Eg Ahold and control
• Eg private label Nestle because of the
brands- human
Kirkland involvement
signature • Eg
Costco
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 Multiple sources of advantage- McDonalds
Good value
• Food at reasonable price

Good customer service

• Extensive employee training, back end production integration-
reduces customer waiting time

Strong brand name

• Favourable associations ,high level of awareness

Good locations
• convenience

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 Growth strategies

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 Growth strategies
Market • Target existing customers using existing retail format
• Tgt customers who visit competitor retailer, make current customers visit
/buy more
penetration • Long opening hrs, more stores, cross sell, sell more impulse goods

Market • Use the current retail format to target new markets

• Eg Carrefour in Europe

expansion
Retail format • Uses new retail format to target current market
• Eg Barnes and Noble and internet, amazon physical stores

development
• New retail format for new market
Diversification • Related- shares commonality with current opportunity,unrelated- nothing in
common

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 Global Growth opportunity
⚫ Domestic market leadership – strong base
⚫ Exploiting core competencies – competitive
advantage
⚫ Low cost - Wal-mart, Carrefour
⚫ Fashion Reputation - The Gap, Zara, H&M
⚫ Category dominance - Toys ‘R’ Us, Office Depot
⚫ Unique Image, Brand – Disney, IKEA, Starbucks

⚫ Adaptability
⚫ Global Culture
⚫ Long-term commitment

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 Entry strategies
⚫ Direct investment: Retail firm owns/invests in a division
/subsidiary in a foreign country. Mc Donalds in UK to
mfg buns

⚫ Joint venture: Entering retailer pools resource with a local

retailer to form a new company

⚫ Strategic Alliance: Collaborative relationship between

two firms

⚫ Franchising: lowest risk and lowest investment. M&S

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 Strategic Retail planning process
⚫ is the set of steps a retailer goes through to develop a strategy and plan.
⚫ How retailers select target market segments, determine the appropriate
retail format and build competitive advantage.

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Strategic Retail Planning Process
 1. Define the business mission
⚫ Is a broad description of retailers objectives and scope of activities it
plans to undertake.
⚫ Defines the general nature of target segment and retail formats it will
serve
⚫ Answer questions like – what business currently in/business in
future/who are our customers/what are our capabilities/what do we
want to accomplish
⚫ Eg Ikea's mission is to offer a wide range of home furnishing items of
good design and function, excellent quality and durability, at prices so
low that the majority of people can afford to buy them

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 2. Conduct a situation audit- a SWOT analysis
Competitive Environmental
Market factors
factors factors
• Target market • Barriers to entry- • Technological,
size and growth- scale economies, social, economic
indicate customer and regulatory
opportunity, ROI loyalty, changes
• Seasonality - eg availability of • Govt regulations
locations • Demographic,
skiwear
• Bargaining lifestyle attitudes
power of and personal
vendors values trend
• Competitive
rivalry
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Elements in a Situation Audit
 SWOT analysis
⚫ Management capability: experience, commitment

⚫ Financial resources- cash flow and ability to raise debt

⚫ Operations: cost structure, operating system, distribution, MIS,

inventory management

⚫ Merchandising capabilities: knowledge and skill of buyers ,vendor

relationships, private brands, advt

⚫ Store management capability: management and sales

⚫ Locations

⚫ Customers- loyalty

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 for
Analyzing the Environment

⚫ New developments or changes -- technologies,

regulations, social factors, economic
conditions

⚫ Likelihood changes will occur

⚫ Key factors determining change

⚫ Impact of change on retail market firm,

 Performing a Self-Analysis

⚫ At what is our company good?

⚫ In which of these areas is our company better than our
competitors?
⚫ In which of these areas does our company’s unique capabilities
provide a sustainable advantage or a basis for developing one?

Stockbyte/Punchstock Images
Strategy planning process

3. Identify • Identify opportunities for increasing retail sales

strategic
opportunities
4. Evaluate • Evaluate opportunities which have been identified
strategic in the situation audit
Feedback

opportunities
• Establish specific objective for each opportunity
5. Establish specific objective
• Performance against numerical index, time frame
and allocate resources
and level of investment

Develop a retail mix to • Investment will be made and evaluated

implement strategy

Evaluate performance & • Evaluate results ,meets or exceeds objectives, no

make adjustment change or else reanalysis is reqd
Retail Locations
What are the three most important things in retailing?

Location
Location
Location
Importance
⚫ Location- prime consideration in customers store choice decision Eg car
garage, supermarket
⚫ location- strategic decision- competitive advantage
⚫ risky decision- retailer needs to put substantial investment to buy
and develop the real estate
⚫ India- less space and costly
Types of locations
Three basic types
⚫ Free standing
⚫ City/town business district
⚫ Shopping centre
⚫ non traditional forms: airport/within another store
Evaluation criteria for a location
⚫ Size of trade area
⚫ occupancy cost of location
⚫ pedestrian and vehicular traffic
⚫ restrictions placed on store by property managers
⚫ convenience for customers
 Types of locations

Unplanned areas Shopping centres

• Free standing • Neighbourhood and

• Urban locations/CBD community shopping
centres
• Power centres
• Enclosed malls
• Lifestyle centres
• Fashion/specialty counters
• Outlet centres
• Theme/festival centres
 Unplanned retail locations
Free standing sites
• individual isolated store unconnected
to other retailers
• Might be near to other free
standing retailers, a shopping centre.
• Adv: convenience (easy access and
parking),high vehicular traffic and
customer visibility, modest occupancy
costs, fewer restrictions on signs,
merchandise.
• Disadv: limited trade area, no multiple
retailers to attract customers ,high
maintenance costs – no other retailers for
sharing.
• Eg :Kohl- off mall store
Merchandise kiosks
• Small, temporary selling spaces
typically located in the walkways of
enclosed malls, airports,train stations,
or office building lobbies
• 40-500 sq feet, operate seasonally, short
term leases.
• For mall operators-kiosks generate rental
income in vacant space and offer broad
assortment of merchandise for visitors.
• careful to avoid kiosks that block
any store fronts, create an
incompatible image, or compete
directly with permanent tenants by
selling similar merchandise
• Eg ferns and petals,perfumes etc
 City or Town locations
Central Business District -CBD
• Traditional downtown
business area in a city or
town.
• Has large no people in that
area during business hours
• Hub for public
transportation, high level of
pedestrian traffic.
• Large no of residents living
in that area
• Disadv: high security,
limited parking, evening and
weekends slow, lack of
planning. Eg Church gate
and Colaba, Fifth Avenue-
NY
Main street
• Traditional shopping area of
smaller towns, or secondary
business district in a suburb
or a larger district.
• Occupancy costs are lower,
fewer people in the area,
fewer stores-low selection
• Fewer entertainment and
recreation options
Inner city
• High density urban area
consisting of apartment
buildings populated by
primarily lower income
consumers
• inner city customers desire
to buy merchandise from
nationally recognized
retailers in the
neighborhood where they
live
• Higher sales volume-higher
margins, resulting in higher
profits
 City or Town Locations

Big-box retailers like Target, Walmart, Home Depot, and Costco, which usually
locate in the suburbs, are now opening new outlets in cities, sometimes with
smaller stores and on multiple floors.
Shopping centers
⚫ A group of retail and other commercial establishments that is
planned, developed, owned and managed as a single property.
⚫ Usually developer and shopping center management carefully select a set of
retailers that are complementary to provide consumers with one stop shopping
experience with well balanced assortment of merchandise
⚫ SC mgt maintains the common facilities – parking, security, lighting,
outdoor signage for the centre, advt and special events to attract
consumers
⚫ Stores within the centre pay a negotiated annual fee based on size to cover
maintenance costs.
⚫ SC mgt may place restrictions on operating hours, signage and type
of merchandise stored
⚫ Every SC has one or two major retailers known as Anchors. Anchors are
wooed by the developer because they attract a significant no of consumers
and are appealing to consumers and other retailers.
⚫ Anchors get special deals in terms of rent
 Shopping centres
Neighborhood and community shopping
Power centres
Centres (also called simply strip
shopping centers )
• Attached row of stores managed as • Shopping centres that consist of
a unit, with onsite parking in front primarily of collections of big box retail
• Common areas – not enclosed- open stores such as discount, off price,
air centres category specialists
• Open air,include several other free
• common layout: linear, L
shaped, inverted U shaped. standing anchors and other specialties
• Smaller centres- neighbourhood
centres- anchored by supermarket/
drugstores
• Larger centres- community centres –
addl anchors- discount stores, off price
stores,category specialists.
• Adv: lower costs, customer convenience
• Disadv: limited trade area,lack
entertainment and recreation ,no
protection from weather
Neighborhood shopping centers are attached rows of non-enclosed
stores, with onsite parking usually located in front of the stores.
 Shopping centres

Shopping malls Lifestyle centres

• Enclosed ,climate controlled, lighted • Shopping centres with open air
shopping centres with retail stores on configuration of upscale specialty
one or both sides of enclosed stores, entertainment and
walkway. restaurants
• Adv: broad merchandise, large • Located near affluent neighbourhoods
customer traffic, large trade area, and cater to lifestyle of consumers in
entertainment option, hangout options their trade area
for teens. Weather protection, • Eg Palladium
maintenance taken care of.
• Disadv: high occupancy costs,
mall management issues, intense
competition within retailers.
• Challenges: window shopping,
time pressures- limited time for
shopping, mall losing appeal
 Shopping centres
Fashion/Speciality centres
• Composed of upscale apparel
shops,boutiques and gift shops carrying
fashion or unique merchandise of high
quality and price.
• Upscale dept stores, gourmet restaurants
,theatres can function as anchors.
• Elegant rich décor and high quality
landscaping.
• Found in high trade areas with high
income levels,in tourist areas,or in some
CBDs
• Trade areas and occupancy costs
are high.
• Eg Phipps Plaza- Atlanta – tiffany, Gucci
Max Mara etc
Outlet centres
• Shopping centers that contain mostly
mfg and retailers outlet stores including
off price stores
• Well designed buildings with
landscaping, gardens food courts.
entertainment .
• located at some distance away from
shopping centres so that mfg brands sold
at discount prices will not compete.
• Located in tourist areas.
• Eg 1.2 million sq foot Factory Outlet Mega
mall in Niagra falls – 15 million tourists
Other types
⚫ Theme/festival centres: unifying theme carried by the individual shops in
design and merchandise
⚫ Mixed use development : combine several uses in one complex incl
shopping centres, office towers, hotels,residential
complexes,convention and civic centres.
⚫ Airports:high pedestrian area, bookstore ,gift store, costs are higher,
workers inconvenienced, high wages.
⚫ Hospitals
⚫ Store within store
LOCATION AND RETAIL
STRATEGY
Location and Retail Strategy
⚫ Type of location must reinforce the retail strategy
⚫ Location type decision- consistent with size of target market, shopping
behavior, and retailers positioning in the target market.
Shopping behavior – target market
⚫ A critical factor- how consumers select a particular shopping location
depends upon the shopping situation
⚫ Convenience shopping
⚫ Comparison shopping
⚫ Specialty shopping
Convenience shopping
⚫ Concern – to minimize the effort required to get the product/service
they want
⚫ Indifferent towards: Retailer, brand and price
⚫ Eg:Coffee during work break
⚫ Don’t spend time in brand evaluation
⚫ Retailers – locate stores close to customers, offer easy parking,
access and location
⚫ Located in the neighborhood
Comparison shopping
⚫ Have a general idea about the product/service they want, but no strong
preference for a brand,retailer or a model.
⚫ Not brand/store loyal
⚫ Seek info, spend effort ,take time in making a purchase decision.
⚫ Competing shops present close to each other to increase
consumer traffic
⚫ Eg Furniture,appliances,apparel
Specialty shopping
⚫ Consumers know what they want and don’t accept a substitute
⚫ Brand, retailer loyal and pay a premium /spend extra effort
⚫ Eg designer perfumes, clothing.
⚫ will travel extra to obtain that item
⚫ thus location- not important for retailers selling unique merchandise
Density of target market
⚫ Good location- close to target market
⚫ For eg convenience store- close to target customers- living /working
⚫ Not applicable for a premium retailer
Uniqueness of retail offering
⚫ Unique differentiated offering .
⚫ Customers will travel wherever the store is located and the location -
destination
Legal considerations
⚫ Environmental issues: storage of hazardous material: Eg car garage –
disposal of used motor oil and battery fluid
⚫ Signs: restrictions on use of signs can also affect location.
⚫ Licensing requirements: for alcohol
Retail Site locations
Objectives
⚫ What factors do retailers consider when determining where to locate
their stores?
⚫ What is a trade area for a store, and how do retailers determine the trade
area?
⚫ What factors do retailers consider when deciding on a particular site?
⚫ How do retailers forecast sales for new store locations?
Factors which affect the demand for
region/trade area
⚫ Best locations- generate highest profit for a retailer
⚫ Factors which affect the long term profit generated by stores that should
be considered:
- Economic conditions
- Competition
- Strategic fit of the areas population with retailers target market
- Cost of operating stores
Economic conditions
⚫ Locations: involve commitment over a long term, imp to examine areas
level of growth and population and employment
⚫ The growth of population and employment
⚫ Fully employed population – high purchasing power and high level of
retail sales
⚫ How long the growth will continue, and how it will effect demand for
merchandise sold in stores
⚫ Which areas growing quickly and why
⚫ Example- Seattle and proximity to Microsoft
Competition
⚫ Competition in an area- affects demand for merchandise
⚫ Eg Walmart- early success: areas which were understored.
Strategic fit
⚫ Demographic, lifestyle profile, size and composition of households in an
area
⚫ Area needs to have consumers in the retailer’s target market
⚫ Mc Donald's – families with kids
Operating costs
⚫ Varies according to areas. Store rentals and advt costs can be lower in
certain areas
⚫ Store near to the distributor- cost of transportation is lower
⚫ Legal restrictions
Number of stores in an area- Retailers must consider the trade-offs between lower
operating costs and potential sales cannibalization from having multiple stores in an
area.
 Economies of Scale from Multiple Stores
⚫ Since retail chains plan to go into an area with a network of stores, they
attempt to achieve promotion and distribution economies of scale for all
the multiple locations.
⚫ Multiple stores in an area are needed to justify the cost of building a new
distribution center.

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 Cannibalization

⚫ While there are scale economies gained from opening multiple locations in an
area, there also are diminishing returns associated with locating too many
additional stores in an area due to cannibalization (one store taking sales away
from another).
⚫ Because a primary retailing objective is to maximize profits for the entire chain,
retailers should continue to open stores only as long as profits continue to
increase.
⚫ In this case, the retailer would continue to open stores as long as the marginal
revenues achieved by opening a new store are greater than the marginal costs.
⚫ For franchise operations, the objectives of the franchisor and the franchisee
differ, and thus, disputes can arise over the number of locations in an area.
⚫ The franchisor is interested in maximizing total store sales, while the franchisee
is interested in just the sales and profits from its store(s).
⚫ To reduce the level of conflict, most franchise agreements grant franchisees an
exclusive territory to protect them from another franchisee cannibalizing their
sales.
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Evaluating a site for locating a retail store
Three factors to consider
⚫ Characteristics of the site
⚫ Characteristics of the trading area for a store at the site
⚫ The estimated potential sales that can be generated by the store at
the site.
 Site Characteristics

Traffic flow and Location

Costs
accessibility characteristics
• vehicular traffic • parking spaces • Rental fee
• Ease of vehicular • access to store • common area
access entrance and exit maintenance costs
• access to • visibility of • local taxes
major store from • advt and promotion
highways street fees
• street congestion • access for deliveries • length of lease
• pedestrian traffic • size and shape
• availability of stores
of transport • condition of building
• adjacent retailers
Traffic flow and accessibility
⚫ High traffic- more customers likely to stop and shop
⚫ Traffic counts important for retailers offering merchandise bought on
impulse
⚫ Accessibility is important as traffic flow. Greater for sites located
near major highways, on uncongested highways and with traffic
lights and turns which enable to turn into the site
⚫ Natural barriers and artificial barriers also affect
⚫ pedestrian traffic, access by public transportation – imp min
countries where consumers don’t drive to shopping centers
Location characteristics
⚫ Parking: Amount of parking and quality determines location Less:
customers are discouraged, more: store may be perceived as unpopular
⚫ Std rule of thumb: 5.5:1000 (5.5 spaces per 1000 sq feet of retail store
space) for shopping centre
⚫ Need to consider the availability of employee parking, proportion of shoppers
using cars, parking by non shoppers, typical length of shopping trip.
⚫ Congestion: refers to amount of crowding by cars or people. Optimal level
essential. Too much: discourage sale, make shopping slow, irritate customers.
High level: generate excitement and stimulate sale
⚫ Visibility refers to customers' ability to see the store from the street. Good
visibility is less important for stores with a well-established and loyal customer
base
⚫ Locations with complementary, as well as competing, adjacent retailers have
the potential to build traffic. Complementary retailers target the same market
but with non-competing merchandise.
Location characteristics
⚫ Within a shopping centre: Affects both sales and occupancy costs
⚫ Stores which cater to impulse purchases- eg drug store/florist should be closer
to supermarket, whereas shoe repair store- farther away
⚫ Consumers- comparison shopping, -fashionable apparel, benefit from
located near departmental store anchor.
⚫ When consumers enter and leave- attracted to neighboring specialty retailers
⚫ Locate stores closeby – to attract similar target market- good assortment of
merchandise
⚫ Another consideration is to locate stores that appeal to similar target markets
close together. This is based on the principle of cumulative attraction which
states that a cluster of similar and complementary retailing activities will
generally have greater drawing power than isolated stores that engage in the
same retailing activities. This principle applies to both stores that sell
complementary merchandise and those that compete directly with one
another.
 Trade area
⚫characteristics
After site identification: have acceptable traffic flow, accessibility and
location characteristics, next step
⚫ Collect info about the trade area- used to forecast sales for a
store located at that site
⚫ Retailer needs to define trade area for the site, retailer
develops understanding of nature of consumers in the sites
trade area
Trade area
⚫ A contiguous geographic area that accounts for majority of store`s sale
and customers
⚫ Primary trading area: geographic area from which the shopping centre
or store site derives 50-70% of its customers
⚫ Secondary trading area: Geographic area of secondary importance
in terms of customer sales, generating 20-30% of the sites
customers
⚫ Tertiary trading area/fringe: includes the remaining customers who shop
at the site but come from widely dispersed areas
⚫ Trading areas of three zones may be defined on basis of driving time.
Primary: customers within five mins of driving site. Secondary: 15 min
drive, Tertiary: more than 15 mins from site
⚫ Also define by distance: 3,5,10 miles from site
The Segments of a Trading Area
Benefits of Trading Area Analysis
⚫ Discovery of consumer demographics and socioeconomic characteristics
⚫ Opportunity to determine focus of promotional activities
⚫ Opportunity to view media coverage patterns
⚫ Assessment of effects of trading area overlap
⚫ Ascertain whether chain’s competitors will open nearby
⚫ Discovery of ideal number of outlets, geographic weaknesses
⚫ Review of other issues, such as transportation
Factors affecting the size of trading area
⚫ Accessibility
⚫ Natural & Physical Barriers
⚫ Type of Shopping Area
⚫ Type of Store
⚫ The nature of merchandise, assortment, location of alternative sources
for the merchandise
⚫ Competition
⚫ Parasite Stores
1.Type of shopping area
⚫ Size of trading area is determined by the nature of merchandise sold, the
assortment offered, and location alternatives for the merchandise
⚫ Convenience store: for speed, category specialist for
comparison shopping. Eg Decathlon
 2. Type of store

Destination stores Parasite stores

• Merchandise, selection, • do not create their own traffic and

presentation pricing or other have no real trading area of their
unique features attract customers
own
to other stores regardless of other
neighboring stores • Trading area is determined by
• have a better assortment, better dominant retailer in the shopping
promotion, and/or better image area or retail area
• It generates a trading area much • offer
larger than that of its complementary
competitors products/services
• Anchor stores in shopping • These stores depend on people
malls such as dept stores who are drawn to area for other
• Eg Lifestyle, Marks and Spencers reasons
• Eg drycleaners
3.Measure the trade area for customer site
⚫ Can determine the existing trade area for their existing store by
Customer spotting
⚫ Is the process of locating residences of customers for a store on a
map and displaying their positions relative to the store location
⚫ Address for locating the customers residence : ask the
customers/internet/cheque info/customer loyalty programs
⚫ Data processing: manual or through GIS(Geographic Information
Systems)
⚫ For new store use the info from existing stores
Trading Areas and Store Type

Largest Department stores

Supermarkets
TRADING Apparel stores
AREAS
Gift stores

Convenience stores
Smallest
The Trading Area of a New
Store
Different tools must be used when an area must be evaluated in terms
of opportunities rather than current patronage and traffic patterns
⚫ Trend analysis
⚫ Consumer surveys
⚫ Computerized trading area analysis models
Sources of information about the Trade
area
⚫ Census data
⚫ GIS data
GIS-Geographic Information system
⚫ System of hardware and software used to store/retrieve/map/analyse
geographic data.
⚫ Identified with a coordinate(latitude/longitude)that
references a particular place
⚫ Firms offer GIS combine data with updated demographic census
data+ consumer spending pattern+lifestyle.
⚫ Data can be analysed easily and output are maps which enable to
visualize implications easily
⚫ EG : ESRI
Estimating a sales potential for a store site
⚫ Huffs Gravity model
⚫ Regression analysis
⚫ Index of Retail Saturation – Measure of Market Attractiveness
 Huffs gravity model
⚫ This model, following Newton’s law of gravity, is based on the premise
that the probability that a given customer will shop in a particular
store or shopping center becomes larger as the size of the store or
center grows and the distance or travel time from customers to the
store or center shrinks.
⚫ Force of attraction is based upon two factors: size of store (larger
stores have more pulling power) and time taken to travel to stores
(more time to travel has less pulling power)
⚫ the objective of Huff’s approach is to determine the probability that a
customer residing in a particular area will shop at a particular store or
shopping center.
⚫ To forecast sales, the location analyst multiplies the probability that the
customer will shop at a particular place by an estimate of the customer’s
expenses. Then, all the estimated expenditures in an area are
aggregated to estimate sales from the area

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 Huff’s Gravity Model (Continued)
⚫ Formula for predicting the probability of a customer going to a specific store location is
λ
P ij = 𝑆𝑗/𝑇𝑖𝑗
σ λ
𝑆𝑗/𝑇𝑖𝑗

Where P i j = probability that customer i shops at location j

𝑆𝑗 = size of store at location j
𝑇𝑖𝑗 = travel time for customer i to get to location j

Indicates that larger the size of the store (𝑆𝑗), greater is the probability to shop at the location.
Large size= more variety and more assortment
Travel time or distance (𝑇𝑖𝑗) has opposite effect on the probability. Greater the travel time or
distance from the consumer- lower the probability of shopping at that store

λ – relative effect of travel time vs store size. When λ=1 store size and travel time have an
equal but opposite effect on probability of consumer shopping
λ>1- travel time has a greater effect
λ< 1- store size has a greater effect
Value of λ is affected by the nature of the shopping trips consumers take when visiting a type of
store . For eg travel time /distance is more important for convenience goods than shopping goods
83
 ⚫ Probability of Rock creek residents shopping at a new location is

PRC = 10,000/5 2 =
0.889
10,000/52 + 5,000/52

⚫ Probability of Oak hammocks residents shopping at a new location is

POH = 10,000/152 0.182=
10,000/152 + 5,000/52

⚫ Expected sales (probability of patronage * market size) is

0.889 x $5 million + 0.182 x $3 million = $4,910,000

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Regression analysis
It is based on the assumption that factors affect the sales of existing
stores will have the same impact on a new store. Multiple regressions
are done to estimate a statistical model that predicts sales at existing
store locations.
 Regression Model
for Estimating Store Sales

⚫ Stores sales = 275 x number of households in trade

area (15 minute drive time)
⚫ + 1,800,000 x percent of household in trade
with children under 15
⚫ + 2,000,000 x % of households in trade area in
Tapestry segment “aspiring young ”
⚫ + 8 x shopping center square feet
⚫ + 250,000 if visible from street
⚫ + 300,000 if Wal-Mart in center
Application of Regression Model

Store Sales A = $7,635,000

= 275x11,000 + 1,800,000 x 0.7 + 2,000,000 x 0.6
+ 8 x 200,000 + 250,000 + 300,000

Store Sales B = $6,685,000

= 275x15,000 + 1,800,000 x 0.2 + 2,000,000 x 0.1
+ 8 x 250,000
Index of Retail Saturation – Measure of Market
Attractiveness

This index is based on the assumption that if a market has low level of retail
saturation, then the likelihood of success is higher
IRS = H x RE/ RF
Where,
IRS = Index of Retail Saturation
H = Number of Households
RE = Annual Retail Expenditure for a particular line of trade per household
RF = Total square footage of Retail space
The higher the IRS value the higher the possibility of success
Information systems & Supply Chain
Management
Objectives
⚫ Flow of merchandise and information from vendor to retailer to
consumers
⚫ IT developments facilitating vendor-retailer communications
⚫ How do retailers and vendors collaborate to make sure that
right merchandise is available when customers are ready to buy
it
⚫ Benefits to vendors and retailers of collaborating on SCM
⚫ RFID and its effect on retailing
Creating strategic advantage through SCM
and IS
⚫ Retailers connect customers with vendors who want to provide
merchandise
⚫ It is retailers responsibility to gauge customer needs and wants and
work with other members of the supply chain- distributors, vendors and
transportation companies
⚫ This is to make sure that merchandise is available to customers when
they want it
⚫ SCM is a set of business activities that manages the movement of
products to retail distribution centres and stores and the exchange of
information between retailers and vendors
⚫ Retailers- increasingly assuming leadership role
⚫ Small retailers- large mfgs and vendors determined how when, and
where the merchandise is to be delivered
⚫ With consolidation and emergence of larger national retail
chains- retailers taking active interest in SCM
⚫ Size of retailers – give them more power over vendors and thus able to
control their SCs
⚫ Addly, retailers are more knowledgeable about their customers
⚫ This info is being shared with suppliers to plan
production, promotions,deliveries,assortment and
inventory level
Supply chain
Three benefits of Supply chain
⚫ Improved product availability
⚫ Higher ROI
⚫ Strategic advantage
 Improved product
availability
• Stockout occurs when an SKU a customer

Reduced wants is unavailable

• Will help in customer retention
Efficient SCM
leads to the
Stock outs following:
-Greater sales
- Lower costs
• To make sure that right merchandise is available at -- Higher
Tailored •
the right store
Stores adjust according to merchandise on
inventory
basis of season turnover
assortments • Retailers use statistical methods- to analyse
customer data and adjust assortments
- Lower
markdown
for retailers
Higher ROI
⚫ An efficient SCM and IS can improve ROI because it increases :
- Sales: customers are offered more attractive assortments that are in
stock
- Net profit: Increase gross margin and lower expenses: special buying
opportunities- products bought at low cost,-improving GM
- Margins : lower operating expenses by coordination and reducing TC
- Assets (Inventory turnover) : Efficient SC- leads to lower inventory levels-
lower investment- total assets are lower-so assets and inventory turnover
is also higher
 Strategic
⚫advantage
Is difficult to develop, once developed it is sustainable enough to give
competitive advantage
⚫ Eg Walmart: high investment in SCM and also has large economies
of scale
⚫ Efficient coordination within all areas of company
⚫ Opportunity to increase sales by making sure the right merchandise is in
the right place at the right time
⚫ Fewer stock-outs
⚫ Greater assortment with less inventory
⚫ Opportunity to reduce costs
⚫ Transportation costs
⚫ Inventory holding costs
⚫ Improved ROA
 Strategic Advantage: ZARA
⚫ Timely information from store
mangers with handheld
devices to the corporate office
⚫ Shorter cycle time from design
to production to delivery to
stores
⚫ Shorter lead time – own
production, small quantity
production in close proximity,
efficient logistics, premium
transportation, frequent
delivery
⚫ No discounts necessary
 Strategic Advantage:
Wal-Mart
⚫ Wal-Mart’s success is from its information and supply chain management
systems
⚫ Why are competitor’s lagging behind?
⚫ Made a substantial investment in developing its systems and has the scale
economies
⚫ Through experience and learning, changes are always made to improve the
system
⚫ Coordinated effort of employees and functional areas throughout the
company
Information and Merchandise Flows
10
 ⚫ The flow of information is complex in a retail environment.
⚫ As the transaction takes place, the merchandise Universal Product Code
(UPC) is scanned and a sales receipt is generated for the customer.
Purchase information is recorded in the POS terminal and sent to the
buyer/planner. The planner uses this information to plan additional
purchases and make markdown decisions.
⚫ The sales transaction data are also sent to the distribution center. When
the store inventory drops to a specified level, more merchandise is
shipped to the store and the shipment information is sent to the
retailer’s computer system so the planner knows the inventory level left
in the distribution center.

102
 ⚫ When the inventory drops to a specified level, the planner communicates
with the vendor regarding the purchase order for the merchandise. At
this point they often negotiate shipping dates and terms of purchase.
⚫ The planner communicates with the distribution center to coordinate
deliveries from the vendor and to the stores, check inventory status, and
so on.
⚫ When the manufacturer ships the product to the distribution center, it
sends an advanced shipping notice (ASN) to the distribution center. An
ASN is a document that tells the distribution center what specifically is
being shipped and when it will be delivered.
⚫ When the shipment is received at the distribution center, the planner is
notified and then authorizes payment to the vendor.

103
Data warehouse
⚫ Purchase data collected at the point of sale collected in a huge database
known as data warehouse
⚫ Information can be accessed at various levels: SKU, vendor,
category, department, merchandise,store division,company
⚫ Used to collect info about customers so as to modify promotions and
products
⚫ Data warehousing is the coordinated and periodic copying of data from
various sources, both inside and outside the enterprise, into an
environment ready for analytical and informational processing
⚫ Wal-Mart makes good use of its data warehouse. Experts estimate that
it is second in size only to that of the U.S. government
105
Electronic data interchange (EDI)
⚫ Communications between vendors and retailers occur via EDI.
⚫ EDI is the computer-to-computer exchange of business documents between
retailers and vendors
Merchandise sales, inventory on hand, orders
Advanced shipping notices,
Receipt of merchandise, invoices for payment
⚫ Use both intranet and extranet
⚫ Specific symbols used
⚫ Benefits:
- Reduces cycle time- or time to place order and receipt
- Improves overall quality with better record keeping and less errors
- data available in an easy to read format
- Merchandise sales, Inventory On Hand, Orders
- Advanced shipping notices,
- Receipt of merchandise, Invoices for payment
 ⚫ There are implications of security failures (loss of data, loss of public
confidence), but retailers have security policy objectives:
⚫ Authentication – system assures person on other end of session is who it
claims to be
⚫ Authorization - that person has permission to carry out request
⚫ Integrity – info arriving is the same that was sent

107
 Push and Pull supply chains
Pull SC Push SC

• a SC where in orders for merchandise are • Here merchandise is allocated through the
generated at store level on basis of sales data store on basis of forecasted demand
captured by POS terminal • Forecast developed, inventory
• Demand for an item pulls it through the SC shipped at regular intervals
• Less chances of stock out: since • Used for predictable demand
inventory is based on consumer demand • Thus retailers use a combination
• Increases inventory turnover • Less costly than a pull supply chain
• Becomes useful when demand is erratic • Less sophisticated information system needed to
• requires sophisticated costly IT system support it
• for some fashion merchandise, retailers
cannot adjust inventory according to demand
• Less likely to be overstocked or out of sock
• Increases inventory turnover
• Responsive to changes in customer demand
• Efficient when demand is uncertain, and hard to
forecast
The Physical
Flow of Merchandise - Logistics
⚫ Logistics:
⚫ The aspect of supply chain that refers to the planning, implementation, and
control of the efficient flow and storage of goods, services, and related
information from the point of origin to the point of consumption to meet
customers’ requirements.
Merchandise Flow
Retailers can have
merchandise shipped directly
to their stores (path 3) or to
their distribution centers
(paths 1 and 2)
Activities Performed by Distribution Centers
⚫ Managing inbound transportation
⚫ Dispatcher
⚫ Receiving and checking merchandise
⚫ Storing or cross docking
merchandise
⚫ Getting merchandise floor ready
⚫ Ticketing and marking
⚫ Putting on hangers
⚫ Preparing to ship merchandise to a
store
⚫ Managing outbound transportation
Advantages of Using a Distribution Center
⚫ More accurate sales forecasts are
possible when retailers combine
forecasts for many stores serviced
by one distributor
⚫ Enables retailers to carry less
merchandise in the store
⚫ Easier to avoid running out of
stock
⚫ Retail store space is more
expensive than space at the
distribution center
Outsourcing Logistics
⚫ Retailers consider outsourcing logistical functions if those functions can be
performed better or less expensively by third-party logistics companies.

⚫ Transportation
⚫ Warehousing
⚫ Freight Forwarders
⚫ Integrated Third-Party Logistics Services
 Advantages of Direct Store
⚫Delivery
Gets merchandise faster, and is thus
used for perishable goods (meat and
produce)

⚫ Helps the retailer’s image of being

the first to sell the latest product
(video games) or fads

⚫ Some vendors provide direct store

delivery for retailers to ensure that
their products are on the store’s
shelves, properly displayed, and fresh
Reverse Logistics
⚫ The process of moving returned goods from their customer destination for the
purpose of capturing value or proper disposal.

⚫ Retailers recover loss through on-line auctions

⚫ Reverse-logistics systems are challenging

⚫ Items may be damaged or require special handling
⚫ Transportation costs are high
Supply Chain for
Fulfilling Catalog and Internet orders

⚫ When fulfilling orders from individual

consumers, retailers ship small
packages with one or two items to a
large number of different places
⚫ Distribution centers for picking and
packing orders for consumers
Drop Shipping
⚫ Drop-shipping, or consumer direct fulfillment, is a system in which
retailers receive orders from customers and relay these orders to vendors
and then the vendors ship the merchandise ordered directly to the
customer.

⚫ Drop-shipping has been used for years by companies that sell bulky
products such as lumber, iron, and petroleum, as well as catalog and
mail-order companies.
Collaboration between vendors and
retailers in SCM
⚫ Main objective for retailers and vendors is to make stock available in
stores when customers want it and to achieve this task with minimum
cost and investment
⚫ SC efficiency dramatically improves when vendors and retailers
share information and work together
⚫ Vendors can make sure that inventory is available JIT when the retailer
needs it without having excess inventory
⚫ When retailers and vendors do not coordinate their SCM activities,
excess inventory builds up in the system even if the retail sales for that
product is constant. This effect is called as “Bullwhip” effect
⚫ Occurs due to delay in transmitting orders and receiving
merchandise, overreacting to shortages, and ordering in batches
 Bull whip effect

⚫ Bullwhip Effect - The built up inventory in an

uncoordinated channel where retailers and vendors
do not coordinate their supply chain activities
 What Causes a Bullwhip Effect?

⚫ Delays in transmitting orders and receiving merchandise

⚫ Over-reacting to shortages

⚫ Ordering in batches rather than generating number small

Collaboration between Retailers and
Vendors in Supply Chain Management
⚫ Four approaches for coordinating SC activities are:
1. Using EDI
2. Sharing information
3. using vendor managed inventory (VMI)
4. employing collaborative planning, forecasting, and
replenishment (CPFR)
Using EDI
⚫ used to transmit the purchase order info reduces the time taken for
retailers to place orders and for vendors to acknowledge the receipt and
communicate delivery info
Sharing Information
⚫ Excess inventory caused due to – inability of vendors to know
what actual level of store retail sales are.
⚫ If they know they are increasing, production schedule can be
planned accordingly
⚫ Eg FMCG vendor offered discounts on order basis to retailers- hoping
to pass on price reduction to consumers ,but retailers ordered extra
inventory and kept discounts to increase margins.
⚫ Observing the orders-vendors could increase production on observed
demand-increased inventory. Thus best way- discounts on sales data than
inventory.
⚫ Walmart Retail Link : data warehouse and decision support system
that provides vendors with two years sales history and inventory levels
for products across 5000 stores
⚫ With sharing, thus vendors can improve their sales forecast,
production efficiency, and reduce excess inventory
Vendor Managed Inventory (VMI)
⚫ VMI is an approach for improving supply chain efficiency in which the
vendor is responsible for maintaining the retailers inventory level at each
of these stores
⚫ Vendor determines a reorder point – a level of inventory at which
more stock is reqd. The retailer shares data with vendor through the
EDI.
⚫ When the inventory drops to the order point the vendor generates the
order (reverse purchase order) and delivers the merchandise
⚫ Used sometimes on consignment basis
⚫ Usually applied at the retailers DC
⚫ But difficult for the retailer to know the other actions of vendor:
SP schemes for competitors brands
⚫ Eg TAL and JC Penney, frito Lay
CPFR
⚫ collaborative planning, forecasting, and replenishment (CPFR) is the
sharing of forecast and related business information and
collaborative planning between retailers and vendors to improve SC
efficiency and product replenishment
⚫ retailers share sales and inventory data when using VMI
approach, whereas vendor is responsible for managing inventory
⚫ CPFR is an advanced form of retailer –vendor collaboration that
involves sharing of proprietary info such as business strategies,
promotion plans, new product development etc
⚫ Eg Walmart-Procter and Gamble
CPFR (Collaborative Planning,
Forecasting, and Replenishment)
⚫ Common goals
⚫ A single demand forecast developed collaboratively
⚫ Collaborative promotional planning & execution
⚫ A single, shared data source
⚫ Improved inventory management across Supply Chain
⚫ Optimized replenishment strategies with joint ownership
⚫ Process simplicity creates optimal framework for success
RFID
⚫ Radio Frequency Data Identification- RFID
⚫ It is a technology that allows an object or person to be identified at a
distance using radio waves.
⚫ These devices or tags are inserted into ocean going containers, on
shipping cartons, behind merchandise labels. They transmit data about
the object in which they are embedded.
⚫ Is more superior than a bar code – with ability to store more data and
upload data on the device
⚫ Eg it can keep a track of where the item is in SC,where it is stored in
a distribution centre
⚫ Data can be obtained even in harsh environments
RFID
⚫ Enables real time tracking of the product from mfg to check out in
the store
⚫ Eliminates the manual point and read operations needed to get
data from UPC
⚫ Thus it can significantly decrease warehouse, distribution,
inventory costs, increase margins and provide better in stock
conditions

⚫ Not all retail tags are RFID-based

⚫ Not all electronic tags on retail goods are RFID/EPC tags. --e radio
frequency (RF) security tags.
⚫ RF security tags do not have a unique identification number, and do
not store data or allow linkages to other databases.
⚫ These use radio signals to send a code to the store’s security system, and
trigger an alarm when a product leaves the premises without the tag
having been deactivated.
Benefits of RFID
⚫ Reduces warehouse and distribution labor costs: reduces manual
tracking and labor intensive sensors for point and read approach
⚫ Reduces point of sale labor costs: reduces costs for checking shelf
inventory. Increases the use of self scan and reduces the incidence of
employee fraud
⚫ Inventory savings: Reduces errors
⚫ Reduces theft
⚫ Reduced out of stock condition
⚫ Thus it helps to streamline SC
⚫ High costs of purchase, processing and implementation
⚫ Eg Pantaloons
 Decathlon and RFID
⚫ goal was to improve customer satisfaction by ensuring items were on store
shelves when customers wanted to buy them. That meant increasing inventory
visibility of a wide range of merchandise. Decathlon sells roughly 35,000
different items—apparel, equipment and accessories for 65 sports
⚫ In 2013, Decathlon began a global rollout of an RFID solution to track
goods throughout its supply chain—from factories to warehouses to stores.
⚫ Today, RFID is improving efficiencies in all Decathlon facilities—1,030 stores and
43 warehouses. The company has tagged 1.4 billion items—90 percent of its
products are tagged at the point of manufacture
⚫ The RFID solution has increased product availability on store shelves,
which, has had a direct impact on the customer experience and sales.
⚫ Decathlon saw an 11 percent increase in sales from July 2014 to July 2015,
and the company attributes part of that growth to the RFID deployment.
⚫ Decathlon also says the RFID solution has helped the company meet its
other goals: improved efficiencies and a decline in product shrinkage.

130
 EmbiWay, a fixed UHF RFID tunnel reader deployed on conveyor belts
at suppliers' factories, monitors boxes as they are shipped out to Decathlon warehouses.

131
Customer Relationship management
Overview
⚫ CRM is a business philosophy and a set of strategies, programs, and
systems that focuses on identifying, and building loyalty with a
retailers most valued customers
⚫ Retailers can use CRM programs for increasing profitability by
building relationships with their better customers
⚫ Goal- develop a base of loyal customers who patronize the retailer
frequently
Overview
⚫ From using mass advertising retailers are shifting their focus to
provide more value for their customers by using targeted products and
services to increase the “share of wallet”(% age of customers
purchases made from the retailer) from thee customers
⚫ This perspective is supported by research that it costs 3-6 times more
to sell products to new customers than to existing customers
Customer loyalty- objective of CRM
⚫ It is having the customers to make repeat visits to the retailer and
being satisfied with their experiences
⚫ Customer loyalty to a retailer means that customers are committed to
purchasing merchandise and services from the retailer and will resist the
activities of competitors attempting to attract their patronage
⚫ They have a bond with the retailer which goes beyond positive
feelings for the retailer
⚫ Have an emotional connect
⚫ Their reasons for loyalty go beyond the normal retail attributes

⚫ Emotional attachment to retailer

Personal attention
Memorable positive experiences
Brand building communications programs
 Can Offering Price Discounts
Achieve Customer Loyalty?

⚫ No!
⚫ Retail strategies like these can be copied by competitors

⚫ These strategies encourage customers to be always looking

for the best deal rather than developing a relationship with
a retailer
Overview of the CRM process

Collecting customer
data Learning

Implementing CRM Analyzing customer

programs data and identifying
target customers

Action Developing CRM

programs
Step 1: Collecting Customer data- constructing
a customer database

Customer • Shd contain transactions, customer contacts, customer preferences

descriptive information

database • Response to marketing activities

Identifying • Customer identification is difficult

• Ask customers for identifying information, offer frequent purchase

information cards, connect internet purchase data with stores

• Consumers are concerned about retailers violating their

Privacy privacy when they collect information: depends upon control over
personal info and knowledge about collection and personal
information
& CRM • place cookies which identify the info the next time consumer
visits the website
Collecting Customer Data: Customer Database
• Transactions – a complete history of purchases
• Purchase date, price paid, SKUs bought, whether or not the purchase was stimulated
by a promotion

• Customer contacts by retailer (touch points)

• Visits to web site, inquires to call center, direct mail sent to customer

• Customer preferences

• Descriptive information about customers

• Demographic and psychographic data

• Customer’s responses to marketing activities

Collecting Customer Data:
Identifying Information
Approaches that store-based retailers use:
• Asking for identifying information
• Telephone number, name and address

• Offering frequent shopper cards

• Loyalty programs that identify and provide rewards to customers who patronize a
retailer
• Private label credit card (that has the store’s name on it)

• Connecting Internet purchasing data with the stores

• Use Biometrics
• Measuring human characteristics such as a person’s hand geometry, fingerprints, iris,
or voice.

• Place RFID chips on merchandise

Privacy Concerns
⚫ Control over Collection:
⚫ Do customers know what information is being collected?
⚫ Do customers feel they can decide upon the amount and
type of information collected by retailers?
⚫ Control over Use:
⚫ Do customers know how the information will be used by the
retailer?
⚫ Will the retailer share the information with third parties?

Steve Cole/Getty Images

Protecting Customer
⚫ Privacy by design
Privacy
⚫ Shift responsibility for privacy from
consumers to retailers.
⚫ Simplified consumer choice
⚫ Allow customers to track their
online activities.
⚫ Greater transparency
⚫ Improve customer understanding

Stockbyte/Punchstock Images
Customer’s Decision to Offer Information
Frequent shopper programs- loyalty
programs
⚫ Are programs which identify and provide rewards to customers who
patronize the retailer
⚫ When customer enroll for such programs they provide detailed info
about themselves and their household- issued a card with an identifying
number
⚫ Customers are offered an incentive to use the card when they make
purchases from the retailer
⚫ offer 2 benefits- provide demographic and other info when they sign
up and are motivated to identify themselves at each transaction.
Motivated by the rewards offered at each visits and amount purchased
at each visit
Frequent shopper programs- loyalty
programs
⚫ Drawbacks: customer might forget to bring it or decide not to show it-
use of phone no
⚫ Use of ILC- interactive loyalty cards- optical scanner- use of kiosks
⚫ Fingerprint scans
Step 2: Analyzing data and identifying target
customers
⚫ The next step- to analyze the customer database and convert the
data into information that will help retailers develop programs for
building customer loyalty
⚫ Data mining – used to identify the patterns of data.
⚫ Market basket analysis: specific type of data analysis that focuses on
the composition of the basket, bundle of products purchased by a
household during a single shopping occasion. Eg Tissues near cold
medicines
Identifying Best Customers
⚫ Estimating Lifetime Value (LTV)
⚫ The expected contribution from the customer
to the retailer’s profits over his or her entire
relationship with the retailer

⚫ Use past behaviors to forecast future

purchases, the gross margin from these
purchases, and the costs associated with
serving the customers

⚫ Classifying Customers by recency,

frequency, and monetary value of
purchases (RFM Analysis)
(c) Brand X Pictures/PunchStock
Identifying market segments
⚫ Identifying segments- group of customers who have similar
needs, purchase similar merchandise and respond in a similar
manner to marketing activities
⚫ Identifying best customers: retailers can develop a score or a number
indicating how valuable customers are to the firm. This score can be used
to target the customers
Market Basket Analysis
Data analysis focusing upon the
composition of the customer’s market
basket – what items are bought during
a single shopping occasion?

Uses:
⚫ Adjacencies for displaying merchandise
⚫ Joint promotions
⚫ Bananas in the cereal aisle as well as in the
produce section
⚫ Beer with baby diapers
⚫ Tissues with cold medicine
Burke/Triolo Productions/Getty Images
 Life time Value
⚫(LTV)
A measure to score each customer is called lifetime customer value.
LTV is the expected contribution from the customer to the retailers
profits over his or her entire relationship with the retailer.
⚫ To estimate LTV retailers use past behavior, gross margins, costs of
service. Eg a customer who buys apparel only when it is on sale will
have low LTV than a customer who typically pays the full price and buys
the same amount
⚫ Customer pyramid: most customers differ in their LTV. Follow the
80-20 rule, 80% of sales come from 20% of customers
 The Customer Pyramid

Most profitable Platinum

Gold

Iron

Lead
Least profitable
 The Customer Pyramid

• top 25% of LTVs

Platinum • Not concerned about price but place more value
on customer service

• The next 25% after platinum segment

Gold • More price sensitive, buy significant amount from
retailer, not as loyal as platinum, may buy from
competitors

• Modest LTV- Iron – not much deserved attention by the

Iron & Lead •

retailer
Lead: Cost company money, often demand attention,
but don’t buy much
RFM Analysis
⚫ An RFM (Recency, Frequency ,Monetary) analysis is often used by
catalog retailers and direct marketers is a scheme for segmenting
customers according to how recently they have made a purchase, how
frequently they make a purchase, and how much they have bought
⚫ Use this type of analysis to determine which customer group should
be sent catalogs. From each RFM group they will determine the % age of
customers in each group who made a purchase from the last catalog sent
to them
⚫ Customers who have made a small infrequent purchases – first
time customers
⚫ Objective of such CRM program is to convert them into early repeat
customers and eventually into high value customers
⚫ CRM programs directed towards high RFM value- look for
maintaining loyalty, increase retention and increase the share of
wallet
RFM Analysis
Used by catalog retailers and direct marketers
Recency: how recently customers have made a purchase
Frequency: how frequently they make purchases
Monetary: how much they have bought
RFM Target Strategies
Developing CRM Programs

Retaining Best
Customers

Converting Good
Customers into
Best Customers
Getting Rid of
Unprofitable
Customers
Step 3: Developing CRM programs
⚫ After segmentation – next step is to develop programs for
different
customer segments
⚫ Programs retailers use for
- Retaining the best customers
- Converting good customers into high LTV customers
- Getting rid of unprofitable customers
Customer retention
⚫ To retain the best customers retailers use the foll programs
- Frequent shopper programs
- Special customer services
- Personalization
- Community
 Frequent shopper
⚫programs
Used to build a customer database by identifying customers by
their transactions and encourage repeat purchases and customer
loyalty
⚫ Retailers provide incentives to encourage customers to enroll and use the card
⚫ Incentives- in form of discounts on purchases or points on every rupee spent
⚫ Nature of rewards can be
- tiered: according to volume of purchase to motivate the customers to increase
the level of purchases
- offer choices: other than points for all customers who don’t value the same
rewards. Eg Tesco- offers discounts on entertainment, vacations etc
- Link frequent shopper programs to charitable causes
1.
- Disadvantages:
2.
3. Expensive
4.
Difficult to make corrections in program system
Not clear if such programs increase customer spend
Difficult to gain competitive advantage as it can be easily replicated by
competitors
⚫ Special customer services : provide high quality customer service to
build and maintain loyalty
Personalization
⚫ Different customers in each segment will require different strategies
⚫ Availability of various data analysis tools, retailers offer unique benefits
and different target messages to individual customers
⚫ 1 to 1 retailing: developing retail programs for small groups
or individuals. Usually practiced by local retailers.
⚫ Internet allows personalization Eg Amazon
⚫ Rewards and benefits are based on information obtained by the retailers
⚫ Positive feedback cycle for CRM program : Increasing repeat
purchases- increases data- personalized benefits- increases purchases
Community
⚫ To develop a sense of community amongst customers
⚫ Internet allows opportunity for customers to exchange information using
bulletin boards
⚫ Eg sporting goods retailer posts info on local sporting website
Converting good customers into best
customers
⚫ Increase the sales made to customers is referred to as customer
alchemy- converting iron and lead to platinum customers
⚫ Alchemy involves offering and selling more products and services
to existing customers and increasing the share of wallet
⚫ Use database analysis for cross selling and add on selling
⚫ Add on selling: Oprah Winfrey – books movies
Dealing with unprofitable customers
⚫ At bottom tier – customers have negative LTV
⚫ Retailers lose money when they make sale to them
⚫ Catalog retailers- customers buy 2-4 items and keep only one of them
⚫ Cost of processing is more than profit
⚫ Charge customers for services they are abusing
⚫ need to develop a lower cost approach
Step 4: Implementing CRM programs
⚫ Needs appointing a CRM manager
⚫ Computer and technology for data analysis
⚫ Close coordination by different functions
Human Resource Management
Introduction
⚫ Achieve financial objectives by effectively managing 5 critical assets:-
locations, inventory, stores,employees and customers
⚫ HRM – critical role in retailing because employees play an imp
role: buying and display of goods and providing service to
customers
Introduction
⚫ Issues involving an organization structure
⚫ General approaches used for motivating and coordinating employee
activities
⚫ Management practices for building an effective committed
workforce and reducing turnover
Competitive Advantage through HRM
⚫ Labor costs account for significant % age of retailers total expenses
⚫ Effective employee management- cost advantage
⚫ Most customer experience is determined by activities of employees
who select and display merchandise, provide information and
assistance, and stock display and shelves
⚫ Thus employees can play a major role in differentiating its retail offering
from that of the customers
⚫ These advantages are difficult to replicate
Objectives of Human Resource Management
⚫ Short Term
⚫ Increasing Employee Productivity
⚫ Productivity = Sales/ Number of Employees

⚫ Long-Term
⚫ Employee attitude 🡺 customer satisfaction and loyalty 🡺 long-
term performance
⚫ Increasing Employee Satisfaction 🡺 Reducing Turnover
⚫ Employee turnover
= # of employees leaving their job during the year
# of positions
HRM Performance Measures
⚫ Employee Engagement:
⚫ an emotional commitment by an
employee to the organization and its
goals.

⚫ Engaged employees care about their

work and their company.
Human Resource Management
Challenges in Retailing
Work Environment Employees
• Open Long Hours • Unskilled
• Peak Sales Periods • Part-Time
• Emphasis on Cost Control • Diverse Backgrounds

High
Turnover
 Downward Performance Spiral
Financial
Performance
Problems
- Low profits
- High costs

Employee response Retailers Response

-Decreased motivation and -Layoffs
effort - Freeze on hiring and promotion
- Poor customer service - Reduced training
- Lower job satisfaction - Salary freeze
- Greater turnover - More part timers and
outsourcing
Special HR conditions facing retailers
⚫ Need to use part time employees
⚫ Emphasis on expense control
⚫ Changing demographics of the work force
 Part time
⚫employees
Employee needs vary depending on the time of day, day of week, time of
year, and promotion schedule
⚫ To minimize costs, retailers should complement their full-time employees
with part-time workers
⚫ needed because most retailers are open long hours and weekends to
cater to family shoppers and working people
⚫ Peak sales often occur during lunch time, at night and during sales
⚫ these employees are difficult to manage since they are less
committed and more likely to quit
⚫ Work in shifts
⚫ Part-time employees are less expensive than comparable full-time
employees
Expense control
⚫ Retailers often operate on thin margins and must control expenses
⚫ Low skill workers- pay cautiously
⚫ Often hire people with little/no experience
⚫ Results in high turnover, absenteeism and poor performance
⚫ These employees who are in direct contact with customers- lack
of experience and motivation is troublesome
⚫ Also these are the ones who are most visible- poor appearance,
manners affect sales and customer loyalty
Employee demographics
⚫ Utilizing Diverse Employee Groups
⚫ Increased efforts to recruit, train, manage, and retain mature,
minority,
and handicapped workers
⚫ Different approaches need to be used to manage younger and older
employees
⚫ HR policies will differ from country to country
Designing the org structure for a retail firm
⚫ The organization structure identifies the activities to be performed by
specific employees and determines the line of authority and responsibility in
the firm
⚫ Org structure should match with the retail strategy, mission and vision of
the firm
⚫ Employees within the hierarchy need to have clear understanding of
where the responsibility and authority lie within the structure
⚫ Need to have appropriate reporting structures
⚫ Type of work perfomed- generalists and specialists
⚫ To develop organisation structure one needs to determine the various
tasks involved
⚫ Various tasks are
- Strategic management
- Merchandise management
- Store management
- Administrative management
 Tasks performed by a typical retail firm
Strategic mgt Merchandise mgt Store mgt Administrative Mgt

• Developing the • Buy merchandise • Recruit, hire,train • Promote the firm,

retail strategy • Control store personnel merchandise and
merchandise services
• Tgt mkt • Plan work
inventory
identification schedules • Manage HR
• Price merchandise
• Determine the • Maintain store • Distribute
retail format facilities merchandise
• Design org • Locate and display • Establish financial
structure merchandise control
• Location selection • Sell merchandise
• Repairs and
alteration
• Customer
complaints
• Physical inventory
taking
• Other services
Organization of a single store retailer
⚫ single owner/manager of entire store
⚫ As it grows- owner hires employees
⚫ Coordination and control of employees in small store
⚫ Limited no of employees- limited specialization
⚫ Each employee has to perform wide range of activities
⚫ As sales increase then more specialization
Org structure for a small retailer
Organization of a National Chain store
⚫ More complex because managers must supervise units that are
geographically distant to one another
⚫ Traditionally retail stores were family owned and managed. Positions
designed to accommodate family members
⚫ Mazur plan: functional org plan
⚫ org structure has to be divided amongst the foll 4 functions
- Control: Accounting,credit,control
- Publicity: Advt,sales promotions, PR etc
- Operations: actual store operations eg customer relations,receiving goods etc
- Merchandising
- SCM
- HRM
- Logistics
Diff stores use diff structures Eg Dept stores- functional org structure
Centralized or decentralized
184
 President

General
Manager

Asst Mgr Asst Mgr

Controller IMC Mgr Merchandisi Operations

ng Mgr Mgr

Expense PR Website Workroom

Control

Merchndise Advt & Pricing Vendor

control Display relations

Credit Customer Divisional Personnel

service manager

Records Research Buyers Maintenanc

director e

Sales
manager
Retail organization design issues
2 imp issues
⚫ The degree to which decision making is centralized or
decentralized- arises due to whether decisions concerning activities
such as merchandise mgt, IS,HRM should be made at
regional/corporate level
⚫ Approaches used to coordinate merchandise and store
management- because retailers divide merchandise and store
management activities into diff organizations within the firm
⚫ Thus they need to develop ways to coordinate these activities
 Centralization vs Decentralization
Centralization
• Authority for decision making
is delegated to corporate
managers than geographically
dispersed managers
• Reduced costs- OH costs-
fewer mgrs-reqd
• Coordinated buying- lower prices
from suppliers
• Can recruit skilled expert people
• Increased efficiency
• no local mkt adaptation
Decentralization
• When authority for decisions is
assigned to lower levels of org
• More people are required-
more costs
• Reduce costs (overhead falls with
fewer managers)
• Coordinated buying achieve lower
prices from suppliers
• Opportunity to have the best people
make decisions for the entire
corporation
• Increases efficiency
 Coordinating merchandise and store
management
Small Retailers National retailers

• Difficulty in • Organize buying

coordinating their and selling
stores buying and selling functions into
activities separate divsions
• Owners-buyers buy their • But buyers- difficult
own merchandise and ask to understand
sales to sell it consumer needs
• Owners are close
contact with customers-
they know their needs
and wants
MOTIVATING RETAIL EMPLOYEES
 Winning the Employee Talent
⚫War
Retailers are engaged in a “war” with
their competitors for talent – for
effective employees and managers –
who can effectively deal with the
incased complexities of retail jobs
⚫ (the use of new technologies,
increased profit & loss
responsibilities, increased global
competition, a diverse
workforce).

⚫ Develop programs to attract, develop,

motivate, and keep talent
Attracting Talent: Employment Marketing
⚫ Employment marketing (branding)
⚫ Marketing programs that attract “best and
brightest” potential employees
⚫ Starbucks – “Love What You Do”
⚫ Southwest – “Free to Actually Enjoy What
You Are Doing”
 Developing Talent: Selection and
⚫Training
Selective Hiring:
⚫ Recruit “the right people”
⚫ Simply seeking the best and the brightest may not always be the most effective
approach
⚫ Training:
⚫ Increasing investments in management training programs and developing leaders
⚫ Increasing attention to college graduates
- Generation Y
Motivating Talent: Aligning Goals
⚫ Policies and Supervision
⚫ Indicate what employees should do
⚫ Behavior enforced by managers
⚫ Incentives
⚫ Commission, Bonus, Stock Options
⚫ Organization Culture
⚫ The set of values, traditions, and customs of a firm th at guides employee behavior
⚫ Behavior enforced by social pressure
MOTIVATION
⚫ Critical tasks of HRM is to motivate employees to work towards
achieving employee goals and implementing its strategy
⚫ Difficult because employee goals differ from that of firm
⚫ Retailers use three methods to motivate their employee activities
- Written policies and supervision
- incentives
- Organization culture
Policies and Supervision
⚫ most fundamental method of coordination
- To prepare written policies that indicate what employees should do
- Have supervisors enforce these policies
- Written policies – actions consistent with retailers strategy
- Strict reliance- reduce employee motivation because employees
have little opportunity to use their initiative to improve performance in
areas of responsibility
- Also leads to red tape in the organization
Incentives
⚫ Uses incentives to encourage them to perform activities consistent with
retailers objectives
⚫ For eg: buyers will be motivated to focus on the firms profits if
they receive a bonus based on profitability of the merchandise
they buy
⚫ Types of incentives compensation
- Commission : compensation based on a fixed formula eg 2% of sales.
Many retail personnel is based on the fixed % age merchandise they sell
- Bonus: Addl compensation awarded periodically on the basis of an
evaluation of the employees performance. Eg store managers often
receive bonuses at the end of year based on their store performance.
- Profit sharing: cash bonus based on firms profit or a grant of
stock options
Incentives
⚫ Are very effective at motivating employees to perform the activities on
which the incentives are based.
⚫ May also cause employees to ignore the other activities. For eg : focus
only on sales and no time to restock shelves and fixtures
⚫ Excessive use of incentives to motivate employees also can
reduce employee commitment.
Organization Culture
⚫ Is the set of values, traditions and customs of a firm that guides
employee behavior.
⚫ Traditions passed along by the experienced employees to
new employees
⚫ Nordstrom- customer service
⚫ OC has a much stronger effect on employee actions than rewards,
direction or written company policies
⚫ OC is often maintained and developed through stories and symbols.
Values are often explained to new employees and reinforced to present
employee stories
⚫ Symbols are effective means for communicating with employees
because with that they remember the values very easily Eg Walmart
Building Employee committment
⚫ Imp challenge : Reduce turnover
⚫ High turnover reduces sales and increases costs
⚫ to reduce Turnover, retailers need to build atmosphere of
mutual commitment in their firms
⚫ Develop employee skills through selection and
training,empowering employees and creating partnering
relationship with employees
Developing skills
⚫ Selection : recruiting right people
⚫ Training: 60 % of employees are in direct contact with the customers
⚫ Empowering employees: is a process in which mgrs share power and
decision making authority with employees
⚫ Creating partnering relationships
-reducing status differences
- Promotion from within
- Balancing career and families
Issues in HRM
⚫ Increasing importance of a diverse workforce
⚫ The growth in legal restrictions on HR practices
⚫ Use of technology to increase employee productivity
Franchising
Introduction
⚫ Form of business which is popular in retailing
⚫ Used by org to expand their business through partners who in general
terms are given the right to run the org business
⚫ Org- Franchiser and the partner is the Franchisee
⚫ In Franchise agreement, the franchisee pays the franchiser a sum
of money or % age of income , the franchisee is allowed to exercise
right under the franchisors guidance
⚫ India- organized retail franchise market is estimated at approx 450 crores
⚫ Thus, Franchising involves a contractual agreement between a
franchisor (mfg/wholesaler/service sponsoror) and a retail franchisee
,which allows the retail franchisee to conduct a given form of business
under a established name and according to a given pattern of business
 Types of
Franchising
Product franchising
• Franchisees acquire identities of
franchisors by agreeing to sell the
latter`s products and/or operate
under the latter`s names
• Franchisees here
operate autonomously
from their franchisors
• Adhere to certain operating
rules,they set store hours,choose
locations determine displays and
run the business
• Eg Arrows,Scullers,Tommy Hilfiger,
Disney etc
Business format franchising
• more interactive
relationship between
Franchisor and Franchisee
• Franchisees receive assistance on
prescribed business format: site
location, QC, accounting
systems, start up practices, mgt
training
,problem response along with
rights to sell goods/services
• Eg Bata,KFC,McDonalds etc
Size and Structural Agreements
⚫ Manufacturer –Retailer- A mfg gives independent franchisees the right
to sell goods through a licensing agreement
⚫ Wholesaler-Retailer:
- Voluntary: A wholesaler sets up a franchise system and grants franchises
to individual retailers
- Cooperative: A group of retailers sets up a franchise system and shares
ownership and operations of the wholesaling organization
⚫ Service Sponsored retailer: A service firm licenses individual retailers
to let them offer specific service packages to consumers
Types of Franchise Agreements
⚫ Single Unit
⚫ Multi Unit
⚫ Area Development
 Single Unit
⚫Franchising
A single-unit franchisee has the right to operate one franchise unit. It
is an excellent way to gain an understanding of the franchise system
before considering additional units.
⚫ Territory: The single-unit franchisee may have a small radius of exclusive
territory to operate within. If it is a retail store, it may be a two or three
mile radius around the store. If it is a home-based business, it may be a
few specific zip codes.
⚫ Level of participation: The single-unit franchisee is very involved with
almost all operations. Because of this level of involvement, these
franchisees are also known as owner-operators.
⚫ Eg Himlaya stores, Titan stores
 Multi Unit
⚫Franchises
The franchisee acquires more than one unit of the franchise usually
at reduced initial franchise fees. A good sign of the health of a
franchise organization is that many of the franchisees are multi-unit
owners.
⚫ Territory: There is usually no exclusive territory where the franchises
must be opened. The franchisee may have one unit in one part of town
with a surrounding radius of exclusivity and another unit in another part
of town 15 miles away or even in another county with its exclusive radius
of operation.
⚫ Level of participation: The franchisee is less involved with each unit's
operations but is managing multiple operations and will need to have
some level of supervision in each unit. The franchisee acts as a general
manager. If many units are opened, a general manager and additional
administrative and training staff may be needed.
 Area Development
⚫Franchises
This license usually grants the franchisee the right to open a certain number
of franchises in a given area. There is usually a production schedule where the
area development franchisee must open a certain number of franchises during
a certain period. As long as the area development franchisee stays on track in
opening franchises in the area, he/she has an exclusive area where no other
franchisees are allowed to open a franchise. Area development franchisees also
typically pay reduced franchise and royalty fees.
⚫ Territory: The area development franchisee maintains an exclusive geographic
territory as long as the opening schedule is maintained. The territories range
from a small city to parts or all of a larger city.
⚫ Level of participation: The area development franchisee will be very involved in
the opening of the first store to ensure its success. Another important function
will be to look for qualified real estate to open the next few locations. Once
several locations are open, the area development franchisee will need
assistance to manage the units.
⚫ Eg Mc Donalds
 Master
⚫Franchises
Sometimes called a regional developer, a master franchisee has all the rights of
an area developer and usually assumes a larger area.
⚫ The main difference is that the master franchisee, in addition to opening
franchises at reduced franchise and royalty fees, can also sell unit franchises,
multi-unit franchises and area development franchises, and profit from those
sales.
⚫ The master franchisee usually receives a part of the ongoing royalties paid by
each franchisee.
⚫ There may be additional income available from distribution of products
through the franchisees in the area and possibly some real estate interests in
franchisee locations.
⚫ The master franchisee will usually operate at least one unit for income
generation, for use in franchise sales, and for use as a training facility. Master
franchises are rare, and when they are available, they are usually sold quickly.
Because of the multiple revenue streams associated with a master franchise,
the potential return on investment is substantial.
Master
Franchises
⚫ Territory: Usually is a large metropolitan area, an entire state, or even
several states or country. It is an exclusive area and will remain
exclusive as long as the master franchisee meets the development
schedule of franchises in the territory.
⚫ Level of participation: The master franchisee will usually open at least
one unit and use a manager to manage it while selling other "sub-
franchises" and helping them to operate properly. Very rarely is a master
franchisee "hands on" in a unit franchise. They generally spend more of
their time operating as a business consultant or coach to their
franchisees to help them become successful.
 Advantages For
⚫Franchisee
Individual Franchisees can own retail enterprises with relatively small
capital investment
⚫ Franchisees acquire well known names and goods/service lines
⚫ SOP & management skills may be taught to the franchisees
⚫ Cooperative advt used
⚫ Franchisees obtain exclusive selling rights for specified
geographical territories
⚫ Franchisee purchases may be less costly per unit due to volume
bought by the overall franchise
 Problems for
⚫Franchisee
Oversaturation could occur if too many franchisees in one geographic
area, affecting adversely the sales and profit
⚫ Franchisees may be locked into contracts whereby purchases must
be made through franchisors or certain approved vendors
⚫ Agreements are of short duration
⚫ Contribute to constrained decision making – franchisors exclude
franchisees or limit their involvement in strategic planning process
 Advantages for the
⚫Franchisors
A national or global presence can be developed quickly with less
franchisor investment
⚫ Qualifications for franchisees can be set and enforced
⚫ Money obtained when goods are delivered than sold
⚫ Agreements can be drawn up requiring franchisees to abide by
stringent rules set by franchisors
⚫ Franchisors can receive royalties
 Problems for the
⚫Franchisors
Franchisees could harm a firms overall reputation if they do not adhere
to company stds
⚫ A lack of uniformity amongst outlets could affect the customer
loyalty and image
⚫ Intrafranchise competition is not desirable
Retail information systems and retail research
RIS
⚫ Data: News facts and figures which are unorganized
⚫ Information: A meaningful body of facts organized around any topic
⚫ Once raw data is gathered and organized- retail information results
⚫ Retailers managers need to inform themselves with
sufficient information to make decisions possible
⚫ Data used- from customers, the marketplace, the retail
environment, employees and competition
RIS
⚫ A method for systematically gathering, analyzing, storing,utilizing
valuable retail information and data
⚫ facilitates the process of finding solutions to problems
⚫ The process of collecting, organizing, analyzing, disseminating
data relating to particular area is called as Market research
⚫ can be high tech or low tech
⚫ could be used in almost all areas of operation
⚫ Generally accessible to all users but specific enough to generate solutions
to any retail problems
⚫ RIS – could be used among store groups,vendors,internal
buyers,planners,dc
RIS
⚫ Could be used in Supply chain mgt
⚫ Data warehousing
⚫ Distribution
⚫ Pricing
⚫ Merchanidising
⚫ IMC
⚫ Product acquisition
⚫ Strategy
RIS
Processes
-Data collection
and
interpretation
- Control of
Inputs information
Systems
-Mission
Data
--Vision
storage
-Objectives
,retrieval and
-Situational
updates
analysis
-Environment
scanning
- strategic plans
Outputs
Data dissemination
to internal and
external public
Benefits of RIS
⚫ Development of an effective RIS helps to ensure that the system is fully
integrated into the overall retail management plan
⚫ Effective RIS- allow for continuous data updation
⚫ Necessary to be competitive in todays retail environment
⚫ Use RIS to access data regarding which items have the highest
turnover rates and where EOQ items have to be ordered
RIS- facilitators
⚫ Universal Product Code (UPC): Used along with a optic scanner to read
the bar code and gather the particular data
⚫ A barcode which stores all pertinent product information
⚫ Quality of codes is important : unscannable, erroneous-
concern- additional expense for improper information fed into
an RIS
⚫ A typical UPC has a company identifier,specific SKU built into it
⚫ US and Canada- 12 digit
⚫ EAN 13 EAN 8
RIS- facilitators
⚫ Point of sale terminal (POS)
⚫ Data from UPC collected and sent to centralized location for analysis
⚫ Used by managers to make decisions regarding
inventory,merchandise advt,accounting,planning etc
⚫ POS – another facilitator in RIS
⚫ A computer workstation designed to collect info from sale of products
or services
⚫ Each workstation has optional peripherals- barcode
readers,scanners,invoice printers,magnetic card readers. Can be fixed
,handheld or both.
⚫ Effective in providing data to generate retail information
⚫ RFID
RIS- facilitators
⚫ Self checkout systems: A format in which shoppers scan,bag and pay for
their own purchases
⚫ Outsourcing: certain expertise