Scanning The Marketing Environment

RETAILING AND WHOLESALING

CHAPTER CONTENTS PAGE MATERIALS AVAILABLE FOR LECTURE AND DISCUSSION...... 14-2

STUDENT LEARNING OBJECTIVES...... 14-3

KEY TERMS AND CONCEPTS...... 14-3

LECTURE NOTES

 Smart, Chic, and Cheap: Target Hits the Bull’s-Eye...... 14-4

 The Value of Retailing...... 14-4

 Classifying Retail Outlets...... 14-5

 Nonstore Retailing...... 14-8

 Retailing Strategy...... 14-10

 The Changing Nature of Retailing...... 14-13

 Wholesaling...... 14-13

ANSWERS TO “APPLYING MARKETING CONCEPTS AND PERSPECTIVES”...14-16

ANSWERS TO “INTERNET EXERCISE”...... 14-19

SUPPLEMENTAL LECTURE NOTE (SLN)

 SLN 14-1: Lillian Vernon: A Catalog Success Story...... 14-20

VIDEO CASE 14 TEACHING NOTE (TN)

 Mall of America: Shopping…and a Whole Lot More!...... 14-21

POWERPOINT THUMBNAILS...... 14-29

14-1 Chapter 14 MATERIALS AVAILABLE FOR LECTURE AND DISCUSSION

PowerPoint Trans- Hand- Slides1 parencies2 outs3

Textbook Figures Figure 14-1 Which company best represents which utilities?..... Figure 14-2 The top five franchises......  Figure 14-3 Breadth versus depth of merchandise lines......   Figure 14-4 The retailing mix......  Figure 14-5 The wheel of retailing......   Figure 14-6 The retail life cycle...... 

Supplemental Figures and Advertisements Figure 14-A The largest retailers......   Figure 14-B eBay ad......   Figure 14-C Functions performed by merchant wholesalers, agents, and brokers......  

1 “PowerPoint Slides” are available on a CD-ROM and appear as “PowerPoint Thumbnails” within this chapter of the Instructor’s Manual. 2 100 “Transparencies” are available to textbook adopters by request of their local McGraw-Hill/Irwin sales representative. 3 Instructors may choose to reproduce some figures and hand them out to each student in the class to enhance discussion. These “Handouts” are shown with a check in the right column. Chapter 14 14-2 STUDENT LEARNING OBJECTIVES

After reading this chapter students should be able to:

 Identify retailers in terms of the utilities they provide.  Explain the alternative ways to classify retail outlets.  Understand the many methods of nonstore retailing.  Develop retailing mix strategies over the life cycle of a retail store.  Describe the types and functions of firms that perform wholesaling activities.

KEY TERMS AND CONCEPTS

breadth of product line off-price retailing brokers power center central business district regional shopping centers community shopping center retail life cycle depth of product line retailing form of ownership retailing mix intertype competition scrambled merchandising level of service selling agent manufacturer’s agent shrinkage merchandise line strip location merchant wholesaler telemarketing multichannel retailer wheel of retailing

14-3 Chapter 14 LECTURE NOTES

Chapter Opening Photo CHAPTER OPENING EXAMPLE

Smart, Chic, and Cheap: Target Hits the Bull’s-Eye!

Target began as a discount store competing with rivals Kmart and Wal- Slide 14-7 Mart. Then Target implemented a strategy repositioning itself as an upscale discounter. Dave Peterson, creative director of advertising agency Peterson Milla Hooks, produced a funky retro pop campaign called “Bull’s Eye World” featuring the Target logo on everything in the ads.

The campaign was a huge success, establishing Target’s simple red logo in a class with McDonald’s arches and Nike’s swoosh. One industry expert remarked that Target has “the ultimate retail positioning, with both a perception of having the highest quality products and, at the same time, a perception of being a low price leader.”

Target has continued its repositioning by adding lines of designer and high-fashion private label products. Other marketing activities take advantage of the many new ways retailers can reach customers. To encourage website traffic, the retailer opened Target House in Manhattan to showcase its merchandise. Finally, Target decided to become the first major U.S. retailer to issue smart cards to its shoppers. Consumers will be able to use smart cards to keep track of purchases, qualify for frequent purchase rewards, and even download electronic coupons. Target is installing chip readers in all its 1,000 stores and will issue the new cards to its 36 million current card holders over the next year.

I. THE VALUE OF RETAILING

Retailing includes all activities involved in selling, renting, and providing goods and services to ultimate customers for personal, family, or household use.

A. Consumer Utilities Offered by Retailing.

The utilities provided by retailers create value for consumers. Time, place, possession, and form utilities are offered by most retailers in varying degrees, but one utility is often emphasized more than others.

Figure 14-1 Levi Strauss ad Companies & What retailer utilities utilities?

Slide 14-9 Slide 14-10

Chapter 14 14-4 Figure 14-A B. The Global Economic Impact of Retailing Largest retailers  Four of the 30 largest U.S. businesses are retailers (Wal-Mart, Sears, and Home Depot), who employ 1.8 million people.

 Retailing is important in global economies. Large retailers Slide 14-11, T include Daiei in Japan, Pinault-Printemps in France, Printemps webpage Karstadtguelle in Germany, and Marks & Spencer in Britain. What’s the impact of global retailing? In emerging economies, such as China and Mexico, a combination of local and global retailers is evolving.

CONCEPT CHECK

Slide 14-10 1. When Levi Strauss makes jeans cut to a customer’s exact preferences and measurements, what utility is provided?

Answer: Form utility.

2. Two measures of the importance of retailing in the global economy are ______and ______.

Answer: total sales; number of employees.

II. CLASSIFYING RETAIL OUTLETS

Because of the large number of alternative forms of retailing, it is easier to understand the differences among retail institutions by recognizing that outlets can be classified in several ways:

 Form of ownership distinguishes retail outlets on the basis of whether individuals, corporate chains, or contractual systems own the outlet.

 Level of service is used to describe the degree of service provided to the customer.

 Merchandise line describes how many different types of products a store carries and in what assortment.

A. Form of Ownership

1. Independent Retailer. One of the most common forms of retail ownership, the independent store offers customers convenience, quality personal service, and lifestyle compatibility.

2. Corporate Chain.

 Has buying power that allows it to bargain with manufacturers to obtain good service or volume discounts.

14-5 Chapter 14  Consumers benefit because there are multiple outlets with similar merchandise and consistent management policies.

Radio Shack 3. Contractual System. What form of retail ownership?  Contractual systems involve independently owned stores that band together to act like a chain. The three kinds are retailer-sponsored cooperatives, wholesaler-sponsored voluntary chains, and franchises. Slide 14-16  Member stores can take advantage of volume discounts commonly available to chains.

Figure 14-2  In a franchise system, an individual or firm (the franchisee) Top 5 franchises contracts with a parent company (the franchiser) to set up a business or retail outlet.

a. The franchiser usually assists in selecting the store location, setting up the store, advertising, training Slide 14-17 personnel, and providing step-by-step procedures and guidelines for the major aspects of the business. b. The franchisee pays a one-time franchise fee and an annual royalty, usually tied to the store’s sales. When the fees are combined with other costs such as real estate and equipment, the total investment can be much higher.

B. Level of Service

Differences in retail outlets are more obvious in terms of level of service, not form of ownership. Home Depot What level of service provided? 1. Self-Service. Is at the extreme end of the level-of-service continuum because the customer performs many functions and little is provided by the outlet.

Slide 14-19 2. Limited Service. Outlets provide some services, such as credit, and merchandise return. Customers are responsible for most shopping activities, although salespeople are available in selected departments.

3. Full Service. These retailers, which include most specialty and department stores, provide many services to their customers.

C. Merchandise Line Figure 14-3 Breadth vs. Depth Retailers also vary by their merchandise lines, the key distinction being the breadth and depth of items offered to customers.

1. Depth of Line. Depth of product line means that the store Slide 14-21, T carries a large assortment of each item. Chapter 14 14-6  Stores with large assortment (depth) of a related line of items are limited-line stores.

 Stores that carry tremendous depth in one primary line of merchandise are single-line stores.

 Both limited- and single-line stores are often referred to as specialty outlets.

 Specialty discount outlets focus on one type of product at very competitive prices. These outlets are referred to as category killers because they often dominate the market.

2. Breadth of Line. Breadth of product line refers to the variety of different items a store carries.

 Stores that carry a broad line, with limited depth, are referred to as general merchandise stores. For example, large department stores carry a wide range of different types of products, but not unusual sizes.

 Traditionally, outlets carried related lines of goods. Today scrambled merchandising, offering several unrelated product lines in a single store, is common.

 Scrambled merchandising is convenient for consumers because it reduces the number of stops required on a shopping trip. However, for the retailer this merchandising policy means there is competition between very dissimilar types of retail outlets, or intertype competition. Scrambled merchandising and intertype competition make it more difficult to be a retailer.

CONCEPT CHECK

1. Centralized decision making and purchasing are an advantage of ______ownership.

Answer: chain

2. What are some examples of new forms of self-service retailers?

Answer: Federal Express’s self-service package shipping stations, and the self-service scanning system installed at Kroger grocery stores.

3. Would a shop for big men’s clothes carrying pants in sizes 40 to 60 have a broad or deep product line?

Answer: deep product line

14-7 Chapter 14 III. NONSTORE RETAILING

Nonstore retailing occurs outside a retail outlet through activities that involve varying levels of customer and retailer involvement.

Coke machine A. Automatic Vending What form of nonstore retailing? Vending machines make it possible to serve customers when and where stores cannot.

 Maintaining and operating vending machines is expensive, so Slide 14-26 product prices tend to be higher than those in stores.

 Typically, small convenience products are available in vending machines.

 Improved technology for cashless payment and the use of wireless technology to notify retailers when their machines are empty are reasons automatic merchandising sales are expected to increase in the future.

B. Direct Mail and Catalogs

Lilly’s Kids  Direct mail and catalog retailing eliminate the cost of a store and What form of nonstore retailing? clerks and improve marketing efficiency through segmentation and targeting.

 In addition, catalogs create customer value by providing a fast

Slide 14-27 and convenient means of making a purchase.

L.L. Bean What form of  Catalog sales are growing as direct mail purchases have nonstore retailing? increased and traditional retailers and Internet retailers have added catalogs.

 A successful approach used by many catalog retailers is to send Slide 14-28 specialty catalogs to market niches identified in their databases.

QVC C. Television Home Shopping What form of nonstore retailing?  Television home shopping is possible when consumers watch a shopping channel, select products, and order by telephone or the Internet.

Slide 14-29  A limitation of TV shopping has been the lack of buyer-seller interaction. New Internet technologies now allow consumers to simultaneously shop, chat, and interact with their favorite show host while watching TV.

Chapter 14 14-8 SLN 14-1 D. Online Retailing Lillian Vernon: A  Online retailing allows consumers to search for, evaluate, and Catalog order products through the Internet. For many consumers, the Success Story advantages are 24-hour access, the ability to comparison shop, ICA 14-1 in-home privacy, and variety. Retail Shopping  There has been a melding of traditional and online retailers Online: —“bricks and clicks”—that are using experiences from both Comparing approaches to create better value and experiences for customers. Prices for a Digital Camera  Online purchases can result from paying dues to an online discount service, using a shopping “bot,” which searches the Web for a desired product and reports on the locations with the best prices, and bidding on a product via an online auction.

Wal-Mart & eBay Figure 14-B What form of eBay ad nonstore retailing?

Slide 14-30 Slide 14-31, T

E. Telemarketing

 Telemarketing, involves using the telephone to interact with and sell directly to customers.

 Compared with direct mail, telemarketing is viewed as a more efficient means of targeting consumers. It has grown in popularity as companies search for ways to cut costs but still provide convenient access to their customers.

 As telemarketing grows, consumer privacy has become an issue among consumers, Congress, the FTC, and businesses.

a. The industry self-regulation program, called Telewatch, encourages legal, ethical, and professional business conduct among telemarketers. b. The Direct Marketing Association maintains a nationwide “Do Not Call” list, and several states have enacted “Do Not Call” laws.

F. Direct Selling

 Direct selling, sometimes called door-to-door retailing, involves direct sales of goods and services to consumers through personal interactions and demonstrations in their home or office.

14-9 Chapter 14  Direct selling is growing in international markets where the lack of effective distribution channels increases the importance of door-to-door convenience and where the lack of consumer knowledge about products and brands will increase the need for a person-to-person approach.

CONCEPT CHECK

1. Successful catalog retailers often send ____ catalogs to ____ markets identified in their databases.

Answer: specialty; niche

2. How are retailers creating better value and experiences in online retailing?

Answer: Retailers are using a streamlined and intuitive website layout, providing real-time inventory levels of individual stores that allow customers to go to the store or buy online, and adding “experiential” activities, such as “virtual models,” to involve customers in the purchasing process.

3. Where are direct selling retail sales growing? Why?

Answer: Direct-selling retailers are expanding into other global markets due to a lack of effective distribution channels and consumer knowledge about products and brands.

IV. RETAILING STRATEGY

 In developing a retailing strategy, managers work with the retailing mix, which includes the (1) goods and services, (2) physical distribution, and (3) communications tactics chosen by a store.  Decisions relating to the mix focus on the customer. Three basic areas of the retailing mix include (1) pricing, (2) store location, and (3) combinations of communication formats.

A. Retail Pricing

 Markup refers to how much should be added to the cost the retailer paid for a product to reach the final selling price. Retailers decide on the original markup, but by the time the product is sold, they end up with a maintained markup.

 The original markup is the difference between the retailer cost and initial selling price. If an item does not sell quickly, the price is reduced. The difference between the final selling price and retailer cost is the maintained markup, which is also called the gross margin.

Chapter 14 14-10  Discounting a product, or taking a markdown, occurs when a product does not sell at the original price and an adjustment is necessary.

 The timing of a markdown can be important. Many stores take a markdown as soon as sales fall off to free up valuable selling space and obtain cash; other stores delay markdowns to discourage bargain hunters and to maintain an image of quality.

 Many retailers use price discounts as part of their regular merchandising policy. For example, Wal-Mart and Home Depot emphasize consistently low prices and eliminate most markdowns with a strategy called everyday low pricing.

 Another strategy, everyday fair pricing, is advocated by retailers that may not offer the lowest price but try to create value for customers through service and the total buying experience.

 A special issue for retailers trying to keep prices low is shrinkage, or breakage and theft of merchandise by customers and employees.

ETHICS AND SOCIAL RESPONSIBILITY ALERT

Who Takes the Five-Finger Discount? You’ll Be Surprised

Retailers lose almost 2% of their sales to theft annually. They spend millions on security devices designed to discourage shoplifters, but more than 50% of the thefts come from within–from the employees themselves.

 Off-price retailing involves selling brand name merchandise at lower than regular prices. The difference between the off-price retailer and a discount store is that off-price merchandise is bought by the retailer from manufacturers with excess inventory at prices below wholesale, whereas the discounter buys at full wholesale price but takes less of a markup than do traditional department stores. Thus, selection at an off-price retailer is unpredictable, and searching for bargains has become a popular activity for many consumers.

B. Store Location

A second aspect of the reailing mix involves deciding where to locate the store and how many stores to have. Most stores today are near several others in one of five settings:

 The central business district is the oldest retail setting, the community’s downtown area.

14-11 Chapter 14 Mall of America  Regional shopping centers consist of 50 to 150 stores that TV ad What kind location? typically attract consumers who live or work within a 5- to 10-mile range and often contain two or three anchor stores, which are well-known national or regional stores.

Slide 14-39  The community shopping center typically has one primary store (usually a department store branch) and often about 20 to 40 smaller outlets and serve customers within a 10- to20- minute drive.

 A strip location is a cluster of stores to serve people who are within a 5- to 10-minute drive. Gas station, hardware, laundry, grocery, and pharmacy outlets are commonly found in a strip location, which differs from larger shopping centers in that the composition of these stores is usually unplanned.

 A variation of the strip center is the power center, which is a huge shopping strip with multiple anchor (or national) stores that often have 2 to 5 anchor stores and often contain a supermarket that brings the shopper to the power center.

 Other types of retail locations include carts and kiosks.

C. Communication Formats

Today’s re retailers combine many of the formats to offer a broader spectrum of benefits and experiences. These multichannel retailers utilize and integrate a combination of traditional store formats and nonstore formats such as catalogs, television, and online retailing to make shopping simpler and more convenient.

CONCEPT CHECK

1. How does original markup differ from maintained markup?

Answer: Original markup is the difference between retail cost and initial selling price. Maintained markup is the difference between the final selling price and retailer cost, also called gross margin.

2. A huge shopping strip with multiple anchor stores is a____ center.

Answer: power

3. How do multichannel retailers make shopping simpler and more convenient?

Answer: (1) Customers can research choices online or in a catalog and then make a purchase online, over the telephone, or at the closest store and (2) reach a broader profile of customers.

Chapter 14 14-12 V. THE CHANGING NATURE OF RETAILING

New retailers are always entering the market. The reason for this continual change is explained by two concepts:

Figure 14-5 A. The Wheel of Retailing Wheel of retailing The wheel of retailing describes how new forms of retail outlets enter the market:

 Usually they enter as low-status, low-margin stores. Slide 14-45, T  Gradually, these outlets add fixtures and embellishments to their stores to increase the attractiveness for customers. With these Taco Bell additions, prices and status rise. Where on the wheel of retailing?  As time passes, these outlets add still more services and their prices and status increase even further.  This opens an opportunity for a new form of retail outlet—a low-price, low-margin, low-status operator. And the wheel of Slide 14-46 retailing turns as the cycle starts to repeat itself.

Figure 14-6 B. The Retail Life Cycle The retail life cycle The process of growth and decline that retail outlets, like products, experience is described by the retail life cycle. Its four stages are:

 Early growth. Retail outlet first appears, with a sharp departure Slide 14-47 from existing competition. Market share rises gradually, although profits are low due to start-up costs.  Accelerated development. Market share and profit achieve their greatest growth rates. Multiple outlets established. Competitors enter. Goal is to establish a dominant position for market share.  Maturity. Some competitors drop out, new retail forms enter, stores try to maintain market share, and price discounting occurs.  Decline. Profit and market share drop.

VI. WHOLESALING

Many retailers depend on intermediaries that engage in wholesaling activities—selling products and services for the purpose of resale or Figure 14-C Wholesalers, business use. There are several type of intermediaries: agents, & brokers A. Merchant Wholesalers

Merchant wholesalers are independently owned firms that take title Slide 14-50, T to merchandise they handle.

14-13 Chapter 14  Merchant wholesalers are classified based on the number of functions performed.

1. Full-service wholesalers. Two types exist:

a. General merchandise (or full line) wholesalers carry a broad assortment of merchandise and perform all channel functions but do not maintain much depth of assortment within specific product lines. b. Specialty merchandise (or limited-line) wholesalers offer a relatively narrow range of products but have an extensive assortment within the product lines carried. They perform all channel functions.

2. Limited-service wholesalers. Four types exist:

a. Rack jobbers furnish the racks or shelves that display merchandise in retail stores, perform all channel functions, and sell on consignment to retailers, which means they retain the title to the products displayed and bill retailers only for the merchandise sold. b. Cash and carry wholesalers take title to merchandise but sell only to buyers who call on them, pay cash for it, and furnish their own transportation for it. c. Drop shippers, or desk jobbers, are wholesalers who own the merchandise they sell but do not physically handle, stock, or deliver it. They simply solicit orders from retailers and other wholesalers and have the merchandise shipped directly from producer to buyer. d. Truck jobbers are small wholesalers who have a small warehouse from which they stock their trucks for distribution to retailers. They usually handle limited assortments of fast-moving or perishable items that are sold for cash directly from trucks.

B. Agents and Brokers

Unlike merchant wholesalers, agents and brokers do not take title to merchandise and typically provide fewer channel functions. They make their profit from commissions or fees paid for their services, whereas merchant wholesalers make their profit from the sale of the merchandise they own.

Chapter 14 14-14  Manufacturer’s agents, or manufacturer’s representatives: a. Work for several producers and carry noncompetitive, complementary merchandise in an exclusive territory. b. Act as a producer’s sales arm in an exclusive territory. c. Are resonsible for the transactional channel functions, primarily selling.  Selling agents represent a single producer and are responsible for the entire marketing function of that producer.  Brokers are independent firms or individuals whose principal function is to bring buyers and sellers together to make sales. Unlike agents, brokers have no continuous relationship with buyer or seller but negotiate a contract between the two parties and then move on.

C. Manufacturer’s Branches and Offices

Manufacturer’s branches and sales offices are wholly owned extensions of the producer that perform wholesaling activities:

 A manufacturer’s branch office carries a producer’s inventory and performs the functions of a full-service wholesaler.  A manufacturer’s sales office does not carry inventory, typically performs only a sales function, and serves as an alternative to agents and brokers.

CONCEPT CHECK

1. According to the wheel of retailing, when a new retail form appears, how would you characterize its image?

Answer: A low price, low margin, and low status outlet.

2. Market share is usually fought out before the ______stage of the retail life cycle.

Answer: maturity

3. What is the difference between merchant wholesalers and agents?

Answer: Merchant wholesalers are independently owned firms that take title to the merchandise they handle, whereas agents do not take title to merchandise and typically provide fewer channel functions.

14-15 Chapter 14 ANSWERS TO “APPLYING MARKETING CONCEPTS AND PERSPECTIVES”

1. Discuss the impact of the growing number of dual-income households on (a) nonstore retailing and (b) the retailing mix?

Answers:

a. Nonstore retailing. Nonstore retailing alternatives such as direct mail may grow as a convenient way for two-income households to shop. Television-assisted and computer-assisted retailing, which are available 24 hours a day, may also increase in attractiveness to these households.

b. Retailing mix. Retailers will have to adjust their mix in terms of store hours. Working couples may need to shop at less traditional times. Also, credit cards and telephone ordering may become more important because of the time pressure on these types of households.

2. In retail pricing, retailers often have a maintained markup. Explain how this maintained markup differs from original markup and why it is so important.

Answer: Maintained markup differs from original markup in an important way. Maintained markup is the final selling price less retailer’s cost. Original markup is the initial selling price less the retailer’s cost. Initial markup is what the retailer hopes to get for the product; maintained markup is what the retailer can actually sell an item for to consumers. It must cover costs for a retailer to show a profit.

3. What are the similarities and differences between the product and retail life cycles?

Answer: The retail and product life cycles are similar in that they consist of four stages over which market share and profit (from sales) are matched. In the first stage of each life cycle, new retail forms or products enter the market. Competition emerges in the second stage, and by the maturity stage, competitors fight for market share. In the decline stage, both curves show falls in market share and profit. Differences relate to nomenclature. The first stage of the product life cycle is introduction as opposed to the retail life cycle’s early growth. The second stage of the PLC is growth versus the retail life cycle’s accelerated development.

4. How would you classify Wal-Mart in terms of its position on the wheel of retailing versus that of an off-price retailer?

Answer: Wal-Mart is moving up the wheel of retailing. Wal-Mart has added services. Off-price retailers represent today’s low-price, low-margin, low-status new entrant.

Chapter 14 14-16 5. Develop a chart to highlight the role of each of the three main elements of the retailing mix across the four stages of the retail life cycle.

Answers:

Retail Life Cycle Stage Retail Mix Element Early Accelerated Maturity Decline Growth Development

Expand line on Shrink to Goods and Offer breadth a. breadth or Maintain profitable services or depth depth items

Expand Shrink Physical Few b. number of Maintain number of distribution locations outlets outlets

Offer Highlight Focus on specials to c. Communications competitive Limited awareness keep advantages customers

6. Breadth and depth are two important components in distinguishing among types of retailers. Discuss the breadth and depth implications of the following retailers discussed in this chapter: (a) Levi Strauss, (b) Wal-Mart, (c) L. L. Bean, and (d) Circuit City?

Answers:

a. Levi Strauss. Provides great depth and little breadth by manufacturing and selling hundreds of styles and sizes of jeans.

b. Wal-Mart. Provides great breadth by offering a huge variety of products. Its lines, however, have little depth.

c. L. L. Bean. As a catalog retailer, has moderate depth and moderate breath.

d. Circuit City. Is a category killer, a specialty discount outlet, with great depth and little breadth.

14-17 Chapter 14 7. According to the wheel of retailing and the retail life cycle, what will happen to warehouse clubs?

Answer: Warehouse clubs will begin to add services, raise their status, and subsequently their margins. This retailing form should hit maturity earlier than previous forms.

8. The text discusses the development of online retailing in the United States. How does the development of this retailing form agree with the implications of the retail life cycle?

Answer: Computer-assisted retailing is in the accelerated development stage of the retail life cycle, suggesting that additional growth in market share and profit are likely.

9. Comment on this statement: “The only distinction among a merchant wholesalers and agents and brokers is that merchant wholesalers take title to the products they sell.”

Answer: Agents and brokers provide a limited number of channel functions, whereas many full-line merchant wholesalers perform all channel functions. Additionally, agents and brokers make their profit from commissions or fees paid for their services, whereas merchant wholesalers make their profit from the sale of the merchandise they own.

Chapter 14 14-18 ANSWERS TO “INTERNET EXERCISE”

For many consumers, comparison shopping is not appealing because of the inconvenience of traveling to multiple locations. Even on the Internet, finding and searching multiple websites can be tedious. One solution is a form of software called an “intelligent agent” or “bot” (derived from robot), which automatically searches for the best price. Try each of the following shopping bots—www.mysimon.com and www.dealtime.com—to find the best price for one of the following products: (1) Wilson tennis racket, (2) Sony TV, and (3) Guess jeans.

How did the agents differ? What range of prices did you obtain? What shipping and handling charges would apply to each purchase? Why are different recommendations made by the agents?

Answers: Responses will vary depending on the product and model chosen. The instructor should access the sites so that prices and charges will be current. The instructor may want to change the names of the products to those that are available at the time of the assignment.

 Wilson tennis racket. MySimon returned 22 products priced from $19.99 to $249.99. Dealtime returned 6 products priced from $29.99 to $199.99.

 Sony TV. Prices will depend on the model chosen.

 Guess jeans. Prices will depend on the model and size chosen.

Both sites indicated that they accept payment for prominent placement in the search results, but that the customer had the option of sorting all of the available matches in any way they would like. They both search all sites, regardless of whether they are paid by the site or not.

14-19 Chapter 14 SLN 14-1: SUPPLEMENTAL LECTURE NOTE

Lillian Vernon: A Catalog Success Story

Leading catalog retailer Lillian Vernon has a history of more than 50 years of success. The evolution of the company is both fascinating and inspirational:

1951: It all began at the kitchen table when, as a housewife expecting her first child, Lillian Katz used her wedding gift money to place a $495 ad in the September issue of Seventeen magazine. The ad offered a personalized leather handbag and belt and generated $32,000 in sales!

1954: Vernon Specialties, named after Lillian’s home in Mount Vernon, New York, begins manufacturing and selling wholesale, custom-designed products for other companies, including Max Factor, Elizabeth Arden, Avon, and Revlon.

1956: Lillian mails her first catalog (16 black-and-white pages) to 125,000 customers who have previously responded to her ads. The product line is expanded to include personalized combs, blazer buttons, collar pins, and cuff links.

1970: Annual sales reach $1 million.

1982: Super Sale catalog is introduced.

1990: Lillian Vernon is named the Catalog of the Year. Lilly’s Kids catalog is introduced.

1994: The Direct Marketing Association honors Lillian in its Hall of Fame.

1995: Lillian Vernon offers its products online. The website (www.lillianvernon.com) quickly becomes the fastest growing part of the business and the premier site for personalized products.

2000: The company acquires Rue de France catalog and its website (www.ruedefrance.com).

Today: The company has annual sales over $287 million; 5,300 employees; eight catalogs, two websites, 15 outlet stores, and a business-to-business division. More than 6,000 products are offered in 35 countries; free personalization continues to be the company trademark. In the U.S. alone, there have been 23 million customers…perhaps you are one of them!

Sources: “Lillian Vernon Celebrates 50th Anniversary,” Direct Marketing (March 2001), pp. 58-59; “Mail Order Pioneer Lillian Vernon Celebrates 50th Anniversary,” PR Newswire (September 28, 2001); “Lillian Vernon Launches New Website,” PR Newswire (January 15, 2002).

Chapter 14 14-20 TN VIDEO CASE 14

Mall of America: Shopping…and a Whole Lot More!

Mall of America Synopsis: aerial photo This What do you think is the No.1 tourist destination in the United States? Disney World? The Grand Canyon? The Statue of Liberty?

Slide 14-58 The correct answer is the Mall of America in suburban Minneapolis-St. Paul with over 40 million visitors annually. No. 2 is Disney World with 29 million visitors. Whereas regional malls are in decline nationally, the Mall of America is able to attract record crowds. This case provides an exciting example of recent changes in retailing and consumption: If you want to attract customers, you can’t just tell them your mall is the biggest and best shopping Mall of America Camp Snoopy photo place, you also have to entertain them. The “marketing” of Mall of America presents a straightforward task: Design a strategy to attract customers to an area equivalent to 88 football fields. You do it by bringing in exciting new stores, entertainment, and events—not just the same ones that can be found at other Slide 14-59 malls. Students address this task by identifying environmental factors, marketing challenges, and market plans for the Mall of America.

Teaching Suggestions:

Some questions to ask your class and related discussion points to introduce the case include:

1. Have any of you ever visited the Mall of America (MOA)? If so, what were your impressions? The discussion should bring out at least two key points: (a) the massive size of MOA and (b) the importance of combining shopping and entertainment.

2. If no one has been to MOA, ask them what they’ve heard about it. Then ask them how they heard about it, if they would like to see it, and why they want to see it.

3. In your own behavior, do you combine shopping and entertainment on your visits to local malls? How? This combined shopping-entertainment experience is central to the success of MOA, as brought out below.

14-21 Chapter 14 Answers to Case Questions:

1. Why has the Mall of America been such a marketing success so far?

Answers: Key reasons for the success of the Mall of America (MOA) include:

 The local and regional markets are large. The Minneapolis-St. Paul metropolitan area had a population of nearly 3 million in 2000. The area is projected to grow by an additional 1 million by 2030. A total of 28 million people live within 400 miles, or a day’s drive from MOA.  Income levels are high. The metropolitan area’s per capita income was $33,561 in 1998, $6,358 or 23.4% greater than the national average. Income also grew by 6.1% over the previous year. This placed it fifth among the 25 largest metropolitan areas in per capita income behind San Francisco, New York, and Boston.  The metropolitan area is the regional center of the Upper Midwest. Its sphere of economic influence extends into western Wisconsin, northern Iowa, and the Dakotas. It provides the region with professional sports (football, basketball, baseball, and hockey), cultural venues (live theater, music, and art), services (financial, medical, transportation, and personal), and retailing (upscale, unique, and specialized).  MOA is an international attraction. About 6% of MOA’s visitors come from outside the United States. Part of this is because of business travelers associated with local Fortune 500 companies like 3M, The St. Paul Companies, General Mills, and Medtronic. Consumers are attracted because the price of merchandise is less (Japan) or there are no taxes on clothing (Canada). The Minneapolis-St. Paul airport, located two miles away, is the world’s thirteenth busiest and a hub for Northwest Airlines, which provides easy access to the Mall via frequent shuttles.  The market was “under-stored.” The metro area had less retail space per capita than other markets. The last regional mall had been built 15 years earlier. Most of the eight malls had not been physically updated, and none had an important entertainment component.  MOA is huge. MOA is 4.2 million square feet, including 2.5 million square feet of retail space. It combines something for everyone: a theme park, Lego Land, Cereal Adventures, and Underwater Adventures for families, bars; nightclubs, cinema and recreation for young adults; four department stores, over 520 specialty stores, and numerous restaurants for adults at every age.  MOA has unique stores. Nordstrom’s, Macy’s, and Bloomingdale’s have their only store in the market here. Major chains use the Mall to test new stores or redesigned stores, which keeps the Mall fresh and alive.  MOA creates events. Events drive traffic to the Mall and, by extension, to the stores and entertainment venues.  MOA has excellent access and parking. MOA is located on the major circumferential and near other major highways. Highway ramps were designed to facilitate huge amounts of traffic as part of developing MOA. Similarly, MOA has 12,750 ramp spaces plus 7,000 overflow spaces across the street.

Chapter 14 14-22 2. What (a) retail and (b) consumer trends have occurred since Mall of America was opened in1992 that it should consider when making future plans?

Answers:

a. Key retail trends.

 Regional malls are mature. The first fully enclosed, climatically controlled regional mall, Southdale, opened five miles away from MOA in 1956. It was a planned center that attempted to replicate downtown shopping centers. While the tenant mix changed over the years, the regional mall’s physical structure limited what it could change.  Regional malls are undifferentiated. Malls offer shoppers similar stores within a geographic area. This results in homogeneous offerings, few points of difference, and few reasons to shop in a particular mall other than convenience.  Retail competition has changed. Discounting has become pervasive. General merchandise discounters, category killers, off-price stores, and factory outlet stores provide shoppers with lower prices, improved selection in some product areas, and greater convenience. They have become destination stores. Malls find it difficult to include such stores in their tenant mix because of their high rent structure, lack of access, and conflict with existing full-price tenants.  Can the MOA continue to attract retailers? MOA has a higher rent structure, which intensifies the need to attract large numbers of people. There has been significant turnover of stores, which puts increased pressure on MOA management.  New regional malls could undercut MOA. A proposed mall 20 miles from MOA could replicate some of the stores and entertainment venues for local shoppers. This would be particularly threatening if Nordstrom’s and Macy’s were to be part of the new mall.  Other regional malls are updating themselves. Some of the regional malls have expanded, added off-price stores, entertainment, improved parking, etc. The threat of adding other department stores to them could also undercut MOA.  Catalog and Internet retailers are increasing pressure on store-based retailers. The convenience, selection and pricing of these shopping venues are siphoning off much of the growth in retail sales. This limits store-based retailer’s sales growth on one hand and, on the other, makes it difficult to leverage their high fixed costs of having a physical facility.  The terrorist attack of September 11, 2001 has increased security concerns and expenses for malls. Large malls that attract large numbers of shoppers could be a terrorist target for explosives and biological or chemical agents. Heightened security measures have resulted in increased costs at the same time revenues were declining. No one is sure what will happen in the long run.

14-23 Chapter 14 b. Key consumer trends.

 Consumer behavior has changed. The increase in dual-income households has resulted in a major changes in the time spent in search, comparison, and actual buying among consumers. “Shoppers” have become “buyers.” They spend less time shopping and comparing. The amount of time consumers spend in regional malls has declined about an hour a month. Consumers increasingly prefer to shop at freestanding stores or strip malls. They are easier to get to and to get in and out of quickly compared with regional malls.  Can the MOA continue to attract customers? MOA is highly dependent on non-local visitors. It is not known if shoppers will return for subsequent trips. Keeping MOA fresh will be important.  Consumer purchasing power increased substantially in the 1990s. Salaries, stock values, and housing prices increased greatly buoying retail sales. A recession dampened purchasing power in 2001. The growth of income and wealth appears less certain than it was in the 1990s.  Consumer credit has expanded faster than income. Credit card, installment loans, mortgages, and home equity loans all reached all-time highs in the 1990s. This helped fuel retail growth. Continuation of this trend is less certain..  The terrorist attacks of September11, 2001 changed people. For the short term, these resulted in lower retail sales, less travel, staying home more, and reevaluating priorities. These and possible other terrorist events have made consumers less predictable in their shopping behavior at least for the short term. Less travel and staying closer to home will benefit places less dependent on tourism. It will likely reinforce the “nesting” trend that began in the 1980s.  MOA needs to partner with other entertainment, recreational, cultural, and tourist attractions and facilitators. Bundling or packaging of trips and tours has become increasingly important. The region in general and Minneapolis-St. Paul offer numerous partnership possibilities. The proximity of the airport, a Northwest Airlines hub and its corporate headquarters, could facilitate partnerships. The advantages of partnering can create synergies beyond what either partner could contribute individually.

Chapter 14 14-24 3. (a) What criteria should Mall of America use in adding new facilities to its complex? (b) Evaluate (1) retail stores, (2) entertainment offerings, and (3) hotels on these criteria.

Answers:

a. Possible criteria to use.

 MOA needs to assess what would attract new visitors and improve return visits. MOA should not attempt to duplicate what it already offers. More of the same won’t cut it. It should include stores, attractions, and facilities that will be a draw or destination on their own such as an IMAX theater. It should also provide things that will complement what is in the mall such as lodging. Similarly, it should provide other facilities that will attract non-shoppers such as office space for workers and convention space for business events. It must constantly reinvent itself for “distance” shoppers in order to attract them for return visits.  It should continue to freshen the mall with new and exciting retailers and entertainment attractions. New retailers continue to emerge like those selling consumer electronics. MOA needs to identify these retailers and incorporate them into the tenant mix. They must continually be on the cutting edge of entertainment attractions and restaurants as well.

b. Evaluate (1) retail stores, (2) entertainment offerings and (3) hotels on these criteria.

1. Retail stores.

 New concept stores or redesigned stores freshen the mall. They catch shoppers’ attention and position the mall as the place to see what’s new before it’s available in other malls.  Inclusion of category killers and discounters enlarges the market appeal. It provides greater variety in product and pricing at the same time it helps neutralize the advantage that similar freestanding and strip mall stores have.

2. Entertainment offerings.

 One of MOA’s points of difference is entertainment. It must continuously evaluate what it has as well as identify emerging entertainment attractions. An IMAX theater, recent addition of a bowling alley, the proposed conference/entertainment center will extend the mall.  MOA must balance the variety of entertainment to serve existing and prospective visitors. New types of entertainment, or offering special events like concerts, trade shows, conferences, and special events are needed.

14-25 Chapter 14 3. Hotels.

 Hotels complement the MOA. They would make MOA a one-step shop for visitors spending more than a single day at the mall. It would be especially advantageous for visitors that fly in, particularly those from abroad. Special services like employees who speak foreign languages, currency exchange, broad menu selection at the restaurant(s), and international cable television would be necessary. Swimming pools, game rooms, vending, etc. should also be included.  Hotels to support the conference center and office buildings would be required. These would need to accommodate the special needs of the business traveler: concierge, telecommunications, meeting rooms, workout facilities, room service, etc.

4. What specific marketing actions would you propose the Mall of America managers take to ensure the continuing success in attracting visitors (a) from the local metropolitan area and (b) from outside of it?

Answers:

a. Steps to attract visitors from the local metropolitan area.

 Attract unique specialty stores not in the market. This keeps the mall fresh and exciting and differentiates it from other malls.  Continue to create special events. These are the retail equivalent of sales promotions in the package goods area. It gives consumers another reason for coming to the mall.  Increase security to relieve 9/11 fears. MOA is the country’s largest and best- known mall. It could be a terrorist target. Increased security would ensure that terrorist activity does not become a reality at the same time it reassures those concerned about security that the mall is ensuring their safety.  Continue to work with government officials to improve transportation to and from the Mall. This includes the new light rail line from downtown Minneapolis, the proposed line between Minneapolis and St. Paul, proposed commuter rail, and integration and coordination of local metropolitan and charter bus lines.  Attract cutting edge entertainment venues. This would include all types of active entertainment such as golf simulations, dance instruction, etc.

Chapter 14 14-26 b. Steps to attract visitors from outside the local metropolitan area.

 Work with the state in promoting tourism. This involves inclusion in radio, TV, newspaper, and magazine ads; promotion of tourist trade shows in the U.S. and abroad; inclusion in the state’s website or having a direct link.  Work with chambers of commerce. Providing brochures, web links, and easy transportation from hotels, the convention center, and business centers is important.  Continue the public relations campaign. Increase awareness of the Mall and give people another reason to visit the Mall again.  Develop package deals with other tourist attractions and airlines. Create multiple reasons for visiting Minnesota and the Mall. The power of acting as one will increase total traffic that will help the Mall.  Develop special shopping packages with the airlines. Fly in shoppers during off-season when airline traffic and shopping activity are soft. January and February are the prime examples.

Epilogue:

Listed below are some facts about the Mall of America that can give your students some idea about the largest mall in the U.S.:

 Date opened: August 11, 1992.  Visits since opening: more than 350 million.  Weekly visits: ranges from 600,000 to 900,000 (varies by season).  Cost to build: more than $650,000,000.  Gross building area: 4.2 million square feet; Mall of America sales literature says it can fit 32 Boeing 747s or 20 of St. Peter’s Basilica in Rome within its confines.  Gross leasable retail space: 2.5 million square feet; this is the area of 88 football fields.  Number of stores: over 520.  Number of sit-down restaurants: 22.  Number of fast food restaurants: 27.  Number of specialty food stores: 34.  Number of nightclubs: 8.  Number of theater screens: 14.  Employees at Mall of America: 11,000 (year-round); 13,000 (summers and holidays).  Parking spaces at Mall of America: 12,750 on site, 7,000 off-site.  Percent of visitors from outside 150-mile radius: 37 percent (it can go up to 40 percent at certain periods of the year.).

14-27 Chapter 14  Key attractions: Knott’s Camp Snoopy, Lego Imagination Center, Planet Hollywood, Upper Eastside Entertainment District, Cereal Adventures, Rainforest Café, a 1.2 million gallon walk-through “Underwater Adventures” aquarium that cost $28 million to build and $7 million annually to maintain.  Camp Snoopy: 30 million plants, approximately 20 rides including a log chute, roller coaster, ferris wheel, Mystery Mine Ride, and Mighty Axe.  Walking distance around one level: .57 mile around one level with 4.3 miles to total storefront footage.  The average amount spent by visitors per visit is $125, compared with a nationwide average for malls of $51.94. Tourists spent twice the amount of locals.  The average time spent at the MOA by visitors per visit is 3.0 hours; non-residents average 3.5 hours and metro area residents 2.0 per visit.  97 percent of Mall of America respondents indicated that they intended to visit again.  Visitors come from all around the world, but most non-U.S. tourists come from five countries: Canada, Japan, England, Germany, and Mexico.  Education: Two universities and one high school.  $875 million in sales in 2001.  Two miles from Minneapolis-St. Paul International Airport, a hub for Northwest Airlines and the thirteenth busiest airport in the world.  Constructed on a 78-acre parcel that was formerly occupied by the Met Stadium where the Twins and Vikings played.  7,000 hotel rooms close to the Mall.  Generates more than $1.6 billion in economic impact for the state of Minnesota.  Mall sponsors include NWA, Pepsi-Cola, Grand Casino, USPS, Daimler Chrysler.  More than 2,500 couples have been married at the MOA.