5th Edition

PPT 14-1
 Chapter 14

Buying Merchandise

McGraw-Hill/Irwin
PPT 14-2
Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
 Merchandise Management

Retail Planning
Communication Merchandise
Mix Assortments

Buying
Merchandise

Buying Pricing
Systems

PPT 14-3
 Merchandise Branding Strategies

• Manufacturer (National) Brands

– Designed, produced, and
marketed by a vendor and
sold by many retailers

• Private-Label (Store) Brands

– Developed by retailer and
only sold in retailer’s outlets

• Licensed Brand
– Developed by licensee and
right sold to either
manufacturer or retailer
PPT 14-4
 Spectrum of
National vs. Private Label

% Store National
Brands Brands

The Gap Macy’s Wal-Mart

Limited Target Home Depot
Marks & Spencer
IKEA

PPT 14-5
 Relative Advantages of
Manufacturer versus Private Brands

Type of Vendor
Impact on Store Manufacturer Private-Label
Brands Brands
Store loyalty ? +
Store image + +
Traffic flow + +
Selling and promotional + -
expenses
Restrictions - +
Differential advantages - +
Margins ? ?

PPT 14-6
 Private Labels

Advantages Disadvantages

• Unique merchandise not • Need to develop

available at competitive expertise in developing
outlets and promoting brand

• Difficult for customers to • Unable to sell excess

compare price with merchandise
competitors • Typically less desirable
• Higher margins for customers

PPT 14-7
 Manufacturer (National) Labels

Advantages Disadvantages
• Lower margins
• More desired by
• Vulnerable to competitive
customers pressures
• Resell excessive
merchandise

• Don’t need skills and

people to develop and
promote merchandise

PPT 14-8
 Most Recognized Apparel
and Accessory Manufacturer Brands

PPT 14-9
 Most Recognized Apparel
and Accessory Private Label Brands

PPT 14-10
 Examples of
Private-Label Brands

PPT 14-11
 Examples of
Private-Label Brands

PPT 14-12
 Examples of
Private-Label Brands

PPT 14-13
 Examples of
Private-Label Brands

PPT 14-14
 Private Label Options

• Bargain Branding
– no-frills product at a discount price.
• Copycat Branding
– imitates the manufacturer brand in appearance and trade dress
• Premium Branding
– private label at a comparable manufacturer-brand quality.
• Parallel Branding
– private labels that closely imitate the trade dress and product
attributes of leading manufacturer brands.

PPT 14-15
 Issues in International Sourcing of
Private Label Merchandise
• Country of Origin Effects
• Costs
– Foreign Currency Fluctuations
– Tariffs
– Supply Chain Efficiency and Inventory
Carrying Costs
– Transportation costs
• Quality Control

PPT 14-16
 Regulations Affecting the
Costs of Importing Goods

• World Trade Organization

• NAFTA
• Maquiladores
• Free Trade Zones

PPT 14-17
 Managing International Sources

• Quality Control
• More difficult to maintain quality standards
• Human Right Issues
• Need to Build Strategic Partnerships

PPT 14-18
 Domestic vs. International Sourcing
Domestic International
• Higher cost of • Lower cost
merchandise
• Longer lead times
• Shorter lead times –
• More control problems
easier to use quick
response systems
• Easier to control human
rights issues and quality
control
• Customer preferences
for domestic
manufactured products
PPT 14-19
 Connecting with Vendors
Going to Market

• Internet Exchanges
• Wholesale Market Centers
• Trade Shows
• Resident Buying Offices
• Meeting Vendors at Your Company

PPT 14-20
 Functions Provided by Internet Exchanges

• Product Directories
• Use of Reverse Auctions
• Collaboration in Planning – CPRF
Software
• General Information about Trends

PPT 14-21
 Types of Exchanges

• Consortium Exchanges
– Transora
– Worldwide Retail Exchange
– GobalNetXchange
• Private Exchanges
• Independent Exchanges

PPT 14-22
 Online Reverse Auctions

• Auction
– A market institution with an explicit set of rules determining
resource allocation and prices on the basis of bids from market
participants.

• Why reverse?
– Vendors bid for buyer’s business

– Price falls

• One buyer, multiple vendors

• Sealed vs. open bid auctions

PPT 14-23
 B Reverse Auctions

S B

B Reverse Auction

S
Traditional Auction

S B

S
PPT 14-24
 Reverse Auctions
in Retail Buying
• Online vs. physical differences
– Reduced contact cost

– Instant feedback

– Bidder anonymity

• The retailer’s goals

– Gain competitive pricing

– Open vendor base

– Improve negotiation process

– Maintain valuable relationships

PPT 14-25
 Price Path on Open-Bid Auction

PPT 14-26
 Issues in Using Reverse Auctions
to Buy Products
• Private vs. Collaborative Auctions/Exchanges

• Fixed Cost High for Software

– Standardized Software  Less Need for Collaborative
Exchanges

• Collusion

• Consideration of Quality Differences from Bidders

• Impact on Supplier Relationships

– Used Primarily for Non-Resale Products – Carpet, Fixtures

PPT 14-27
 Negotiating with Vendors

Two-way
communication
designed to reach
an agreement when
two parties have
both shared and
conflicting interests.

PPT 14-28
 Planning Negotiations
• Consider prior history

• Assess current situation

– General market conditions

– Vendor’s position

– Power of vendor

• Set goals

• Be aware of vendor’s goal’s

• Number of people involved

• Select an advantageous place

PPT 14-29
 Issues to Negotiation

• Markup opportunities from excess from vendor’s excess

merchandise
• Purchase terms
• Transportation costs
• Delivery times
• Exclusivity
• Advertising allowances

PPT 14-30
 Types of Negotiations

Vendor
Win Lose

Win
Buyer

Lose

PPT 14-31
 Win - Lose Negotiation

• Can be good in the short run and

bad in the long-run
• Short-term solution-- person you
are negotiating with can’t lose all
the time
• Might degenerate into LOSE -
LOSE

PPT 14-32
 Lose - Lose Negotiation

• Wastes time and energy

• No relationships established

• Objectives not met

PPT 14-33
 Win - Win Negotiation

Collaboration Doesn’t mean “giving-in”

Cooperation Enhances vendor trust
Long-term relationship

PPT 14-34
 Guidelines for Negotiations

• Separate people from problem

• Insist on objective criteria to evaluate
performance
• Invent options for mutual gain
• Let the other party do the talking
• Know how far to go

PPT 14-35
 Negotiating Tips

• Be aware of time
• Location -- comfortable
• Keep negotiating participants even
• Be patient
• Let him/her mention a figure
• Don’t be afraid to say “no”

PPT 14-36
 Negotiating Tips

• Don’t over negotiate

• Don’t assume
• Visualize the negotiation
• Timing is everything
• Always leave the door open
• Maintain self-esteem

PPT 14-37
 SUMMARY

• Planning is critical
• Knowledge is power
• A person will only do what is right for
him/her

PPT 14-38
 Strategic (Partnering) Relationships

Retailer and vendor committed to maintaining

relationships over the long-term and investing in
mutually beneficial opportunities

PPT 14-39
 Strategic Relationships

Win – Win --Concerned about expanding the

pie, not how to divide the pie

Retailer vs. Vendor

PPT 14-40
 Building Blocks for
Strategic Partnerships

• Mutual Trust
• Open Communications
• Common Goals
• Credible Commitments

PPT 14-41
 Developing Trust:
Capability or Competence
Competence
Salespeople demonstrate
competence when they can
show that they know what
they are talking about.

Requires knowledge of:

The customer
The product
The industry
The competition
PPT 14-42
 Stages in
Building Strategic Relationships

• Awareness
• Exploration
• Expansion
• Commitment

PPT 14-43
 Legal and Ethical Issues

• Contractual Disputes • Gray Markets and

• Chargebacks Diverted
Merchandise
• Commercial Bribery
• Exclusive Territories
• Slotting Allowances
• Exclusive Dealing
• Buybacks
• Counterfeit Merchandise

• Refusal to Deal
• Tying Contracts

PPT 14-44
 Chargebacks
• A practice used by retailers in which they deduct
money from the amount they owe a vendor.
• Two Reasons:
– merchandise isn’t selling
– vendor mistakes
• Can be a profit center
– one senior executive at a large department
store chain was told to collect $50 million on
chargebacks
PPT 14-45
 Commercial Bribery

• A vendor or its agent offers to give or pay a

retail buyer “something of value” to influence
purchasing decisions.
• A fine line between the social courtesy of a free
lunch and an elaborate free vacation.
• Rule of thumb - accept only limited
entertainment or token gifts.

PPT 14-46
 Slotting Allowances

• Fees paid by a vendor for space in a retail

store.
• Currently aren’t legal.
• Retailers argue that they are a reasonable
method for ensuring that their valuable space
is used efficiently.
• Manufacturers view them as extortion.
• $9 billion or 16% of all new product
introduction costs in grocery industry.

PPT 14-47
 Buybacks

• Used to get products into retail stores.

• Two scenarios:
– Retailer allows a vendor to create space for its
goods by “buying back” a competitors inventory and
removing it from a retailer’s system.
– Retailer forces a vendor to buyback slow-moving
merchandise.

PPT 14-48
 Counterfeit Merchandise

• Goods made and sold without the permission of

the owner of a trademark, a copyright, or a
patented invention that is legally protected in
the country where it is marketed.
• Major problem is counterfeiting intellectual
property.

PPT 14-49
 What to do About Counterfeiters

• Trademark,copyright, and/or patent products in

the countries in which they’re sold.
• US government is engaged in bilateral and
multicultural negotiations and education to limit
counterfeiting. (WTO)
• Take steps to protect yourself.

PPT 14-50
 Gray-Market and
Diverted Merchandise
• Gray- Market Merchandise possesses a valid
U.S. registered trademark and is made by a
foreign manufacturer but is imported into the
United States without permission of the U.S.
trademark owner.
• Not Counterfeit.
• Is legal.
• Diverted Merchandise is similar to gray-
market merchandise except there need not be
distribution across international boundaries.
PPT 14-51
 Gray-market and Diverted
Merchandise: Taking Sides

• Discount stores argue customers benefit

because it lowers prices.
• Traditional retailers claim important service
after sale will be unavailable
• May hurt the trademark’s image.

PPT 14-52
 Avoiding the
Gray-Market Problem

• Require customers to
sign a contract
stipulating that they will
not engage in gray
marketing.
• Produce different
versions of products for
different markets.

PPT 14-53
 Exclusive Territories

• Granted to retailers so no other retailer in the

territory can sell a particular brand.
• Benefits vendors by assuring them that “quality”
retailers represent their products.
• Assure retailers adequate supply.
• Grants retailers a monopoly.
• Illegal when they restrict competition.

PPT 14-54
 Exclusive Dealing Agreements

• Occur when a manufacturer or wholesaler

restricts a retailer into carrying only its
products and nothing from competing
vendors.
• Illegal when they restrict competition.

PPT 14-55
 Tying Contracts

• An agreement that requires the retailer to

take a product it doesn’t necessarily desire to
ensure that it can buy a product it does
desire.
• Illegal when they lessen competition.
• Ok to protect goodwill and quality reputation
of vendor.

PPT 14-56
 Refusals to Deal

• Suppliers and retailers have the right to deal

or refuse to deal with anyone they choose.
• Except when it lessens competition.

PPT 14-57
 Terms of Purchase

• Discounts
– Trade (Functional) Discounts

– Chain Discounts

– Quantity Discounts

– Seasonal discounts

– Cash discounts

• ROG and EOM dating

– Anticipation discounts

• Shipping Terms and Conditions

PPT 14-58
 A Sample Price List

Price to Wholesaler Price to Retailer

Quantity
per Order Discount Price Discount Price

1 - 10 40 - 5% $57* 30% $70

11 - 25 50 - 10 45 40 60

26 + 50-10-5 42.75 40-10 54

* Based on a $100 suggested retail price.

PPT 14-59
 Example of a Cash Discount

1/30, n/60

Nov 1 Dec 1 Jan 1

Date of Invoice 30 days 60 days
1% discount Full amount
Due

PPT 14-60
 Example of ROG Dating

ROG Dating

Nov 1 Nov 15 Dec 15 Jan 15

Date of Merchandise 30 days ROG 60 days ROG
invoice arrives 1% discount Full amount
due

PPT 14-61
 Example of EOM Dating

EOM Dating

Nov 1 Dec 1 Jan 1 Feb 1

Date of 30-day discount 30 days EOM 60 days EOM
invoice period begins 1% discount Full amount
due

PPT 14-62
 Example of EOM Dating,
Grace Period

EOM Dating, Grace Period

Oct 25 Nov 1 Dec 1 Jan 1 Feb 1

Date of 30-day 30 days EOM 60 days EOM
invoice discount 1% discount Full amount
period due
begins

PPT 14-63
 Example of Extra Dating

Extra Dating

Nov 1 Dec 1 Jan 1 Feb 1 Mar 1 Apr 1

Date of 30-day 60-day 60 days Full
invoice discount Extra Extra amount
period discount 1% discount due
begins period
begins

PPT 14-64
 Alternative Shipping
Terms and Conditions

Owns Merchandise
Pays Freight in Transit and
Charges Files Claims (If Any)

F.O.B. origin, freight collect Retailer Retailer

F.O.B. origin, freight prepaid Supplier Retailer
F.O.B. destination, freight collect Retailer Supplier
F.O.B. destination, freight prepaid Supplier Supplier

PPT 14-65