Retail Marketing Management

Transcription

1 second edition David Gibert Retai Marketing Management This, the second edition, is one of the few retai marketing textbooks that fuy integrates the two issues in a concise, readabe, up-to-date way. Key features: A cear and accessibe writing stye Learning Objectives, Iustrations, Exampes, Mini Case Studies and Revision Questions A coherent structure, which provides a ogica overview of the deveopment of a retai marketing management strategy This edition aso has expanded coverage of: The retai marketing mix, with a chapter on each area Retai marketing panning Retai marketing environment and retai communications Segmentation and positioning Eectronic retaiing Retai Marketing Management Retai Marketing Management covers the key marketing appications of retai management by marrying the traditiona retai marketing theory with newer retai concepts. second edition Retai Marketing Management David Gibert Internationa aspects of reguation, contro, concessions and particuar consumer markets Merchandising and foor pans, with foor pan iustrations David Gibert is a Professor of Marketing at the Surrey European Management Schoo, University of Surrey. David Gibert Retai Marketing Management is an invauabe aid to students of Retaiing, Retai Marketing and Retai Marketing Management at undergraduate eve. HND students of Retai Marketing wi aso find the text usefu. Cover: Armani shop interior by James Morris Axiom an imprint of second edition

2 Retai Marketing Management

3 We work with eading authors to deveop the strongest educationa materias in marketing, bringing cutting-edge thinking and best earning practice to a goba market. Under a range of we-known imprints, incuding Financia Times Prentice Ha, we craft high quaity print and eectronic pubications which hep readers to understand and appy their content, whether studying or at work. To find out more about the compete range of our pubishing, pease visit us on the Word Wide Web at:

4 Retai Marketing Management David Gibert

5 Pearson Education Limited Edinburgh Gate Harow Essex CM20 2JE Engand and Associated Companies throughout the word Visit us on the Word Wide Web at: First pubished 1999 Second edition 2003 Pearson Education Limited 2003 A rights reserved. No part of this pubication may be reproduced, stored in a retrieva system, or transmitted in any form or by any means, eectronic, mechanica, photocopying, recording or otherwise, without either the prior written permission of the pubisher or a icence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1P 0LP. ISBN British Library Cataoguing-in-Pubication Data A cataogue record for this book is avaiabe from the British Library Typeset in 10/12.5pt Sabon by 35 Printed and bound by Be & Bain Limited, Gasgow The pubisher s poicy is to use paper manufactured from sustainabe forests.

6 Contents About the contributors Preface xi Acknowedgements xii ix 1 An introduction to retaiing as an activity 1 Hayey Myers and David Gibert The retai environment 1 The growing importance of the retai industry 2 The study of retaiing 6 Retai definition 6 The dynamic nature of retai change 8 The structure of retaiing in the UK and Europe 15 Concusion 16 Exercises 17 References and further reading 18 2 An introduction to retai marketing 20 Retaiing and marketing 20 Need for a strategic approach 21 The deveopment of marketing 27 Definitions and concepts of marketing 31 The differences between marketing and seing 34 Marketing management tasks 35 The adoption of marketing 36 The marketing environment of the company 37 Aternative business phiosophies 39 Marketing orientation 41 Concusion 43 Exercises 44 References and further reading 45 3 Consumer behaviour and retai operations 46 Consumer behaviour in the retai context 46 Comparison of behaviourist and cognitivist approaches 51 The main theories of consumer behaviour 51 The buying decision process and the impications for retai management 55 Understanding motivation Masow s hierarchy mode 65 Demographic factors 67 Socio-economic categories 71 Roe and famiy infuence 74 Socia infuence 82 Concusion 83 Exercises 84 References and further reading 85 4 The management of service and quaity in retaiing 87 What constitutes retaiing? 88 The service product concept 89 The intangibe tangibe product continuum 90 A cassification of service and quaity 92 Impementation of service management 97 Why there is growing emphasis on contro of quaity 100 What are the key terms for quaity? 101 Characteristics of quaity 102 Quaity auditing systems 104 Is quaity a cost or a ong-term benefit? 106 Concusion 109 Exercises 109 References and further reading The retai marketing mix and the retai product 112 What is the marketing mix? 113 The marketing mix for services are the four Ps sufficient? 113 Target markets 116 The retai product 118 A breakdown of retaiing as a product 118 Store ayout 124 Concusion 131 Exercises 132 References and further reading 133 v

7 Contents 6Merchandise management 135 James Be and David Gibert What is merchandise management? 135 Methods of panning and cacuating inventory eves 137 Merchandiser skis and profie 141 Category management 144 Range panning 146 Space aocation 150 Merchandise assortment and support 153 Negotiating the purchase 154 Concusion 154 Exercises 155 References and further reading Retai pricing 157 Understanding price as a concept 157 Price sensitivity 158 Further factors infuencing pricing 161 Approaches to pricing the retai product 162 Pricing and the reationship to vaue 167 Markdown poicy considerations for retaiers 170 Concusion 172 Exercises 172 References and further reading Retai communication and promotion 175 Setting objectives 175 Communication effects 178 Advertising 179 Saes promotion 186 Reationship marketing and oyaty schemes 188 Persona seing 199 Pubic reations 201 Other important promotiona toos 204 Characteristics of promotions 206 Concusion 207 Exercises 208 References and further reading Retai distribution and suppy chain management 211 Channes and channe fows 212 The suppy channe 213 Growth of channe reationships and partnerships 215 Distribution ogistics and stock contro 217 Retai ogistics 217 Retai ogistics the cost structure 219 Computerized repenishment systems (CRS) 224 Corporate repenishment poicies 224 Internet and direct distribution systems 227 Concusion 230 Exercises 230 References and further reading Methods and approaches to retai strategy and marketing panning 233 Probems that may arise if retai panning is ignored 235 The purpose of a marketing pan 236 Reasons for poor panning experiences 237 The structure of the marketing pan 240 The corporate mission and goas 240 Understanding the forces of industry competition 242 Externa and interna audit 245 Business situation anaysis 246 Providing an effective marketing mix strategy 271 Monitoring the pan 272 Concusion 273 Exercises 273 References and further reading Retai ocation strategies and decisions 276 Geographic ocation decisions 278 Expanations for the spatia distribution of retai activities 282 Location site and types of retai deveopment 287 Locationa techniques 292 Catchment area anaysis 294 Regression anaysis 296 Retai property deveopment 299 The easing of a retai outet 300 Concusion 301 Exercises 302 References and further reading The management of a retai brand 304 Definition of a brand 306 The roe of the brand 307 Brand oyaty 308 Positioning of a brand 309 Personaity of a brand 312 Consumers concept of sef-image 316 Brand proposition 317 Brand name 318 Brand awareness 319 vi

8 Contents Managing brands over their ife cyces 320 Successfu brands 321 Brand updating 323 Counterfeit or copycat brands 325 Own-brands 325 Corporate branding 329 Types of brand extension 330 Concusion 334 Exercises 334 References and further reading The appications of IT to retai marketing 337 Joshua Bamfied and David Gibert The growing roe of information technoogy in retaiing 337 Information technoogy some expanations and definitions 338 IT for competitive advantage 339 Capturing and transmitting data at the point of sae 346 Database marketing, data mining and business inteigence 348 Business e-commerce and data communications 350 Eectronic retaiing 354 Future trends 365 Concusion 368 Exercises 368 References and further reading Consumerism and ethics in retaiing 372 The different pressures for a company to be sociay responsibe 373 Criticism of marketing activity 378 Product misuse and safety issues 384 Green issues 385 The acceptabiity of a societa marketing approach 387 Corporate socia responsibiity 389 Concusion 393 Exercises 394 References and further reading Internationa retaiing 396 Hayey Myers and David Gibert The move to internationa retaiing 396 The deveopment of internationa retaiing 397 Internationa retaiing: a definition 400 Internationa retai structures 404 Motives and reasons for internationaization 406 Direction of expansion 414 Market-entry methods 417 Typoogies of internationa expansion 421 Concusion 422 Exercises 423 References and further reading The future of retaiing 426 Improved understanding of the key changes 427 More emphasis paced upon brand, image and positioning 433 Emerging trends in IT 435 The physica aspects of retaiing 437 Company earning curves 439 Concusion 441 Exercises 441 References and further reading 441 Index 443 vii

9

10 About the contributors David Gibert, BA, MA, DipM, PhD, is Professor of Marketing in the Schoo of European Studies at the University of Surrey. Prior to working in academia he was empoyed as a marketing manager for Rank Leisure. He aso has experience of working with Littewoods on various aspects of their strategic panning and was retained as a Research Director of major studies into image, promotion awareness and change of corporate identity. He has extensive consutancy experience, having worked on an assignment for M&S in the restructuring of their marketing, has carried out ocation studies, and acted as ead consutant in the improvement of retai outets in museums, zoos and other eisure attractions. Dr Gibert has pubished extensivey in appied marketing journas and is very invoved in the fieds of tourism marketing, consumer behaviour and reationship marketing. Joshua Bamfied, MA, MPhi, MBCS, is Director of the Centre for Retai Research based in Nottingham and Professor of Management. He runs his own consutancy and has carried out work over the ast twenty years for a range of arge and medium-sized retaiers, mainy deaing with EPOS and IT as we as strategic innovation. He has aso conducted a number of studies into the costs of crime and the use of technoogy to combat theft. James Be, BA, CertEd, MBA, is a Senior Lecturer in Retai Management in the Schoo of Management Studies for the Service Sector at the University of Surrey. Before starting an academic career, he worked for a number of years in food retai operations. Current research interests incude the management of retai service quaity and of consumer co-operatives. Hayey Myers, BA, PhD, is currenty Director of European Retai Research with Retai Inteigence, Minte Internationa Group and Visiting Feow at the University of Surrey. Previousy she spent three years as a Lecturer in Retai Management in the Schoo of Management Studies at the University of Surrey, where her teaching and research interests incuded the internationa activity of retaiers. Prior to this she competed a PhD, which focused upon the internationaization of European food retaiers. ix

11

12 Preface Retaiing occupies a pre-eminent position in the economies of a modern societies. However, retaiing is by no means static. In the twenty-first century we are witnessing an ever-increasing series of changes in retaiing incuding the decine of once powerfu icons, such as Marks & Spencer, as we as a turbuent introduction of appications of the Internet to retaiing. Market stabiity is a thing of the past as technoogy advances and retaiers have to seek out ways to add vaue to their services. In order to address contemporary change the second edition of this book has been revised and updated, based upon new knowedge reated to retai marketing as we as feedback from a number of anonymous reviewers. As part of the incorporation of the atest deveopments the book has been restructured with the marketing mix expanded and extended into separate chapters to incorporate sections such as retai formats and category management. More emphasis has been paced on eectronic aspects of retaiing and a chapters have been extended and revised. The main phiosophica underpinnings of the book remain. In short, it is based upon the beief that in order to gain success retai management has to be carried out within the context of a marketing approach. As such the need for a retaier to ook at the business from the customer s point of view is essentia. Each of the chapters emphasizes a consumer-ed approach so as to refect the key marketing issues facing today s retai marketpace. The aim of this edition is to provide the theory, concepts and practice of retaiing so that the needs of undergraduate and/or postgraduate students, managers and practitioners are met. The continuation in the burring of areas of retai with the incusion of financia services, catering outets and eectronic retaiing has made it even more important to have specific chapters on service and quaity, IT, consumerism and retai brand management. In addition retaiing is becoming much more internationa and there is a need to understand the compexity of the process of deciding on internationa expansion given the number of pitfas that can occur. The book has a number of topica minicase studies that hep the reader to reate more easiy to the theories because of the practica nature of the content. The atest book coud not have been produced without the hep of others, prime among whom are James Be, Hayey Myers and Joshua Bamfied. I am aso indebted to advice from Chris Dutton and Harvey Es at Brighton University, Bonny Yu, and Chares Stancomb at SRI Consuting Business Inteigence. My thanks are aso due to those staff at Surrey University who have heped in my quest to find materia for this book or improve different sections, incuding Karen Choi, Gavin Ecces, Aisa Kosaker, Jenny Long, Haiyan Song, Harmen Oppewa and Jan Powe-Perry. I need especiay to thank Jean Gibert, who made many comments regarding the draft manuscripts, and Pau Gambe who was supportive of my efforts throughout the second edition s production. David Gibert xi

13 Acknowedgements xii We are gratefu to the foowing for permission to use copyright materia: Figure 13.3 from Strategy and the Internet by Porter, M.E., in Harvard Business Review, March, pp , reprinted by permission 2001 by the Harvard Business Schoo Pubishing Corporation; a rights reserved. Minicase 2.1 from Does M&S have a future? in The Economist The Economist Newspaper Limited, London, October 31, 2000; Minicase 3.1 from Youth, Inc in The Economist The Economist Newspaper Limited, London, December 23, 2000; Minicase 3.2 from Think Ethnic, Act Ethnic, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, Juy 5, 2001; Minicase 4.2 from The Persona Touch in The Economist The Economist Newspaper Limited, London, November 11, 2000; Minicase 6.1 from M&S perfect soution?, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, September 13, 2001; Minicase 8.1 from Get the most out of window space, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, August 2, 2001; Minicase 8.4 from Point of Purchase: POP designers add creative ingenuity, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, May 24, 2001; Minicase 10.1 from Has the Body Shop ost its direction for good?, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, May 10, 2001; Minicase 11.2 from Market Forces in The Economist The Economist Newspaper Limited, London, October 7, 2000; Minicase 12.1 from The right to grey goods?, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, Juy 19, 2001; Minicase 12.2 from How shoud Monsoon go about expansion?, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, August 2, 2001; Minicase 13.1 from Opinion: Onine shopping the next five years, FT.com, The Financia Times Limited, October 26, 2000 Richard Hyman, Chairman Verdict Research Limited; Minicase 16.2 from How can KFC catch the UK s fast food retaiers?, reproduced from Marketing magazine with the permission of the copyright owner, Haymarket Business Pubications, August 16, We are gratefu to the Financia Times Limited for permission to reprint the foowing materia: Minicase 1.2 from Rewriting the rues, Financia Times, August 17, 2001 John Hunt; Minicase 5.3 from M&S hopes tis wi revive with the sound of music Financia Times, Juy 26, 2001; Minicase 8.2 from Persuading viewers to pay for

14 Acknowedgements services coud be tough Financia Times, September 5, 2001; Minicase 10.2 from 7 from Eeven wants to cut it the UK way Financia Times, Juy 25, 2001; Minicase 12.3 from Back to cheap and cheerfu Own Labe Financia Times, June 19, 2001; Minicase 13.2 from How the fittest survived the dotcom metdown: Onine Retaiing Financia Times, August 27, 2001; Minicase 14.2 from Brusses drops compact disc price-fixing probe Financia Times, August 18, 2001; Minicase 15.1 from Creating a warm fuzzy feeing Financia Times, August 31, 2001; Minicase 15.2 from Kingfisher s new chief executive wants a run of good fortune Financia Times, August 2, 2001; Minicase 15.3 from UK pc: overspent, overstretched, over there from (2001 News Anaysis) Financia Times, June 19, In some instances we have been unabe to trace the owners of copyright materia, and we woud appreciate any information that woud enabe us to do so. xiii

15

16 1 An introduction to retaiing as an activity This chapter shoud enabe you to understand and to expain: the importance of the retai industry; what retaiing is; the major theories of change which underpin the study of retai management; the structure of retaiing in the UK. THE RETAIL ENVIRONMENT It is often stated that the ony constant in retaiing is change and it is certainy true that the pace of deveopment within retaiing is acceerating. More than at any other period before we are witnessing the emergence of new forms of retaiing, in part as a response to demand from increasingy sophisticated consumers. The market is becoming more segmented with retai formats focusing on the needs of particuar consumer groups. The resut of this is the deveopment of a more compex retai environment. Where once it was manufacturers brands that were a important, the 2000s are witnessing the power of retaiers brands chaenging the position of suppiers. The traditiona forms of independenty owned sma businesses and co-operatives have ost significant market share and, in deveoped economies, the retai sector is now characterized by arge-scae mutipe chains run by powerfu and sophisticated organizations. The increasing size of retaiers and intensifying rates of competition in the markets in which they are operating has ed retaiers to search for new ways in which to grow their businesses. More recenty we have observed the trend in retaiers moving away from their core businesses into such areas as financia services exempified by eading grocers Tesco and J. Sainsbury inking up with the Roya Bank of Scotand and the Bank of Scotand respectivey. The other main avenue of growth has been to move retai operations into new markets. Many foow a border-hopping strategy moving into nearby markets, whie others have focused on markets they perceive to be cuturay cose for exampe, US retaiers such as Gap entering the UK. Certainy retai internationaization has boomed in recent years, resuting in the same famiiar ogos, iveries, store fascias and retai formuas being found throughout the word. A this iustrates that retaiing is a truy dynamic industry. More recenty the impact of e-retaiing has received considerabe attention however, after the initia hype, the success mode for most retai sectors now seems estabished as one of muti-channe retaiing. Many pure-pay Internet retaiers are having a tough time 1

17 An introduction to retaiing as an activity 2 attempting to make profits, even if they are abe to increase saes (for exampe the e-taier Amazon). The Internet is aso used as a compementary channe by estabished bricks and mortar retaiers moving to a muti-channe bricks and cicks approach, as exempified by UK grocer Tesco, among others, with its Tesco.com onine grocery offer. THE GROWING IMPORTANCE OF THE RETAIL INDUSTRY Retaiing is not ony an integra part of our economic structure but aso shapes, and is shaped by, our way of ife. Whie the trading of goods has aways been a part of traditiona societies, in recent times the buying and seing of products has become a much more formaized and brand-dominated activity. Even as recenty as the 1960s, retaiing was predominatey seen as having a smaer and significanty ess important roe than other industries such as manufacturing. However, the retai sector is increasingy being viewed as an important activity in the economy and its impact on society in genera is readiy acknowedged. This acceptance is a refection of a number of factors; for exampe, retaiing accounts for a significant proportion of the economy, it empoys a arge proportion of the workforce, and retaiers today are among the argest and most sophisticated of organizations. The power of individua retai organizations is growing; they are now comparabe with, and even bigger than, many manufacturers, which is an indication of the growing dominance of retaiers within the suppy chain. Certainy the annua turnovers achieved by retaiers are comparabe with the argest companies in other service industries. If the retai sector is compared with organizations within the hospitaity sector, and indeed with major corporations outside the service sector, the reativey powerfu position of retaiers is cear (Tabe 1.1). The increasing importance of the retai sector is refected in its contribution to GDP. In 1999, the UK retai sector accounted for about 10 per cent of GDP, thus a very significant proportion of the economy is inked to retaiing. Whie pubic poicy tends to recognize its importance as a driving force of the economy and aims to promote its sustained growth, other reguations, such as panning restrictions on arge new stores and imits on store opening hours, act in favour of some consumer groups and sma independent retaiers and baance the power of the mutipe retaiers. A significant historica reason underying the perceived increasing importance of retaiing is that its contribution to the economy is much more visibe in the modern era than it was in the past. In ess deveoped economies retai structures are ess deveoped and are dominated by informa retaiing, such as markets. In such environments bartering Tabe 1.1 Annua turnovers for a variety of companies, 2000 Company Sector Turnover 2000 ( m) Tesco UK Food retaiing Uniever fmcg Uniever UK fmcg Marks & Spencer Variety retaiing Gaxo SmithKine Pharmaceuticas Whitbread Group Hospitaity Sources: Company annua reports; Retai Inteigence, 2001a

18 The growing importance of the retai industry may be an important way of trading, making it very difficut to estimate transactions. Even when currency is used, informa retaiing methods are much ess ikey to incude the recording of transactions in a systematic way, in part due to the seers not being faced with the same reguations as forma retaiers. As a retai structure becomes increasingy deveoped, characterized by arge mutipe chains rather than sma-scae independent retaiers, the retaiers businesses become more sophisticated and successfu and hence turnover and profit are more visibe. The formaization and growing importance of distribution channes has resuted in the retai sector s contribution to economic vitaity becoming more obvious as a matter of pubic record. Another indication of the important roe retaiers pay in today s society is their status as empoyers. It is estimated that the retai industry empoys one in nine of the UK workforce. Retaiers empoy a significant proportion of the overa workforce, and they are particuary important empoyers of some groups. Notaby, the retai sector has higher eves of femae empoyees than many other sectors; indeed, it is estimated that more than two-thirds of the retai abour force are femae. Aso more than haf of retaiing empoyees are empoyed on a part-time basis (Labour Market Trends, 1998), in part due to the need to maintain a highy fexibe workforce capabe of adapting to the differing abour demands. In the past the retai sector has had a reputation for not supporting its empoyees and for having ower pay and onger hours than other sectors. However, increasingy there are exampes of retaiers impementing innovative and supportive working conditions. For exampe, the DIY retaier B&Q has marketed itsef to both its workforce and consumers as an organization supportive of part-time and oder empoyees. Retaiers are becoming increasingy important in their roe as gatekeepers within the channe of distribution. In the past, when suppiers were dominant, retaiers suppied the merchandise that was on offer and consumers seected from this. However, as retaiers have become significanty more powerfu they are more abe to exert their power over suppiers and stock ony the brands they wish to se, depending on their overa retai strategy and suppier reationships. The effect of this is that consumers are abe to purchase ony what is seected and offered to them by the retaiers, as opposed to manufacturers, and so retaiers may be considered to be shaping consumer demand (see Minicase 1.1 which highights this debate). MINICASE 1.1 Britain: Supermarket profits boom whie food poverty increases At the outbreak of the foot and mouth crisis, Prime Minister Tony Bair accused Britain s supermarkets of having farmers in an arm-ock to produce cheap food. Ever carefu not to bite the hands that feed New Labour Bair s cabinet contains Lord Sainsbury, head of one of Britain s top five supermarket chains and a major financia backer of the party this popuist jibe at the food retaiing giants was soon dropped. This is an issue that Labour cannot wish away, however. The so-caed cheap-food poicy of the supermarkets is the opposite of how it is portrayed by Labour. It is a poicy of maximising profits at the expense of both their suppiers and, more importanty, their customers. The arm-ock empoyed by Britain s supermarkets is first of a paced on farmers, in order to drive down the price that the major food retaiers pay for agricutura produce. But the supermarkets do not pass this saving on to the miions of working peope who use their faciities. Instead shoppers are being forced to pay over the odds for the food they eat. 3

19 An introduction to retaiing as an activity This situation was exempified by ast week s announcement by the Tesco supermarket chain of record profits of over 1 biion the equivaent of 2.7 miion a day. Britain s food retaiing is the most concentrated in Europe, with the top five supermarket chains Asda, Morrison, Safeway, Sainsbury and Tesco controing 70 percent of a food purchased. This trade was vaued at biion in 2000, an increase of 4.5 percent over the previous year. Deveoping internationa operations are increasingy necessary as the UK food retaiing market is so heaviy saturated. In reporting Tesco s record profits, business weeky The Economist writes that the company s growth prospects now depend upon expanding overseas. The magazine pointed out that Tesco has aready opened 68 foreign hypermarkets, with overa foreign saes growing by 43 percent to 2.9 biion, and increasing by a massive 85 percent in Asia. The purchasing power of these supermarket chains is such that it has forced margins down at many food suppiers. Price discounting by the arge supermarkets has been passed on to suppiers, and a number of suppiers have ost contracts as supermarkets have rationaised their suppy arrangements. The expansion of arge supermarket outets, often in out-of-town ocations that are poory served by pubic transport, has been at the expense of ocay based shops, abe to serve those without cars. Industry figures record that between 1975 and 1995, the number of produce outets fe from 30,000 to just 8,000. The powerfu position of Britain s supermarket chains has created an oigopoy, with a very few payers controing virtuay a outets for food and fresh produce, and abe to dictate terms to the primary producers. A 1996 report in the Austraian Agribusiness Review pointed out that the UK eads the word in food retaier suppy chain inkages for meat and produce. These are horizonta retai aiances, where individua retai chains are powerfu buyers in their own right. In Europe, the chains combine in buying groups to further enhance their buying power. These groups account for one third of the tota European food market, the report notes. The fina report produced by the Competition Commission ast year found that UK food prices were on average percent higher than in France, Germany and Hoand and that this coud ony partiay be accounted for by the reative strength of the pound against European currencies. The investigation concentrated on two main areas of compaint. Firsty, pricing practices, where the Commission concuded that three of the current practices distorted competition and gave rise to a compex monopoy situation. These areas were identified as: persistent beow-cost pricing, price fexing varying prices in different geographica ocations and the adoption of pricing structures that concentrated competition on a very sma number of ines across the majority of the outets from ostensiby competing chains. However, the Commission gave the supermarkets a free hand to continue their operations unchecked. The Commission recommended no remedy for identified adverse effects, arguing that imposing reguations woud cost too much. Secondy, concerning the reationship between the supermarket chains and their suppiers, the Commission found that two common practices in this area aso operated against the pubic interest. Evidence of coercive practices is cear from the report, which states, Most suppiers were unwiing to be named, or to name the main party that was the subject of the aegation. There appeared to us to be a cimate of apprehension among many suppiers in their reationship with the main parties. Here, the Commission merey recommended the estabishment of a Code of Practice, which woud be drawn up by the retaiers and suppiers themseves, but approved by the Director Genera of Fair Trading. Source: Richard Tyer: 23 Apri 2001 For exampe, if organic produce is difficut to obtain or is sod at a reativey high price, saes are ikey to be imited the retaier thus shaping consumer purchasing behaviour. Furthermore, as retaier own-brand ines take an increasingy arge proportion of the market, retaiers are aso infuencing the deveopment of new products. Many retaiers use new product deveopment as a competitive too for exampe, Marks & Spencer ed the way with added vaue ready mea products and continues to deveop innovative products such as their range of Steam Cuisine meas. The issue of retaiers as gatekeepers brings into question the concept of socia responsibiity. It has been suggested that the ony responsibiity of businesses is to make profits 4

20 The growing importance of the retai industry (Friedman, 1970), athough the ate Lord Sainsbury had put it more succincty and fairy by eaving room for ethica concern, seeing profit as a first motive for a commercia business. However, such is the current ack of trust of the pubic in arge business that the degree of socia responsibiity taken by retaiers is being questioned more and more. In some cases reguations are brought in to try and make the retai environment a fairer one. However, retaiers are increasingy using the idea of sef-reguation and socia responsibiity as a marketing too (see Chapter 14). No existing business can reax in the competitive nature of the retai marketpace. Large retai mutipe chains are constanty ooking for new opportunities or new areas in which to grow their business. This is especiay the case in markets with highy deveoped retai structures, such as the UK and France, where competition is fierce and reguation often restricts the deveopment of further stores. One strategy of expansion has been for retaiers to move away from their core business and into broader retai activities: for exampe, moving from the food sector to the DIY or cothing sector, or diversifying into financia services. It is in part a refection of the high esteem in which retaiers are hed that many of the persona banking services are proving to be a success. Customers are dispaying increasing oyaty to the retaier fascia or brand rather than manufacturer brands. It appears that consumers are wiing to trust the ikes of J. Sainsbury or Marks & Spencer with their financia needs in part because they trust their retai offer and organizationa cuture. In fact many companies are moving from a sef-concept of being a trader to one of being committed to the deveopment and marketing of a brand. This market-ed approach requires the deveopment of a sophisticated set of marketing programmes, as exempified in some ater chapters of this book. By strong brand positioning and image creation a retaier can improve trade rather than trading itsef being the main business focus. The rise in competitive pressure in the industry has ed to an endess search for competitive advantage currenty based on the precept that it is much cheaper to retain an existing customer than to acquire a new one. This has ed to the deveopment of oyaty card schemes that provide for targeted marketing whie providing the benefit of vauabe market data for the retaier. Factors iustrating the growing importance of the retai sector arge and increasing contribution to GDP economic importance more visibe major empoyer retaiers as gatekeepers retaiers diversifying their activities organizations growing on an internationa scae size of operations aowing for suppy chain contro burring of areas of retai to incude wider area of business activity Increasingy retaiers are aso expanding their businesses internationay. Athough there have ong been exampes of internationa retaiers, they often focused on the uxury goods markets. Despite earier exampes, it was not unti the ate 1980s that the process of retai internationaization occurred on any significant scae. Furthermore, it is a process 5

21 An introduction to retaiing as an activity 6 that is increasing at an acceerating rate: not ony are more retaiers operating internationay, but they are moving into an increasing number of markets and expanding into more geographicay and cuturay distant markets. Thus, whereas in the past retaiers were essentiay domestic operations, but often deaing with mutinationa suppiers, by the 2000s many are operating as mutinationa companies, thus strengthening their negotiating position (see Chapter 15 for a fu discussion of retai internationaization). THE STUDY OF RETAILING Interest in the study of retaiing has to some extent mirrored the growth and increasing prominence of the retai industry. Retaiing has emerged from a number of interreated discipines: geography, economics, panning and, more recenty, management and marketing. In the past it has not been acknowedged as a subject area in its own right, indeed Potter (1982, p. 2) described the academic study of retaiing as the Cinderea of the Socia Sciences. Increasingy retaiing is being focused upon as an accepted area of academic debate, in part a refection of the industry s growing importance and visibiity as a contributor to nationa economic deveopment. Brown (1992) has suggested that the deveopment of the study of retaiing may be considered as foowing the whee of retaiing (see discussion beow of cycica theories of retai change). Changes in academia have aso resuted in the deveopment of the subject area. University research centres focused on retaiing have become estabished and professoria appointments in retaiing have been made. One outcome of the recognition of the study of retaiing is the fact that academic journas focusing on retaiing are being pubished as we as specific retai industry consutancy reports. As marketing and management discipines have become more estabished, degree courses speciaizing in retaiing have been deveoped in North America, the UK and esewhere within Europe in part in response to cas from industry for significant increases in graduate recruitment in the retai sector. Athough retaiers may have been considered to be behind other industries in terms of recruitment processes, they are becoming more sophisticated as organizations and they are reaizing the importance of appropriate recruitment and retention. As a resut, they are beginning to use simiar procedures and offer empoyment packages that compete favouraby with those of estabished bue chip organizations in the market for graduates. RETAIL DEFINITION There are many approaches to understanding and defining retaiing; most emphasize retaiing as the business activity of seing goods or services to the fina consumer. We have defined retai as: any business that directs its marketing efforts towards satisfying the fina consumer based upon the organization of seing goods and services as a means of distribution. The concepts assumed within this definition are quite important. The fina consumer within the distribution chain is a key concept here as retaiers are at the end of the chain and are invoved in a direct interface with the customer. However, the emphasis on fina consumer is intentionay different from that on customer: a consumer is the fina user of a purchase whereas a customer may have bought for his or her own use, as a present or

22 Retai definition as part of an own business activity. Purchases for business or industria use are normay not retai transactions. Additionay, retaiing incudes more than the sae of tangibe products, as it invoves services such as financia services, hair cutting or dry ceaning. Retaiers are often referred to as middemen or intermediaries. This suggests they occupy a midde position, receiving and passing on products from producers and whoesaers to customers. This is accompished by the addition of service and the provision of the store in a convenient ocation to provide a successfu channe of distribution. The key objective for any successfu channe is to ensure avaiabiity of the right product, in the right quantity, at the right time via the right channe. A marketing channe decisions need to be reated to ensuring the customer is a foca point for the seection and dispay of stock so as to make the saes operation as effective as possibe. In demand-ed Western economies we usuay consider retaiing as providing a necessary service and a positive contribution to the economy. This is due to the effectiveness of the retaier in supporting manufacturing by buying in buk (either directy from the manufacturer or through a whoesaer) on the basis of knowing what the consumer requires. However, in suppy-ed economies such as the former centray panned economies (CPEs) of Eastern and Centra Europe, retaiing has traditionay been viewed as an unnecessary and unproductive ink in the channe of distribution (Myers and Aexander, 1997). Jack (2001) highights this as: The norm throughout most of the deveoped word is modern shop design, products you can pick up to examine, and reasonaby hepfu shop assistants. Such things are a rarity in Russia, where you are more ikey to be screamed at, ordered to produce the exact change and charged for a pastic bag to carry away what you have bought. During the Soviet era, which was pagued by shortages, the shop assistant was king. In pharmacies, the inferiority of the customer was institutionaised by heath reguations. Cients were meant to bend down to speak through a tiny window supposedy for the sake of hygiene through which they received orders on which drugs to buy. The actua term retaiing is thought to be derived from the od French word retaier which means a piece of or to cut up (Brown, 1992). This impies the breaking-of-buk function of the retaier that is, the acquiring of arge amounts of the products they se and dividing them up into smaer amounts to be sod to individua consumers. Thus a retaier carries out a specific service and this shoud not be confused with the whoesaer. Retaiers and whoesaers are different in nature and perform distinct functions. Some specific differences that characterize a retaier are isted beow: 1 The retaier s interface with the customer is predominatey service based, often with socia interaction and interpersona saes techniques masking the sophistication of computer-based ordering, stocking and transaction systems. 2 Retaiers se sma quantities of items on a frequent basis unike whoesaers who se in buk but on a ess frequent basis. 3 Retaiers attempt to provide convenience in terms of ocation, payment and credit faciities, range of merchandise, after-saes service, etc. 4 Retaiers offer seection an assortment of merchandise reated to the target market in order to provide choice. 5 Retaiers set up in business to trade with the genera pubic whereas whoesaers may restrict the genera pubic from purchasing from their warehouses. 7

23 An introduction to retaiing as an activity 6 Retaiers normay charge higher unit prices than woud a whoesaer. 7 A retaier s pricing poicy tends to be simper than that of the whoesaer, with ess use of a discounting structure. 8 The retaier bears a different kind of risk to the manufacturer and whoesaer. THE DYNAMIC NATURE OF RETAIL CHANGE Retaiing, however judged, is dynamic. One of the areas of retaiing that has been addressed by authors is the way in which the retai environment changes. Brown (1987) has reviewed the research in this area and suggests that theories of retai institutiona change may be cassified into three groups: environmenta, cycica and confict theories. Environmenta theories seek to expain deveopments in the retai industry as resuting from changes in the wider environment such as variations in ifestye patterns. Cycica theories, aied to the business cyce, suggest there are patterns of deveopment which may predict changes in the retai industry, just as cyces can be seen in genera economic conditions. Confict theories propose that institutiona retai change is an outcome of the reationships between, and competitive behaviour of, retaiers. MINICASE 1.2 Rewriting the rues (factors of change) FT Destruction is essentia for creativity: Dyson attacked Hoover; Diese attacks Levi s. What did Schumpeter te us about successfu chaengers? First, emergent industry eaders change the rues of the game. For exampe, current marketeers do not see themseves as seing a product but as creating an experience. So Starbucks chaenged the might of Nesté and others in the coffee business by offering a coffee bar experience. Other chaengers that radicay changed the rues of the game incude easyjet, Nokia and Southwest Airines. New Word wine producers, car importers, non-finance intruders in pensions and mortgages and onine retaiing have a dramaticay changed the rues of their industries. A have offered an experience, not simpy a product. Severa decades ago, woud you have invested your money in a pan to buid huge, poory serviced, isoated warehouses fu of inexpensive Swedish fat-packed furniture? Changing the rues means breaking with the past. This requires energy. Schumpeter observed that new industry eaders are motivated by an entrepreneuria drive. Someone with power sees an opportunity and grabs it to restructure the company and, eventuay, the industry. Seecting the right new experience appears compex, especiay when academics try to expain it. Yet from my experience, those who successfuy predict the future do so with disarming, even naive simpicity. Schumpeter is often quoted by critics for his concept of destruction rather than creativity. But he was not suggesting doom and goom for eaders. Many retain their thrones for years. If they react swifty, the threat passes. In Schumpeter s terms, equiibrium is restored to the market. In a recent paper,* four US academics tested Schumpeter s theory, to estabish how chaengers increase the probabiity of dethroning the industry eader. They offered four concusions and one chaenge for success: be aggressive; use a compex repertoire of actions; be unpredictabe; and deay the eader s reaction time. Their chaenge was to keep the company fit. The first concusion be aggressive refers to the ferocity of a sustained attack by the chaenger. Between 1987 and 1990, Microsoft aunched 43 more new actions (new products, ideas and promotions) into the market per year than any competitor. Between 1991 and 1993 it aunched 131 more actions than the number two in the business. This raised Microsoft from fourth to first, bypassing Lotus, Word Perfect and Computer Associates. The second concusion was to strike with a compex repertoire of actions that is, severa different attacks on the same product. So change product, 8

24 The dynamic nature of retai change pricing, production, peope, distribution, promotion. In short, make it impossibe for any competitor to repicate. Nokia did this to the mobie phone market, Wa-Mart to K Mart and Sears and Tesco to Sainsbury. Third, maximise unpredictabiity. Effective chaengers pan unpredictabe actions. They use misinformation and gossip to increase uncertainty. They circuate stories of products, of market penetration, of customer surveys and of appointments in order to raise anxiety. Last, deay the eader s reaction. The onger the eader takes to react, the greater the probabiity that it wi ose market share. The researchers add one ast but important suggestion: keep fit. Some modes of strategic management suggest it is possibe for a competitor to avoid the effects of competition. This paper rejects that view: the chaenger must engage the industry eader, not avoid it. This is a refreshing concusion. In an age of hyper-competition there is no haven. Source: FT.com site; 17 August 2001 * Smith, K., Ferrier, W. and Grimm, C. (2001) King of the hi: Dethroning the industry eader, Academy of Management Executive, 15, 2. Environmenta theory A whoe array of factors shape the nature of retai environments: factors of an economic, socia, poitica, reguatory, cutura and demographic nature a impinge upon the environment in which retaiers operate. It is easy to see direct inks between some environmenta conditions and retai change: for exampe, a reaxation in reguations governing store opening hours changes the retai offer avaiabe. Other changes in the wider environment may be ess direct but sti pay a fundamenta part in shaping the nature of retai deveopment; for exampe, increasing acceptance of femae waged abour infuencing ifestye and consumer purchasing patterns (Myers, 1996). Changes in government panning guideines may provide further exampes of significant environmenta factors. There are specific exampes iustrating how environmenta factors have directy infuenced the deveopment of particuar types of retai format. For exampe, Appe (1972) suggested that the success of the import of the sef-service format from the USA to Europe in the 1940s was due in part to environmenta conditions. The format was based on price competitiveness which made it particuary appropriate in a time of economic downturn. Some consumer groups were characterized by increasing rates of car and refrigerator ownership, which meant there was a growing demand for ess frequent buying. More recenty superstores have transformed the grocery retaiing marketpace in the UK and now account for the majority of retai expenditure each week by UK consumers. The deveopment of superstores is a means by which the eading grocery retaiers have increased their market shares. Customers have switched to this reativey new form of grocery retaiing, moving away from smaer oca stores. Superstores (saes areas greater than square feet) have grown to what coud be a saturation point for the market as there are now over 1100 such outets. Figure 1.1 indicates the growth patterns of these stores in the UK. It is interesting to note that the top four grocery retaiers account for just under 90 per cent of a superstores. Environmenta theories have taken a Darwinian approach and suggest that ony retaiers with the most appropriate organizationa structure and formats wi survive (Gist, 1968; Davidson et a., 1983; Brown, 1987). This impies that if retaiers expand into new markets where there are different environmenta conditions in terms of, for exampe, economy and cuture, they may need to adapt in order to succeed. It aso suggests that if retaiers are to survive over 9

25 An introduction to retaiing as an activity Fig. 1.1 Indicative growth in number of grocery superstores by eading payers Source: Institute of Grocery Distribution, 1997* (totas ony), 2001 time they must respond appropriatey to the evoution of market conditions or otherwise face the possibiity of extinction. The major environmenta factors 1 Changes reated to the consumer: demographic changes increases or decreases in popuation numbers, age groups, racia groups, socio-economic groups, etc.; attitudes and preferences to purchasing, brands and products; changes in ifestye, whereby time is more important and therefore fast food, teephone banking, credit card payments and suchike are becoming important; economic infuences based upon rea incomes, confidence, numbers of women working, etc. 2 Changes in technoogy: microwave cookers, food freezers, motor cars, the Internet, computer appications to business, just-in-time deivery systems, and so on. 3 Changes in competition: the competitive strength or otherwise of actua or aternative channes of distribution, depending upon the nature and type of the retai organization. The impact of the Internet is a fundamenta exampe of new types of competition that can appear. 10 Cycica theories The whee of retaiing One of the origina theories addressing the issue of retai institutiona change is the whee of retaiing (McNair, 1931, 1958). This concept proposes a more or ess definite cyce,

26 The dynamic nature of retai change as foows. When retaiers enter a market they compete by offering goods at the owest possibe price or the bod new concept, the innovation, in order to attract customers. As retaiers deveop their experience and gain capita, they tend to increase their eve of service and quaity and therefore their price. This success aows mature retaiers to move steadiy into an upmarket position. However, retaiers in this position may become vunerabe due to high costs, decining efficiency and, perhaps, stagnating management strategies which cuminate in a downturn in saes. If this is the case the retaier may punge into decine and even be forced to withdraw from the market. The consequence of this move around the whee of retaiing is that a gap is eft at the bottom end of the market an opportunity for a new retaier to enter. An exampe of this process is provided by changes within the UK food retai sector. In the 1970s the main payers were very much price oriented, iustrated by Tesco s saes cry of pie it high, se it cheap. However, throughout the 1980s the main grocery retaiers moved to a higher quaity and service orientation, operating arger stores from more accessibe sites. This trend has resuted in further consoidation of the market during the 1990s and a considerabe gap being eft at the ower end of the market. This opportunity has been seized by the Continenta hard discounters who have moved into the UK market. For exampe, German retaiers Adi and Lid have foowed an aggressive expansion strategy, roing out smaer-scae stores and offering heaviy discounted imited ines reying on high voumes and an efficient operation to make their money. In the cassic phases of the whee of retaiing there are three stages: entry; trading up; and vunerabiity. At the entry stage a retaier enters the market as a ow-price, owstatus competitor with operating expenses reduced to a minimum. This is refected in restricted services, ow rent ocation, modest shopping atmosphere and imited product mix. As the retaier becomes successfu, and accepted, others emuate the origina business. The retaier then tradesup through success to improved faciities, and offers enhanced services and improved or additiona product ines. With maturity, the retaier becomes more vunerabe due to an inabiity to adapt, producing a decine in the rate of return from the business. The entry of new ower-price innovators signas decine for the mature business. In practice the whee of retaiing can expain some of the changes in the UK retai marketpace. The changes from corner store to supermarket as price vunerabiity occurred fits the mode. However, the factors in modern retaiing such as size of operation of eading retaiers, the importance paced on branding and oyaty schemes, and a continua drive for efficiency by a personne create highy competitive operations. The basic difficuty in utiizing the whee of retaiing approach is the timescae. It can vary extensivey, depending on the speed of economic, socia and technoogica change. The retai accordion theory The retai accordion theory suggests that retaiers initiay enter a market as a genera retaier; with experience they focus down on particuar product sectors and/or consumer groups. Over time they begin to diversify their offer in order to grow, but again wi revert to speciaization. The premise of the retai accordion is that the changes in retai operations are reated to strategies that ater the width (seection) of the merchandise mix. An exampe of this type of pattern is the estabishment of sma-scae speciaist food retaiers such as grocers or bakers foowed, over time, by the takeover of the food retai 11

27 An introduction to retaiing as an activity sector by arge-scae superstores with diverse product ranges. We are now witnessing the next stage in this pattern: the re-emergence of the sma store in the guise of convenience formats such as Tesco s Metro and Sainsbury s Loca and Centra with imited ranges for a different market but trading under the same name, brand and reputation. We can see this speciaization occurring due to: store sizes in some ocations being unabe to accommodate greater variety in order to compete and therefore speciaization occurs; greater disposabe income and arge urban popuations aowing for profitabe segmentation; the importance of the speciaist shopping experience and convenience stores; estabished retaiing brands wanting to obtain more speciaist coverage of the market. Potted history of the UK retai marketpace 1950s Rationing ends and austerity and shortage sti prevaent; Popuation is carefu about expenditure and debt; Launch of the sef-service supermarket format in the UK; Very few nationa retai chains; TV advertising heps to boost saes of the eading branded products; Manufacturers set the retai price of their products, e.g. through price-marked packs. 1960s Increased weath and UK popuation increase fues demand; Repea of the Price Maintenance Act aows retaiers greater freedom to compete on price; First motorways buit making it more economica to distribute goods over onger distances; There is a change in socia attitudes deveoping growth of a consumer society especiay with the young; Retaiers become arge enough to dea with manufacturers directy, rather than buying through whoesaers; The fashion and eisure industry deveops. 1970s Youth market continues to deveop and retaiers deveop segmentation strategies; UK joins the European Community; Scanning technoogy first introduced to stores, repacing traditiona price tickets; Supermarkets begin to extend beyond their traditiona range of packaged products to se more fresh foods: meat, fish, dairy, fruit and vegetabes, etc.; Marks & Spencer deveops new chied products, e.g. desserts and ready meas. 1980s Co-op reinquishes its ong-hed position as the UK s eading grocer; Major decine in speciaist oca stores (butchers, bakers, greengrocers, etc.) as the pubic accepts the benefits of the onestop shopping approach of out-of-town and arge formats; Superstores (over sq. ft) repace smaer supermarkets as the eading retai format triggering a race between retaiers to find the best sites; Retaiers centraize their purchasing (buying through head office) and distribution (suppiers deiver to regiona warehouses); Growth of the fast-food sector: pizzas, burgers, kebabs, etc.; Steep rise in the proportion of own-branded products. 1990s Large chains (such as Sainsbury s, Tesco and ASDA) achieve nationa coverage and the high street fascias are simiar in a main centres; Continenta retaiers (Adi, Netto, Lid) enter the UK 12

28 The dynamic nature of retai change marketpace; Sunday opening egaized; Broadening base of retai offers supermarkets become eading petro retaiers and branch out to other forms of retaiing incuding financia services; Longer opening times 24-hour opening in some stores; Large-category retaiers enter the market; Internationaization of retaiers with UK retaier chains expanding overseas and others entering the UK, e.g. America s Wa-Mart, the word s biggest retaier acquires ASDA; Rapid uptake of the Internet prompts the aunch of e-commerce shopping services. 2000s Smart cards and new ways of paying are adopted; E-commerce becomes more sophisticated; The traditiona retaiers hit back at the new cicks and mortar e-taiers by deveoping their own Internet sites; More emphasis on vaue for money and brand vaues as C&A disappears and M&S suffers; Need for more convenience as time is at a premium. The trend to become more genera is due to: expansion of compementary ines as part of the retai offer; a skimming poicy that is, carrying more of the profitabe ines and creaming these off from those of the competition; a move to increase the density of shoppers in-store by providing a compete range offering (one-stop shopping); the growth of arge shopping centres with outets which aow for expansion of ines and ranges. The retai ife-cyce theory The retai ife-cyce theory suggests that retai deveopments pass through stages. At birth (termed the embryonic stage in the context of industry ife cyces), there are sow rates of growth due to imited resources and experience. This is foowed by a time of rapid growth as efficiency and experience increase. Eventuay growth wi eve off into the mature stage due to increased costs and competition and reduced efficiencies. In a mature market the competition remains intense, growth sows and profits begin to fa. A continued decrease in market share and profitabiity wi eventuay cause the deveopment to decine and, if the situation worsens, utimatey to withdraw from the market. The ess competitive companies, which have previousy entered the market, wi be forced out eary as the market goes through a shake-out period. An exampe of a company which has had probems in reation to the ife cyce is Wooworths. In an attempt to remain competitive its range was expanded to a point where the offer was undefined and it became a store of ast resort. The group reaized it was not adequatey providing for the needs of the contemporary consumer and survived ony because it recognized the vaue of adopting a focused strategy. Figure 1.2 iustrates the way a retai business may grow from the embryonic stage into a period of maturity and, perhaps, to fina decine. Confict theory Competition between retaiers causes changes in the nature of the retai environment. However, it is not so much the day-to-day competition between companies that causes 13

29 An introduction to retaiing as an activity Fig. 1.2 The retai ife cyce institutiona change, but rather the imbaance caused by innovations. Brown (1987) states that a response to innovation foows a process of four stages. Initiay, retaiers are in shock at the innovation; secondy, they deny the threat by means of defensive retreat; thirdy, they then move into a stage of acknowedgement and assessment; finay, they deveop a strategy of adaptation. Types of retaier response to innovation shock defensive retreat acknowedgement and assessment adaptation The question is the timescae and strategy requirements which may occur as a resut of the ca for adaptation. There is a need to understand the type of change needed, the cost of any adaptation and the resutant profitabiity of a change. An exampe of retai innovation as a catayst for change is the introduction of sefservice supermarkets. As the supermarket deveoped and increasingy took market share from the traditiona speciaist retaiers a direct reaction by the independents was necessary; in order to remain competitive, they formed themseves into vountary groups and buying aiances. As part of their strategy companies such as Spar copied the trend by offering sef-service. The buying aiances aso heped the independents to remain in touch with the prices offered by the deveoping supermarket chains. A more recent exampe is muti-channe retaiers. Traditiona bricks and mortar payers fet threatened by this new channe of distribution and by the new pure-pay e-taiers. They seized the opportunity to deveop a competing offer, and one that woud compement their existing offer, hence the bricks and cicks approach. Due to the heavy osses incurred by e-retaiing speciaists it is now the muti-channe operators that, on the whoe, are more successfu. 14

30 The structure of retaiing in the UK and Europe Theories of retai institutiona change a summary 1 environmenta 2 cycica: the whee of retaiing the retai accordion the retai ife cyce 3 confict THE STRUCTURE OF RETAILING IN THE UK AND EUROPE A number of structura changes in the retai environment have become evident during the post-war era. These deveopments have occurred throughout Europe, athough they are apparent to differing extents in different markets. Three fundamenta and interreated transitions have occurred in the European retai environment: first, the baance of power has shifted aong the distribution channe from the manufacturers to the retaiers; secondy, traditiona independent retaiers and co-operatives have ost market share to mutipe chain organizations; and thirdy, markets have become increasingy consoidated and concentrated. The second point above is reinforced by Hoinger (1998), who identified that the Co-op had fifty mutua retai societies, of which the fifteen argest accounted for more than 90 per cent of the movement s trade. In fact in 1985 the Cooperative movement as a whoe coud boast that it was the UK s eading grocery retaier, as we as a banker, insurance provider, funera services group and agricutura operator. The Co-op business aowed its competitors such as Tesco, J. Sainsbury, ASDA and Safeway to invest heaviy in store deveopment, deivering a consistent product range to customers whie the Co-op s individua societies were eft to anguish. Tabe 1.2 indicates the saes of some of the major UK retaiers with foreign operations. These structura trends are intrinsicay inked. Retaiers have been abe to use their power against suppiers, in part, due to the growth of mutipe organizations. Mutipes Tabe 1.2 Major UK retaiers with foreign operations, 2000 Saes 2000 Retaier Sector ( m, exc VAT) Countries operated in Dixons Group Eectricas UK, Scandinavia, Ireand, Spain, Portuga Kingfisher Muti-sector UK, France, Germany, Begium, Netherands, Itay, Luxembourg, China, Singapore, Taiwan, Czech Repubic, Sovak Repubic, Turkey, Canada, Brazi J. Sainsbury Grocery UK, USA Tesco Grocery UK, Ireand, Hungary, Czech Repubic, Poand, Sovak Repubic, France, Thaiand, South Korea, Taiwan Source: Retai Inteigence, 2001b 15

31 An introduction to retaiing as an activity have grown dominant by being more competitive and achieving economies and efficiencies of scae, in turn owing to their enhanced negotiating position because of their power over suppiers. The extent of the domination of the market by mutipes varies throughout Europe. The highest eves of concentration and mutipe dominance are in the structuray advanced markets of the UK and Germany, where the top three to five payers account for amost haf the market share in the grocery sector. This trend decreases sighty in the structured markets of France and the Netherands, whie in intermediary and traditiona markets such as Spain, Itay, Portuga and Greece sma-scae independent retaiers sti maintain a strong market presence. However, even in these markets the trend is towards market dominance by mutipes. Just as we can foow these structura trends since the 1960s and 1970s, so we can trace geographica trends. Independent and co-operative retaiers have fought to maintain their market share. To varying degrees throughout Europe pubic poicy has favoured them, for exampe by restricting the deveopment of new stores or controing acquisitions of arge companies. They have aso attempted to fight back strategicay by joining together in vountary groups and aiances and by providing a compementary retai offer to the mutipes. For exampe, sma grocery stores may be unabe to compete with the range of merchandise of a superstore but they can increase their competitiveness by ocating in neighbourhoods rather than out-of-town sites and offering onger opening hours for oca consumer convenience. Retaiers are constanty having to assess the changing environment in which they operate and adapt accordingy. One outcome of this has been the way in which retaiers have atered their store format, size and ocation. Outcomes of environmenta changes are the dichotomous trends in store size, the deveopment of dominant formats in nationa markets, and ocationa issues such as the move of stores to out-of-town sites. Structura trends in European retaiing increasing dominance of retaiers over suppiers increasing market share hed by mutipes and associated oss by independents and co-operatives increasing rates of market concentration technica superiority of the big payers providing cost-effectiveness A of the trends occur to differing extents throughout Europe. The most advanced markets have the most power hed by retaiers, highest proportion of mutipe chains and the highest eves of market concentration. CONCLUSION Retai organizations have grown in size dramaticay, particuary in the food sector. This has mirrored a growth in store size, for exampe, the emergence of the superstore in the UK and the hypermarket in France. At the same time as food retaiers have been increasing the size of new stores, they have aso been seing off the smaer stores in their 16

32 Exercises portfoio. These oder, smaer stores are typicay ocated on the high street and in town centres, whie the new very arge stores tend to be on out-of-town sites. Thus the upgrading of store size has atered the ocationa strategy of food retaiers from within towns to their outskirts. The major payers have consoidated their positions with the use of improved branding, reationship marketing schemes, own-brands and improved retai environments. Store size may be considered in terms of the poarization mode. Whie on the one hand arge-scae formats are becoming increasingy arge in order to benefit from economies and efficiencies of scae, they have eft a gap at the other end of the market for sma-scae stores. Whie we are seeing fewer speciaist retai outets, sma-scae convenience formats and stores are very much in evidence. Not ony are these operated by independent retaiers and vountary chains, but even the mutipe retaiers have recognized an opportunity for sma-scae stores that compement their arge-scae operations as exempified by Tesco s Metro and Sainsbury s Loca and Centra fascias. Simiary, though the hard discounters have entered the UK market to fi a gap at the ower end of the pricing structure, their entry may aso be viewed in terms of poarization of store size and ocation. Whereas the superstores are increasing their size and moving to out-of-town ocations, the discount supermarkets and convenience stores are of a significanty smaer scae and tend to be ocated in town centres in part because they are abe to find sites of adequate size, unike the superstores which need very arge sites, and in part because they are focused on consumer demand within retai centres, not the need for one-stop shops. Leading retaiers have tended to move towards arge-scae retaiing, in terms of mutipe chains and store size, in order to gain from efficiencies and economics of scae. However, sma-scae operators do have certain advantages. First, they often benefit from supportive pubic poicy, for exampe, egisation imiting the deveopment of arge out-of-town stores. Second, they attempt to gain their own economics by deveoping vountary groups and buying aiances. Third, sma-scae retaiers may benefit from custering in town centres and thus creating a critica retai mass to attract and more easiy satisfy consumers. It is interesting to note that in terms of arge-scae food retaiing different formats are apparent in various markets. For exampe, the UK food sector is dominated by the quaity and service oriented superstore; in contrast the French market is characterized by the arge-scae, out-of-town hypermarket that is price oriented and has a high ratio of nonfood ranges. Germany has a mix of hypermarkets and discount supermarkets, whie in the Beneux countries the high street supermarket format is dominant. This begs the question: is the deveopment of these dominant formats in markets a reaction by retaiers to nationa consumer demand or have retaiers imposed particuar retai conditions upon consumers? EXERCISES The exercises that foow hep to pace the information in this chapter in a practica context. We suggest they are worked through before you move on to Chapter 2. 1 What is a retaier and what is their function? Which retaiers woud fa into the categories outined in the grid beow? Add your responses in the spaces in the grid. 17

33 An introduction to retaiing as an activity Retaier that has deveoped through Who: How: cycica theory change Retaier that has deveoped through Who: How: accordion theory change Retaier that has deveoped through Who: How: confict theory change Of the theoretica approaches you have considered, which one offers the cearest understanding of change and why? 2 Think about the trends that have occurred in your oca high street. Read Minicase 1.1 about the increasing power of the supermarkets. What are the main changes in high street retaiing which may affect the consumer due to the power of the arge payers? Is this inevitabe given the change theories you have read in this chapter and if so what theories appy more than others? 3 Consut the statistics on the performance of different types of retai businesses (e.g. Internet, DIY stores, superstores, corner shop grocers, department stores, bespoke taiors, mai order). You then need to provide a breakdown by company of at east three areas from this ist with at east three years figures. Now comment on what are some of the important statistics you have found and the changes which may occur in the next decade. Aso comment on the ways change theories hep us understand these trends. 4 Read Minicase 1.2 and then identify those retaiers who are changing the rues of the game by deveoping new formats and retai experiences. What do you predict wi happen as an outcome of these changes? 18 REFERENCES AND FURTHER READING Appe, D. (1972) The supermarket: eary deveopment of an institutiona innovation, Journa of Retaiing, 48, Brown, S. (1987) Institutiona change in retaiing: a review and synthesis, European Journa of Marketing, 21 (6), Brown, S. (1992) Retai Location: a micro-scae perspective. Adershot: Avebury. Davidson, W.R., Sweeney, P.J. and Stampf, R.W. (1983) Retaiing Management. 5th edn. New York: John Wiey. Financia Times (2001) Rewriting the rues, FT.com site: 17 August. Friedman, M. (1970) The socia responsibiity of business is to increase profits, New York Times Magazine, September, 13. Gist, R.R. (1968) Retaiing: Concepts and decision. New York: Wiey and Sons. Hoinger, P. (1998) Survey future of mutuaity: the Co-op: Members urged to co-operate, Financia Times, 10 March. Jack, A. (2001) Heathy break with the past: Russian retaiing, Financia Times,6 August. Institute of Grocery Distribution (1997) Grocery Retaiing 1997: The market review. Watford: IGD Business Pubications. Institute of Grocery Distribution (2001) fact sheets. Keh, H.T. and Park, S.Y. (1997) To market, to market: The changing face of grocery retaiing, Long Range Panning, 30 (6), Labour Market Trends (1998) Empoyee jobs, Labour Market Trends, June, S. 21. McNair, M.P. (1931) Trends in arge scae retaiing, Harvard Business Review, 10, 30 9.

34 References and further reading McNair, M.P. (1958) Significant trends and deveopments in the post-war period, in Smith, A.B. (ed.) Competitive Distribution in a Free High-Leve Economy and its Impications. Pittsburgh, PA: University of Pittsburgh. Myers, H.A. (1996) Internationaisation: The impact of the European Union. A study of the food retai sector. Unpubished PhD thesis. Schoo of Management Studies, University of Surrey. Myers, H.A. and Aexander, N. (1997) Food retaiing opportunities in Eastern Europe, European Business Review, 97 (3), Nationa Accounts (1998) Annua Abstract of Statistics London: The Stationery Office. ONS, Department of Manpower Services, Annua abstract of Statistics (2000). Potter, R.I.B. (1982) The Urban Retaiing System: Location, cognition, behaviour.adershot: Gower. Ratchford, B.T. (1998) Introduction to the specia section: Economic perspectives on retaiing, Journa of Retaiing, 74 (1), Retai Inteigence (1998) The European Retai Handbook 1998 edition. London: Retai Inteigence Research Pubications. Retai Inteigence (2001a) The UK Retai Rankings, London: Retai Inteigence Research Pubications. Retai Inteigence (2001b) The Word s Top 100 Retaiers. London: Retai Inteigence Research Pubications. Tyer, R. (2001) Britain: Supermarket profits boom whie food poverty increases, 23 Apri. 19

35 2 An introduction to retai marketing This chapter shoud enabe you to expain: the origins of marketing; business phiosophies and the differences between the production, saes and marketing eras; definitions, concepts and functions associated with marketing; the differences between marketing and saes and what constitutes a marketing orientation. RETAILING AND MARKETING Retaiing was introduced in Chapter 1 in terms of its function and structure and why it is so visibe in our everyday ives. However, not everyone may be cear that retaiing invoves the activity of shopping, purchasing by means of the Internet, deaing with financia services or even visiting a oca fast-food outet or hairdresser. This daiy invovement is interpreted in different ways and underies the compexity of retai marketing operations. This compexity has to be understood in reation to the revoution occurring in the whoe of the retai area that is transforming the way goods and services are being offered to the market. For a fuer understanding we require a framework of concepts to ensure that we have a basic knowedge of what may constitute retai marketing. Retaiing in its various guises can be traced back for centuries but because the eements of retaiing and conditions of the marketpace have changed substantiay there has been a requirement for a corresponding change in both techniques and approaches. Reid (1995) has described retaiing as a once-cinderea business which has now evoved as a eader in business innovation and the management of compexity. Retaiing comprises a the activities invoved in the marketing and distribution of goods and services. Therefore, marketing is a core area for any retai operation as the success or faiure of retaiers is based upon how we they understand and serve the needs of their customers. Change in consumer behaviour is constanty occurring. For exampe, there has been increasing pressure on peope s time given the growth in the number of famiies with both partners working; more chidren arrive home to organize their own cooking or purchases; and extra time is being spent on eisure activities, incuding shopping as a eisure pursuit. This has ed to a number of segments which have higher disposabe income but itte discretionary time for more routine purchasing. Such changes produce intense competition among retaiers. These changes are so dramatic, we are witnessing major shifts 20

36 Need for a strategic approach in the way that consumers interact with some of the more traditiona areas of the retai sector prime among these are the financia service providers. Changes in consumer ifestyes have required eements of the banking reationship to be handed in a more convenient manner and more economicay. This has ed to the deveopment of banking services using automated teer machines (ATMs), the post, teephone or by eectronic means. Non-branch banking is an important deveopment which refects the needs of the modern consumer. This trend, known as disintermediation, is even more pronounced in the insurance sector. The traditiona use of an insurance broker to organize car, house or persona insurance has given way to a major growth in direct marketing. Companies such as Direct Line in insurance and Citibank in banking have pioneered the changes. The use of teephone saes, the Internet and other methods of marketing has transformed both the distribution and the cost structure of the industry. This has been made possibe not ony by rapid and focused technoogica deveopment but aso by consumers acceptance of the new services and their price advantage. However, at the same time as we are witnessing these changes, such as e-banking, there is growing pressure from some consumers to retain oca banks in order to counteract concerns about the excusion of certain sections of society from financia services provision. NEED FOR A STRATEGIC APPROACH Any change that occurs has to be underpinned by an appropriate marketing strategy if it is to be successfu. As part of the deveopment of retai marketing there is a need to ensure that both the positioning of any offer, and the image of that offer, are sound and ogicay inked. Positioning as a marketing concept is based upon a market position of image, price and quaity rather than geographica position. It is where a retaier wi decide on the pacing of their business in a market position where it wi be abe to compete favouraby with other simiar retai outets. This position shoud be perceived ceary by the consumer so that the retaier gains some advantage, either through being different from others in the mind of the consumer or more ceary identified as offering a particuar type of retai offer by the choice of that position. This type of approach can provide a positive image of the retaier. For exampe, one success story in positioning is Toys R Us, which has positioned itsef in a category. Category retaiers dominate through speciaizing in very arge-scae, high voume formats with vaue-formoney pricing and strong branding. However, the cut-price operations and the operating costs of Toys R Us has caused a number of financia probems and the cosures of some of its European outets. Notwithstanding the setback for Toys R Us, the success of such positioning has ed to the coining of the term category kiers, so caed because the concept destroys or snuffs out various parts of a traditiona chain and dominates an entire category of merchandise. This recent retai marketing approach has ed to the eary domination of some areas of the market for toys, sports goods, eectrica goods and DIY needs. The approach of many retaiers is to aim for growth and domination of their chosen position in order to create eadership. Leadership in the marketpace cannot be gained overnight. Even Wa-Mart, now the word s argest retaier, had ony fifty stores and saes of $50 miion in the 1970s. We shoud, however, be aware that there is a reverse to these successes; a high number of ventures end in faiure. In the USA in 1993, Sears 21

37 An introduction to retai marketing announced that after 107 years the company woud no onger offer its mai order cataogue. This was because of increasing competition through the penetration of retaiers such as Wa-Mart stores into rura areas, changes in the use of the car, and changing consumer purchasing patterns. However, many other cataogues were doing far better than that of Sears. The probems of companies such as Sears may be reated to their inabiity to squeeze saes from mature markets and the need to improve their retai marketing approach. However, Sears is sti a arge retaier with consoidated operations. The company has its main internationa operations in America, Puerto Rico and Canada. In 1999 they had what they term fu-ine stores (858) with excusive bands such as Canyon River Bues, Fiedmaster, Crossroads, Kenmore and Craftsman, as we as their speciaity stores (2100). The maturation of the retai marketpace has ed to the deveopment of schemes which aow improved reationship buiding with the customer. There is a recognition that reationship marketing schemes wi reduce the ong-term costs of attracting customers owing to the retention benefits they provide. Therefore, recent deveopments in retai marketing have been associated with buiding customer oyaty (see Chapter 8 for definitions and a fu discussion of retai oyaty schemes). Dick and Basu s (1994) framework of customer oyaty conceptuaizes oyaty as the reationship between reative attitude towards an entity (product/service/brand/store) and patronage behaviour. This means that cognitive, affective, and behavioura components of attitude wi a contribute to eves of oyaty. These attitudes wi be based upon the function of pre- and post-appraisa. The foowing are possibe oyaty states: No oyaty: Low reative attitude and ow repeat patronage signa an absence of oyaty (Dick and Basu, 1994). This may occur when there has been a recent introduction of a new store brand and/or inabiity to communicate the distinct advantages or differences of a new store brand. Spurious oyaty: Describes a ow reative attitude and high repeat patronage and is characterized by non-attitudina infuences on behaviour. It is simiar to inertia when consumers perceive itte brand differentiation as in a ow invovement purchase situation and it may invove repeat purchases based upon situationa cues, such as famiiarity. Latent oyaty: A high reative attitude and a ow repeat patronage is a sign of atent oyaty. Consumers may dispay high reative attitudes toward a particuar outet, but patronize other stores that offer superior promotions. Loyaty: Ceary the favoured situation for any retaier. Loyaty is based upon a favourabe correspondence of both reative attitude and reative patronage. A storeoya customer prefers and visits the same store to purchase certain merchandise. Thus, the retaier s objective is to increase customers store oyaty. The abiity of a retaier to enhance and buid customer oyaty is highy dependent on identifying and understanding the target market, and offering the right type of reward or scheme to ensure the retention of the buk of their custom over the ong term. It aso requires superior service, few stockout probems and convenience of operation. This is not just for the arger retaier. There are sma businesses based upon oca ownermanaged retaiers, mobie shops or door-to-door trading. Each of these reies on buiding reationships and deivering some form of added vaue in order to be successfu. Just as 22

38 Need for a strategic approach Fig. 2.1 Transaction and reationship marketing a comparison Source: Gibert, 1996 customers may be unique in their demands, there is a need for different types of oyaty buiding. Sopanen (1996) carried out research for the SOK group and found there are six different kinds of oyaty: 1 monopoy oyaty where no choice is avaiabe; 2 inertia oyaty where customers do not seek aternatives; 3 convenience oyaty attributed soey to the ocation of a retai outet; 4 price oyaty where customers beieve in seeking out ow prices, but wi shift if ower prices are identified esewhere; 5 incentivized oyaty based upon oyaty reward schemes for accumuating benefits; 6 emotiona oyaty found in brand oyaty: this is the most eusive to create. Each of these is important and requires attention by marketing peope to estabish the future direction with regard to providing competitive prices, offering the appropriate oyaty schemes and deveoping stronger branding. The current use of reationship marketing can be seen to be in direct contrast to transaction marketing approaches which have been the traditiona approach to markets; Fig. 2.1 provides a cear comparison of their differences in approach. As can be seen, reationship marketing has a onger-term perspective, emphasizing the retention of the customer. Genger et a. (1997) carried out research into reationship marketing and found that, because of the importance of repeat business and measuring attitudes, it is a vita too for retai businesses. Loyaty schemes have recenty been extended to incude improved targeted groupings such as OAPs, students, famiies with chidren, etc. The schemes now offer rewards such as air mies or extra oyaty points inked to seasona promotions and financia services. The benefit of these schemes to a retaier is that by utiizing persona data coected for the scheme aong with the transaction data the retaier can carry out data mining of the information coected in order to provide improved promotiona and targeting benefits. Once customers utiize their store credit card it is possibe to monitor them in terms of what, when, and where they purchase so that a retai database can be provided. An important business need of modern retaiing is to do things better than the competition, in the case of oyaty schemes to offer better types of incentives or reationship 23

39 An introduction to retai marketing cubs. This fits with the need to deveop sustained competitive advantage, with each aspect of the business being improved to a eve which gives a superior position to that of the competition. This wi be reated to decisions over retai ocation and design, service provision or merchandise seection, technoogy, financia cost contro, and communication pans. Communication programmes are especiay important for retaiers. It wi not have been ong since you ast saw a promotion for either a fashion product, brand of food or discounted good. We are continuay bombarded with advertising and saes materia. Each day the post brings yet another etter containing one type of retai offer or another. There are numerous advertisements paced in the media each day and a shops have a myriad of promotiona messages. We are surrounded by invasive messages and communication paid for out of marketing budgets. However, as we sha see ater in this chapter, marketing is far more than the promotion of a retai product this constitutes ony one aspect of marketing. Promotion is often used to buid brand image and we witnessed a great dea more activity or investment in stronger branding at the end of the 1990s. This may be in reation to the retaier s name or the own-brand products which cover a wide spectrum of price and quaity positioning. Improvement of brand image creates more added psychoogica vaue to the retai operation. The need to offer vaue in the retai cothing marketpace The tabe beow highights the reative under-performance of the traditiona mass market eaders. In the case of Marks & Spencer, the (non-food) figures are a serious downturn. The company had ignored marketing, aowed quaity standards to sip and faied to offer vaue for money, just as consumers were becoming more demanding and used to improvements from other retaiers. The M&S share of the UK cothing market suffered major decine and there was the need for a marketing turnaround. Cothing retaiers: Estimated UK trading area and saes growth, 1996/ /01 Retaier Trading area growth Saes growth (%) (%) Mataan New Look +99 a +127 a Peacocks The Officers Cub +500 b +392 b TJ Hughes Marks & Spencer (non food) a 6.5 Arcadia a a Next (retai) Source: Retai Inteigence, 2001 Note: a 1995/ /2000, b 1996/ / The background to these changes is a continuous rise in the potency of retai companies. Over a reativey short period of time the retai industry has deveoped enormous power and is now exercising considerabe contro over manufacturers. This change has occurred aongside a continuing concentration of the retai business into fewer arge

40 Need for a strategic approach internationa companies. This is especiay the case in food retaiing; in the UK, for exampe, five chains account for the major share of the market. Many of the recent changes in the size of organizations have ed to the creation of a widening guf between managers of the business and consumers. A consequence of the distance which has been created is the ack of first-hand knowedge of the consumer s wants and needs. Where marketing thinking has been adopted, the emphasis is on deveoping a fu understanding of the dynamics of consumer behaviour. We shoud be aware that organizations which use marketing are infuenced by historica changes such as the change of power from the manufacturer to the retaier, and the change in perception of consumers and their resutant behaviour. Gabor (1977) in McGodrick (1990) ists three major indicative trends in the transfer of power to the retaier in the UK: 1 The aboition of resae price maintenance (RPM) in 1964 in the UK, in most product sectors. This represented a significant andmark in the shift of power, athough pressures for change existed we before the egisation. This process has been ongoing. In 1997 the Monopoies and Mergers Commission decided to support a ban on recommended retai prices (RRPs) across a wide range of eectrica goods. This means arge eectrica manufacturing companies cannot refuse to suppy discount retaiers. 2 The spread of own-brands, which accounted for neary 22 per cent of retai saes and 25 per cent of food saes by By 2000 own-brand saes represented over 50 per cent of grocery saes (ACNiesen, 2001). 3 Increased retai concentration which is both an effect and a cause of further retai power. By 1986, arge mutipe chains (ten or more outets) hed amost 60 per cent of retai trade in Britain. This concentration has increased as the eading grocers increase their retai offers with financia services, new store deveopments, and a broadening of the product range. Retai concentration in grocery retaiing is ceary iustrated in Figs 2.2 and 2.3. The changes represented in Fig. 2.3 need to be paced in the context of the 1960s, when business in the UK had become increasingy uncompetitive by word standards. This was identified to be a faiure of management and new courses were set up introducing the concepts and appications of marketing to a new breed of managers. However, changes have often been sow to materiaize. Within the marketpace the companies that have adapted most successfuy to contemporary changes are those which have directed management resources to supporting research into market and consumer trends, and to improving channes of distribution and communication campaigns. The stress is shifting to brand buiding and invoves the deveopment of own-abes. This dates from as ate as the 1980s due to the retai industry being one where custom and tradition have been particuary strong, based upon an emphasis on trading or buying. According to Wieman and Jary (1997), in most retai companies a marketing function does not exist; even if it does, they point out, it is ikey to be subordinate to the trading function. McGodrick (1990) indicated the marketing concept was ate in its appication to the retaiing industry and that even though there had been a use of marketing it did not mean the concept had been propery or fuy appied. The interpersona saes, trading service aspects of the industry have created styes of interaction with customers which ony began to ater in the ate 1990s. As with many other industries in the service sector this saes mentaity has 25

41 An introduction to retai marketing Fig. 2.2 Percentage of grocery saes through mutipes, Sources: ACNiesen, 2001; Board of Trade Fig. 2.3 Number of grocery outets, Source: ACNiesen, preserved the customary, ong-estabished ways of doing business. The need for change has been forced upon the industry by the changes which have occurred in reation to the consumer and market forces. Modern retai marketing has emerged as a business reaction to changes in the socia and economic environment, with the most successfu companies having demonstrated a keen sense of providing the right organization structure and compete package offer for the retai consumer. This emergence reies as much on an approach or attitude to business or the market as it does to specific management expertise. Marketing is, therefore, a phiosophy which initiay reies on the art and science of different management approaches.

42 The deveopment of marketing THE DEVELOPMENT OF MARKETING We have discussed some of the important retai changes which may be associated with marketing. If we state that we ive in an era of marketing, what does this mean? One method for perhaps understanding the deveopment of marketing is to treat it as the deveopment of ideas and trace what has been written about them. Unfortunatey, whie historica accounts show that trade has aways existed, the term marketing was ony used as a noun in the first part of the twentieth century. The use of the word marketing in the eary stages of the twentieth century was associated with a number of factors which were oosey reated to the activity of achieving a sae. Therefore, marketing as it is known at the beginning of the twenty-first century must be considered to be a recent deveopment. One way of attempting to answer a question about the meaning of marketing is to ook at the definition which is presented ater in this chapter. It is very easy to describe, using a definition, what is meant by marketing; but it is far more difficut to describe the practice of marketing. This is because centra to marketing is the body of underying concepts which forms the genera guide for organizationa and manageria thinking, panning and action. Therefore, to achieve a comprehensive understanding of marketing, it is necessary to master the underying concepts. Marketing has evoved against a background of economic and business pressures which have required an increased focus on adopting a series of manageria measures based upon satisfying consumer needs. Key to the importance of marketing within retai has been the eve of economic growth throughout the twentieth century growth which has ed to improvements in iving standards, enargement of the popuation, a dramatic improvement in educationa standards and increases in the discretionary time of consumers. Such changes enabed the Disney management to aunch the Disneyand theme park concept and McDonad s to open their first fast-food restaurant, in the USA in Not a retai management was we conceived. Eary retaiing foowed a passive suppy-ed approach; markets were assumed to exist and the retaier ony had to provide an acceptabe outet, or means, for the consumer to make a purchase (channe management). At the eary stage of retaiing there was ony minima branding and competitive advantage was gained through creating efficiencies in operationa costs. The deveopment of marketing is fashioned as the outcome of socia and business pressures. The most widey accepted account of the deveopment of marketing is that proposed by Keith (1996) outining the production to saes, to marketing evovement of the Pisbury company in the USA. In 1960 Keith argued that the growing recognition of consumer orientation woud have far-reaching impications for business, achieving a virtua revoution in economic thinking. He inferred that, at the time of writing, consumer orientation was ony just beginning to be accepted as a business concept. A survey of the iterature reveas an account of the history of marketing and modern business practice as having deveoped in three distinct stages: the production era, the saes era, and the marketing era. 1 The production era. During this stage there was a beief that if products were priced cheapy enough they woud be bought. Therefore, it was important to pan suppy to the marketpace, with the emphasis on consistenty reducing costs. The focus of management was on increasing the efficiency of production, which invoved an inward, 27

43 An introduction to retai marketing 28 product-oriented emphasis to reduce unit costs rather than an outward, marketoriented emphasis. The overriding objective for management was standardization of the production of the offer, in order that it coud be sod at the owest price to the market. 2 The saes era. This is an evovement phase where companies attempted to se the products they beieved in. If the consumer did not agree with the company s assessments and so did not buy there had to be a search for more effective means of seing. As competition increased, companies reaized they coud not survive without knowing more about different markets and improving their saes techniques. Therefore, the attempts of companies to infuence demand and taior it to meet their suppy in terms of retai product and outet characterized a saes era. 3 The marketing era. This is the phase that characterizes the end of the twentieth century and start of the twenty-first, and is dominated by a reversa of the preceding phiosophy. Companies started to provide the products or merchandise they coud se the goods peope wanted rather than trying to se what they had. They adopted a consumer-ed approach and concentrated on improving the marketing mix. It was recognized that customer needs and satisfaction were the most effective basis for panning and that a company has to be outward ooking to be successfu. With this approach, customer needs are key: the starting point for retai business processes. More recenty the emphasis has subty shifted to incude the buiding of asting reationships with customers. This approach focuses on an increase in profitabiity by concentrating on the achievement of higher ifetime vaue from the customer through cost-effective retention strategies. There are continuing arguments as to the dates encompassed by the above eras, or even whether they can be treated as discrete periods. For our purposes, in the majority of texts the marketing era is identified as having been estabished from the 1950s onwards. For a fu discussion, see Gibert and Baiey (1990). The important factors, which have ushered in the marketing era during the ate twentieth century, are discussed in some detai in the foowing paragraphs. First, the increases in demand were occurring at a ower rate than the rises in productivity. This cuminated in an oversuppy of retai outets serving simiar markets and too many companies in the marketpace. The increase in competition, couped with the risks associated with the retai marketpace, has ed to greater reiance on the use of marketing. Seing strategies can ony dominate when there is a ack of competition. As competition increases, the weaker competitors are squeezed or bought out of the marketpace. Concentration, contraction and mergers produce a battefied for retaiers and provide the incentive to adopt marketing as a superior business phiosophy. With the growth in market concentration, the arger companies are abe to benefit from increased negotiating and buying strength. The retai business system may be viewed as an organism that is concerned soey with surviva and a wish for proiferation. Foowing this argument, when a business system is threatened it wi take functiona steps to improve the situation. The reaction by competitors, such as Sainsbury and Safeway, to Tesco s aunch of their oyaty card is an exampe of the way change occurs through competition and the need to deveop marketing to suit new environments. This response did not stop Tesco creating a competitive advantage from the aunch of its Cubcard in 1995 or Cubcard Pus in 1996, nor did it

44 The deveopment of marketing hat Tesco s rise to the position of the UK s most successfu grocery retaier. Marketing may provide for tactica change and modification of the system in times of risk, oversuppy or market saturation. When the marketpace is competitive, marketing assumes a much more important roe. Second, the consumer was becoming more affuent and, therefore, it was possibe to deveop retai products which coud be sod using a range of non-price attributes. This has required the deveopment of methods of creating, and changing, consumer attitudes and beiefs; it is noticeabe that promotion and image, managing quaity and services, and improving store/retai atmosphere have a become significanty more important. Third, the distance between the retaier and consumer had been continuousy increasing. This ed to a need for marketing research in reation to the gathering of information on market trends, evauating eves of satisfaction, and understanding consumer behaviour. This has been compounded by the centraization of retai decision-making away from individua unit or store managers and into head office. This deveopment was fueed by the need for retaiers to take advantage of the economies of scae of centra buying. However, retai technoogy has provided much more detaied information about customers and their buying habits aong with increased operationa efficiency in such areas as checkout processes, and shef and inventory repenishment. Larger retaiers were in a position to regain reationships with their customers and the abiity to do this through avaiabe resources and technica deveopment has aowed this. Fourth, as society deveoped, the mass market spintered into a number of submarkets whie at the same time methods of reaching the mass market became increasingy difficut. This was due to the increase in speciaist media and the potentia for a whoe range of new retai products. The changes required improved expertise in the segmentation of markets and the formuation of different marketing mix strategies which woud maximize demand for individua segments. Segmentation in retaiing can take a number of different approaches. These are often based upon customer groups, product groups and shopping/usage occasions. MINICASE 2.1 Does M&S have a future? Marks & Spencer s big store in London s Kensington High Street has just had a re-fit. Instead of the usua drab M&S interior, it is now Caifornian shopping ma meets modernist chrome and creamy marbe foors. Roomy wakways and designer dispays have repaced dreary row after row of cothes racks. By the end of the year M&S wi have 26 such stores around Britain the first visibe sign that the company is making a serious effort to pu out of the nose-dive it has been in for the past two years. Things have become so bad that M&S, unti recenty a nationa icon, is in danger of becoming a nationa joke. It does not hep that its advertisements featuring pump naked women on mountains the first-ever TV ads the company has produced have met with an embarrassed titter; nor that, ast week, the BBC s Watchdog programme savaged M&S for overcharging and poor quaity in its range of garments for the fuer figure. As the attacks grow in intensity, so do the doubts about M&S s abiity to protect its core vaue: a reputation for better quaity that justified a sight price premium at east in basic items, such as underwear. It is a ong time since any sef-respecting teenager went wiingy into an M&S store to buy cothes. Now even parents have earned to say no. Shoppers in their thirties and forties used to dress ike their parents. Now many of them want to dress ike their kids. M&S s makeover comes not a 29

45 An introduction to retai marketing moment too soon. Compared with the jazzy store ayouts of rivas such as Gap or Hennes & Mauritz, M&S shops ook ike a hangover from a bygone era. The makeover aims to bring it into the present. The 26 stores being overhaued account for around a fifth of M&S s turnover. According to one former director, the retaier makes most of its profit from around 40 stores. So it makes sense to pay to the company s strengths. But M&S wi sti be eft with a ong tai of some 270 reativey dowdy stores. Before the company ros out its new ook nationwide, it wi have to work out how many of the stores are even worth hanging on to. M&S has aways had difficuties with such issues. When its profits were growing strongy, it was incined to add foor space, such as the 19 stores it took over from Littewoods three years ago just before profits peaked. It rarey cosed down any of its high-street shops. Worse, the company had no satisfactory system for evauating which of its stores, most of which it owns outright, were making money: M&S did not, unti recenty, charge notiona rents to its stores. M&S does not discose the performance of individua stores. But, judging by recent changes in retaiing, its future ies increasingy with the most prominent. According to Verdict, a retai consutancy, the 100 top shopping ocations in Britain (ranging from the biggest high streets, such as Oxford Street, to shopping centres, such as Lakeside in Essex) now account for around 60% of retaiers tota high-street takings, but ony around 40% of their space. No wonder M&S s chairman, Luc Vandevede, is thinking of cosing more than 20 mosty sma stores. The detais wi be announced next month, when M&S is expected to revea yet another set of appaing resuts, and yet another reorganisation. The rot began appearing two years ago, when M&S announced a 23% fa in haf-year resuts and warned of further bad news. In the event, pre-tax profits haved from 1.2 biion to 546m, then fe again to 418m for the year to March The biggest probems were in M&S s core British retaiing, but foreign operations in North America and continenta Europe were aso going sour. Behind this decine ie two basic fauts. The first is the rigid, top-down, head office knows best cuture buit on M&S s proud record of success. This was fine so ong as customers kept coming and the competition agged behind, but it aso made it difficut to question the M&S way of doing things. M&S is ony now scrapping outmoded rues that meant staff spent too much time on rituas such as checking stock or counting cash in the tis, just because somebody at Michae House, its head office in London s Baker Street, had decreed years ago that such tasks were essentia. Add to this in-bred top management. Peope tended to join M&S straight from coege and work their way sowy up the ranks. Few senior appointments were made from outside the company. This meant that the company rested on its aures, harking back to innovations such as machine-washabe puovers and chied food. Worse, M&S missed out on the retaiing revoution that began in the mid-1980s, when the ikes of Gap and Next shook up the industry with attractive dispays and marketing gimmicks. Their suppy chains were overhaued to provide what customers were actuay buying a surprisingy radica idea at the time. M&S, by contrast, continued with an outdated business mode. It cung to its Buy British poicy and it based its buying decisions too rigidy on its own buyers guesses about what ranges of cothes woud se, rather than reacting quicky to resuts from the tis. Meanwhie, its competitors were putting together goba purchasing networks that were not ony more responsive, but were not ocked into high costs inked to the strength of stering. In cothing, moreover, M&S faces probems that cannot be soved simpy by improving its fashion judgments. Verdict points out that overa demand for cothing has at best stabiised and may be set to decine. This is because changing demographics mean that an ever-higher share of consumer spending is being done by the affuent over-45s. They are ess incined than youngsters to spend a high proportion of their disposabe income on cothes. The resuts of M&S s rigid management approach were not confined to cothes. The company got an enormous boost 30 years ago when it spotted a gap in the food market, and started seing fancy convenience foods. Its success in this area capitaised on the fact that, compared with cothes, food generates high revenues per square metre of foor space. Whie food takes up 15% of the foor space in M&S s stores, it accounts for around 40% of saes. But the company graduay ost its advantage as mainstream food chains copied its formua. M&S s share of the British grocery market is under 3% and faing, compared with around 18% for its biggest supermarket riva, Tesco. M&S has been unabe to respond to this competitive chaenge. In fact, rather than eading the way, it has been copying rivas features by introducing inhouse bakeries, deicatessens and meat counters. 30

46 Definitions and concepts of marketing Perhaps the most egregious exampe of the company s insuarity was the way it hed out for more than 20 years against the use of credit cards, aunching its own store card instead. This was the cornerstone of a new financia-services division, aso seing persona oans, insurance and unit-trust investments. When, in Apri this year, M&S eventuay bowed to the inevitabe and began accepting credit cards, it stumbed yet again. It had to give away around 3% of its revenues from card transactions to the card companies, but faied to generate a big enough increase in saes to offset this. Worse, it had to sash the interest rate on its own card, undermining the core of its own finance business. And this at a time when the creditcard business was aready becoming more competitive, with new entrants offering rates as ow as 5%. How has M&S managed to escape a hostie takeover bid, despite its increasing woes? The break-up merchants had a crucia cacuation to make. How much woud they have to pay in reation to M&S s underying assets (i.e., the stores, the retai business and financia services)? For the numbers to work for any bidder, especiay one ooking to break up M&S, the market vaue of its properties needs to be significanty higher than the vaue shown in its books. This is because the costs of breaking up M&S, which has around 75,000 empoyees, woud be huge. Athough some experts think the properties are worth more than enough to cover cosure costs, others are not so sure. It is a very we, they say, to ook at how easiy the 100 C&A stores were disposed of (when the Dutch retaier started cosing down its British operations earier this year), but this misses the point. The probem is: if you do not use a prime M&S site on a high street for mainstream retaiing, what can it be used for? Any break-up merchant coud we face a compex task of seing property in smaer ots. This means that anyone seeking to take over M&S woud have to be prepared to run at east the core, profitabe part of the business, whie managing the cosure and disposa of the ong tai of ackustre shops. This is precisey the strategy with which the present management is grapping. Despite the firm s advantage of scae in a saturated cothing market, it is increasingy hard to avoid the concusion that M&S s future is a sow and inevitabe decine with the ony question being who is going to manage that process. If shrunk to its profitabe core, M&S may become an attractive target for another big retaier. At the moment, however, whie its food division may be attractive to the ikes of Tesco, the cothing side represents a daunting chaenge. Why take the risk now, when the brand may be damaged beyond repair? Source: The Economist Newspaper Ltd, London, 28 October, 2000 The four factors discussed on pages 28 9 have combined to force retaiers and suppiers (manufacturers or providers) to work even more cosey with one another in an effort to provide for the precise needs of the customer. Both retaiers and suppiers are combining their taents in areas such as product design and research and deveopment to ensure systems, services and goods wi continue to satisfy current and future customers. DEFINITIONS AND CONCEPTS OF MARKETING Any conceptua definition of a business discipine is, by nature of its condensed form, a imited abstraction of vaues, techniques and practices which are the focus of its activity. Therefore, no singe definition can be comprehensive enough to describe the true essence or compexity of marketing. Various definitions of marketing have been offered based upon the vaues prevaent at the time. Eary definitions, refecting the business phiosophy and environment of the time, stressed the importance of seing. A popuar definition utiized for many years stressed marketing being a manageria process of providing the right product, in the right pace, at the right time and at the right price. This definition is mechanistic and stresses the provision of the product offer without due regard to those invoved in the process. 31

47 An introduction to retai marketing No modern definition of marketing can ever disregard the importance of Phiip Koter, who has estabished himsef as the most widey referenced proponent of genera marketing theory. Koter et a. (1999) define marketing as: a socia and manageria process by which individuas and groups obtain what they need and want through creating and exchanging products and vaue with others. Koter et a. argue that the definition is buit on the main concepts of wants, needs, demands and satisfaction through exchange, transactions and reationships because these aspects are centra concepts to the study of marketing. In 1984 the British Chartered Institute of Marketing defined marketing as: the management process responsibe for identifying, anticipating and satisfying customers requirements profitaby. A comparison of both definitions reveas that there are significant core simiarities. On examination it is found that both stress marketing as a management process. In addition, the British Chartered Institute carifies the management responsibiity as being one of assessment of consumer demand through the identification and anticipation of customer requirements. This denotes the importance of research and anaysis as part of the overa process. One important difference is that Koter s definition is more appropriate to notfor-profit organizations where there is free entrance or a subsidization towards the cost of a service. However, the most important impication which shoud be at the heart of any definition is the emphasis which is paced on the consumer s needs as the origin of a of the company s effort. The marketing concept has been expressed in many succinct ways, from Burger King s Have it your way to the You re the boss of United Airines. This is the basis of the modern marketing concept which hods that the principa means of success is based upon not ony identifying different consumer needs but aso in deivering a retai product, the experiences of which provide sets of satisfactions which are preferabe to those of the competitors. In addition, these satisfactions have to be deivered with attention to their cost-effectiveness as marketing has to be evauated on the basis of its expenditure. 32 The concept of vaue within retaiing It shoud be noted that deivering vaue is an important aspect of the marketing approach. Companies have to find ways to ensure they optimize the deivery of vaue. This requires a way of uncovering the vaue sought by the customer, the deveopment of that within the company and then the deivery of optimum vaue to the end customer (see Fig. 2.4). The vaue of a retai product incudes a number of different aspects, among them the perception of price, quaity, and image as we as the economic and socia aspects of the consumer. Consumers of today have far more information with which to make comparisons between aternative offers. As we are deaing with perceptions these wi differ as they are based upon the avaiabe time individuas have to carry out comparison shopping. Aso, some individuas have a wide network of acquaintances and may consut aternative information sources in making a decision about what offer deivers more vaue than another. A retaier or channe does not project a singe image. It is ikey to generate various images which differ according to a specific group, such as customers,

48 Definitions and concepts of marketing Fig. 2.4 A system for deivering vaue empoyees, and sharehoders, each of whom has a different type of experience with the company. This means perceptions of vaue wi fuctuate within the popuation. The information box ists the components of retai product perceived vaue. Retai product perceived vaue This is based upon: actua price asked and the reativity to prices for same or simiar product offered esewhere perceived quaity of the brand / product retaier or channe image, and its congruence with the image of the customer consumer characteristics by disposabe income and eve of difficuty in assessing the benefits / reative price of the product experience associated with the purchase or consumption process However, it wi be seen from the ast point in the box that the focus on the cognitive or functiona aspects of vaue for money shoud incude intrinsic aspects, so that either the purchase or a shopping experience can be treated as of vaue for its own sake. For exampe, an experientia perspective may incude the symboic, hedonic and aesthetic aspects of the consumption process. This means that consumer judgement through utiitarian criteria has to incude hedonic criteria, based on an appreciation of the good or service for its own sake. Vaue can be based upon the thinking and feeing dimensions of purchase and consumption behaviour. Consumption by vaue criteria is based upon a mutipicity of inputs which contribute in varying ways to consumer judgement in different choice situations. Vaue is an essentia aspect of the creation of retai success. If we consider the success of McDonad s, the vaue is not simpy the hamburger or fries: it is the way the service, ceaniness, and speed of food production has provided an added vaue to the food. McDonad s customers are made up of a whoe series of segments who vaue a fast, ight and reasonaby priced mea. This is a achieved by means of a great dea of panning and understanding. The company sets itsef a series of high standards to achieve, known internay as QSCV, which is Quaity, Service, Ceaniness and Vaue. These provide a defined target of vaue deivery for its operations. This is ony one aspect that is important in the running of the company. The marketpace is dynamic and therefore 33

49 An introduction to retai marketing 34 McDonad s has had to renew itsef on a constant basis by introducing new menu items which fit with the vaues of heath and nutrition in order to react to the changing market environment. Understanding the retai experience from a marketing perspective is extremey important. However, the marketing concept where the consumer is the driving force for a business activities must not be confused with a saes approach. The next section ensures that the difference is understood and then we wi introduce you to the notion of marketing orientation. THE DIFFERENCES BETWEEN MARKETING AND SELLING By now it shoud be obvious to the reader that marketing and seing are not synonymous. Levitt (1960) described the difference as foows: Seing focuses on the need of the seer; marketing on the needs of the buyer. Seing is preoccupied with the seer s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whoe custer of things associated with creating, deivering and finay consuming it. Current changes in the retai marketpace, from Internet e-commerce to teephone banking, have paced greater emphasis on the use of marketing rather than seing. Retaiing is much more than a saes transaction. Marketing has ed us to focus on the fu experience of the customer. Even though shopping may take pace in a number of different types of retai setting, each offers a unique set of diverse experiences. Whether a shopper goes to the convenience store as opposed to an upmarket boutique in a shopping ma, or a fast-food outet rather than a sandwich bar, there is a tota retai experience of the occasion. This incudes everything about the purchase, from the journey and parking unti the checkout or payment and eaving. The tota retai experience invoves a eements of the retai offering which provide satisfactions or dissatisfactions to that retai episode. This wi incude the number and type of saespeope, and their eve of service and demeanour; the dispays on the foor and in the window; the merchandise by brands, depth and width; and the atmosphere of the retai outet in terms of music or other factors which wi affect the senses. Marketing has to consider these and many other variabes in order to ensure that each and every experience by the consumer is as satisfactory as possibe. In fact, the marketing management team have to exceed customer expectations if they are to provide a wow factor to the whoe experience. A this is very important because satisfied consumers return and wi te others; they act as advocates of the retaier if their experience is consistenty good. The contrast between the saes and the marketing approaches highights the importance of marketing panning and anaysis reated to customers and the marketpace (see Fig. 2.5 for a summary comparison of the two concepts). The saes concept focuses on the merchandise or goods being offered, and uses seing and promotion to achieve profits through saes voume. The underying weakness is that the saes concept does not necessariy satisfy the consumer and may ony cuminate in short-term, rather than ongterm company success. If the customer does not vaue the product, more resources and effort wi have to be provided at the saes stage in order to achieve the sae. The marketing concept, on the other hand, has as its focus customer needs and it stresses the requirement for an integrated marketing effort throughout the company to achieve

50 Marketing management tasks Fig. 2.5 The saes and marketing concepts compared profits through customer satisfaction. Thus we begin to see the importance of the pervasive infuence of marketing for the whoe of the company. Exampe: IKEA Adherence to the marketing concept has rewarded IKEA with a major return on its investments. IKEA, the Swedish home furnishings retaier, started in 1958 with one store and now operates in 29 countries with over 140 stores and pans for further expansion. The company has a range of products that are based upon the benefits of design, quaity and affordabiity. Its internationa marketing success is the envy of other retaiers. The brand is a recognized concept based upon customer needs, incuding: ease of parking, stock avaiabiity and sef-assemby take-away packs, modern designs, good vaue, chidren s pay areas, and the offer of a eisure day out experience. In addition, products are constanty updated to match changing consumer ifestyes. The target group matches the product as it is young, new homeowners and midde-income famiies. Emphasis is paced upon in-store service and staff training programmes. Given the description of IKEA s retai operation, the adoption of the marketing concept (as outined above) can be identified as centra to the company s success. The success of IKEA can be gauged by saes per foot being over 2.5 times the industry average. MARKETING MANAGEMENT TASKS A marketing orientation reies on a series of management responsibiities. To carify the situation, marketing can be seen to provide for a business to customer interface with responsibiity for specific management tasks. These tasks are more ceary expained in Chapter 5 which provides a discussion of the marketing mix. It shoud be made quite cear here, however, that retai companies without a proper commitment to a marketing orientation have itte ikeihood of effectivey executing the marketing function. Moreover, they wi have an even ower expectation of success if their competitors adopt and commit themseves to a marketing orientation. The fu retai marketing function requires a combination of many activities. Whether they are those invoving staff, producers or customers, they are a focused on faciitating and expediting transaction exchanges. The tasks isted in Fig. 2.6 ensure that potentia buyers and seers wi be abe to offer vaue to each other, wi be informed and wi communicate with each other. Surrounding this set of tasks is the requirement for a activity to be focused on creating customer satisfaction. The marketing function may, therefore, be treated as a system which is designed to be an interface with the customer. This marketing system is iustrated in Fig

51 An introduction to retai marketing Fig. 2.6 The business to customer interface of marketing functions Fig. 2.7 The marketing system 36 THE ADOPTION OF MARKETING There are numerous exampes within retai of a change to a marketing orientation resuting in success. The retai industry, owing to its high service-based content, has been characterized by a history of custom and tradition rooted in trading practice. Unti recenty there has been a ack of vision in the industry which has resuted in the demise of many of the traditiona companies during the fina 25 years of the twentieth century. During this period we have seen a growing concentration and power shift towards retaiers. However, there are weaknesses in historica trends which are sti pertinent now. For exampe, O Reiy s (1984) comments are apposite and sti reevant; they are based on some areas of concern:

52 The marketing environment of the company 1 surpus foorspace capacity arising from rapid geographica expansion may cause space productivity to fa; 2 the intensification of competition as retaiers strategies converge in terms of ocations, retai formats, assortments and private brands; 3 a possibe serious decine in high street property vaues, especiay as new technoogy reduces the financia institutions reiance on arge networks of branches; 4 the sheer scae of retaiers investment in stores, distribution systems, information systems, etc. coud make them ess fexibe and more vunerabe to those offering new formats, improved economies and superior systems to the market. As the marketpace becomes ever more compex, there is a need to ensure that the marketing function is attuned to current customer requirements. It woud seem a simpe change to isten to customers and provide what they say they want. If we examine the service marketing mentaity of a very important piece of eisure equipment a teevision we can see that it began to change as ate as the 1980s and 1990s. If you want to rent a TV, or have one repaired, there is a history of intractabiity and infexibiity of suppiers, who work to their own deivery and work schedues. This eads to consumers having to wait in after taking days off work, or canceing socia arrangements, or reorganizing the chidren s trave to or from schoo. By 1989, Radio Rentas had finay recognized the advantage of offering to insta or repair teevisions and a range of other equipment at a time when it was convenient to the consumer. This was further improved abeit amost a decade ater with the use of arger vans to carry spares, mobie teephones, and fexibe hours to suit the cient incuding various times at weekends and/or in the evenings. As instaations take ony minutes and because repairs more often than not invove the repacement of a compete circuit board or parts, the time costs to the company are not excessive. At the same time, the company is abe to buid customer oyaty and stabiize the number of accounts it hods. THE MARKETING ENVIRONMENT OF THE COMPANY In 1995 Argy (ASDA) tried to reinvent itsef to counteract the way it had been caught in the increasingy competitive environment of grocery retaiing. As such the Safeway supermarket group announced 124 store cosures and 4800 job osses (Cope, 1995) as part of a major restructuring intended to aow the company to become more competitive with the market eaders Sainsbury and Tesco. At the time, the chairman Sir Aistair Grant said, I want Safeway to be a eader rather than a foower so that we are in a better position to come up with new initiatives. The environmenta forces of competition and change can be seen to have caused major probems for the retai sector. In order to compete more effectivey, ASDA became part of Wa-Mart in Juy 1999, and by 2001 had 240 stores and 19 depots across the UK. The company is more abe to compete on price and mix fresh food, grocery, cothing, home, eisure and entertainment goods. Given the strength of Wa-Mart, ASDA is abe to pan for investing over 1 biion and to open a number of new stores. The Wa-Mart brand was utiized on a UK store for the first time in 2000 in Bristo and other supercentre stores are panned. These environmenta forces affect each individua retai enterprise as we as the tota retai market structure. This environment is made up of different eves of infuence 37

53 An introduction to retai marketing Tabe 2.1 Four eves of marketing environment affecting the company Leve 1: The company Leve 2: Company markets Leve 3: Company stakehoders Leve 4: The wider environment Marketing subfunctions need to be we organized and integrated with other company functions. Marketing has to communicate the needs of the market environment as described in eves 2, 3 and 4; and marketing thinking needs to dominate any strategy formuation. The existing distribution systems and trends in specific forms of retai seing or outet wi affect the retai marketpace. The degree of rivary, extent of consumer sophistication and the intensity of competitive activity wi affect market activity choice. Interest groups wi affect the context of decision-making, e.g. sharehoders, competitors, customers, empoyees, unions, government, suppiers, debtors, oca community, banks, etc. a of whom may have conficting vaues but a of whom have a stake in the company. Anaysis is required of various forces: poitica economic socia technoogica. Interreationships of these different forces and changes in them are powerfu market environment determinants. which wi affect the opportunities and marketing decisions that need to be made as a consequence of their actua or forecast pressures. Historica conditions affecting competition and rivary in company markets; the vaues of stakehoder groups; and the poitica, economic, socia and technoogica changes of the wider environment these a affect the ikey performance of the company and its brands. These infuences are discussed in greater detai in Chapter 10, which deas with marketing panning. The company marketing environment can be considered to be reated to four eves (see Tabe 2.1): Retai marketing operates as a demand management function within an organizationa context (eve 1) and as such it needs to be adequatey resourced and managed in order to be effective. A sma retaier may have grown (eve 2) through suppying to a oca consumer market and using superior service and knowedge of customer needs over the competitors. However, ater growth may require a more sophisticated deveopment of new markets and a fuer understanding of the range of customer requirements. Retai is predominanty an intermediary service which, ike any other market type, wi be affected by the market environment in which the company operates. Therefore, competitors are as important as the customers served. As a resut of the price-ed strategies of companies new to the UK, such as Adi (Germany) and Netto (Denmark), considerabe growth was achieved in a reativey short time period. In fact the price-ed discounters marketpace changed rapidy and by 1996 it accounted for 8 per cent of the grocery sector (Retai Week, 1996). The most significant casuaty at that time, due to the environmenta changes, was J. Sainsbury. For the first time in 20 years Sainsbury s announced a fa in profits from 809 miion in 1994 to 765 miion in In 2000 Sainsbury s sod its Homebase DIY business to Schroder Ventures for

54 Aternative business phiosophies miion. At the time Sir Peter Davis, group chief executive of Sainsbury s, said: Our priority now is to focus on food retaiing and to devote our management and financia resources to the profit recovery in our UK supermarket business and in becoming first choice for food shopping. The stakehoder system (eve 3) invoves a those participants in the company s vaue chain a system within which different reationships have to be carefuy fostered and reinforced. The power of stakehoder infuence can be harnessed in a positive way to ensure a greater ikeihood of competitive advantage in brand management, company reputation, product and service acceptabiity, etc. The wider macro-environment (eve 4) paces pressures on a company which are beyond the contro of management. The broad categories of Poitica, Economic, Socia and Technoogica (mnemonic: PEST) invove a series of different eves of aggregation regiona, nationa and internationa reated to business constraints and opportunities. (See page 245 for further discussion.) A retaiers need to take account of the environment and its ikey effects on business. Those companies foowing a market-ed business phiosophy wi take the infuences and pressures of the different eves into account. The foowing section heps to carify further what a company marketing approach is, describing the market-ed company in terms of a business phiosophy. ALTERNATIVE BUSINESS PHILOSOPHIES Marketing is a business phiosophy which paces consumers and their needs at the forefront of a activities. For exampe, at Men s Wearhouse in the USA customers are not given ess service because it is a discount outet with prices up to 30 per cent beow those of department stores; they are offered added services: free pressing and ateration of any suit bought in the outet. In addition, after 15 days a teephone ca is made to ensure the suit fits propery. Shoppers need to fee they are getting added vaue for a purchase even though it may be discounted. A vauabe knowedge of the process reated to the purchase of men s suits ony occurs when someone bothers to identify the key needs of the shopper. Whie it is important to recognize the importance of structuring any organization so that the focus is the customer, there are a number of aternative phiosophies which can be recognized. Each of these phiosophies acts as a guiding orientation and a system of approaching the market. Figure 2.8 iustrates an important set of approaches, especiay for those retai companies creating their own-brand products. In order to foow these phiosophies it is important to understand the initia starting point within each chain system. This is because the first stage in the sequence of events demonstrates most ceary the ocus of the company s approach to effecting exchange transaction reationships. The product-oriented company (see Fig. 2.8(a)) may be ineffective due to probems encountered in having the wrong retai product or store ayout for the market, and therefore having to waste extra resources on promotion and seing in order to achieve a sae. With this business type it is norma to find that companies beieve their products to be acceptabe and a that is required for saes to occur is the identification of prime markets and methods of seing. Such an approach to the marketpace by retaiers who make, as we as buy in, products is associated with a ack of understanding of the true needs of 39

55 An introduction to retai marketing Fig. 2.8 Three possibe business phiosophies 40 the customer. A focus and emphasis on the merchandise as product, rather than an understanding of the benefits the consumer is seeking, is sti the basis of a great dea of current marketing. Being product focused is misguided because the retaier shoud offer benefits such as: the promise of attractive ooks, not simpy a stress on cothes; good-ooking feet and peasure from waking, not simpy a stress on the offer of shoes; hours of peasure and the benefit of knowedge, not simpy a stress on books or magazines; the snob effect of certain brands where richer groups purchase expensive merchandise in order to manipuate the management of their impression on others. In short, the retaier is not seing simpy things ; the sae has to incorporate aspirations, benefits, peasure and new emotions. Retai managers shoud take heed of success stories such as that of Wa-Mart; the ate Sam Waton argued he had one abiding principe: to give customers what they wanted. In addition the strategy was to discount, concentrate on sma town ocations and aim for exceent empoyee reations. A product-focused phiosophy is acceptabe when there is a shortage or during boom times which are characterized by itte competition. However, this approach usuay indicates inward-ooking management which

56 Marketing orientation concentrates on improvement within the company rather than outward-ooking management, concentrating on the consumer and emerging retai needs. The exampes in Fig. 2.8(b) and (c) offer the idea approach to organizing business in the modern retai marketpace. They are driven by research which creates an understanding of the consumer, the business and the marketpace. Research wi be both secondary and primary. Information has to be coected from within and outside the company in order to estabish a cear picture of the marketing environment. The integrated approach provides for a sequence of events that commences with an understanding of the consumer, the competitors, and the types of product that the company is capabe of providing. It aso requires a system that sensitizes the whoe company to a marketing orientation. The integrated system heps to ensure that methods of improving the satisfaction eves of the consumer are incorporated into each department s objectives. Within these two exampes of company phiosophy, it can be seen that the feedback process aows the marketing department to deveop products as we as different forms of promotion which are right for the consumer. This estabishes a more effective means of ensuring that products are successfu and that marketing budgets are used more efficienty. Marketing starts with the consumer and the market; the sovereignty of the consumer is cear. This has to be the correct strategy as it is the consumer aone who can dictate what they may want from tomorrow s retai marketpace. The retai industry is spending vast sums of money on deveoping new promotions, improving products, buiding or refurbishing new outets and investing in technoogy. The ony way for the risk eve to be kept to a minimum is through the adoption of a marketing phiosophy which provides products reated to the needs of consumers. MARKETING ORIENTATION Markets are ever-changing and characterized by risk and threat; retai marketing, therefore, requires an appreciation of the types of decision needed in reation to the compexity of situations faced by the company. The factors creating compexity are: the need to consider a vast number of changing situations reated to the scae of the modern retai market and its competitive forces (for exampe, there is a need to consider the muti-channe nature of retaiing rather than focus on a bricks and mortar mentaity as such Internet, mobie phones, kiosks, digita TV a need to be considered); the uncontroabe nature of the above forces, and the unstabe and unpredictabe character of markets; the scarcity of reiabe and comprehensive information; the continua improvement in marketing by competitors; the changing nature of consumers. In order to dea with markets in a systematic way marketing has introduced a number of key approaches. These have been deveoped to capitaize on the many different saes and marketing opportunities in the retai industry. The industry has thrown off many of the traditiona attitudes it had towards the customer, argey due to a reaization of the importance of a marketing orientation. Five main areas can be identified which offer a truy marketing-based approach and these are discussed beow. 41

57 An introduction to retai marketing 1 It is a management orientation or phiosophy When a company is truy marketing oriented, the focus of company effort is paced on the consumer and this then eads to an integrated structure and customer focus within the company. There is the recognition that the conduct of the organization s business must revove around the ong-term interests of the customers it serves. It adopts an outwardooking orientation which requires responsive action in reation to externa events. The overriding phiosophy is to maximize customer satisfaction. This is achieved through offering merchandise or ways of purchasing which provide benefits of satisfaction through the buying process, as we as through use and possession of different items. The utiities deivered can be both perceived and rea, as store image, saes techniques and branding can a affect the overa satisfaction eve of the consumer. The focus of retaiers in the 1980s and eary 1990s was on new ways to satisfy consumers. This is characterized by Currys, arge DIY retaiers and the superstores which pioneered out-of-town deveopments. The ate 1990s witnessed a focus on new product deveopment, oyaty schemes, a concern with branding, and the broadening of retai channes. This has cuminated in grocery retaiers moving into petro forecourts, own-brand deveopments and smaer, city-centre formats, and Dixons setting up Freeserve. In addition, the Internet is in the process of rapid deveopment for appropriate types of product and where more direct methods of seing are the norm. 2 It encourages exchange transactions This invoves affecting the attitudes and decisions of consumers in reation to their wiingness to make purchases. Marketers have to deveop innovative methods to encourage exchange to take pace. They aso need to ensure the service offers vaue for money which may have to be inked to buiding intrinsic vaue into the retai offer. This can be reated to the retaier s decisions over the intrinsic quaities of design, workmanship, materias used and features of the merchandise they offer. The customer wi be ooking for quaity, suitabiity, vaue and acceptabiity. Marketers are required to ensure that they understand what the consumer vaues in order to create high eves of exchange transaction. Reationship marketing is a more refined aspect of this, with marketers attempting to retain the customer over onger periods of time through cub or oyaty programmes Long- and short-term panning This concerns strategic panning and tactica activity. There is a need for the efficient use of resources and assets for the ong-term success of a company, whie tactica action wi be required to keep pans on course. A retai panning needs to create some match between the differences in consumers purchasing and usage needs on the one hand, and the retaier s buying and seing requirements on the other. This may invove merchandise panning, trading area and store panning, market targeting, merchandising techniques, own-product deveopment, as we as saes and tactica promotions (see Chapter 10 for a marketing panning approach to business). Such panning is used to create innovative formats or to target niche markets. The retaiing success stories of the ate 1990s were those of:

58 Concusion B&Q Warehouse a DIY category kier (in 1998 B&Q merged with France s eading DIY retaier, Castorama, to become the argest DIY retaier in Europe. The group s DIY brands incude Brico-Depot and Dubois Materiaux in France and Reno- Depot in Canada. In 1999 B&Q opened its first store in mainand China); Crazy George s in 2001 there were 86 Crazy George s which were part of Thorn Financia Services Ltd prior to being aquired by the Principa Finance Group of Nomura in Thorn s format offers househod goods to ow income groups; Daisy and Tom chidren s superstores; Disney Store character merchandising and toy retaier; Internet Bookshop WH Smith was the first UK bookseer to utiize cyberspace; MVC music retaier offering discounted CDs, magazines and videos to its members. 4 Efficient cost-effective methods Marketing s principa concern for any company has to be the deivery of maximum satisfaction and vaue to the customer at acceptabe or minimum cost to the company, in order to ensure ong-term profit. A arge marketing budget may achieve a great dea but this may not constitute an acceptabe cost to the retaier. Retaiers have to be abe to judge the operationa and financia performance of their business in reation to the eve of marketing expenditure. The productive use of any marketing budget reies on the knowedge and expertise of those empoyed in the marketing department and varies according to the type of trade invoved, for exampe fashion, food or DIY. 5 The deveopment of an integrated company environment The company s efforts and structure must be matched with the needs of the targeted customers. Everybody working for the company must participate as much as they can in a hoistic, tota corporate marketing environment, with each retai department maximizing the satisfaction eve of consumers. Integration is not just a smie or poiteness; the emphasis has to be on creating assured quaity and the highest standards of service (see Chapter 4 for a fu discussion of this important area). Any company barrier to satisfying the customer or improving service must be removed. The onus is on the company to provide organizationa structures which are responsive and are fexibe enough to undergo change to suit changing customer needs. CONCLUSION From the discussion in this chapter it shoud be abundanty cear that retai marketing invoves a number of specia characteristics, as outined beow: 1 Marketing is a phiosophy with the overriding vaue that the decision-making process of any company has to be ed by the consumer s needs, the marketpace, and the company s assets and resources. 2 Successfu marketing requires a specific type of organization structure which supports the beief in integrating the principes of consumer orientation throughout the company. 43

59 An introduction to retai marketing 3 It requires innovative methods of thinking and panning so that new ideas are generated to take advantage of opportunities or to improve existing methods of marketing. As such, retaiers need to create cear propositions of their retai offer. The cear differentiation of a Sainsbury s position from an Adi or that of a 7 Eeven from a Marks & Spencer are exampes of the carity of retai marketing thinking and panning. 4 The retaier has to create the right environment, additiona advantages and vaue, or oyaty schemes in order to ensure the customer is offered a compete package of benefits. Retai marketing has evoved due to the different business and socia changes which have occurred throughout the twentieth century and the beginning of the twenty-first. This chapter emphasizes that marketing has deveoped as a reaction to the different conditions which impinge on business operations. Whie we can identify different business phiosophies, carify the marketing concept and describe the benefits of a marketing orientation, the heart of marketing ies in the way marketing management functions in an attempt to create consumer satisfactions. EXERCISES The exercises that foow hep to pace the information given in this chapter in a practica context. We suggest they are worked through before you move on to Chapter 3. 1 Discuss the way you beieve marketing is being used by the retaier types isted in the top efthand box of the grid beow. You need to identify the ways in which aspects of marketing may be changing. You need to think about this with regard to the marketing mix. For exampe, do supermarkets now offer more cothing or eectrica products? Major grocery chains ASDA/Tesco Banks and buiding societies Petro stations Chemists Others (provide types) Can you identify any trends or emphases by type of retaier? What is the marketing emphasis? What are they and do they seem successfu? Now share your ideas with other students and come to some agreement as to what are the five most important trends occurring in today s retaiing arena. You need to agree a system of voting or ranking to obtain this ist. 2 Ask some of your coeagues or friends what they beieve retai marketing to be. Aso ask them what marketing peope are responsibe for. Now expain the phiosophy and concepts of retai marketing, highighting the differences between the theory you have read in textbooks and the ideas of those to whom you have spoken. 44

60 References and futher reading 3 Think about the contemporary pressures from the wider environment and ist a those that you beieve wi have an impact on a retai company s business. Are companies addressing these? If not, what action shoud be taken for retai companies to react to the most important changes you have identified? What, if any, are the wider and more genera impications of the environmenta changes you have identified? REFERENCES AND FURTHER READING ACNiesen (2001) The Retai Pocketbook. Oxford: NTC Pubications. British Chartered Institute of Marketing (1984) The Institute of Marketing, Cookham, Maidenhead. Business Week (1993) History coides with the bottom ine, Business Week, 8 February, 34. Cook, D. and Waters, D. (1991) Retai Marketing: Theory and practice. Heme Hempstead: Prentice Ha. Cope, N. (1995) Kwik Save starts price war, Independent, 3 May, 34. Dibb, S. and Meadows, M. (2001) The appication of a reationship marketing perspective in retai banking, Service Industries Journa, 21 (1), Dick, A.F. and Basu, K. (1994) Customer Loyaty: Towards an Integrated Conceptua Framework, Journa of the Academy of Marketing Sciences, 22 (2), Drucker, P. (1974) Management Tasks, Responsibiities, Practices. London: Heinemann. The Economist (2000) Does M&S have a future?, The Economist, 28 October. Egan, J. (2000) Drivers to reationa strategies in retaiing, Internationa Journa of Retai and Distribution Management, 28 (8), Gabor, A. (1977) Pricing, Principes and Practices. London: Heinemann. Garbarino, E. and Johnson, M.S. (1999) The different roes of satisfaction, trust and commitment in customer reationships, Journa of Marketing, 63 (2), Genger, C.E., Leszczyc, P. and Popkowski, T.L. (1997) Using customer satisfaction research for reationship marketing: a direct marketing approach, Journa of Direct Marketing, 11 (1), Gibert, D.C. (1996) Reationship marketing and airine oyaty schemes, Tourism Management, 17 (8), Gibert, D.C. and Baiey, N. (1990) The deveopment of marketing a compendium of historica approaches, Quartery Review of Marketing, 15 (2), Keith, R.J. (1960) The marketing revoution, Journa of Marketing, January, Keith, R.J. (1996) The marketing revoution, in Enis, B.M. and Cox, K.K. (eds) Marketing Cassics. 8th edn. London: Ayn & Bacon. Koter, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principes of Marketing. 2nd European edn. Engewood Ciffs, NJ: Prentice Ha. Levitt, T. (1960) Marketing myopia, Harvard Business Review, Juy/August, Lusch, R.F., Dunne, P. and Gebhart, R. (1993) Retai Marketing. Ohio: South-Western Pubishing Co. McGodrick, P.J. (1990) Retai Marketing. Maidenhead: McGraw-Hi. Moss, S. (2000) The Gospe according to IKEA, Guardian, 26 June, 2. O Reiy, A. (1984) Manufacturers versus retaiers: The ong-term winners?, Retai and Distribution Management, 8 (2), Reid, M. (1995) Survey of retaiing (1): Change at the check-out economies of scae and information technoogy have given top retaiers awesome power. But can they keep it?, The Economist, 4 March, 334. Retai Inteigence (2001) UK retai report, May, 120. Retai Week (1996) Retai Week, November, Sivakumar, K. and Weigand, R.E. (1997) Mode of retai price match guarantees, Journa of Business Research, 39 (3), Sopanen, B. (1996) Enhancing customer oyaty, Retai Week, December, Sweeney, J.C. and Soutar, G.N. (2001) Consumer perceived vaue: The deveopment of a mutipe item scae, Journa of Retaiing, 77 (2), Wieman, A. and Jary, M. (1997) Retai Power Pays. London: Macmian. 45

61 3 Consumer behaviour and retai operations This chapter shoud enabe you to understand and expain: the benefits of studying consumer behaviour; the decision-making process as part of buying behaviour theory; motivation theory and Masow s hierarchy of needs; the content of simpe as we as compex consumer behaviour modes; the infuence of demographics and famiy roes on retai purchase behaviour. CONSUMER BEHAVIOUR IN THE RETAIL CONTEXT It is important to reaize that management cannot be effective uness it has some understanding of the way in which retai consumers make decisions and act in reation to the consumption of retai products. There is, therefore, a need to understand the different ways in which consumers choose and evauate aternative retai services. Whie the term consumer woud seem to indicate a singuar concept of demand, the reaity is that there is a wide diversity of consumer behaviour with decisions being made for a range of reasons. We need to study consumer behaviour to be aware of: the needs as we as the purchase motives of individuas; how demographic change may affect retai purchasing; the different effects of various promotiona tactics; the compexity and process of purchase decisions; the perception of risk for retai purchases; the different market segments based upon purchase behaviour; how retai managers may improve their chance of business success based upon understanding what is required as part of the retai experience, and how customers react to that experience process based upon a the retai marketing approaches utiized. Many variabes wi infuence the way consumption patterns differ. These wi change based upon the different types of retaiers in the marketpace and the way individuas have earnt to approach purchase opportunities. The variations are countess and this makes it more practica to dea with genera behavioura principes which are often discussed within a framework that incudes the discipines of psychoogy, socioogy and economics. 46

62 Consumer behaviour in the retai context Tabe 3.1 Needs, wants and demand functions for the purchase of cothes Motivation Needs Characteristics Basic human requirements that pre-exist for warmth, covering, socia status Wants Potentia to purchase occurs as the individua fees a drive to satisfy those needs retai marketing attempts to direct needs to a specific want for the retaier s own channe or service and merchandise Demands Those wants for which the customer is abe to pay The principes that appy wi hep expain retai purchases whether they are from a store, a cataogue, or some other form of retai offer. A market-based system assumes that individuas enter the marketpace with money to spend. Consumer spending is directy reated to an individua or househod s income, the first ca upon which wi be for necessities such as food, rent, insurances, energy and home costs. The amount of money someone has eft after paying for necessities and their taxes is known as discretionary income. From this discretionary income individuas may purchase uxury items. However, discretionary income is not an easy concept to pin down because some individuas and househods treat particuar purchases as necessities whie others treat them as uxuries. First, we shoud a be aware that there is a process of purchasing which takes into account the needs, wants and demands for products; Tabe 3.1 describes this process for the purchase of cothes. The simpest of modes of buying generated from the states of motivation outined needs, wants and demands is iustrated in Fig This process is based upon the response to a stimuus. The decision to buy the cothes may be inked to feeing a need to impress friends at a party, that something is wearing out, that there is a need for more fashionabe cothes and knowing where to go to purchase the favoured brand. The retaier engenders wants which ead to demand by affecting consumer behaviour through the image of the store, its ayout and the ways the customer is brought into visua and sensory contact with the merchandise. Fig. 3.1 Simpe mode of the purchase process 47

63 Consumer behaviour and retai operations Buyer characteristics (see Tabe 3.1 and Fig. 3.1) wi infuence the type of purchases made. For exampe, the cuture, socia cass, age, occupation, personaity and beiefs of the individua wi affect the types of product they purchase. Hoinger (1998) has indicated that in the UK the mai order market has historicay served ower income groups owing to the attraction of financia credit which may have been difficut to obtain esewhere. This is argued to be a UK phenomenon whereby mai order is not attractive to the midde casses. However, it does not have the same image within other parts of Europe. This is because the buyer wi be attempting to estabish his or her sef-worth by buying products as part of impression management. The purchase process has been infuenced by marketers to ensure that products and brands are chosen to create a socia comparison between the purchaser and others. This is based upon the symboic meaning that brands have buit up over a period of time. Nevertheess, the fina choices made by consumers are by no means simpe. Time taken to shop There are differences in the type of shopping behaviour embarked upon. For exampe, sometimes a shopping trip is merey a functiona or compex activity whereas at other times it wi be a eisure activity. Shopping expeditions can combine different behavioura infuences whereby some individuas want a predictabe set of events as part of compex or functiona shopping whereas in contrast others want some novety and interest. In compex shopping the customer wi probaby contempate the purchase of a technica product. This wi ead to prior research of information or the need to take advice from retai staff as there is normay a higher risk associated with the intended purchase. This takes more time than in functiona shopping but is required to reduce the eve of perceived risk associated with a purchase (see ater section on perceived risk). The eisure shopper is different, as he or she wi not be concerned with the time taken to shop but is more interested in browsing and discovering wants rather than simpy satisfying needs. The continuum for this is shown in Fig A simpe account of differences between the functiona and eisure shopping occasion needs to be further enarged by understanding how the eisure shopper is deveoping their demand patterns for certain styes and fashion. The next section uncovers the process by which fashion trends may deveop. Exampe of process retai fashion buying Snyder and Fromkin (1980) expained the dichotomy of individuaity and conformity in fashion adoption. According to this theory, humans strive towards individuaity (uniqueness) and conformity in appearance. Through a socia comparison process individuas evauate their eve of uniqueness in reation to others, resuting in both emotiona and behavioura reactions. It woud appear that individuas have the most positive reactions 48 Fig. 3.2 Simpe mode of time-reated shopping expeditions

64 Consumer behaviour in the retai context when they perceive their appearance to be moderatey simiar to others. The most negative reactions occur when individuas perceive themseves as either dissimiar or very simiar to the comparison individua or group. Consequenty change occurs towards simiarity when perceived simiarity is ow, and towards dissimiarity (uniqueness) when perceived simiarity is high. Accordingy, fashion merchandising and sensibe stock eves at perceived reaistic prices can satisfy the need both for individuaity as we as for conformity. There are three theoretica approaches that may expain the way by which adoption processes for fashion occur in retaiing: 1 Tricke-down theory is based upon the premise that new innovative fashions and styes originate in the weathier casses owing to abiity to purchase designer cothing and are passed down through the midde casses to the ower socio-economic groups. 2 Tricke-up theory, as a hypothesis, is based upon a process of fashion and stye creation by the ower socio-economic groups which is foowed by the upper casses prior to being adopted by the midde casses. 3 Tricke-across theory is based upon the notion that fashion and stye can originate in any one of the socia casses. If the opinion eaders within one or more of the casses take up the fashion deveopment then that fashion and stye is more ikey to be adopted. This is because the opinion eaders wi be instrumenta in endorsing the acceptabiity of the fashion change. In this process the fashion wi extend horizontay through the popuation and may affect a casses in its turn. The purchase of fashion items and accessories can aso be seen to foow Veben s notion of conspicuous consumption: the theory that consumption often takes pace as a means of dispaying one s weath. Conspicuous consumption is the acquisition and dispaying of products that are purchased to gain recognition and respect from others. It coud be argued that some forms of conspicuous consumption are decining as those individuas with the weath to purchase extravaganty deiberatey adopt more fruga ifestye purchases. However, when dressing in styes associated with the working casses or urban groups, as has occurred with jeans, there is sti the opportunity to achieve the snob effect of purchasing designer or expensive brand abes. The weathier groups, or those who have been wiing to pay higher amounts for cothing, have remained important as it is the tricke-down effect of reference group infuence which may account for the adoption of different products by ess weathy individuas. Sometimes the fashion product is created in arge numbers to bring down unit price and thus enabe tricke down; at other times products, such as mobie phones or eectronic diaries, are accepted at the height of their pricing. Retai buying roes Choices over purchase are subject to a vast number of forces acting coectivey. As part of the way the whoe process is infuenced we aso need to reaize that there are different roes initiator, infuencer, decider, buyer, user which individuas may pay in the buying process (see Tabe 3.2). Within these roes the potentia consumer exhibits varying types of purchase behaviour. These wi be based upon the nature and importance of the decision to be made and who needs to be consuted prior to purchase. Buying a wedding 49

65 Consumer behaviour and retai operations Tabe 3.2 Buyer roes Buyer roe Initiator Infuencer Decider Buyer User Characteristics First individua who suggests product/service shoud be evauated/purchased Provides views and advice which are vaued by others and can subsequenty infuence the fina decision The individua who wi take the decision in the buying process as to what, how, when and where to buy (store choice), etc. The individua who actuay makes the purchase The individua who consumes or uses the service/product present for a best friend wi probaby invove a the above buying roe types and may invove a number of peope. Decision over store choice The decider in Tabe 3.2 has decision power over where the purchase wi be made (store choice). Consumer motives in store seection have been researched for many years and itte deveopment has been made over the work of Key and Stephenson (1967) who identified eight basic dimensions in store choice: 1 genera store characteristics (reputation, number of stores); 2 physica characteristics of the store (decor, ceaniness, checkout services); 3 convenience of reaching the store from the customer s ocation (time, parking, etc.); 4 products offered (variety, dependabiity, quaity); 5 prices charged by the store (vaue, specia saes); 6 store personne (courteous, friendy, hepfu); 7 advertising by the store (informative, beievabe, appeaing); and, 8 friends perception of the store (we known, iked, recommended). The next question that needs to be asked is: how free are individuas to make choices or purchase decisions? Some woud argue that behaviour is conditioned and that it is possibe through effective marketing to persuade individuas to adopt specific purchase behaviour. The question remains as to how rationa human beings are in the purchase process. The assumptions of how consumers may approach retai purchases are we summed up by Ajzen and Fishbein (1980): Generay speaking, human beings are usuay quite rationa and make systematic use of the information avaiabe to them. We do not subscribe to the view that human socia behaviour is controed by unconscious motives or overpowering desires, rather peope consider the impications of their actions before they decide to engage or not engage in a given behaviour. However, it is sti debated whether consumers act in a rationa way by consideration of the aternatives or whether they are more compusive in action. The difficuty we have in 50

66 The main theories of consumer behaviour Tabe 3.3 Behaviourist and cognitivist perspectives Behaviourist Cognitivist Observed behaviour is a important Behaviour is predictabe Peope are information transmitters Peope are a aike Behaviour is rationa Human characteristics can be studied independenty Emphasis is on what a person is and does Behaviour can be understood What goes on in a person s mind is the key to comprehension Behaviour is not predictabe Peope are information generators Each person is unique Behaviour is irrationa Peope must be studied as a whoe Emphasis is on what a person can be Behaviour can never be competey understood understanding this is that individuas have expressed conscious rationaizations as we as having unexpressed attitudes to purchase. The anaysis of the different patterns that take pace and why is therefore compex. COMPARISON OF BEHAVIOURIST AND COGNITIVIST APPROACHES The study of consumer behaviour as a whoe can be found to ie either within or between two major approaches: the behaviourist approach and the cognitivist approach. It is not aways cear from the iterature the approach that any one author is taking. To enabe you to have a cearer idea of the difference in perspective between the two approaches, simpified key points are isted in Tabe 3.3. As with most poar opposites, reaity probaby occurs somewhere between the two extremes of these views. Behaviour is predictabe to a certain extent, yet can never be competey understood. Decisions are made that have both rationa and irrationa eements. The importance of identifying both extremes is that it sets a framework within which to work and heps us to understand the more extreme stances taken by some theorists. What we do know is that socio-economic, demographic, socia and psychoogica buying decision variabes wi affect the purchase patterns of consumers. These infuences are examined ater in the chapter; first, there is an expanation of some of the main theories of consumer behaviour. THE MAIN THEORIES OF CONSUMER BEHAVIOUR Perhaps the most fruitfu approach to an understanding of retai demand is to identify and evauate the broader theories of consumer behaviour inked to purchase behaviour. This is far from simpistic as we are faced with a proiferation of research within a discipine which has dispayed significant growth and diversity. The discipine of consumer behaviour has borrowed a range of concepts from the quantitative and behavioura sciences in order to generate integrated modes of action. Because of the difficuties which are invoved in proving that one mode is superior to another, we are confronted by a range of modes which rey on a correspondence of beief rather than any ogica proof that they are right or wrong. Theories can ony be assessed on the contribution they make to our understanding of the purchase process. Compex modes may never be 51

67 Consumer behaviour and retai operations proven or vaidated beyond any doubt; they can offer ony intuitive criteria based upon existing knowedge to predict the ikey process of decision-making. However, behaviour is not totay random or beyond our comprehension due to the patterns of consumer behaviour which may be predicted. Modes of behaviour are a usefu means of organizing disparate bodies of knowedge regarding socia action into a somewhat arbitrary yet pausibe process of intervening psychoogica, socia, economic and behavioura variabes. The eary major theories were those of Enge et a. (1968); Enge et a. (1986); Howard and Sheth (1969); and Nicosia (1966). These modes can be found to share severa commonaities: 1 they a exhibit consumer behaviour as a decision process. This is integra to the mode; 2 they provide a comprehensive mode focusing mainy on the behaviour of the individua consumer; 3 they share the beief that behaviour is rationa and hence can, in principe, be expained; 4 they view buying behaviour as purposive, with the consumer as an active information seeker both of information stored internay and of information avaiabe in the externa environment. Thus the search and evauation of information is a key component of the decision process; 5 they beieve that consumers imit the amount of information taken in, and move over time from genera notions to more specific criteria and preference for aternatives; 6 they a incude a notion of feedback that is, outcomes from purchases wi affect future purchases. A brief overview of some modes wi provide a better understanding of the decisionmaking process. The Enge Koat Backwe (EKB) mode The Enge Koat Backwe (EKB) mode has been widey referenced and is acknowedged as one of the most comprehensive expanations of consumer behaviour. The origina mode has undergone three major revisions since 1968 and the current mode, whie retaining some of the fundamentas, has become more sophisticated in definitiona and expanatory aspects and therefore varies from the origina version. This refects the progress made in knowedge which required some adaptation to the origina mode for its continued surviva. The EKB mode (see Fig. 3.3) takes a broad view, incorporating inputs such as perception and earning which are discussed in great detai. A key feature of the EKB mode is its incorporation of the differences between high and ow invovement as part of the buying process. High invovement is normay present in the decision-making process when the perceived risk in the purchase is high. This eement of risk is higher when the consumer is unsure about the outcome of his or her purchase decision. This arises when: information is imited; the buyer has ow confidence; the price reative to income is high. 52

68 The main theories of consumer behaviour Fig. 3.3 The Enge Koat Backwe (EKB) mode Source: Enge, Koat and Backwe,

69 Consumer behaviour and retai operations This has obvious connections to demand. Enge, Backwe and Miniard (EBM) in 1986 stated that imited probem-soving (LPS) activity takes pace when there is itte perceived risk that a wrong decision wi be made. As they aso point out, most consumer decisions are of the LPS type. However, when present, extended probem-soving (EPS) affects the amount of effort put into the search to reduce the perceived risk. This wi invove a great dea more externa searching. The EKB mode has the decision process as pathways of convergence passing through various stages of processing prior to any choice being made. The centra process can be seen to incorporate five stages: 1 probem recognition/arousa; 2 interna search aternative evauation; 3 externa search aternative evauation; 4 choice/purchase; 5 outcomes as dissonance or satisfaction. The environmenta factors, such as cutura norms and vaues, motives, etc., which infuence these stages are important. The mode incorporates infuence which moves from the genera to the specific, which is from the macro eve (reference group, socia cass, norms) to the micro eve (beief, intention, attitude). Minicase 3.1 iustrates the importance of changes in age profie and its resutant impact on cuture, beiefs and behaviour in reation to consumers shopping behaviour. MINICASE 3.1 The importance of the Teenager Youth, Inc Sure, the young are going to change the word. But first they are going to buy a huge amount of stuff. The economic infuence of the young has never been greater. Just in America aone, the 31m kids between 12 and 19 contro $155 biion-worth of consumer spending, according to Teenage Research Unimited, a market-research firm. Their numbers are sighty smaer than those of the boomers at the same age, but their spending power, adjusted for infation, is five or six times as arge. No wonder the young consumer has gone from afterthought to perhaps the most important retai sector today. If society seems obsessed with youth, it is at east party because companies are. Like it or not, the young increasingy pick the styes and brands that tricke up to the rest of the popuation. Now that dua-income famiies have become the norm, parents spend money on their chidren to compensate for their absence. Divorce and remarriage compound this effect. Young peope s money tends to fow in concentrated streams that can make or break companies. This year, for exampe, Pokémon, a series of fighting cartoon characters, generated more than $3 biion in revenue for its owner, Nintendo, in America aone. When urban teens got bored with Tommy Hifiger s cothes in mid-1999, the firm s share price pummeted by 85% in a matter of months. Push scooters were a 1950s anachronism; now, thanks to an overnight youth craze there is an updated mode caed the Razor. A thriving industry has emerged to try to understand young consumers and predict what they wi ike. Companies have entire research arms dedicated to youth trends. Microsoft set up a youth house to watch teenagers work and pay. Market-research firms send out pint-sized spies into the mas to report back on the atest spontaneous fashions and brand oyaties. So who are they? A ot of things. They are the echo boomers, offspring of the baby boomers, that huge wave of chidren of the post-war reconstruction. They are aso the net generation, the first to 54

70 The buying decision process and impications grow up never knowing a time before computers, and not much time before the Internet. They were bathed in bits, immersed in a revoutionary technoogy that the rest of the word is sti strugging to understand. And they are the miennias, with the cean sate and new day that impies: born in the 1980s, the richest generation in history, the best educated, heathiest, the first to grow up knowing nothing of war, famine, disease and poverty. The gradua departure of the boomers from the workforce over the next 25 years wi eave a huge vacuum for the miennias to fi, and the ikey faiure of Socia Security wi force them into the roe of saviour, heping the state to support their parents. Unimaginativey, they are better-known as Generation Y, a reference to their once-troubed predecessors, Generation X. Source: The Economist, London, 23 December 2000 Sheth s famiy mode of behaviour Quite often the purchase decision process is investigated in terms of the individua; for exampe, some modes have stressed the individua as the singe focus of attention. It is cear that for the purchase of high price items the decision process invoves a high eve of risk that the decision may be a poor one. It aso often invoves the preference resoution of more than one individua. This creates a compex situation whereby, more often than not, the purchase has to satisfy the divergent needs of the group. Obviousy a famiy decision invoves mutipe infuences from its members. Within the theory of famiy buying behaviour there is the concept of roe structure, that is, individua members of the famiy take on roes such as coecting information, deciding on the avaiabe budget, etc. Whatever way a famiy makes its fina decisions we have to reaize we are not deaing with a homogeneous unit but with a coection of individuas with different goas, needs, motives and interests. The Sheth mode of the famiy decision process (Fig. 3.4) provides one of the few exampes of an attempt to repicate the behaviour of group decision-making. The probem with the schema of Sheth is that aspects of search, motives, beiefs and predispositions occur in tandem with each member of the group prior to there being a resoution of the group to a fina decision, whereby joint or autonomous outcomes occur. Whie we have to appaud Sheth for breaking away from an overreiance by theorists on individua decision modes, we may need to question the reaity of his mode as to how groups bargain and trade off parts of the arger decision, especiay in reation to products shared by members of the famiy. THE BUYING DECISION PROCESS AND THE IMPLICATIONS FOR RETAIL MANAGEMENT Retai has deveoped rapidy over the past few decades, ed by a marketing thrust which has created diversity of suppy, focused on important consumer segments and stimuated high eves of demand. Within this deveopment, marketing has often concentrated more on improving the product than understanding the consumer and the compexity of their decision processes. Whatever approach is taken it is normay agreed that the act of buying retai products is characterized as a process of different stages. As part of this approach, the buying decision is the invovement of some or a of the stages outined in Fig. 3.5 and isted on pages

71 Consumer behaviour and retai operations Fig. 3.4 The Sheth mode of famiy buyer behaviour Source: Sheth,

72 The buying decision process and impications Fig. 3.5 Eight-stage mode of the retai buying process The retai buying process outined The starting point is where a need is recognized and the individua is energized into becoming a potentia customer. 1 Need arousa The buying process is triggered by the emergence of an unsatisfied need. The stimuus for this is a cue (socia or commercia) or a drive (physica, when the senses are stimuated) which motivates or arouses the individua to act. 2 Recognition of the need This is the prerequisite stage based upon the recognition of the need to perhaps repenish the stock of food or a need for new cothes because of a forthcoming function or hoiday. 57

73 Consumer behaviour and retai operations 58 Retaiers can affect this stage using good window dispays, advertising and promotion, and stimuating in-store merchandise dispays. The stimuation of demand is important given that many shopping trips are simpy to browse. The recognition may be that other secondary needs emerge. For exampe, the desire for a hoiday may require new uggage and eisurewear. A new suit may aso be part of a compex need that incudes buying a shirt, tie and shoes as we. Good retaiers recognize the opportunity to group compementary products or to provide cues as to what ese the customer may require. The marketing-oriented retaier wi present a tota merchandise package to the consumer but aso wi train their staff to prompt the customer to think about his or her accessory requirements. 3 Leve of invovement This is the amount of time and effort invested in the decision process, for exampe the depth of search for information. Invovement wi differ based upon the compexity of the product, the individua customer perceptions and the buying situation in which the purchase is to be made. This is discussed further beow in the context of simpe or compex decision-making. 4 Search for information and identification of aternatives Brands which initiay come to mind when considering a purchase are referred to as the evoked set. However, friends, shop assistants, merchandise, eafets, magazine adverts, etc. may provide a consideration set. The search for information occurs on an interna and externa basis (Fig. 3.6 iustrates this). Individuas wi draw upon activey and passivey acquired memory as to which products and/or stores wi satisfy their needs best. Ceary any brands or stores which come to mind evoked sets are going to achieve a distinct advantage over competitors. The promotiona campaigns of brands or new products, as we as peer group infuence, wi aso have a major impact on what is to be considered for purchase. This wi be via the externa search process. Some customers who enjoy shopping wi search more than those who do not enjoy shopping. The individua who enjoys shopping is more ikey to spend time in shops assessing the aternatives and gathering information from different saes staff. It is important to reaize that if this type of buyer does not obtain the required information from one retaier they wi visit another for more appropriate information. There are those customers who are more sef-confident and as such wi be found to search ess. In addition, there are the routinized shoppers who know in advance what they want to spend and where to find the products they want. The situationa factors which affect search phases are the number of competing brands and stores avaiabe, and the time pressure within which the purchase has to be made. Typicay, the potentia customer wi continue to coect information unti the point when he or she is satisfied that the risk of their intended purchase is acceptabe. 5 Evauation of aternatives Comparisons are made of the saient attributes based upon the criteria of the potentia purchaser. These coud be criteria such as cost, reputation or performance expectation. This is a compex stage based upon comparing attributes within the context of brand

74 The buying decision process and impications Fig. 3.6 Information source consideration prior to purchase beiefs and attitudes. As they come to their fina choice customers wi form some ranking of preference among the aternatives. Aso, the customer may be trying to satisfy both functiona needs reated to the performance of the product as we as psychoogica needs associated with the gratification shoppers obtain in terms of sef-image. For exampe, a designer abe shirt may not be functionay as good as another shirt but may be chosen because it wi say something about the wearer. Usuay the customer wi form a purchase intention at this stage but they coud aso seek additiona information or deay the purchase if they remain unsure of the outcome. The attitudes of consumers are dynamic and as channe management improves so the expectations of the retai customer wi change. Tabe 3.4 indicates some changes that are occurring. 6 Decision Choice is made as part of a probem-soving exercise to seect on the basis of the overa baance of evauation, with the most favoured offer, brand and method of purchase being seected. 7 Purchase action This may be affected by the avaiabe merchandise: for exampe, coours or size. The type of transaction, based upon credit faciities or payment methods, may aso affect a purchase event. 59

75 Consumer behaviour and retai operations Tabe 3.4 Attitude change 20th-century attitudes to retai 21st-century attitudes to retai I need to seek out an offer When are your opening hours? When can you deiver? I have to make a shopping trip I am an unknown customer I wi not worry if quaity is ow I am ooking for the right product, in the right pace, at the right time... You shoud make the offer to me I want the convenience of 24-hour 7-day opening Deivery time shoud be short and suit me I want an experience and discovery event You shoud buid a reationship with me I expect quaity probems to be resoved I expect choice of channes (Internet, WAP, high street etc.) with anywhere anytime anything service. 8 Post-purchase feeing/behaviour This is the feeing the individua experiences after the purchase. Quite often with important purchases the purchaser wi doubt the wisdom of their choice or have some dissatisfaction; they may have a need for reassurance to reduce what is known as cognitive dissonance or disequiibrium. This state is when tension resuts from hoding two conficting ideas or beiefs at the same time. If the doubt over purchase is high, it may affect use of the product or resut in a decision not to repurchase. This psychoogica state of anxiety is reduced by the means of guarantees, teephone hepines to dea with queries, or no-quibbe return poicies such as those operated by Marks & Spencer. It is aso reduced through advertising which reinforces the wisdom of having made the purchase. The post-purchase process is reated to how we the customer has been satisfied on the basis of their expectations of the product and store. The buying decision process can be simpe or compex In the case of high risk purchases such as expensive items, medicina cures or presents for those we care about, the purchase is often of a compex nature where an individua wi be ikey to go through each of the eight stages outined. This type of purchase routeing is sometimes termed a compex or high invovement purchase. We have aready touched upon this with the EKB mode of consumer behaviour. As part of the high invovement process, customers wi spend more time and effort to seek out information and evauate aternative products. Customers who are trying to satisfy important needs may require, or be reassured by, in-store merchandise dispays which reduce uncertainty and risk. For exampe, a purchase of a bed to hep with a bad back may require a cutaway mattress to show how the springs wi provide support. The provision of in-store videos, brochures and eafets to expain the merchandise and describe its specifications in terms that the customer understands wi assist in the sae of merchandise. For routine, habitua or norma day-to-day purchase items, however, the process is more eementary and often termed simpistic or ow invovement. The phases at 3, 4 and 5 above are often ignored or skipped through. For exampe, the purchase of reguar items such as sat, sugar and matches wi be ow invovement. As a genera rue goods 60

76 The buying decision process and impications Tabe 3.5 Product categories and eve of purchase invovement Product category Convenience Shopping Speciaity Fashion Characteristics of purchase There is frequent purchase with itte effort exerted to compare or judge aternatives the typica process is ow invovement Price, quaity and vaue comparisons are made the typica process is medium invovement Due to the speciaist aspects of the purchase, the perception of quaity and vaue are reevant. Given ignorance often exists regarding the product, the risk is higher. The typica process is therefore high invovement Fashion products are highy susceptibe to peer and reference group infuences. However, some fashion products have sower rises to popuarity than others with gradua decines the typica process is medium to high invovement that are purchased more frequenty, are ess expensive and perform functiona roes are reated to a simpified process of purchase. With ow invovement the customer reies more on persona knowedge due to successfu prior experiences; even if the purchase is expensive, through prior satisfaction the process may be simpistic. The consumer may be brand or store oya because they have been highy satisfied with previous purchases and, therefore, may adopt a ow invovement route of purchase. Store oyaty exists when consumers habituay visit the same store because they are satisfied with the shopping experience and products on offer. Store oyaty may be enhanced by seecting the right ocation, offering breadth and depth of merchandise seection, creating the right saes ambience or atmosphere, promoting goods inteigenty, providing optimum service standards and rewarding frequent customers through oyaty schemes. We can examine the product categories of retai to understand the inks to different characteristics of the purchase (see Tabe 3.5). The different aspects of perceived risk The retai service encounter can be characterized as a moment of sef-reaization: that is, the customer assesses the quaity of the service encounter as we as his or her own persona feeings about the possibe purchase. Retai purchases are associated with: some risk of the decision-making eading to a negative physica or tangibe consequence; the uncertainty of the decision with regard to subjective consequences. Uncertainty is often associated with persona reservations and risk. Therefore, there is a requirement paced on retaiers to understand its compexity. For exampe, the purchase of some product categories invove a sense of more risk than others. The purchase of baby food is perceived as more risky than groceries. For some customers own-brand products may not be favouraby evauated against nationa brands whereas for others 61

77 Consumer behaviour and retai operations 62 they wi be. Therefore, perceived risk is based upon persona factors and the magnitude of an expected adverse consequence of a purchase. This means that in the decisionmaking process it is the ikeihood of a probem occurring which wi heighten the risk factor associated with a purchase. Retai products may invove compex decision-making because the purchase is often persona and thus often of reativey high risk. Quite often the perceived risk is reated to the probem of making a mistake. This is promugated on the basis of worries about the economic, physica, psychoogica and performance aspects of the purchase. Economic risk The risk can be economic, invoving the purchaser in the probem of deciding whether or not the product offer is of good vaue or not. Consumers face economic or financia risk when they purchase retai products that they cannot be sure wi deiver the desired benefits. Retai sometimes invoves the purchase of an expensive product which cannot be easiy assessed prior to purchase and being taken home. This type of risk is heightened for those with ow eves of disposabe income for whom the purchase represents a major expenditure. Physica risk Some products may be perceived to be dangerous such as chidren s toys or eectrica goods which have unknown brand names. It may be the case that some peope have a fear of eectrica goods or medicines, irrespective of what brand they purchase. Psychoogica risk Status can be ost through patronizing the wrong stores or using companies which have a poor image. The fear is that the peer group of the consumer may ask, Where on earth did you buy this? This risk occurs when the potentia customer fees the purchase may not refect the sef-image they wish to portray. Performance risk This risk is experienced where the effectiveness of different brands cannot be assessed in advance. This type of risk is associated with feeings that the product may not deiver the desired benefits. For those who made a bad purchase such as a poor hoiday or an uncomfortabe new bed, there is unikey to be an opportunity to make up for it by attempting to have another, better hoiday or to repace the bed in the same year. Most consumers do not have the additiona money or hoiday entitement to make good the purchase if it goes wrong. From a marketing point of view these risks have to be minimized through product and promotion strategies. Creating and deivering communication campaigns heps to convince the potentia customer of the reiabiity of the company and wi essen the feeing of risk. By acquiring information the consumer buids up menta pictures and attitudes which create the expectation of positive benefits from the retai or consumption experience. Consistency of offering wi aow the consumer to earn to worry ess about risk. It is therefore important for retaiers to have an understanding of how expectations wi

78 The buying decision process and impications affect the service experience. The deveopment of brand or store oyaty is far easier if the consistency of service is managed propery. If this is successfu, the resuting reputation wi ead to risk-reduction perceptions. Infuences on the consumption process The consumer decision processes can be found to fa within a simpified framework of infuence. Many different authors have researched these infuences. It can be found that investigation has centred on the foowing four areas. 1 Energizers of demand. These are the forces of motivation that ead a potentia consumer to decide upon a shopping visit or to seek out a product. 2 Fiterers of demand. Even though motivation may exist, demand is constrained or channeed due to: economic factors (socia cass and disposabe income), socioogica factors (reference groups, cutura vaues), and psychoogica factors (perception of risk, personaity, attitudes). In addition, evauative criteria wi fiter the different retaiers offers with regard to ocation, assortment, vaue for money, store personne, and services. 3 Effecters. The consumer wi have deveoped ideas of a product or brand from its promotion, deveopment of image, and information which is generay avaiabe (earning, attitudes, associations). These effecters wi heighten or dampen the various energizers which ead to consumer action. In addition, an effecter coud be the position, dispay and type of merchandise which creates an impuse purchase. For exampe, grocery items which are ocated at end-of-aise dispays, and paced at eye eve, often exhibit increased demand. 4 Roes. The important roe is that of famiy member who is normay invoved in the different tasks of the purchase process and the fina resoving of decisions about when, where and how the group wi consume the retai product (famiy infuence, cutura infuence). Energizers or motivationa forces the need and invovement stage The cassic dictionary definition of motivation is derived from the word motivate which is to cause (a person) to act in a certain way due to compeing forces; or to stimuate interest. There is aso reference to the word motive which is concerned with initiating movement or inducing a person to act. As woud be expected, the concept of motivation offers insight as one of the major determinants of consumer behaviour. Tauber (1972) suggested shoppers utiize six categories of persona motivation: 1 roe paying shopping may be a earned and expected behaviour pattern which, for some, becomes an integra part of their roe; 2 diversion shopping may provide an escape from the daiy routine, a form of recreation; it can provide a diversionary pastime for individuas or free entertainment for the famiy; 3 sef-gratification the shopping trip may represent a remedy for oneiness or boredom, with the act of purchasing being an attempt to aeviate depression; 63

79 Consumer behaviour and retai operations 64 4 earning about new trends incudes a desire for continuation of persona education. Many peope enjoy shopping as an opportunity to see new things and get new ideas; 5 physica activity the exercise provided by shopping is an attraction to some, especiay those whose work and trave modes provide itte opportunity for exercise; 6 sensory stimuation the shopping environment may provide for many forms of stimuation, through ight, coours, sounds, scents and through handing the products. In addition to the above, shopping activity is aso characterized by the foowing five socia motives. 1 Socia experiences outside the home. In a simiar way to the socia setting of the traditiona market, the shopping area can provide the occasion for socia interaction meeting friends or simpy peope watching. 2 Communication with others having a simiar interest. Hobby, sports and even DIY shops aow the opportunity to associate with staff and shoppers with simiar interests. 3 Peer group attraction. Using a particuar store may refect a desire to be associated with the group to which one chooses or aspires to beong. This may be particuary significant in patronizing a store which is seen to be associated with a high status or a trend image. 4 Status and authority. In the stores that seek to serve the customer especiay when they are contempating high-cost, comparison purchases some shoppers enjoy being waited on whie in the store. 5 Peasure of bargaining. Some derive satisfaction from the process of hagging or from shopping around to obtain the best bargains. As with most of the authors deaing with motivation the research is quaitative; therefore, the proportion of shopping which woud exhibit one type of motivation rather than another is difficut to judge. What we do know is that the patronage of a retai outet wi be based upon certain common motives. These are: its convenience in terms of the time required to reach the outet, perhaps park, wak around to find the product and then pay; the reputation of the retaier as judged by sef, friends and other retaiers; retai environment characteristics such as ambience, decoration, dispays, ighting, heating or air conditioning. Many customers seek to browse and expore the retai outet offerings; service encounter expectations of the friendiness of the staff, their knowedge, return poicy arrangements, the efficiency and courteousness of the transaction, the aftersaes service; the expectation of queues and other shopper numbers; expectations of the merchandise that the variety, vaue for money, quaity and brands wi fufi the needs of the visit; expectations of vaue vaue for money through fair pricing, oyaty rewards, guarantees. If the retai outet image, or service deivery poicy, corresponds to the customer s need priority then improved oyaty is a ikey resut. If the priority is convenience, then a

80 Understanding motivation customer wi be wiing to patronize an outet which is cose but perhaps more expensive. We shoud be aware that convenience in terms of the ease of shopping and paying is becoming more important. This is because, owing to socia pressures, the time that an individua is wiing to aocate to shopping has been decining expaining the popuarity of convenience stores. Aternativey some customers may vaue the shopping experience and want better eves of service. This is why some retaiers pay music in stores to encourage onger browsing times and the higher probabiity of a sae. Once a consumer has found a retai experience which suits him or her, repeat visits and store oyaty are more ikey. There are different types of shopping trip. A number of studies have identified that househods have a routine of supermarket shopping which incudes one weeky main trip and other secondary purchases. The main trip is panned to cover most of a househod s grocery needs. In the USA neary a supermarket trips are by car whereas in the UK about 80 per cent are by car. Larger outets are abe to draw in customers from onger distances as consumers are wiing to spend more time traveing to utiize these stores because of the wider range of merchandise on offer and anciary services such as an integra snack and coffee bar. UNDERSTANDING MOTIVATION MASLOW S HIERARCHY MODEL It coud be argued that, due to its simpicity, Masow s need hierarchy is probaby the best-known theory of motivation. It is used in industria, organization and socia science texts on a reguar basis. The theory of motivation proposed by Abraham Masow (1943) is in the form of a ranking, or hierarchy, of individuas needs. Masow considered the factors which ed to an utimate goa of achieving sef-actuaization or fufiment. He argued that if some of the higher needs in the hierarchy were not satisfied, then the ower needs the physioogica ones woud dominate behaviour. If a ower need, or needs were satisfied, however, they woud no onger motivate and the individua woud be motivated by the next eve in the hierarchy. He initiay proposed that the individua woud endeavour to satisfy the needs of each eve on a sequentia basis but ater accepted that individuas woud attempt to satisfy needs at more than one eve simutaneousy. The mode shape given to Masow s series of motivations is normay trianguar which seemingy indicates a narrowing towards a higher eve set of motivations. Aternativey it is iustrated by way of five steps. There seems itte empirica evidence to suggest why any of these shapes as opposed to, say, overapping Venn diagrams which bur the changes in motivation are more accurate as a representation. Therefore, the foowing hierarchy ist, rather than a mode, is offered. High 5 Sef-actuaization sef-fufiment and reaization, enriching experiences 4 Esteem ego needs, success, status, recognition, accompishments 3 Beongingness acceptance, affection, giving and receiving ove 2 Safety security, sheter, freedom from fear and anxiety Low 1 Physioogica hunger, thirst, sex, rest, seep, activity Masow (1968) identified that there are two motivationa types of sequence mechanism in motivation. These can be greaty simpified as: 65

81 Consumer behaviour and retai operations deficiency or tension reducing motives; inductive or arousa seeking motives. Masow maintained that his theory of motivation is hoistic and dynamic and can be appied to both work and non-work spheres of ife. Despite his caims, Masow s hierarchy of needs has received no cear support from research. Masow treats his need eves as universa and innate. However, he accepts that they have inherent weaknesses due to instinctua reasons; they can be modified, acceerated or inhibited by the environment. He aso states that whie a the needs are innate, ony those behaviours that satisfy physioogica needs are unearned. Whie a great dea of demand theory has been buit upon Masow s approach, it is not cear from his work why he seected five basic needs; why they are ranked as they are; how he coud justify his mode when he never carried out appied observation or experiment; and why he never tried to expand the origina set of motives. His theory was deveoped out of a study of neurotic peope and he argued that he was not convinced that the seective use of its appication esewhere (in organizationa theory) was egitimate (1965). The eary humanistic vaues of Masow seem to have ed him to create a mode where sef-actuaization is vaued as the eve man shoud aspire to. It is not as if Masow has been extended or distorted by behaviour theorists but simpy that he has provided a convenient set of containers which can be reativey easiy abeed. The notion that a comprehensive coverage of human needs can be organized into an understandabe hierarchica framework is of obvious benefit for authors. If individuas are satisfying basic needs and seeking sef-fufiment, then retaiers have to understand the need to offer products which aow consumers the opportunity to fufi their higher needs of sefimprovement, the attainment of individuaity, provide status and give some deeper meaning in ife. Some excusive brands achieve this but many other brand strategies set out to create these associations. Within Masow s mode human action is connected to predetermined, understandabe and predictabe aspects of action. This is very much in the behaviourist tradition of psychoogy as opposed to the cognitivist approach, which stresses the concepts of irrationaity and unpredictabiity of behaviour. However, Masow s theory does aow for peope to transcend the mere embodiment of bioogica needs, an abiity which sets them apart from other species. To some extent the popuarity of Masow s theory can be understood in mora terms. It suggests that, given the right circumstances, peope wi grow out of their concern for the materiaistic aspects of ife and become more interested in higher things. In examining the needs that Masow has isoated, we shoud question some of those that may be absent. For exampe, individuas often strive for dominance or abasement, for intrinsic as we as extrinsic reward, and they often subimate one need for another. One trend which may be oosey inked to Masow s need for improvement in sefesteem is the compusive shopper. In recent years there has been the identification of the deviant pattern of compusive shopping. This type of shopper has been identified in Europe and in other countries. In the USA about 6 per cent of shoppers are thought to exhibit some form of this trait. The characteristic is associated with the purchase of a range of cothes, shoes and goods that are not required and may never be used. This type of behaviour is at the extreme end of a continuum as other individuas aso have strong urges to buy which they find difficut to hod in check. The compusive shopper situation 66

82 Demographic factors is different as it can be based upon a psychoogica difficuty which eads to a financia probem and thereby causes great distress. The behaviour often occurs among individuas who are unhappy and are suffering emotiona difficuties. Compusive buyers obtain emotiona reease or improved mood states when they purchase. The urge to purchase is stronger than their decision not to purchase. It is found that women who have ow sef-esteem mainy carry out compusive buying. It is aso associated with emotiona disturbances such as unsatisfactory reationships with partners. Sufferers are usuay trying to reward themseves through conspicuous consumption and in order to gain recognition wi often tak about their purchases. There are other shoppers who have been identified as definite behavioura types. There is the economic consumer who is oriented to be as carefu as possibe in the use of their finances and time. This consumer is focused on the vaue of purchases. The befriending consumer, sometimes referred to as personaizing, ikes to deveop strong persona attachments with store empoyees as a substitute for socia contact. This type of shopper seeks out more intimate store types. The ethica consumer is happiest shopping in a sma business and wants to hep out oca store merchants, particuary the itte guy. The apathetic consumer does not ike to shop. Convenience is paramount to minimize the time and troube of shopping. The habitua shopper goes grazing in the fied of shops on a very reguar basis. He or she cannot think of anything ese to do with their time and derives a comfort feeing in making reguar purchases. Motivations are an important cue to the purpose and type of shopping individuas wi undertake. This heps retaiers position their store to appea to the different preferences based upon merchandise, price and quaity. This eads to decisions in terms of which type or types of shoppers to attract and how many of them can be targeted. DEMOGRAPHIC FACTORS Demographic factors which infuence demand are based upon the aggregate of individua socia patterns within society. These factors may not be subject to dramatic change but account for powerfu effects on the voume and nature of demand for different products. Demographic factors form the bedrock of the way individuas adopt different forms of ifestye in their own socia words. As shown in Fig. 3.7, the changes over the past decades are creating both probems and opportunities for marketers. Most countries are experiencing changes now and facing predicted and projected ones. Demographic changes probems and opportunities Sowing birth rate Predictions in some countries are indicating the tota popuation wi decine. However, with smaer famiies the first born sti requires the baby-reated goods of furniture, cothes and additiona items which are normay passed on to other sibings. Age is an important demographic variabe as many purchases, such as those for babies and chidren, are age dependent. The trends are inked to important changes in reation to the baby, youth and mature markets. Retaiers are keen to infuence chidren under 12 years of age rather than treat them as passive in the consumer behaviour process. This is 67

83 Consumer behaviour and retai operations 68 Fig. 3.7 Demographic factors which infuence patterns of demand because chidren infuence their parents consumption patterns, constitute a very arge annua purchasing market, are tomorrow s adut consumer and earn to know how to buy for themseves and their future dependants. Average ife expectancy Average ife expectancy for both maes and femaes is continuing to increase. This, in combination with ower birth rates, is creating an ageing popuation the so-caed grey market. According to the government actuary s department in the UK, mae ife expectancy rates rose from 48 years in 1901 to 74.9 years in and for femaes from 52 years to 79.7 years in the same period. By 1998 about 20 per cent of the UK popuation were over 60 years of age and this wi rise to 30 per cent by Such trends wi have an impact on those companies with products targeted on specific age groups. Many of the oder generation, for a number of reasons, did not pay into pension schemes and consequenty their pensions and benefits barey keep up with infation. These groups and the unempoyed are ikey to adapt their ifestye to basic activities inked to the home and famiy. However, the mature market of the 45-years-pus groups offers significant profit potentia due to its spending power now and better future pension entitements. The actua and projected UK popuation by age ( ) is provided in Tabe 3.6. The predicted percentage change in the UK popuation by age ( ) is iustrated graphicay in Fig The socia structure The UK s socia structure may deveop into a poarized society based upon the rich becoming richer whie the poor become poorer. There are other divisions such as the heathy or unheathy, the technoogicay iterate or technoogicay iiterate, those who

84 Demographic factors Tabe 3.6 Actua and projected UK popuation by age, as a percentage of the tota popuation, Under Tota (miions) Source: Office for Nationa Statistics, 1997 Fig. 3.8 Projected percentage changes in UK popuation by age, Source: Office for Nationa Statistics, 1997 are mobie or immobie, and those who are time-rich or time-poor. The impications are that those who are time-rich but money-poor wi have to be carefu with their budgets and wi need to shop around for the owest prices. This socia category may we incude the retired as we as disadvantaged groups. However, ack of mobiity and the high cost and/or unavaiabiity of pubic transport may restrict the money-poor to shop nearer home. Fear of technoogy or ack of expertise in utiizing technoogy wi not iberate these groups. If the majority of the midde and oder aged groups are technoogicay iiterate then penetration of the Internet and their use of other means of IT-based home shopping wi be imited. The target group for retaiers wi be the money-rich and time-poor group, as this segment wi demand quaity products for which they wi be prepared to pay a premium. This group are aso more ikey to embrace IT as a soution to the probems of time constraints and the offer of greater convenience of shopping. The average househod expenditure on food per person per week increased by 5.4 per cent to in Whie this increase may be in part inked to infation according to the Institute of Grocery Distribution (1997) it is aso attributabe to changing consumption patterns. It is argued that this is based upon convenience purchases and higher priced premium 69

85 Consumer behaviour and retai operations 70 products. The report aso indicates that ifestye trends such as vegetarianism, eating out, snack foods, heathier eating and preferences for foreign or ethnic foods have created purchase behaviour changes. In the UK, Sunday opening and ate night shopping are retai strategies which aeviate the constraints of dua-worker famiies especiay if they have chidren. Deay of marriage Coupes are continuing to wait unti they are oder than previous generations before they marry. They aso wait onger to have their chidren. This wi mean a trend towards more compact housing units, smaer packaged food items, etc. It aso means there are higher eves of disposabe income prior to chid rearing. This aows for the sae of more uxury items and a higher preponderance to consume eisure products. The term often used for these househods is dinky (dua income, no kids yet) and reates to a group with higher than average consumption patterns due to their joint incomes and freedom from the time and money constraints of supporting chidren. Vaue of education There is a desire among young peope to obtain a good education and a greater number than ever before are entering higher and further education. This means individuas are entering the workforce ater and are often in debt, with sizeabe student oans to pay off. Occupation trends are for more white coar jobs which paces an emphasis on the purchase of forma styes of cothing. Number of househods The number of househods is increasing due to singe occupancy and parents iving separatey from their chidren. As consumption units become smaer there is more purchase for persona rather than group use (see Tabe 3.8 on page 77 for an indication of househod size). Working women More women are working outside the home and they are predominatey entering the service sector or becoming the soe breadwinner. The rise in the number of femaes in the workforce has to be assessed in conjunction with their traditiona roes of wife/partner and mother. This means they are more ikey to spend higher amounts of money on abour-saving devices in the home, be more independent in their purchases, and have higher eves of disposabe income for eisure activities. Working women are apt to seek individuaism and persona identity through their consumption patterns and therefore the sae of a cars, cothing or appiances has to be attuned to femae requirements. However, time constraints wi be important and retaiers may have to extend their hours of operation and their product range to ensure that they serve the needs of the working woman. Popuation mobiity is increasing The younger groups under 35 years of age are the most mobie. In addition, companies reocate or expand on an internationa basis. The impication for retaiers is that we-known chains or franchises wi be more successfu, especiay if they take the

86 Socio-economic categories opportunity to expand by way of franchising or icensing. There is aso the impication that advertising or PR, which gains a wider recognition for the retaier, wi hep to create and maintain a stronger presence and image for the company. Ethnic groups The interests of ethnic groups are becoming more important because of their increasing percentage share of the popuation. According to Curtis (2001), a survey of 93 organizations by Race for Opportunity (RFO) a forum of pubic and private sector organizations promoting race and diversity issues in business incuding Loyds TSB, Sainsbury s, Marks & Spencer, BT, Boots and British Airways indicates how ineffective companies are in marketing to ethnic minorities. The concusion was that ony a fifth successfuy reach out to ethnic minority consumers. An amazing 29 per cent admitted to not making any effort to target ethnic communities at a and ony 19 per cent sought the opinion of minority consumers in focus groups and research. In 1996 the estimated ethnic minority share of the British popuation was 6 per cent or around 3.3 miion peope (Institute of Grocery Distribution, 1997). Because in Britain the ethnic minorities group is generay younger than the rest of the popuation, the difference in birth rates and famiy composition ead to different retai and product demands. A this means that there is potentia profit for those companies which can target their promotions to this growing segment. In the USA Sears, McDonad s and K Mart have attempted to appea more to the ethnic market by the use of African-American modes in a variety of their promotions, or by the introduction of specia merchandise. In the UK WH Smith have stocked ethnic greetings cards and BT advertise in Hindi to promote ong-distance phone cas. In addition, many food manufacturers and mutipe retaiers have responded to demand in areas with arge ethnic communities by stocking and promoting ethnic foods. SOCIO-ECONOMIC CATEGORIES A main division of consumer groups is that of socio-economic or cass division. The groups isted beow are based upon type of empoyment of the head of househod. The midde-cass groups are categorized as those in the groups A, B and C1. A Upper midde cass higher manageria/administrative or professiona, e.g. doctor, director B Midde cass intermediate manager/administrative or professiona *ABs are 22.8 per cent of the popuation C1 Lower midde cass supervisory/cerica/junior manageria/administrative *C1s are 27.2 per cent of the popuation C2 Skied working cass skied manua worker *C2s are 22.0 per cent of the popuation D Working cass semi-skied or unskied worker *Ds are 17.6 per cent of the popuation E Lowest eve of subsistence pensioners, casua worker, widows and others *Es are 10.5 per cent of the popuation (*taken from NRS, 1999/2000 for aduts over the age of 15) 71

87 Consumer behaviour and retai operations MINICASE 3.2 THINK ETHNIC ACT ETHNIC: Marketers are missing out by faiing to target the UK s specific minority niches Whie marketing to ethnic minorities is an accepted and profitabe practice in the US, British business remains reuctant to pay the race card. Ethnicity is not routiney ignored by UK marketers, but considering the size and spending power of different ethnic segments, remarkaby itte effort is made to target each cuture discretey. Research conducted by Race for Opportunity a division of Business in the Community (BITC) showed that just one-fifth of British companies think they target ethnic communities effectivey. And 29% admit to not attempting to reach them at a. The study, which incudes the views of 90 BITC-member companies, such as HSBC, Boots and Loyds TSB, aso discovered that 25% do not seek feedback from ethnic minorities in focus group research. And ony 19% thought they were effective in their efforts to test marketing strategies against ethnic-minority consumers. The 2001 Census wi provide a more compete picture of the UK s ethnic mix, but the ast survey, taken in 1991, reveaed that 5.5% of the UK s 55 miion popuation comes from ethnic minority groups. In London, that figure rises to 40%. The 850,000-strong Indian community is the biggest of the ethnic groups, with back Caribbeans second on the ist, numbering 500,000. And the ethnic popuation is growing rapidy. As the number of whites in the UK remains amost static, minorities are growing by 2% to 3% a year, driven by higher fertiity rates and immigration. The Commission for Racia Equaity (CRE) estimates that by 2020, ethnic communities wi account for 10% of the UK popuace. In some areas of the country, minorities are rapidy becoming the majority popuation. Leicester, for exampe, is 38% non-white and there, as we as in some innercity areas of London and Birmingham, the ethnic popuation is expected to be in the majority by the end of the decade. This growth is highy significant for marketers. One major factor is youth. According to the CRE, 70% of Asians in the UK are under 35 and, by 2010, it expects that 40% of under-25s in London and Birmingham wi be back or Asian. A second factor is disposabe income. The spending power of ethnic groups is now estimated to be 15bn (two-thirds of ethnic peope have a disposabe income of more than 30,000 a year). So, armed with databanks fu of customer information, why are UK marketers not embracing ethnic diversity? Michae Wiiams, director of marketing and communications at Focus Consutancy, says: British businesses are scared of approaching ethnic groups directy. They tend to tip-toe around, afraid of what to say and what not to say, whereas in the US it s a about money. Marketers are missing a great opportunity because brands are extremey important to ethnic-minority consumers. When you ive in a society that questions your vaue, brands are a way of demonstrating your worth through what you buy. If brands are nervous about targeting ethnic groups, the faut is not a their own. Athough there is a weath of speciaist ethnic media particuary for Asian communities audiences are reativey sma and some media owners strugge to provide reiabe data. There is aso itte conventiona industry research covering ethnic-minority consumers, which makes it hard for advertisers to pan campaigns with confidence. As a resut, many advertisers sette for using mainstream media, even though it may resut in a high degree of wastage. As a survey in New Nation, the newspaper for the back community, reveaed, two-thirds of back peope in the UK think mainstream media has no reevance to them. Speciaist ethnic media is growing rapidy in the UK, with more than 180 press tites and an increasing number of digita TV channes. The Asian market is particuary we-served, with 15 digita TV channes. The big four Zee, Sony, B4U (Boywood for You) and the recenty aunched Star TV have access to between 250,000 and 300,000 Asian househods in the UK. Then there are speciaist channes, such as the highy regarded Prime TV, which serves the Pakistani community (40,000 homes), and Reminiscent TV, which offers a range of channes catering for Punjabi, Gujarati, Tami, Bengai, Urdu and Hindu communities. It caims to have 15,000 subscribers. There are aso five principa Asian radio stations. The biggest, Sunrise Radio in London, has about 300,000 isteners, whie Birmingham s XL and Manchester s ASR both caim audiences of 250,000. Source: James Curtis, Marketing, 5 Juy

88 Socio-economic categories Whie socia cass is often used to describe the readership or viewing patterns of various media it is probaby not as reevant as an understanding of ifestye, demographics and cutura vaues for segmenting markets or positioning products. There are interesting trends towards more home-based working; more women working, especiay in manageria roes; more occupations being cassified as midde cass, etc. A number of changes make it difficut to adhere to traditiona methods of designating cass. 1 Whie cass position may have provided fairy cear demarcations of buying power prior to the 1960s, increases in disposabe and discretionary income by occupationa group type has burred the cass groups. 2 Cass is treated as being reativey permanent whereas peope s careers and jobs may change which affects the basis of the measure of current or past status. 3 Cass groups are treated as if they are homogeneous and individuas are expected to behave ike each other. If a broader set of measures are used incongruence may arise, with an individua registering high on one measure and ow on another. 4 The number of women working and the type of work they do wi affect the definition and measurement of the head of the househod s occupation. An indication of trends is the forecast that in the UK and USA women wi soon represent amost 50 per cent of the workforce. The impact of more women working and the consequent ack of famiy shopping time is ikey to resut in: increased saes of abour-saving appiances and equipment; women having more independence over purchase decisions, with the seeking of identity from purchases; eisure time taking on increased importance with the resutant need for eisurewear and reated products; shopping being skewed more to evening and extended opening hours or perhaps being increasingy based upon direct purchasing. Once attracted to the store, consumers wi require the retaier to ensure there is good, cear signage and abeing in order to faciitate quicker shopping. Limited time may ead to more opportunities for teesaes or Internet saes functions; imited time eading to greater opportunity for pre-prepared and convenience foods or quick service restaurants or takeaway outets. Retaiers may have to examine the need for more sef-service and pre-packaging of various products. There may aso be a greater demand for reductions in payment and checkout time functions; service companies (repairs etc.) having to ensure that services are offered outside norma work hours or at weekends; the purchase of more uxury items due to an increase in affuence among some famiies; advertisers promoting more heaviy to the empoyed femae, as a segment, and this may be based on evening teevision commercias and the daiy press. As indicated above, the attitudes of the genera pubic to heath and eisure are changing. These vaues are refected in the type of cothing and fashions which are based upon eisure-reated activity. However, as Harverson (1998) pointed out, the numbers of year ods in the UK are on the decine, which means the group responsibe for the 73

89 Consumer behaviour and retai operations Tabe 3.7 Ownership of consumer durabes, Great Britain, Househods with % % % % % % % Home computer Coour TV Sateite TV 29 Video recorder CD payer Washing machine Dishwasher Microwave Teephone Car or van Source: Genera Househod Survey, buk of demand in the sports group market is shrinking rapidy, but the retaiers remain confident they can counteract any negative effects of this demographic trend by seing more goods and cothing to existing customers. The changes occurring in society are dynamic and wi ead to further changes in men s and women s roes. Men wi often do the shopping and it may be the femae who is the main breadwinner. Such changes may produce different patterns of retai use, shopping habits and responsibiities. The opening up of higher education in the UK and the increased eve of foreign trave wi infuence further changes. Consumers are more knowedgeabe and sophisticated in their tastes. The degree of education of younger peope is eading them to be ess conforming, ess open to pressure to foow different fashion trends and to be more confident over purchases. However, they are aso aware of their rights and, therefore, wi expect more attention to be given to quaity contro. In addition, their eary schooing wi have impanted in them the vaues of protecting the environment and seeing the resources of the earth as in need of being sustained. Issues of deveoping new retai sites, purchasing products which do not misuse the earth s resources, or the questioning of the expoitation of workers in Third Word countries may become more important. Some retaiers are accepting this trend and changes to methods of doing business have aready been championed by The Body Shop. The changing vaues of househods and the abiity to purchase create a pattern for ownership of a range of consumer durabes. Increasing affuence and the importance of technoogy, inked to purchases based upon eisure activity and hep with househod chores, can be gauged from the househod purchasing patterns outined in Tabe 3.7. Many of these trends are inked; for exampe, the microwave may suppement or repace the cooker but it aso ensures the future of the freezer. ROLE AND FAMILY INFLUENCE As the fundamenta socia unit of group formation in society, the infuence of a famiy on retai demand is extremey important. A famiy acts as the purchasing unit which may be suppying the needs of perhaps two or more generations. In addition, it sociaizes

90 Roe and famiy infuence chidren to adopt particuar forms of purchasing and acts as a wider reference group. Given the importance of famiy behaviour in the purchase of products we may want to question the preponderance of iterature that treats consumer behaviour as a mode of individua action. The concept of famiy ife cyce (FLC) heps us to understand how situation-specific ife stage conditions exert a great infuence on buying behaviour. The FLC is not just a progression by phase or age but represents ikey fuctuations in disposabe income and changes in socia responsibiities. For exampe, the bacheor stage represents an individua iving away from home with few responsibiities but with the need for affiiation with others and the ikeihood of purchases of eisure and entertainment, persona care items and cothes. As we grow oder our preferences for products and activities change in reation to the different demands paced on income and time. In addition, as we grow oder we wi have accumuated durabe goods, such as furniture, which we do not repace uness necessary. Wes and Gubar (1966) have conceptuaized the ife cyce of famiies in the USA, from the bacheor to soitary survivor stage, as foows: 1 Bacheor stage: young singe peope not iving at home (ow earnings, few financia responsibiities, purchase cothing, eisure and eectronics). 2 Newy married coupes: young, no chidren (doube income, therefore abiity to obtain credit for mortgage or different househod goods, eisure, entertainment). 3 The fu nest I: young married coupes with dependent chidren (one or two earners if chid care arranged, more carefu spending and ogica purchase reated to house purchase or appiances). 4 The fu nest II: married coupes with dependent chidren over six (ess ikey to be infuenced by advertising, concentrate on future needs, the chidren, famiy activities and vacations). 5 The fu nest III: married coupes with dependent chidren (higher income eve providing abiity to purchase higher quaity items and enjoy more expensive eisure pursuits). 6 The empty nest I: oder married coupes with no chidren iving with them. Head of househod in the abour force (trave and recreation important, abiity to spend money by choice on grandchidren or sef). 7 The empty nest II: as above, but head retired (carefu and prudent over consumption). 8The soitary survivor I: oder singe peope in abour force (may se home, purchase inexpensive eisure and trave). 9 The soitary survivor II: as above, but retired (poor income, security conscious and ikey to join oca socia groups). Many of these different stages represent attractive market segments for those who market and retai products and services such as insurance, banking, chidren s wear, etc. However, the trends in divorce, deayed-chid marriages and singe-parent famiy househods indicate that a arge number of individuas do not easiy fit into the above ife-cyce pattern. In order to take account of socia trends and ensure the above mode remains appicabe, the definition of married needs to be reaxed to incude any coupe iving together who are in a ong-term reationship. 75

91 Consumer behaviour and retai operations 76 Each member of a famiy fufis a specia roe within the group. They may act as husband/father, wife/mother, son/brother or daughter/sister. Famiy decision-making assigns roes to specific members of the famiy. Decision-making may be shared or decisions may be made by one person. One member of the famiy may be the faciitator, whie another may gather information. The famiy acts as a composite buying unit with the different roe patterns eading to particuar forms of retai product purchase. We shoud not expect famiy decisions to be taken easiy. Osen and McCubbin (1983) suggest that it shoud be assumed there is disagreement and a ack of congruence among famiy members rather than assume the famiy is an integrated and highy congruent group of individuas. Indeed, whie much research has been conducted in order to determine the differentiation and distribution of roes within the famiy in reation to purchasing behaviour, there has been itte theoretica endeavour to determine the effects of ack of consensus on famiy decision-making. Osen caims that famiy decisionmaking moves away from egaitarian preferences towards a more centraized structure as famiies move aong the stages of the ife cyce. In addition to particuar commodities that are inked with joint decision-making, Sheth (1974) defined certain situations where joint decisions are made. He identified that where the eve of perceived risk in buying is high then joint decisions are more ikey in order to reduce individua risk; simiary, where the purchasing decision is important to the famiy as a whoe or where there is high invovement in the purchase, joint decisions are aso probabe. Finay, where there are few time pressures, consensus decisionmaking may be seen as more appropriate (a shortage of time wi usuay encourage one member to make a quick decision). Certain demographic groups are identified as more syncretic, e.g. midde-income groups, famiies in the eary stages of the ife cyce, chidess famiies, and famiies where ony one parent is empoyed. There are other cassifications of consumers by ife cyce, with each system taking a sighty different approach in its emphasis. This is because the concept of a famiy or househod is dissimiar within different countries. For exampe, the age at which we define a chid or adut as having reached aduthood varies widey throughout the word even within the EU. Tabe 3.8 indicates the number of singe person househods and the resutant opportunity to deveop smaer packs and singe servings to reduce the price to the consumer and wastage. In particuar, edery women and maes aged between 25 and 34 are increasingy ikey to ive aone. UK househods with one person have changed from 22 per cent of a househods in 1981 to 28 per cent in Four or more peope in a househod has decined in the same period from 29 per cent to 22 per cent of a househods. The company CACI (CAC Inc. Internationa) has provided a nationa breakdown, pacing each UK househod into a cassification group. It was found that a database system of spitting the different residentia neighbourhoods into segments coud have predictive power for the market targeting of different products. This system known as ACORN (a cassification of residentia neighbourhoods) identified 40 variabes from census data in order to describe the different types of peope iving in each enumeration district. This was further refined to take into consideration postcode matches to address and housing type. This information is used in different ways based upon ifestye groups to provide profies of consumption patterns for food, drink, car ownership, centra heating, kitchen equipment, etc. There are severa eves of abstraction of the data with the

92 Roe and famiy infuence Tabe 3.8 Percentage of peope in UK househods by sex, age and famiy type, 1996 Coupe, Lone parent, with Lone parent, with Coupe, no with dependent non-dependent Agesex One person chidren chidren chidren chidren ony Maes under and over Femaes under and over Source: Office for Nationa Statistics, 1997 simpest iustrated in Tabe 3.9. Tabe 3.9 is based upon sma group cassification of no more than 150 homes and then aggregated to form the different ACORN types. The assumption is that neighbours, due to the simiarity in housing type, wi purchase simiar products. In 2000 ACORN was further improved to take into account ifestye aspects of those iving in specific housing types. The importance of ACORN is that it offers the opportunity to carry out micro-marketing by currenty cassifying the popuation of Great Britain into one of 17 groups and then of 54 types. This can hep in aspects such as seecting a profitabe ocation for a retaier, deciding on the merchandise range and targeting different areas with saes promotion campaigns. Psychographics Psychographics is sometimes termed ifestye as both are used as a description or anaysis of the consumer s activities, interests and opinions. This approach aows the grouping of individuas into a profie of the way they may spend their time; their beiefs reated to different issues about the home, work or poitics or themseves. Ceary the way that an individua may view themseves and act wi affect a whoe range of product needs. For exampe, an individua who is interested in environmenta issues and has beiefs about the protection of natura resources is ikey to seek out those brands that are ethicay and environmentay acceptabe. 77

93 Consumer behaviour and retai operations Tabe 3.9 CACI ACORN profie of Great Britain, 1997 Category Group percentage of percentage of popuation popuation ACORN (16+) ACORN (16+) category group Description A Thriving Weathy achievers, suburbia Affuent greys, rura communities Prosperous pensioners, retirement areas B Expanding Affuent executives, famiy areas We-off workers, famiy areas C Rising Affuent urbanites, town and city areas Prosperous professionas, metropoitan areas Better-off executives, inner city areas D Setting Comfortabe midde-agers, mature home owning areas 10 Skied workers, home-owning areas E Aspiring New home owners, mature communities White coar workers, better-off muti-ethnic areas F Striving Oder peope, ess-prosperous areas Counci estate residents, better-off homes Counci estate residents, high unempoyment Counci estate residents, greatest hardship Peope in muti-ethnic, ow-income areas Source: CACI, SRI Consuting Business Inteigence has deveoped a vaue and ifestye anaysis of consumer markets (VALS anaysis) by pacing individuas into one of eight groups (see Fig. 3.9). The VALS segmentation approach has three premises: a genera segmentation is more effective than a product-specific segmentation; demographics aone are an insufficient basis for modeing segmentation; psychographics are more powerfu as they revea the key attitudes driving behaviour. The VALS mode is based upon a continuum measuring three fieds of sef-orientation. These three are made up of groups that are principe oriented (grounded in the fied of ideas, knowedge and ideas), status oriented (motivated to achieve a cear socia position) or action oriented (based upon direct experience). On the other axis an individua s resources are considered (income, education, heath, sef-confidence, energy eve) as either abundant or minima. Different eves of resource enhance or constrain an individua s abiity and motivation to act, given his or her own sef-orientation. The components of the VALS approach are those identified as principe oriented fufieds or beievers; status oriented achievers or strivers; action oriented experiencers or

94 Roe and famiy infuence Fig. 3.9 Vaue and ifestye anaysis of the consumer market Source: Reproduced with permission of SRI Consuting Business Inteigence 79

95 Consumer behaviour and retai operations makers. Actuaizers or struggers fa either side of the centra area of status oriented as the actuaizers are very weathy whie the struggers are quite poor. One difference here is that the actuaizers are weathy enough to be abe to choose any of the three orientations on the horizonta access whereas the struggers are constrained and find it more difficut to exhibit any particuar orientation. In the principe-oriented group those who are the fufieds are described as mature, satisfied, we educated, responsibe and professiona peope. They are fexibe and refective thinkers, accepting of change, home-centred and aware of the events of the word. They are high income and practica, vaue-seeking consumers. Beievers as the second principe-oriented group are ess weathy, conservative, traditiona, more rigid in thinking and ikey to purchase the estabished brands. In the second part of the mode the status-oriented consumer is more ikey to take notice of the opinions of others and be guided by them. Achievers are successfu work-oriented peope whose satisfaction is based upon succeeding in a work and famiy environment. They are in favour of stabiity and the status quo and purchase products that are we estabished and can provide a cue of their success to their peers. Strivers are amost identica to achievers yet they ack the same eve of resource and therefore stye is more important as a means to emuate others. In addition, strivers are sensitive to the tastes and opinions of others as they exhibit ow esteem and want to obtain a ifestye beyond their means. As identified, those groups either side of the achiever and striver area are based upon high or ow resource. They incude the actuaizers who are successfu and weathy and therefore can have choice over consumption which refects their taste, character and independence and the struggers who have the owest incomes, have restricted choice, yet wi remain more brand oya. Finay there is the action-oriented group. These individuas are judged to be driven by a desire for socia or physica activity, variety and risk taking. The experiencers with a median age of 25 and mainy singe are found to be the youngest of a the VALS groups and as such have high energy and ike physica and socia activities. This group is sti deveoping its norms and wi be ambivaent, enthusiastic at one stage and then ess eager at the next. They spend heaviy on cothing, technoogy, eating out, music and youth cuture. The other group, the makers, are those who are more sef-sufficient and as such wi pace more emphasis on what is famiiar. They are ess ikey to focus any interest on the broader word and wi pace their energy into famiy, work and physica activity. They carry out do-it-yoursef activities and are consumers who wi not vaue the pursuit of materia possessions or status goods that have no practica or functiona purpose. The use of VALS or ifestye anaysis aows the retaier to understand the customer better as we as the target market because it does not take simpistic demographic data as the basis for the approach. It aows a current anaysis of how peope ive and the way they may consider others as we as themseves as part of their choice over spending and consumption. The roe of chidren in the consumer behaviour process The infuence of chidren in the famiy decision-making process has not received the attention from researchers that it deserves. Whie the parents are responsibe initiay for a chid s consumer behaviour, as the chid earns about purchasing and consumption 80

96 Roe and famiy infuence primariy from his or her parents, the chid eventuay becomes a dominant force in certain purchasing decisions. Famiies where both parents are working are increasing which means ess time is spent with chidren. In America in the eary 1990s 70 per cent of mothers worked fu- or part-time (Gubar and Berry, 1993) compared to 30 per cent in Parents may overcome their guit of not providing enough attention to their chidren by spending more money on them or giving them extra pocket money. Moreover, chidren between the ages of 6 and 14 are expected to do more around the house than in the past, with many having to cook for themseves on weekdays. This means that chidren are taking on different roes and becoming more sef-reiant. Companies target chidren at an eary age so as to buid brand oyaty. There are promotions utiizing ong-term coector schemes, direct contact forms of promotion or membership of cubs. The ong-term coector schemes rey on the chid saving tokens from packaging to obtain a reward. This may be a reward for a schoo project for exampe, to coect tokens in order to obtain books as in the case of a Wakers Crisps promotion invoving thousands of schoos or it can be for a persona reward. Many chidren want instant gratification of their needs and, therefore, scratch card promotions by companies such as Goden Wonder have been used to provide an instant reward for a minority of purchasers. The most successfu brand buiding schemes are probaby the cubs which banks and buiding societies have depoyed in order to capture the eary saver. Cubs such as the saver s gang may provide free gifts, organized outings to zoos and museums, and free persona insurance. Some supermarkets and fast-food chains in the USA and Europe have formed cubs which provide chidren with comic books, coupons for purchasing certain foods, and information packages on environmenta and educationa issues. Burger King has used to good effect a passport which gives the chid certain entitements to free gifts, magazines and other incentives. Banks reaize that it is important to capture the younger saver as they are ikey to stay oya. This has ed to a number of schemes incuding offering incentives to schoo eavers to open an account. Each of the schemes described has the abiity to infuence the chid at an eary age and bias their brand oyaties and prejudices when they become an adut consumer. In order to use direct marketing techniques, marketers are faced with severa issues. The main issue is to dea with any negative reaction the parents woud have. Parents may perceive direct marketing as a means of increasing chidren s desires, and thus increasing the pester factor in their own homes. In order to eiminate these probems, marketers need to orient their messages to both parents and chidren. This can be quite a chaenge, as the message has to reach and infuence two separate target groups. The parents wi want to have sufficient information on the promotion whereas the chid wi want to see some fun in the offer, such as humour, visua attraction, excitement and reward. Another possibe soution is for the marketer to contact the parents first in order to gain their consent for a further maiing to the chid. This sort of approach is often used by the financia service sector. After discussing various aspects of famiy decision-making, it is interesting here to concude with a brief overview of the reative infuences of famiy members. Figure 3.10 provides an account of the individua (adut partners) as opposed to joint decisionmaking which may take pace in famiies. This mode is of an average of a findings and it shoud be noted that it wi be affected by the number of years of marriage (or reationship), socio-economic background of partners, time avaiabe for both parties, etc. 81

97 Consumer behaviour and retai operations Fig Husband and wife roes in famiy decisions Source: Davis and Rigaux, SOCIAL INFLUENCE The famiy may introduce poitica ideas and consumer attitudes to purchasing to the chidren. However, the reference group of the individua is just as important. Purchases take pace on the basis of thinking about the way the purchase may hep provide status within the group, how the purchaser may need to consider other members and what messages the purchase communicates to those from whom an individua wants recognition and acceptance. There are four types of reference groups:

98 Concusion primary reference groups; secondary reference groups; aspirationa groups; disassociative groups. Primary reference groups incude the famiy as we as groups of cose friends, coworkers and so on. Secondary reference groups are those where there is forma contact but it is ess continuous. This wi be based upon membership of cubs, professiona associations, reigious organizations or a resut of the contacts from the area someone ives in, or the occupation they have. There are aso aspirationa groups to which the purchaser has positive feeings; they woud ike to be considered a member. Personaities are often used to endorse products as part of the marketing of expensive aspirationa products. Finay there are disassociative groups, with which the individua does not want to be associated. For exampe, if yuppie group association is not vaued then the type of products a member of a yuppie group may purchase, such as a pamtop, may be avoided. Approaches to decisions According to Carmouche and Key (1995), when an individua considers the choice between the aternative fast-food outets of Burger King and McDonad s they wi pass through a number of phases. To understand the process we need to: 1 identify the reevant decision-maker In this case it woud be the individua invoved but if a famiy, or group of friends, were dining out the compexity of parents and chidren s wishes woud need to be considered. 2 identify the courses of action avaiabe In this case there are ony two aternative outets, but in more compex situations the evoked brands and those considered are important. 3 identify the reevant uncertainties in the purchase situation Possiby the time avaiabe, food preferences, choice of menu, etc. If it is time, the three possibiities envisaged coud be: there wi be no queues and food wi be served immediatey; there wi be ong queues and consequenty considerabe deay in being served; the outet wi be cosed. 4 create a matrix that incudes the reevant information This wi be based on a set of vaues reated to the above scenarios in reation to the two outets. This provides for six possibe utiity vaues which can then be summed based on the two outets in order to provide for the subjective utiity of each individua. The ikeihood of choice can be assessed based upon the cacuation which indicates the highest expected vaue of outcome of utiizing either one of the outets. Of course in reaity this iteration is carried out in seconds. CONCLUSION In order to satisfy customer needs the retaier must have a thorough understanding of how customers make store choice and purchase decisions. Consumer behaviour provides 83

99 Consumer behaviour and retai operations some vauabe insights into the process and, therefore, is usefu for retai management decision-making. It is important to reaize that the purchase of products invoves motivationa, socia, psychoogica and economic factors. In addition, there are important stages invoved in the purchase process and the type of purchase as we as the risks of the purchase that wi affect the buying behaviour. Retai consumers need to be understood on a variety of eves. They are probem-sovers, deciding on what offer satisfies their needs. A retai activities and promotions shoud therefore aid the consumer to make a decision. Consumers seek to reduce the risk of their purchase. Retaiers need to provide information, guarantees, and after-saes services to reduce the perception of risk. Consumers wi go shopping for a variety of reasons. The compexity of the shopping trip per se shoud be cear to retai staff. There are a number of demographic and other changes which are having an impact on the patterns of purchasing and consumption. EXERCISES The exercises that foow reate to the contents of this chapter. It is suggested that you work through them before you move on to Chapter 4. 1 Think about the ast time you bought an expensive item. Write down why you think you recognized the need to buy the item, what information you ooked at, who you taked to about the purchase and why you bought the brand you did. Did you then worry that you may have made a poor purchase decision? What inks are there between the theory of consumer behaviour discussed in this chapter and your purchase? Are there any other infuences you can identify? 2 List the key demographic changes which are occurring throughout Europe. Assess what impications these and the foowing wi have for different types of retaiers. Use the grid beow as a guide. Change to birth rates and ong-term prediction of fewer younger peope Impications for grocery retaiers, DIY retaiers, etc. Smaer famiies and househods Impications for grocery retaiers, DIY retaiers, etc. Other key trends identified Impications 3 Produce a decision-making fow diagram based upon a choice between going to the cinema or hiring a video for the evening. The choice process shoud incude your best friend. Ensure you 84

100 References and further reading incude a the key aspects of the process through to post-decision phase as we as the other infuences which you woud consider coud affect the perception of risk in this decision. 4 Using Masow, ist the type of products and brands, or retai stores that utiize a Masow approach which wi appea to individua sef-esteem rather than those which wi satisfy more basic needs. What can a retaier earn from this? Reate this to changes in consumer ifestye which may be affecting the current retai marketpace. REFERENCES AND FURTHER READING Ajzen, I. and Fishbein, M. (1980) Understanding Attitudes and Predicting Socia Behaviour. Engewood Ciffs, NJ: Prentice Ha. Assae, H. (1987) Consumer Behaviour and Marketing Action. Boston, MA: Kent. CACI (1998) Geodemographic Pocketbook. Heney: NTC Pubications. Carmouche, R. and Key, N. (1995) Behavioura Studies in Hospitaity Management. London: Chapman and Ha. Chisna, P.M. (1994) Consumer Behaviour. Maidenhead: McGraw-Hi. Curtis, J. (2001) THINK ETHNIC ACT ETHNIC: Marketers are missing out by faiing to target the UK s specific minority niches, Marketing, 5 Juy. Davis, H. and Rigaux, B. (1974) Perception of marita roes in decision processes, Journa of Consumer Research, 1, June, Deaert, B.G., Arentze, T.A., Bieraire, M., Borgers, A.W. and Timmermans, H.J.P. (1998) Investigating consumers tendency to combine mutipe shopping purposes and destinations, Journa of Marketing Research, 35 (2), The Economist (2000) Youth Inc, The Economist, 23 December. Enge, J.F., Backwe, R.D. and Miniard, P. (1986) Consumer Behavior. New York: The Dryden Press. Enge, J.F., Koat, D.J. and Backwe, R.D. (1968) Consumer Behavior. New York: Hot, Rinehart and Winston. Fant, D. (1998) Understanding customers: The key to retai success, Marketing News, 32 (4), 7. Genera Househod Survey (1998) Office for Nationa Statistics, Socia Survey division, , Cochester. Gubar, S. and Berry, J. (1993) Marketing To and Through Kids. Maidenhead: McGraw-Hi. Harverson, P. (1998) Sports retaiing: reegating ess active sectors, Financia Times, 17 March. Hoinger, P. (1998) Home shopping: homing in on niche markets, Financia Times, 17 March. Howard, J.A. and Sheth, J.N. (1969) The Theory of Buyer Behavior. New York: J Wiey and Sons. Hurey, R.F. (1998) Customer service behavior in retai settings: A study of the effect of service provider personaity, Journa of the Academy of Marketing Science, 26 (2), Institute of Grocery Distribution (1997) Grocery Retaiing 1997: The Market Review. Watford: IGD Business Pubications. Key, R.F. and Stephenson, R. (1967) The semantic differentia: An information source for designing retai patronage appeas, Journa of Marketing?, 31, October, Living in Britain Resuts from the 1994 Genera Househod Survey. London: The Stationery Office. Masow, A.H. (1943) A theory of human motivation, Psychoogica Review, 50, Masow, A.H. (1954) Motivation and Personaity. New York: Harper and Row. Masow, A.H. (1965) Eupsychian Management. Homewood, IL: Irwin. Masow, A.H. (1968) Toward a Psychoogy of Being. 2nd edn. New York: Van Nostrand, Reinhod. Masow, A.H. (1970) Motivation and Personaity. 2nd edn. New York: Harper and Row. Nationa Readership Survey, Juy 1999 June 2000, NRS Ltd. Nicosia, F.M. (1966) Consumer Decision Processes: Marketing and advertising impications. Engewood Ciffs, NJ: Prentice Ha. Office for Nationa Statistics (1997) 1994-based Nationa Popuation Projections Report. London: The Stationery Office. 85

101 Consumer behaviour and retai operations Osen, D. and McCubbin, H. (1983) Famiies, What Makes Them Work? Beverey His, CA: Sage Pubications. Quas, W. (1987) Househod decision behaviour: The impact of husbands and wives sex roe orientation, Journa of Consumer Research, 14 (2), Riche, M. Farnesworth (1989) Psychographics for the 1990s, American Demographics, Juy, Severin, V., Louviere, J.L. and Finn, A. (2001) The stabiity of retai shopping choices over time and across countries, Journa of Retaiing, 77 (2), Sheth, J. (1974) A theory of famiy buying decisions in Sheth, J.N. (ed.) Modes of Buyer Behavior. New York: Harper and Row. Snyder, C. and Fromkin, H. (1980) Uniqueness: the human pursuit of difference. New York: Penum Press. Soomon, M., Bamossy, G. and Askegaard, S. (1999) Consumer Behaviour A European Perspective. Upper Sadde River, NJ: Prentice Ha Europe. Tauber, E.M. (1972) Why do peope shop?, Journa of Marketing, 36 (4), Tuck, M. (1976) How Do We Choose? London: Methuen. Wes, W. and Gubar, G. (1966) Life cyce concepts in marketing research, Journa of Marketing Research, November, Wiiams, T.G. (1982) Consumer Behaviour, Fundamentas and Strategies. St Pau, MN: West Pubishing Co. 86

102 4 The management of service and quaity in retaiing This chapter shoud enabe you to understand and expain: the characteristics of the retai and service product; the basics of the service encounter; some of the ways in which service and quaity are managed, monitored and controed; quaity both as a concept and within the context of a mode. A great dea of retai management invoves taking decisions based upon judgement, information and experience. A areas of retai management shoud, therefore, be fuy informed of the ways in which the quaity of the service and product offer are a key to the processes used by customers to judge competing retai services. On 21 December 1999 customers who had ordered Christmas presents through Toys R Us were informed that the fufiment of their order may not be achieved prior to Christmas. In 2000 shoppers were obviousy affected by the previous year s bad pubicity, or experience, as the majority purchased earier with saes sowing after 10 December. Service standards are therefore directy reated to the way service activities create store or channe seection, oyaty and fufiment. The changing expectation of the consumer is driving the need to ensure that services are panned to be acceptabe. The fastest-growing area is e-commerce; where in previous times Amazon.com coud have been successfu with deivery services of a week or even more, today no e-taier coud survive without a service function that deivered within a few days. There have to be returns management schemes which are easy and have no additiona cost to the customer, and remedia schemes which are proactive and trusted. Changes are constanty occurring which eads to a variety of options for the deivery of services. If the trend in deivering ower contact services is examined its growth is often due to the benefit of a company achieving ower costs. However, ess contact is not necessariy a service weakness, as it is perceived to be beneficia for certain customers. In banking, for exampe, there are a number of service aternatives: make a persona visit to interact with staff and make transactions or queries; conduct the queries and transactions by teephone with a customer service representative; use an automated teer machine (ATM); 87

103 The management of service and quaity in retaiing use a posta service to send payments or account deposits; carry out transactions utiizing the touch keys of a teephone to respond to automated voice commands; conduct home banking operations through a persona computer and specia software; and carry out persona banking operations by means of a password and persona ink via the Internet. Research by the Midand Bank (now part of HSBC) prior to First Direct being set up found that 51 per cent of account hoders wanted to visit their bank as itte as possibe and 38 per cent reported banking hours were inconvenient. Therefore, the operationa and service eve provision of traditiona banking is not necessariy the most preferred form of service interaction. Quaity is another important area for retai marketing management. In order for retai managers to be better at managing quaity they need to start with knowedge of the specific characteristics of retaiing, based upon its tangibe and intangibe nature. When the retai experience is more tangibe it is easier to assess the quaity because physica aspects of the store and merchandise can be subjected to examination. However, retai transactions incude a service eement that is difficut to assess unti the sae has taken pace. This is especiay the case with direct services such as insurance, banking and trave, a of which indicated growth throughout the fina decades of the twentieth century. Therefore, when marketing any one of the retai operations we find in the marketpace, there are a number of tasks and attributes we need to be aware of. The first major factor modern retai managers have to understand is the growing expectation by consumers that they wi receive a quaity product and service. The management of quaity is associated with the need to understand these customer expectations and to attempt to respond to them by monitoring and contro methods. However, for retaiers to be successfu at quaity management it is necessary that they shoud aso understand the specia services marketing characteristics reated to retaiing. WHAT CONSTITUTES RETAILING? We can begin with the separation of the retai offer into two broad areas: 88 1 Tangibe features Retaiing is an amagamation of goods and services. It is a channe service but may aso invove a mix of the physica surroundings, signage, uniforms, changing rooms, dispays and other tangibe features such as the merchandise. Retaiing provides, most of a, the beneficia utiity of a pace for purchase. It aso incudes the characteristics of the service component, such as the intangibe interaction with saes staff and other retai departments. Other characteristics take into consideration the type and timing of the service deivery, other customers and the nature of a retai saes transaction. These are based upon the abiity of retai staff to add extra vaue to the retai environment through advice on the use of the product, any need for maintenance and care, or, if it is a garment, the type of aterations that can be made to improve its fit and so on.

104 The service product concept 2 Intangibe services Retaiing is aso argey intangibe and at the extreme matches the main characteristics of pure services with operations such as banking, insurance and investment services. These broad categories are further expained by comparing transaction with merchandise with transaction without merchandise (see reevant sections beow). To understand the nature of retaiing from a store environment perspective we need to understand it in reation to its specia features. With retaiing we are deaing with an amagam a mixture of a good and a service that has specific characteristics. These characteristics set retai marketing apart from some other principes of marketing and the marketpace. As discussed, retaiing can be pure services such as insurance and banking or an amagam between services and goods based upon their reationship to different types of shops and merchandise offers. The burring of the boundaries between the areas comprising retai is cear when it is considered how many different services coud easiy be incuded within retaiing: dry ceaners and aundries, photographic studios, hairdressers, shoe repairers, undertakers, heath cubs and centres, reprographic shops, pubic houses, garage services, car hire, cinemas, catering outets, trave agents, banking, insurance, investment. With many of these service-dominant retai businesses there is itte or no movement of physica goods through a distribution channe. THE SERVICE PRODUCT CONCEPT An understanding of the compexity of the service product concept is an essentia prerequisite for successfu retai marketing. Some important factors and basic differences are identified beow. Transaction with merchandise In retaiing there are three types of services with goods: owned-goods service, rentagoods service, and service with bought goods. 1 Owned-goods service woud be the traditiona outright purchase and ownership of a good from a retaier. The retaier woud have performed the service of channe management. 2 Renta-goods service woud deiver a tangibe good, such as a car, for the persona use of the customer. No ownership exists and the good has to be returned. 3 Service with bought goods indicates that the retaier performs/suppies extra services. These coud incude deivery, wrapping, providing credit, etc. Transaction without merchandise In retaiing there is aso service without goods: pure services without goods. Pure services are provided by a wide range of retaiers who are invoved in arranging or organizing trave, financia transactions and services, or providing persona services such as dry ceaning, a haircut or shoe repairs. 89

105 The management of service and quaity in retaiing The onus is increasingy being paced on the marketer to deveop a deeper understanding of the inks which correspond to consumer benefits sought, through to the nature of the service deivery system. A starting point is an examination of the traditiona dimensions of the various concepts of service. THE INTANGIBLE TANGIBLE PRODUCT CONTINUUM A products fa on a continuum between pure services and goods, with most products being a combination of the two. A pure service woud be consutancy or financia advice, whereas a pure good woud be more tangibe, such as a can of beans or a botte of emonade. Very few products are purey intangibe or entirey tangibe; services such as retaiing, however, tend to be more intangibe than manufactured goods. Some products wi have more of a service content than others and if they are assessed as being paced to the eft of the centre of the continuum they may be termed service products (see Fig. 4.1). Retaiing fas to the service end of this continuum, despite being associated with the sae of goods. This is due to the nature of transactions invoving the interpersona skis of service providers. The added service eement is a core part of the transaction. Services, such as retaiing, can be characterized as having the foowing attributes (discussed in more detai beow): intangibiity; perishabiity; inseparabiity. Intangibiity This means that some products cannot be easiy stored, evauated or demonstrated in advance of their purchase. For exampe, a trave agent cannot aow for the testing or samping of the tourism product; a bank cannot easiy demonstrate its service. On the other hand, a car or a computer game can be tested prior to purchase and cothing may be tried on but this occurs in a retai environment and not in the home. Mai order saes or simiar methods of seing have to utiize printed iterature to communicate the benefits of the product. In addition, mai order saes offer ony imited visua cues as to the benefits of the product. Prior to the arriva of the goods the potentia customer has to make use of intangibe cues. However, the cearest exampe of retaiing reated to intangibiity is teephone banking, where transactions can be carried out by voicemai and no persona or tangibe interface exists. Moreover, the experience of retai purchases is not something that can easiy be expained or demonstrated away from the branch, store or ma. Fig. 4.1 Service good/product continuum 90

106 The intangibe tangibe product continuum Greater difficuty is faced by the marketers of the more intangibe services which make up retaiing. Because of fixed time and space constraints, they cannot easiy demonstrate the benefits of the retai offer or any merchandise they may be seing. The chaenge for the retai service marketer is to overcome intangibiity through the use of seing techniques, the physica ayout of the store or a depiction by graphica, video or dispay means of the product in use. In addition, the creation of a positive image surrounding the service wi enabe the consumer to envision the retai experience benefits. MINICASE 4.1 Improving service for the consumer FT Granada s teevision renta arm competed the ro-out across the UK of a revamped service that is expected to generate significant cost savings. Roger Mavity, group managing director of the media and eisure group s TV renta business, said the new system of operation had increased the rate of first-time fixes from 75 to 91 per cent after initia trias. The group has torn up the od image of its TV repairman, now equipped with mobie phones. The initia spur was puzzement that 3 miion service cas a year were being made when statistics showed that modern teevisions do not often go wrong. A survey threw up a tae of missed appointments, repeat visits and reuctance by staff to concede defeat on repairs in the home. Astra estate cars have been swapped for arge Mercedes trucks so that a big stock of teevisions can be carried. The working week has been changed from 9a.m. 5p.m. Monday to Friday to 9a.m. 8p.m. Monday to Saturday. The repairmen, who use their mobie phones to check on appointments, have aso been trained as saesmen. If a probem cannot be soved in minutes, the customer is either given a repacement set or offered a dea on a better mode. The atest action foows the 1997 decision to cose 100 shops. Mr Mavity said the cost of revamping the repair service woud be amost nothing as the phones and vehices were eased. Source: David Backwe, Financia Times, 9 March 1998 Perishabiity This means that, unike goods, the service product cannot be stored for sae on a future occasion. For exampe, if customers do not enter the store when it is fuy staffed saes may not occur, for which the revenue can never be recouped. This perishabiity factor eads to the high risk nature of the retai industry. Marketers in the retai industry have to devise compex pricing and promotion poicies in an attempt to create demand in off season periods and create greater synchronization of staffing eves and suppy with demand patterns. Weak demand is not the ony probem; the industry is aso characterized by seasona demand, such as during the Christmas period, when shoppers are more seective where they shop due to overcrowding and reated probems that occur. Stores have a fixed capacity with a maximum upper eve demanding constraint. In peak periods retaiers often have difficuty in coping with demand; therefore, they offer ony fu prices or have to resort to queuing systems. In the ow periods of demand, however, there is a need for greater marketing activity. The chaenge for marketers arising from perishabiity probems is to try to smooth out demand curves by carefu use of the marketing mix. To achieve this the forecast of demand must be reativey accurate to ensure a productive use of staff. 91

107 The management of service and quaity in retaiing Inseparabiity This means retaiing deivers a service which is utiized and produced simutaneousy for each customer. Because there is ess opportunity to pre-check each saes activity, it may vary in the standard of its service deivery. This is sometimes characterized by theorists as heterogeneity. Variance occurs due to the inseparabe nature of the retaiing product s deivery where the customer is part of the saes process. The simutaneous process of production and consumption may ead to situations where it is difficut to assure the overa satisfaction of consumers. For exampe, peak oads of demand cannot aways be forecast and may create dissatisfaction and secondary probems. There is aso a constant threat of probems being caused by one set of customers who may upset another. This provides for the potentia for confict on various eves. Whether it is the young out enjoying themseves, perhaps congregating by the tapes and CDs or in the eectrica department by the computer games and annoying oder customers, or restaurant users invoved in a cash of socia vaues, sets of unacceptabe behaviour may be exhibited by various groups. Manufactured goods, on the other hand, are produced in advance of being sent to the warehouse and there is itte or no contact with the end consumer. The service aspects of retai are inseparabe service is intrinsic to retaiing. Staff may have persona probems or be feeing i or tired and this type of probem may affect their eve of commitment to giving good service or resoving probems. Because the nature of the retai service product is one of interpersona reationships, where the performance eves of staff are directy reated to the satisfaction experience of the consumer, there is a need for quaity assurance mechanisms. Staff are emotiona and changeabe and if a high content of the saes experience is based upon interpersona reationships between strangers as cient and a service provider it is important to ensure standardized service eves are understood and adhered to by everyone. In order to reduce the probems associated with inseparabiity there is a need to invest in company training programmes. The probems discussed above make it cear that there is a need to ensure that quaity is managed as a basis of panning to achieve competitive advantage. The foowing section on service and quaity cassifications wi provide insight into the process of service deivery. 92 A CLASSIFICATION OF SERVICE AND QUALITY We can cassify the different approaches to quaity management into two categories: first, the product-attribute approach; second, the consumer-oriented approach (Gibert and Joshi, 1992). The product-attribute approach is based upon trying to match the product s conformance to standardized requirements which have been set by reference to what company managers think the faiure point to be. Product-attribute approaches rey on trying to contro the company s output by using an interna standard-setting perspective. This reies on an inward-ooking and trading-ed management stye, rather than a marketing-ed approach. It woud seem more appropriate to adopt a consumer-oriented approach which recognizes that the hoistic process of service deivery has to be controed by taking into consideration the expectations and attitudes of retai customers. If the starting point for management is the understanding of how quaity is judged by customers then the

108 A cassification of service and quaity Fig. 4.2 Managing the perceived service quaity Source: Gronroos, 1982 perception processes of this judgement, as to whether a service is good or bad, can be managed. Gronroos is a eading author who has defined this concept. The Gronroos mode of perceived quaity management Gronroos (1982) deveoped a mode, which is a form of gap anaysis, to expain what he cas the missing service quaity concept. The mode (see Fig. 4.2) focuses mainy on the construct of an image which represents the point at which a gap may occur between expected service and perceived service. Gronroos aows us to be aware of the ways in which image is created from the aggregation of different aspects of technica and functiona variabes. By foowing his mode of different inputs we are aerted to the fact that we shoud not reduce quaity to a simpistic description of itsef but that we shoud try to understand the fu range of inputs. This is because to speak simpy of quaity gives the manager no indication of what aspects of the whoe retai experience shoud be controed. Gronroos argues that the function and range of resources and activities incudes what customers are ooking for, what they are evauating, how service quaity is perceived, and in what way service quaity is infuenced. Gronroos defines perceived quaity of the service as dependent on two variabes: experienced service and perceived service, which coectivey provide the outcome of the evauation. Gronroos distinguishes between technica quaity and functiona quaity as the components of the service image deivery: 1 technica quaity refers to what the customer is actuay receiving from the service. This is capabe of objective measurement, as with tangibe goods 93

109 The management of service and quaity in retaiing 94 Fig. 4.3 The service quaity deivery mode Source: Reprinted with permission from the American Marketing Association from Parasuraman et a., functiona quaity refers to how the technica eements of the service are transferred or perceived. We know that a customer in a restaurant wi not ony evauate the quaity of the food consumed but aso the way in which it was deivered (the stye, manner and appearance of the staff or the ambience of the pace itsef). Figure 4.2 shows that the attitudes, behaviour and genera service-mindedness of personne can be infuenced by management. The Parasuraman, Zeitham and Berry mode Parasuraman et a. (1985) have aso deveoped a mode of service quaity, which caims that the consumer evauates the quaity of a service experience as the outcome of the difference (gap) between expected and perceived service (see Fig. 4.3). The mode highights the main requirements for a service provider deivering the expected service quaity. From the mode five gaps may be identified that coud ead to unsuccessfu service deivery. By understanding this mode, it is possibe to provide greater management contro over retai customer service reationships. This shoud ead to an improved reaization of the key points at which the marketer can infuence the satisfactions of the consumer. The marketer is then in a better position to be abe to reduce or cose the gaps.

110 A cassification of service and quaity Gap 1: Ignorance of the customer s expectations This is the gap between consumer expectation and management perception. The gap may resut from a ack of understanding of what consumers expect from a service. The iterature confirms this disparity by reveaing that what providers perceive as being important to consumers is often different from what consumers themseves actuay expect. The gap may reate to a ack of communication or feedback from customers or an unpreparedness to address important changes that are required. In the eary 1990s, Sears faied to reaize that customer buying habits had changed and the company retained its traditiona cataogue when the customers had embarked upon different modes of shopping. In the modern marketpace there is a need for responsive and adaptive adjustment to the service provision, based upon feedback from staff at a eves in the company. In addition, good reationship marketing programmes shoud aso hep in the reduction of customer and company probems arising from different expectations of what constitutes an appropriate service. Gap 2: Requirement for service design standards This is the gap between management perception and service quaity specifications. It resuts when there is a discrepancy between what management perceives to be consumer expectations and the actua service quaity specifications estabished. Management may not set quaity standards; the ones they set may not be very cear; or the quaity standards set may be cear but unreaistic. Aternativey, athough the standards are cear and reaistic, management may quite simpy not be committed to enforcing them. The need here is to provide service design standards which are supported by everyone and form the yardstick against which a service standards are judged. These standards wi then provide the guideines against which the overa service and retai staff may be evauated. Gap 3: Not deivering to service standards This is the gap between service quaity specifications and service deivery. Even where guideines exist for performing a service we, service deivery may not be of the appropriate quaity owing to poor empoyee performance. The empoyee pays a pivota roe in determining the quaity of a service. This is because retai staff and their actions are visibe to the customer, and can be assessed and judged on a constant basis. Companies may have service standards but not faciitate the service with adequate technoogy, the appropriate human resource poicies or a positive company cuture. Gap 4: Inconsistency between performance and promises This is the gap between service deivery and externa communications. Consumer expectations are affected by the promises made by the service provider s promotiona message. Marketers must pay cose attention to ensure consistency between the quaity image portrayed in promotiona activity and the actua quaity offered. The probem is any discrepancy between those who describe and promote the service and those who are deivering the service. If a marketing promotion promises a certain offer or service, it has to be avaiabe when customers demand it. Marketing has a key roe in ensuring that a promotions are co-ordinated effectivey and monitored cosey. 95

111 The management of service and quaity in retaiing 96 Gap 5: The service shortfas This is the gap between perceived service and deivered service. This gap resuts when one or more of the other gaps described occurs. If these shortfas arise, company staff have to ensure they reduce or cose the gaps where probems have appeared. The focus on perceptions and expectations provides a guideine for quaity management intervention strategies. To this end, the mode proposed by Parasuraman et a. has the foowing two main strengths: 1 The mode presents an entirey dyadic view to the marketing task of deivering service quaity. The mode aerts the marketer to consider the perceptions of both parties (marketers and consumers) in the exchange process. 2 Addressing the gaps in the mode can serve as a ogica basis for formuating strategies and tactics to ensure a consistent marketing approach to the creation of experiences and expectations. Zone of toerance Within the deivery of services the consumer wi have different eves of toerance as to what may be judged adequate or expected service. This is known as the zone of toerance: customers are wiing to accept different eves of service which fa within a zone between the desired and adequate eves of performance. The area of the zone of toerance can increase or decrease for individua customers depending on other variabes such as aternatives provided by the competition, how much was paid and whether it represented vaue for money, or other differences in the retaier s service. It is important to reaize that there are differences between individua customer s perceptions; simiary each customer may have different expectations of one brand in comparison with another. For exampe, if Marks & Spencer deivered more consistent service over time than Bhs then the expectations for the M&S brand are higher. If Marks & Spencer service were to decine to the eve consistenty offered by Bhs, the customer might be more disappointed by the service received from Marks & Spencer even though the service standards are simiar. Further factors in service quaity deivery Providing promotiona methods which ead staff to achieve high eves of customer care and service quaity is becoming increasingy important. One poster targeted on staff read, Good enough is not good enough which set the standards and aims of the company personne above the average. This type of inward marketing is used as a means to change the genera attitudes of staff towards quaity. A we-positioned service enabes the company to: differentiate its position so as to distinguish itsef from competitors; deiver superior service to that accepted as the norm (sometimes described as creating customer deight or wow factors). This aows the company to pan and buid competitive advantage by estabishing eadership principes of service standards and deivery. Once the standards are estabished there shoud be a poicy to communicate and reinforce the service provision phiosophy at every possibe opportunity: meetings, training and interna marketing programmes,

112 Impementation of service management Fig. 4.4 An approach to deconstructing service deivery induction programmes and appraisa systems. The human resource function needs to be aware of marketing so as to ensure that the different eves in the service deivery process (see Fig. 4.4) are aways ceary understood and reinforced throughout the company in its cuture and in its reward systems. Without good interna company procedures and reationships it is unikey that even the most we conceived of quaity programmes wi be successfu. IMPLEMENTATION OF SERVICE MANAGEMENT For the mode in Fig. 4.4 to be successfu there is a need for the impementation process to consider the foowing areas vita to success: 1 Leadership and commitment by senior management, with cear goas and a poicy on quaity being set and communicated to others. There is aso the need to reease the appropriate resources to create changes and achieve the required resuts. Sam Waton, founder of Wa-Mart, adopted the foowing phiosophy to direct his retai staff and gain pre-eminence in the retai marketpace: reaize that customer service is key; design for comfort and convenience; provide one-stop shopping; 97

113 The management of service and quaity in retaiing 98 customize; invert the organizationa chart so that the customer is on top and company management is on the bottom; empower the saes staff; provide servant eadership Wa-Mart s managers are servants to the needs of their empoyees and customers; recognize that the customer is aways right. 2 The focus of a changes and objectives shoud be defined by the customer. A the definitions of quaity deivery and standards have to be deineated in a of the dimensions of the service deivery with reference to customers needs. These shoud be incorporated into the training poicy and induction programmes. 3 The orientation of the organization needs to adopt a process and systems approach to match or exceed customer expectations. This reies on a workabe quaity audit system which appies measurement and inspection to ensure defects are corrected and the system deivers optimum quaity resuts. 4 Human resource management is required to motivate, reward, train and educate staff to understand and deiver the concepts of quaity. Teamwork vaues with champions of quaity product deivery are a prerequisite for competitive advantage. 5 Assessment needs to be made of the added vaue and benefit of any change rather than there being an emphasis on costs and profit impications. That is, the ong-term benefits of any change need to be the focus of decision-making. 6 A need for quaity audits and contro to ensure the service meets or exceeds customer expectations must be recognized. An organization has to create a quaity management cuture and not just attempt to be the cone of a system earnt esewhere. This requires honest two-way communication between management and staff which wi buid confidence in the impementation process. It aso means that staff have to be aowed to own up to weaknesses and probems of poor quaity in a supportive atmosphere where the company attempts to earn from weaknesses rather than punish them. Such an atmosphere wi foster teamwork, confidence and commitment. However, there is aso the need for competence to deiver the changes. This may require further training and seminars for staff and foow-up sessions. The recognition that other members of staff shoud be treated as interna customers wi assist the transition to a tota quaity management (TQM) system. It is obvious that organizations have customers from within as we as from outside them. If empoyees visuaize the reationships between each other based upon suppier and customer inks as a quaity chain, then the question is aways: am I meeting the fu requirements of my roe? For exampe, the secretary is a suppier to the boss and needs to provide timey, error-free work in order to assist the boss work as suppier to his or her interna customer, who may be a director. A company, therefore, is a web of interna suppiers and customers. Such chains are easiy weakened or broken by fauty equipment or peope. The important issue is that an interna quaity chain faiure wi utimatey have some effect on the outside customer. Minicase 4.2, in discussing a high eve service approach, indicates how this can be appied to the retai industry.

114 Impementation of service management MINICASE 4.2 The persona touch How do you persuade peope not to buy a carinsurance poicy purey on price? Progressive, an insurance company based in Ohio, has an answer. If a poicyhoder has an accident, a caims officer goes straight to the scene, gives him a cephone and a cup of coffee, pus out a aptop and, in 95% of cases, hands him a caim cheque on the spot. Some customers say: I wasn t a member unti I was hit by one. The service, not the price, ses the product. It creates a wow experience. For the technoogy companies that have pioneered many business appications, customer support is one of the first opportunities for change the Internet provides. Some customers simpy want to tak to someone, admits John Fiore, the chief information officer. But the scarcer support staff become, and the onger teephone inquirers have to hod on, the easier it is to encourage customers to ook up the answer to their probem onine. And there are huge gains to be made from appying the usua 80/20 rue, says Ward Hanson of Stanford Graduate Schoo of Business: if the staff answer ony the compicated 20% of questions, their work is far more interesting and productive. The grey area, he adds, is trying to hide the hep-desk teephone number from the remaining 80%. More savings are to be had if the customer can be trained to pace orders onine. Savings in onine seing do not come ony from ower transaction costs. De s Mr Marengi argues that the best thing about moving to onine ordering has been to dispose of endess arguments over whether the customer ordered this keyboard or that keyboard. If the customer puts in the order, he says cheerfuy, that confict is eiminated. Source: The Economist, 11 November, 2000 The findings of research into hotes by Cadotte and Turgeon (1988) ed to a simpe typoogy of what may ead to compaints or compiments. This acts as a framework which may inform retai managers of what is required for a desirabe service. The research showed that weak performance of the technica service (parking avaiabiity, prices, speed of service, credit avaiabiity, checkout times) wi seriousy detract from the customer s evauation, whereas high performance did not enhance the hote s image. However, the compiments of hepfu attitudes and service knowedge of empoyees, neatness and spaciousness of the buiding and convenience of ocation can a ead to high satisfaction if present, whie few compain if they are absent or the performance is ony indifferent. The potentia for compiments and compaints can be iustrated diagrammaticay (see Fig. 4.5) in terms of four categories: dissatisfiers, satisfiers, criticas and neutras. These may be described as foows: 1 Dissatisfiers. Low performance or an absence of the desired feature is more ikey to produce a compaint. Exceeding the threshod performance standard wi not, however, generate a compiment. For exampe, if a customer arrives at an out-of-town retai Fig. 4.5 Factors with potentia for prompting compaints and compiments Source: Cadotte and Turgeon,

115 The management of service and quaity in retaiing store and cannot find a pace to park they may compain; whereas if a parking space is found, this is what a customer expects and so it wi not prompt a compiment. 2 Satisfiers. Unusua performance beyond expectation wi eicit compiments but average performance or even absence of such an aspect of service wi not cause dissatisfaction or prompt a compaint. For exampe, providing arge portions in a restaurant. 3 Criticas. These are capabe of eiciting both negative and positive feeings. The quaity of service is important as it ranks high in both compiments and compaints aong with empoyee knowedge of the service. 4 Neutras. There are performance ratings which receive few compiments or compaints and, therefore, are not important to the judgements made by customers regarding standards of service provision. 100 WHY THERE IS GROWING EMPHASIS ON CONTROL OF QUALITY Quaity has emerged as a major competitive component of company strategies. There are four main reasons that may account for the increasing reevance of quaity management. 1 Companies need to find new ways of creating differentia advantage by providing better service eves than their competitors. Retai competition has increased because services and goods are avaiabe from a wide range of channes and manufacturers are creating technicay satisfactory goods that require itte after-saes service. 2 The increased eves of consumerism and the greater media attention on quaity have meant that companies have to be more responsive to quaity issues. Consumers are far more aware of their rights and are ess ikey to suffer quiety from the resuts of poor quaity. 3 There has been a growing sophistication of consumer markets, with the non-price factors of image, retai offer positioning and service deivery processes becoming more important. 4 Technoogy is one of the new appications to quaity enhancement. It can aid service by providing higher eves of convenience: for exampe, automatic vending or ticketing machines, bar code checkout systems to improve accuracy and speed of transaction, or smart card deveopments a of which provide memory of purchases. It is important for the quaity of retaiing to be controed, especiay in reation to the process of service deivery. This is because reative quaity between service providers or retaiers has inkages to market share and profitabiity. Quaity is, therefore, one of the key components that eads to a successfu strategy. This is why quaity has emerged as a major competitive component of service company strategies. However, when we examine the use of the term quaity there appears to be amost a superabundance of its use in reation to the way management operates. Overa, there is a crusade for quaity management and improvement within industry wordwide. The campaign for improved quaity can be traced to its roots in the manufacturing industries prior to its expansion into the service industry. However, many individuas in industry are sti unaware of the theoretica grounding of quaity management. Knights and McCabe (1997) have carried out research which iustrates that management often does not understand either the weaknesses or the underying phiosophy of TQM. They argue that management continues

116 What are the key terms for quaity? to adopt inconsistent approaches, such as concentrating on the contro of costs and empoyees whie advocating the importance of the customer and the need for a trustbased cuture. WHAT ARE THE KEY TERMS FOR QUALITY? Kay (1995) reminds us that the quaity of MFI s fatpack furniture was the butt of jokes in the 1980s. However, the senior management at MFI recognize that it sti has an image probem even though the days of i-fitting fatpack furniture are ong gone. It is reported that athough the jokes are sowy dying, many peope remember MFI the way it was and have not been back since. This indicates the importance of a quaity image and shows that a poor image is not easiy improved. To understand the compexity of quaity management there are severa key concepts which have to be mastered, and these are discussed beow. Quaity is the totaity of reationships between service providers (functiona aspects) and the features of retaiing (technica aspects) which are reated to the deivery of satisfaction. It is, therefore, important to create systems of quaity contro, which are checks, and aso monitoring processes to ensure that measurement of service deivery is taking pace. To this end tota quaity management (TQM) is a hoistic organizationa approach which systematicay attempts to improve customer satisfaction by focusing on continuous quaity improvements without incurring unacceptabe cost increases. These improvements are part of an unending quest for exceence in a aspects of quaity service deivery. Therefore, TQM has to infuence the vaues and form the mindset of a empoyees, eading to the creation of an integrated corporate cuture because quaity is required to be the concern of a empoyees. The cuture shoud not be based upon a departmenta or technica understanding of quaity but on a hoistic view of quaity as a systematic process extending throughout the organization. From a retai perspective, the focus of any change in quaity must be based upon externa customer expectations and not on interna company ideas. TQM is managed by quaity assurance arrangements; that is, a system is instituted to aocate responsibiity for panned and systematic activities which wi ensure that the product wi provide the right eves of satisfaction for a concerned. Hart (1988) has postuated that a service guarantee system aows for more quaity contro and data capture in the organization. This information on what goes wrong aows for improved service. A good service guarantee is identified as unconditiona, easy to understand and communicate, meaningfu, and easy to invoke and obtain recompense. It is aso recognized that there is a need not to: promise something your customers aready expect; shroud a guarantee in so many conditions that it is meaningess; offer guarantees so mid that they are never invoked. A guarantee can set cear standards and aow company personne to be cear about what the company stands for. If customers can make compaints without difficuty, the company has the benefit of being abe to coect data on common probems which need to be addressed and eradicated. This is because a guarantee system trains the spotight on why the faiure occurred and what needs to be done about it to improve service quaity. 101

117 The management of service and quaity in retaiing Moreover, a guarantee adds credibiity and weight to the marketing effort of the company. It aows for the emphasis of the guarantee which aso provides for a reduction in the perception of risk associated with purchase and may ead to higher eves of customer oyaty. In order to measure whether the quaity deivery compies with the panned deivery of the service a quaity audit needs to take pace to judge the effectiveness of the tota service deivery arrangements. For a system to be audited correcty a method of creating unbiased feedback must be found. Whie a range of aspects of quaity can be assessed, a number of categories exist. These may incude the foowing, which are based upon various research studies which have attempted to estabish categories of service quaity determinants. CHARACTERISTICS OF QUALITY There are two sets of quaity characteristics which are important to a retaier. These are the characteristics reated to either merchandise or service categories. Merchandise (products) Merchandise categories incude the foowing eements: performance based upon inherent operating characteristics, such as the sound and carity of a hi-fi system; features which add to the basic function of the product; reiabiity of the product not to break down in norma use; conformance to standards of safety or operating performance needs; durabiity based upon the ength of time a product wi ast; serviceabiity reating to the after-saes service and abiity to be repaired; aesthetics of the ook, fee, design, sound and sme of the product; image of the brand association, reputation and personaity of the product. Services Service categories incude the foowing eements. 1 Tangibes: what can be experienced from personne, company iterature and signs, and the physica environment of the retai encounters. These incude aspects of the store or materia the customer can see, touch, use, etc., such as: physica faciities; appearance of personne; toos or equipment used to provide the service; physica representation of the service, e.g. store credit card, fascia design; other customers in the service faciity. 2 Reiabiity of staff to deiver the expected or promised service dependaby and accuratey. This invoves consistency of performance and dependabiity. It means the 102

118 Characteristics of quaity company shoud perform the service right the first time, and honour its promises. This factor aso demands that the company is abe to trust empoyees with the responsibiity to deiver service which, consistenty and accuratey, meets poicy standards, incuding: accuracy in charging; keeping the correct records; performing the service at the designated time for exampe, accurate to opening hour promise. 3 Responsiveness of staff to hep customers and provide timey service. This concerns the wiingness or readiness of empoyees to provide service to hep customers and give timey service, such as: maiing a transaction sip immediatey; caing a customer back quicky after a query; giving prompt service (e.g. arranging an appointment). 4 Competence: an assurance of empoyees abiity to convey trust and confidence through company and product knowedge, as we as by the courtesy of their interpersona skis: knowedge and ski of the contact personne; istening to customer needs and expaining the desired product or service; reinforcing the company s reputation; persona characteristics of the contact personne; abiity to respect confidentiaity, and dispay financia and persona security. 5 Empathy: having an understanding of what customers as individua humans require in reation to psychoogica as we as physica needs. This is not a universa occurrence. A cashier when asked why she had not provided a thank you for a payment was heard to say that her receipt had thank you written on it. Empathy concerns individuaized attention to customers a caring, individua concern and attention for others and their emotions: recognizing reguar customers; earning the customer-specific requirements and anticipating their needs; being attentive and providing individuaized (customized) service; ensuring that if there is a probem it is acknowedged, responsibiity is taken, and some action is carried out to ensure the service faut is compensated for. The above points aow a retaier to focus on a systems perspective which identifies the inkage between consumers needs and service deivery. This highights the management principes associated with service products. It may aso be utiized in the estabishment of benchmark points against which the service can be positioned. In retai, waiting time, whether in a store, when contacting a ca centre or utiizing the Internet, is an important concept. It shoud be remembered that unoccupied time is perceived to be onger than occupied time; reaxation and ack of anxiety makes a wait seem shorter; uncertain waits are more stressfu than expected waits; and unexpained waits seem onger than ones where the time and reason are expained. 103

119 The management of service and quaity in retaiing The eements which coud be assessed in the course of estabishing the position of a service coud aso incude: avaiabiity of items the customer demands; after-saes service and contact (e.g. Amazon.com has an e-mai system to et customers know when a book has been despatched); the way the teephone orders and queries are handed; the reiabiity and safety of the items being sod; avaiabiity of saes iterature and brochures; the number and type of items which can be demonstrated; technica knowedge of staff; the way an empoyee deas with a compaint, etc. MINICASE 4.3 Service can incude the customer IKEA of Sweden has managed to be highy successfu because of the service roe it has deveoped with its customers. IKEA recognized that customers are happy to be part of the business system by taking on responsibiity for the services normay carried out by paid service staff. When customers enter the store they are given a cataogue, tape measure, pen and notepaper. This means they are abe to perform the function normay carried out by the saesperson. The new roe of some of the staff is to ook after customers chidren in a supervised chid centre, aowing a ess stressfu decision-making process for the parents. After choice and payment customers can then take the purchase to their car on a cart. If necessary they can hire, or buy, a roof rack for the transport of arger items. Once home the customer assembes the new furnishings with the aid of carefuy written instructions. Compete service is not aways necessary as sometimes ess service is better service. This is especiay the case if the customer enjoys more invovement in the manufacture and retai process in order to achieve ower prices. The new roe for the customer deveoped at IKEA provides added persona vaue and contributes to the overa satisfaction experience. Source: Based on company information The foowing section indicates some of the ways that quaity may be assessed. It is important to reaize, however, that whatever system is used to audit quaity, at the end of the day, that which is not measured cannot be controed. QUALITY AUDITING SYSTEMS There are various methods that may be used to measure and monitor quaity. Figure 4.6 ists some methods of interna inspection and of auditing. Butte (1994) indicated that foowing research of oya Jaeger customers a ist of 180 service variabes was reduced to 26 key attributes against which mystery shoppers coud assess a store s service performance. It is important to note that the fina ist was based upon customer preferences and did not correate with what Jaeger s own empoyees had identified as being important. The key items identified by customers were: externa appearance of the branch; merchandise pricing in window dispay; greeting upon entry; staff approachabiity; staff avaiabiity to hep; 104

120 Quaity auditing systems Fig. 4.6 Summary of some methods of interna inspection and auditing manager avaiabiity; whether the manager is recognizabe; the number of customers served simutaneousy by one staff member; efficiency/promptness of enquiry handing; branch stock eves; staff awareness of fashion trends; speed of stock ocation; staff awareness of advertised ines; hepfuness of staff advice; honesty of staff advice; standard of fitting rooms; avaiabiity of advertised stock; coour/size avaiabiity; seection within size; avaiabiity of aterations advice; avaiabiity of garment reservation; eye-catching quaity of window dispays; eye-catching quaity of interior dispays; speed of ti transaction; comparabiity of service in other Jaeger branches. Benchmarking A method now widey used for assessment of the service standards of a company is to compare them with those which are deemed to be the best avaiabe the benchmark. Benchmarking is a continuous process of seecting the best practices and services against which to judge. It is based upon the Japanese concept dantotsu, meaning the best of the 105

121 The management of service and quaity in retaiing best, the underying phiosophy which emphasizes that if you seek out and match best practice there is the possibiity of the attainment of superiority. By identifying a guideine, benchmarking wi aow a company to know what operating standards to appy. Four types of benchmarking exist: interna, where the best interna company exampes are utiized; competitive, based upon externa directy competing retaiers and their merchandise; functiona, which measures against the best externa market eaders or functiona operations; generic, which is to take measures of the best practices regardess of what sector or industry is represented. Companies such as American Express may be benchmarked for service standards, Marks & Spencer for specification of product, TGI Friday for service training, etc. For exampe, American Express has a service tracking report which systematicay assesses customer satisfaction and empoyee performance on a wordwide basis. The report is generated each month based on measurement against 100 service quaity factors grouped into the three major service dimensions of responsiveness, timeiness and accuracy. Within the first three years of the adoption of this system American Express improved service deivery by 78 per cent and reduced costs of the average transaction by 21 per cent. Therefore, a retai operation coud try to earn from American Express by benchmarking its service tracking system as this makes marketing sense. IS QUALITY A COST OR A LONG-TERM BENEFIT? It is found that smaer firms embarking upon service quaity programmes (SQP) perceive them as costy, needing a ot of management time, difficut to measure the intangibe benefits, and finay not easy to impement. Given the nature of retaiing (peope-based with empoyee performance and interaction being of paramount importance), it is cear that errors are inevitabe. In addition to this eement of human error is the nature of human response to it. It is estimated that there is a ratio of 4 : 1 where individuas wi speak of poor service to good service and therefore pass on more negative than positive aspects of service deivery. The moment of truth the impact on the bottom ine of any organization is the judgement of customers on the quaity of its service. Figure 4.7 is based upon the mode of Heskett et a. (1990) who argue that the inkages of service encounters create a sef-reinforcing mechanism. Figure 4.7 indicates the reationship between the customer on the eft with the service provider on the right. This overcomes the notion that improvement in quaity is associated with increased costs. The mode indicates that, in the ong term, true quaity improvement eads to an improved trading position. This proposition, that a continuous improvement in service is not a cost but an investment in a customer who wi return more profit in the ong term, is becoming more widey supported. The premise is based upon research which indicates that the cost of acquiring a new customer is much higher than that of retaining an existing customer through providing quaity service. Such an argument is based upon non-traditiona accounting practices which stress that satisfied customers wi be wiing to pay higher prices due to the service quaity they have experienced and iked; there is a free advertising 106

122 Is quaity a cost or a ong-term benefit? Fig. 4.7 Mode indicating that quaity improvement eads to an improved trading position Source: Based on Heskett et a., 1990 benefit due to the positive word of mouth recommendation; and there is a different cost in acquiring new customers as opposed to retaining existing customers over onger time periods. In genera, foowing the ideas of reationship marketing, it is suggested that to keep a customer over the ong term provides important savings. On a cost benefit basis, good service quaity is thought to increase revenue and reduce ong-run costs. Service recovery Service recovery is a broad term that reates to the panned systems and effort that a firm provides to correct a probem foowing a service faiure with the specific objective of retaining a customer s goodwi. Given that the estimated cost of finding a new customer is five times that of retaining an existing one, there is growing emphasis on customer retention and reationship marketing. When a dissatisfied customer defects, the ifetime vaue of that individua and anyone ese who switches due to negative comments is affected. Long-term revenue can be enhanced by service recovery strategies. Good service recovery procedures aow a customer to refocus on the satisfactions received from the service deivery process rather than to question why corrective action was not taken. A probem tests the system and if a customer compaint is deat with appropriatey the customer is ikey to become more oya. Effective recovery requires: acting fast to resove the probem on the spot or within short time periods; being open and admitting mistakes if the retaier is in the wrong 107

123 The management of service and quaity in retaiing 108 rather than being defensive; providing empathy by attempting to understand the probem through the perceptions of the customer so as to acknowedge their feeings; providing a reationship whereby there is a partnership of ooking at the probem to see how both parties may best resove it as part of a mutuay acceptabe soution; informing and carifying the steps which wi be taken to resove the situation, ensuring the customer understands these and any remedia action to be taken to ensure a repeat of the probem does not arise. Individua service recovery strategies may incude some of the factors discussed beow. Watching for sign anguage Consideration needs to be given to enabing those customers who are reticent or mute when it comes to compaints to break their sience. Companies need the opportunity to prove their commitment to the customer through service quaity measures. However, the sient customer who is not satisfied wi escape company notice but may te many of their acquaintances of the probem. Some companies have Freephone numbers for compainants to make a ca to compain, or adopt empoyee training to enabe staff to test for weak signas of a customer s dissatisfaction. Many companies empower staff to provide immediate remedia action if they suspect poor service. A ong wait to be seated in a restaurant, for exampe, may be acknowedged by a reduction in the bi or free coffee. Others pace emphasis on mystery customers or research feedback. Prepanning There is a need to anayse the service deivery process so as to anticipate those aspects of service which may exceed the toerance eve of customers. Times of peak demand, or ow eves of staffing may affect the judgement of the customer in reation to the overa eve of service quaity deivery. Training As service is an interpersona performance activity, the provision of communication and customer reation skis training wi enhance the abiity of staff to dea with the most difficut of situations. Perhaps more important, training wi aow staff to fee confident in the service encounter transaction and aow them to dea professionay with a situations. Training has to be aied to abour retention strategies; overa service recovery may suffer if there is too high a proportion of untrained staff or seasona empoyees. Empowerment A great dea of staff service deivery goes unsupervised. Front-ine retai staff, therefore, need to react quicky to service probem situations without the input of supervisors. Empowerment is where a retai staff member is motivated to service a customer probem and has the skis, resources and authority to do so. A staff member who provides some extra means of satisfying a customer may stave off a more difficut or serious situation. Empowerment conveys responsibiity, too an obigation to act; front-ine staff are trusted to act, not simpy to focus on who is to bame for a poor service encounter. The benefits of empowerment are that decisions are taken more quicky and service recovery

124 Exercises occurs on the spot, aowing empoyees to fee more responsibe and in contro of the situation. This is ikey to motivate the staff more and may affect the whoe service encounter due to staff feeing better about themseves as we as the customers. This is because empowerment often eads to increased job satisfaction, reduced roe stress and ess ambiguity of responsibiity and action. Widening the scope for empoyee empowerment requires acceptance of the need for training schemes and the need for trust in any empoyee s decision. However, it shoud be recognized that the extent to which empowerment can take pace is reiant upon the competency of the member of staff, the compexity of the task and the nature of the service or retai operation. A summary of the key components of a quaity-ed approach 1 An unending quest for exceence in a things. 2 A system which offers continuous improvement and reduces faiure repetition. A feeing that there is no such thing as an insignificant improvement in quaity or service. However, this has to be cost-effective. 3 An orientation which focuses on the customer and stakehoder satisfaction outcomes. The phiosophy is aways to pan to give the customer a itte more than they expect. 4 A feeing of tota invovement of a concerned with ownership of the quest. Senior management commitment is particuary important as a eadership to others. 5 Reguar measurement, monitoring, evauation and adjustment to changing circumstances. CONCLUSION The management of retai cannot be divorced from the management of service and quaity. The marketing management of retai cannot ignore the primary characteristics which set retai apart from other products. These are the important aspects of being intangibe, perishabe and inseparabe. Retai, as a speciaized service, creates a number of important considerations which need to be fuy understood if a retai enterprise or organization is to be successfu. The customer service approach has to support a other functiona strategies with the objective of exceeding customer expectations. At the very minimum it has to be abe to provide an effortess retai saes purchase experience. EXERCISES The exercises in this section reate to the management of service and quaity in retaiing. It is suggested that you work through these exercises before moving on to Chapter 5. 1 Provide an anaysis of the type of service offered and service eves and standards at Argos, B&Q, and a bank you are famiiar with. Assess the service deivery and quaity encounter episodes utiizing a checkist of service and quaity attributes drawn from this chapter. Comment on the expectations and outcomes experienced. 2 What woud be the differences, in service and quaity management, if you were the marketing manager of a chain of supermarkets or a we-known shoe shop as opposed to the saes and marketing manager of an e-taier? What are the service eve impications for the retai industry based upon the changes that e-commerce wi bring about? 109

125 The management of service and quaity in retaiing 3 Seect and visit five simiar retai outets in your oca high street. Using the foowing grid as a guide, assess each store in turn. Externa appearance: paintwork (coours and state of repair) ceaniness of windows window dispay ighting (ist others) Interna: any wecome by staff? was the body anguage of staff friendy? was the ayout of the store user-hepfu? was the standard (of the fitting room, etc.) acceptabe? did the ti transaction ook efficient? (ist others) Assessment by store: Assessment by store: Compare your findings with what you beieve to be the key requirements of quaity management for any high street retaier. 4 Look at the iterature deaing with service encounters and think about any dissatisfying and satisfying aspects of service encounters you or your friends have experienced. Based upon these experiences, and the iterature, describe the poicies you woud impement if you were responsibe for the service quaity management of a retai company. REFERENCES AND FURTHER READING Backwe, D. (1998) Companies and finance: Granada s renta revamp, Financia Times, 9 March. Butte, F. (1994) Jaeger adies, in McGodrick, P. (ed.) Cases in Retai Management. London: Pitman Pubishing. Cadotte, E.R. and Turgeon, N. (1988) Key factors in guest satisfaction, Corne HRA Quartery, February. Cope, N. (1995) Jobs cut in Safeway shake-up, Independent, 25 May. The Economist (2000) The persona touch, The Economist, 11 November. Ernst, R. and Powe, S.G. (1998) Manufacturer incentives to improve retai service eves, European Journa of Operationa Research, 104 (3), Fant, D. (1998) Understanding customers: the key to retai success, Marketing News, 32 (4), 7. Fitzsimmons, J.A. and Fitzsimmons, M.J. (1994) Service Management for Competitive Advantage. Singapore: McGraw-Hi. Genger, C.E., Leszczyc, P. and Popkowski, T.L. (1997) Using customer satisfaction research for reationship marketing: A direct marketing approach, Journa of Direct Marketing, 11 (1), Gibert, D.C., and Joshi, I. (1992) Quaity management and the tourism and hospitaity industry in Cooper, C. and Lockwood, A. (eds) Progress in Tourism, Recreation and Hospitaity Management. London: Behaven Press. Gyn, W.J. and Barnes, J.G. (1996) Understanding Services Management. Chichester: Wiey. 110

126 References and further reading Gronroos, C. (1982) Strategic management and marketing in the service sector. Hesinki: Swedish Schoo of Economics and Business Administration. Gwinner, K.P., Gremer, D.D. and Bitner, M.J. (1998) Reationa benefits in services industries: The customer s perspective, Journa of the Academy of Marketing Science, 26 (2), Hart, C.W.L. (1988) The power of unconditiona guarantees, Harvard Business Review, Juy August, Heskett, J.L., Sasser, W. and Hart, C.W. (1990) Service Breakthroughs Changing the Rues of the Game. New York: The Free Press. Hoffman, K.D. and Bateson, J.E.G. (1997) Essentias of Services Marketing. Fort Worth, FL: Dryden Press. Hurey, R.F. (1998) Customer service behavior in retai settings: A study of the effect of service provider personaity, Journa of the Academy of Marketing Science, 26 (2), Kay, W. (1995) Profie: The sef-made man from MFI: John Randa, Independent on Sunday, 23 Apri, 20. Knights, D. and McCabe, D. (1997) How woud you measure something ike that? : Quaity in a retai bank, Journa of Management Studies, 34 (3), Koter, P. (1996) Marketing Management Anaysis, Panning and Contro. 9th edn. Upper Sadde River, NJ: Prentice Ha. Mishra, D.P. (2000) Interdiscipinary contributions in retai service deivery: review and future directions, Journa of Retaiing and Consumer Services,7 (2), Morrison, L.J., Coman, A.M. and Preston, C.C. (1997) Mystery customer research: Cognitive processes affecting accuracy, Journa of the Market Research Society, 39 (2), O Reiy, A. (1984) Manufacturers versus retaiers: the ong-term winners, Retai and Distribution Management, 12 (3), Pamer, A. (1994) Principes of Services Marketing. Maidenhead: McGraw-Hi. Parasuraman, A., Zeitham, V.A. and Berry, L.L. (1985) A conceptua mode of service quaity and its impications for future research, Journa of Marketing, 49 (4), Rust, R.T. and Zahorik, A.J. (1993) Customer satisfaction, customer retention and market share, Journa of Retaiing, 69 (2), Stern, B.B. (1997) Advertising intimacy: Reationship marketing and the services consumer, Journa of Advertising, 26 (4), Zeitham, V.A. and Bitner, M.J. (1996) Services Marketing. Singapore: McGraw-Hi. 111

127 5 The retai marketing mix and the retai product This chapter shoud enabe you to understand and expain: what constitutes the marketing mix; the importance of targeting and the marketing mix; a mode of the reationships between components of the mix; the pressures to increase the four Ps of the mix for services; what constitutes a product; and the aspects of store ayout and atmospherics which affect demand. When you have finay decided to use a retaier you have probaby been infuenced by a promotiona campaign, have assessed the product offer, considered whether you are wiing to pay the price, and finay thought about how easy it woud be to buy it. Each of these aspects of purchase is part of the marketing mix, which is carefuy panned by marketers in an attempt to convince you to utiize a particuar outet or make a transaction. The four Ps product, price, promotion and the pace (channe) of purchase are the basic ingredients of the marketing mix. However, these ingredients mask a major roe of the retaier which is to seect and acquire the goods they pan to se. There is a need for retaiers to devise and impement a we-deveoped merchandise pan in order to be a successfu retaier. This wi ensure that the proper assortment of goods and services is made avaiabe, based upon historica demand patterns and the strategic positioning of the company or store as a brand. When considering the marketing mix, the part deaing with merchandise becomes part of the product. Because merchandising is so important to the success or otherwise of a retaier it is deat with in a separate chapter (see Chapter 6, Merchandise management) athough merchandising fas within the category of the product. Merchandising is a key area as traditiona retaiing is positioned as the fina distribution stage in the channe of saes to the consumer. This is not to deny the importance of the rest of the mix. Each of the areas which make up the marketing mix invoves a compex set of management decisions which have to be taken into account for the retaier to prosper. This is both for the individua mix strategy and for the combined effect of the whoe mix on the target market sub-groups. In fact the mix has to be combined across its different parts so that each aspect of the mix reinforces and refects the other parts of the mix. This creates a synergy effect, where the whoe becomes greater than the sum of the parts. The combined mix has to be positioned so as to create a cear proposition for the customer. As Ries and Trout (1981) commented: Positioning is not what you do to a product; positioning is 112

128 The marketing mix for services what you do to the mind of the prospect. This chapter s information wi, therefore, provide you with an overview of the most important considerations for panning the marketing mix. WHAT IS THE MARKETING MIX? It is customary to accept the cassic marketing mix to be made up from the four Ps of product, price, promotion, and pace (channe service). 1 The product is the totaity of the offer which wi normay incude the services, store ayout, merchandise. It wi aso incude the company, and product brand name. 2 The price is what the customer has to be wiing to pay in exchange for the benefits of the product and channe service. The price is reated to a perception of vaue based upon the way the whoe of the marketing mix creates an image of the transaction experience. 3 The promotion is the means by which the retai offer is communicated to the target groups in order to inform and persuade different segments of the benefits of utiizing a specific retaier s outet or to make a purchase. 4 The pace is based on the retaier s activities in suppying a channe service. This incudes the ogistics of inventory management systems. Koter et a. (1999) indicate that the marketing mix is one of the key concepts in modern marketing theory. The definition of the marketing mix is provided as: the set of controabe tactica marketing toos that the firm bends to produce the response it wants in the target market. Figure 5.1 iustrates the approach to the interreated nature of the marketing mix favoured here. Whie the four Ps are a traditiona way of understanding the key aspects of marketing which are within the contro of the company or managers, there are aternative approaches where authors stress the need for an expansion of these four components. This is an interesting deveopment because the four Ps were provided by McCarthy (1978) as an abridged version of a much wider range of what were termed marketing ingredients. McCarthy based his four Ps upon a simpified version of a range of tweve marketing ingredients offered much earier by Borden (1965). THE MARKETING MIX FOR SERVICES ARE THE FOUR PS SUFFICIENT? The adaptation of the marketing mix by authors such as Booms and Bitner (1981) has been based upon arguments which stress that the four Ps marketing mix is more appropriate to manufacturing than to service companies, such as are found in retaiing. For exampe, Booms and Bitner add the three extra Ps of peope, physica evidence and process (see Fig. 5.2). Authors such as Booms and Bitner argue that the marketing mix of four Ps is not comprehensive enough. The major difference is argued to be the intangibe eement of human behaviour, where quaity and its contro is of paramount importance. We beieve that there is enough scope in Fig. 5.1 to incorporate each of the additiona areas of Booms and Bitner. 113

129 The retai marketing mix and the retai product Fig. 5.1 The marketing mix 114 For the present it is beieved the four Ps offer an adequate framework into which the differences can be incorporated. The main task of marketers in retai is to understand many of the compexities of the marketing mix contained in this chapter in order to ensure they wi be better prepared to pan, contro and manage different types of retai operations. Retai managers have to contro the aspects of the marketing mix which have most bearing on the demand creation and satisfaction eve of consumers. Whie it is obvious that there are differences between manufactured and service products, the framework of the four Ps is sufficient for retai panning purposes, based on the content of this chapter and the foowing chapter on merchandise management. The four mix categories do not presuppose the reegation of service product considerations to secondary importance. On the contrary, the four categories shoud ensure that within any mix formuation greater emphasis wi be paced on the integration of a the different service management considerations. Whatever approach is taken to the cassification of the controabe aspects of marketing there is a need to reaize that purchases do not take pace uness customers know: that an offer exists; where it is best to purchase the offer; that it offers vaue and is affordabe; that the offer is ikey to satisfy the need for which it is required. The essentias of the marketing mix for retai are expained fuy in the next chapters of this book. First, however, it is important to understand how the target market pays an essentia part in the formuation of any retai mix strategy.

130 The marketing mix for services Fig. 5.2 The marketing mix for services Source: Reprinted by permission of the American Marketing Association from Booms and Bitner,

131 The retai marketing mix and the retai product TARGET MARKETS The fundamenta starting point for the creation of a successfu marketing mix strategy is to ensure that the target market is ceary defined. Whie the target market is not part of the mix, its roe in dictating the different ways the mix is used makes it indistinguishabe from the concept, and of paramount importance. In any management decision which is reated to the marketing mix, the customer base or target market is aways the initia focus of a marketing mix activity. This is because the potentia consumer has to remain the focus for a retai decision-making. For exampe, we need to know what minimum and maximum eve of price or what retai offer proposition wi be acceptabe to target consumers. The retai market is made up of actua and potentia consumers. This tota avaiabe group of consumers wi be anaysed and a decision made as to which segments or subgroups wi be targeted. The segments woud probaby have been identified as part of the marketing panning process and woud have been specified at the time of the setting of objectives. A cear specification of the target market aows for a number of benefits, incuding improved eves of understanding of: the characteristics and needs of the group targeted; the main competitors; the changing/deveoping needs of targeted consumers. Benefits of targeting 1 A fuer understanding of the unique characteristics and needs of the group to be satisfied is reached. The target market acts as a reference point for retai marketing decisions, especiay as to how the marketing mix shoud be panned. This shoud ead to greater effectiveness for the mix, which in turn provides for the success of the programme. 2 A better understanding of the main competitors is gained because it is possibe to detect those retai companies who have made a simiar seection of target markets. If a company does not carify the markets it wishes to target, it may treat every other company in its sector as an equa competitor. Once main competitors are identified, their marketing efforts can be more cosey foowed or benchmarked if appropriate so as to improve marketing decision-making. 3 Improvements are possibe in the understanding of the changes and deveopment in the needs of the target market. Awareness and knowedge of retai demand is heightened due to the scrutiny focused upon the target group s actions and reactions to sighty different forms of the marketing mix. Target markets are often based upon socio-economic groups, geographic ocation, age, gender, income eves, shopper type, benefits sought, purchase behaviour and attitudes. The target market acts as the focus for taioring the mix so that target customers wi judge it to be superior to that of the competition. Segmentation and target marketing is centra to marketing because different customer groups shoud dictate the search for the correct marketing mix strategy. (For further discussion, see Chapter 10, Methods and approaches to retai strategy and marketing panning.) 116

132 Target markets MINICASE 5.1 Product decisions the shop as a destination? FT Is shopping a eisure activity? Behind that question ies a raging debate over the design and management of shopping centres in which a growing number of rea estate professionas are arguing that the two are inextricaby inked. Shopping is eisure, says John Miigan, partner in the retai practice at property consutants Jones Lang Wooten. If you don t make it a eisure activity, you re dead. The introduction of a cinema, with its evening operating hours, entices a far wider range of food retaiers than may be prepared to occupy a shopping centre and these may be prepared to pay far more for the space. Thus, the addition of a cinema encourages further daytime shopping and the growth of food courts, eading to a virtuous circe resuting in higher revenues for everyone. Mr Ronson (Heron) is deveoping retaiing/ entertainment compexes in Continenta Europe. However, he cautions that the retaiing eement itsef must contain a eisure theme. White goods superstores and food supermarkets, he says, wi not be a feature. We re thinking of music superstores, bookshops, that sort of thing, he says. The shopping centre has to be a destination, he argues. It s a day out. However, Michae McCarty cautions against a headong punge into eisure/retaiing deveopment. The conventiona wisdom is that the entertainment and eisure component can enhance the vaue of a retai deveopment, he says. But it is not a panacea for a bad centre. It wi make a good centre better but it wi not make a bad centre survive. Source: Norma Cohen, Financia Times, 1998 Retaiing in shopping centres may need to target the eisure segment of the market in order to encourage that group to use other retai faciities such as food courts and shops. Minicase 5.1 introduces the debate as to what product types shoud be avaiabe in a shopping centre, based upon the ink between shopping and eisure. The marketing mix is put together to ensure the highest expected outcome of demand from the customer. Therefore, when the marketing mix is deivered to the target market it has to produce an outcome of higher vaue than any competing form of retai offer. What we have to consider is that a retai purchases are reated to a cost for the consumer. The marketing mix amagam has to create greater vaue than the trave costs if a car or transport is used, the time costs which have to be taken from an individua s tota time budget for eisure as we as shopping, etc. Figure 5.3 is a simpe iustration of the Fig. 5.3 Components of the derived vaue of purchase for the customer 117

133 The retai marketing mix and the retai product components of a purchase situation, with the customer-derived vaue being an outcome of a deduction of vaue from costs. The figure refects the need to create perceived or actua positive outcomes from any creation of a retai marketing mix strategy. The objective of creating high eves of derived vaue shoud be borne in mind when assessing the underying concepts that foow. Some aspects of vaue and costs are discussed more fuy in Chapter 3 and ater in this chapter. THE RETAIL PRODUCT The effectiveness of panning the marketing mix depends as much on the abiity to seect the right target market as on the ski in devising a retai offer which wi generate high eves of satisfaction. A product is anything that can be offered to a market that may satisfy a need or a want. This means a combination of goods and services, which incudes the store, the staff and the merchandise. In retaiing the compete retai offer of ocation, price eves, merchandise, store ayout or method of seing, brand name and service provided pay a pivota roe in a firm s existence and ong-term success or surviva. The conception of the store has to take into consideration the interna and externa design fittings and features as we as a the myriad ways the brand, merchandise and promotiona messages communicate with the customer. The shopper has to beieve that the merchandise, or outet, offers added vaue in order for it to be successfu. Retaiing comprises everything an individua or customer receives both favourabe and unfavourabe as part of the tota retai transaction. It shoud be noted that Chapter 6 is dedicated to a fu expanation of the roe and functions of merchandise management, which is an important aspect of any discussion of the marketing mix. A BREAKDOWN OF RETAILING AS A PRODUCT The formuation of a successfu retaiing operation invoves a combination of: service; quaity; merchandise; brand name; features and benefits; atmospherics. If you envisage the situation where you have taken a hoiday and you need to have your hair styed you wi ca upon many of the above as cues as to whether or not to use one hairdresser rather than another. If you waked around the area the ocation in terms of other buidings and retai outets may give you some cues as to the type of service you coud expect. You woud probaby ook in the saons to see what the other customers ooked ike, the age and dress of the staff, the interna fixtures and fitments and decide whether the interior was comfortabe enough to wait for a styist. Perhaps you woud see a Vida Sassoon branded fascia on one saon and this may make the difference in the decision made. A these intangibe and tangibe product factors wi have a bearing on the choice made by consumers. Of course, some of the other aspects of the marketing 118

134 A breakdown of retaiing as a product mix such as price wi aso have an infuence but the product attributes are an important means of communicating the promise of a specific retai experience. Service An agreement to service provision is concerned with creating the eve of services to be offered. In a store, how much of the service shoud the cient be expected to perform and how much shoud be provided by staff? For exampe, in supermarkets the sef-service of food and the customer carrying their own purchased items are now thought of as acceptabe and at times desirabe by cients. The use of automatic teer machines (ATMs) at banks extends the avaiabiity of the cash retrieva service (and others) beyond typica bank hours, and aso aows customers to estimate roughy how ong a transaction wi take. There are aso systems for sef-scanning of goods which cut down on the cost of time. A retai operation has to be abe to deiver high eves of service. These are judged through the five dimensions that can be used to measure service quaity: tangibes such as uniforms, toiets, mirrors, fitting rooms; reiabiity based upon the abiity to perform the service dependaby and accuratey; responsiveness by reacting in a timey manner with the right eve of knowedge and courtesy; empathy demonstrated by providing a caring, individuaized service performance for customers; assurance to provide credibiity that the service standard wi be uphed. A fu discussion of service and quaity management is contained in Chapter 4. Quaity A decision regarding quaity invoves deciding on quaity standards and impementing a method of assurance on the performance eve of staff and faciities. The management of quaity is becoming an increasingy important management function. It is important to create a good quaity reputation for the product and service offered as this provides a positive image for the company or organization and is a major advantage in countering the perception of risk which, for many retai consumers, is high. Retai service providers are more ikey to be successfu if they can be depended upon to deiver higher quaity service eves than their competitors. Success through quaity is often seen as, for certain product categories, the outcome of a reationship between a customer s prior expectations of service deivery and the perception of the actua service experience. Quaity is aso used strategicay: as a way of differentiating merchandise and of positioning the offer or retai outet in an excusive way. However, an excusive position does bring with it the added probems of needing to source more widey to continue to find unique merchandise and having to bear additiona overhead costs as a consequence of excusivity. Merchandise Retaiers need to decide on the merchandise to offer by engaging in the sorting process of assembing a range of goods and services from a variety of suppiers. The depth and 119

135 The retai marketing mix and the retai product width of this range wi depend on the specific strategy of each retaier, who must decide how different products wi fit into the overa range of products they offer to the marketpace (Chapter 6 offers a more detaied description of the roe of the merchandise manager). A retaier must aso decide on whether to incude various brands in the range, and whether the offer of traditiona or new products shoud be incuded. The range of the offer and how each product matches or compements the chosen positioning of the retaier is an important retai consideration; for exampe, is the company maintaining an upmarket, mid-market or economy position? The decision regarding the range of products is aso important as it affects the need for space for dispay at the point-of-sae as we as stockhoding. The width and depth decisions over the range of merchandise to offer have to be inked to both the expectations and the financia considerations of the consumer target group. Decisions over merchandise have to take into account that a consumer may want to choose to purchase from a range of different types of goods. This coud encompass the foowing categories. Nationa brands These are the brands which are heaviy promoted by companies, such as Sainsbury, Boots and Kwik Fit, to achieve consumer awareness and preference, for exampe, Keogg s (see Chapter 12 for a discussion of brand management). For the retaier the probem in offering a range which is predominatey made up of nationa brands is that they have no excusivity and are open to price competition from ow-cost retaiers discounting nationa brands. Advantages of own-brands for retaiers Good vaue perceptions which by association enhance store image and may buid oyaty. Quaity improvement of own-brands eads to the beief that they are equa to, or better than manufacturers brands. As such, the deveopment of own-brands may provide for an enhanced corporate image. Own-brands provide a communication function by reinforcing the retaier s name in the consumer s own home environment. Retaier promotions can benefit both the retaier and the own-brand products. Strategic advantage can be gained if competitors do not have own-brand products. More abe to create a superior brand through own specification and quaity contro. The own-brand merchandise then acts as an inducement to visit the store. Can be a fast route for new product deveopment and product innovation. Suppy contro as own-brand products cannot be obtained esewhere. Own-brands often have credibiity as it is generay assumed by the pubic that own-brands are sourced from eading manufacturers. Financia benefits are the improved contro of pricing poicy, stock eves and dispay space. Higher margins (characteristicay 5 10 per cent better) and manufacturers promotiona expenses are avoided. Aso, aows for a competitive baance and greater bargaining power in reation to eading manufacturers. 120

136 A breakdown of retaiing as a product Own-brand Own-brand (sometimes termed own-abe) is discussed in detai in Chapter 12. As the arger retaiers ook for competitive advantage in the marketpace, own-brands have become one of the key weapons in the batte for improved financia returns, channe contro and consumer oyaty. In the growing confrontation between manufacturers and own-brands, retaiers can be found to enjoy a number of advantages and increasing market power (see beow). Initiay positioned as a cheaper vaue-for- money aternative to nationa brands, own-brands are now marketed with the advantage of a quaity focus. Nowadays a retaier can offer the advantage of excusivity and have greater contro over a aspects of the product. Thus they need not enter into heavy advertising as do nationa brands, which may give the fexibiity of being abe to offer ower unit prices. Licensed merchandise The importance of TV or fim characters has ed to the addition of images and symbos on a range of merchandise from everyday items to cothing. Disney characters, Bart Simpson, etc. have appeaed to the chidren s market and ed to major opportunities for increasing the desirabiity of different types of merchandise. Franchised products via concessions in a store An advantage may be gained through an excusive dea with a manufacturer (for exampe, Cinique, Principes, Aexon, etc.). MINICASE 5.2 Supermarkets sew up the cothing market Athough the size of Tesco and Asda s ranges are simiar, in Compabiity s survey for Retai Week, Tesco has the edge. With 2,244 options, Tesco s cothing offer is 10 per cent bigger than the George range, which has 2,049 options, and more than 50 per cent bigger than the cothing offer at Sainsbury s, which has 1,450 overa options. The survey counted every option for styes and coours for cothing, footwear and accessories. Tesco s wider range is mainy due to its extensive Essentias offer for women. The Essentias underwear and hosiery at Tesco dwarfs the choice in Asda and Sainsbury s. Interestingy however, both the George chidrenswear range at Asda and the Adams range at Sainsbury s have more options than the chidren s range at Tesco. George has the widest choice of footwear. The George cothing range at Asda reies on one name and one name ony, whie Jeff & Co articuates the offer via a number of sub-brands. For exampe, 14oz for denims, CMT for taioring and Navy Bue for reaxed weekend wear. The buk of Tesco s range carries the Designed for Tesco abe. The newer and more aspirationa Forence+Fred branding is not yet avaiabe in accessories and footwear, and is at the moment a sma eement of the range. In terms of environment, the trading area for Jeff & Co is far better differentiated from the rest of the store than the cothing ranges at Tesco and George. Frosted gass panes, iuminated wardrobe dispay units and spotights make for a cassy atmosphere. Forence +Fred, on the other hand, does not appear to have been given the same eve of support. 121

137 The retai marketing mix and the retai product Eements of the range incorporate sophisticated coours and fabrics, which woud be better emphasised in a more intimate area, ike the one deveoped for Jeff & Co. George of Asda combines a ot of product on dispay with wide aises for ease of navigation, and ceary demarcated sections. From a product point of view, Tesco is we on the way to deveoping a ifestye brand with the aunch of Forence+Fred, but it fas short from a presentation perspective. Sainsbury s has made a big impact with the styish shopfit and wearabe appea of the Jeff & Co cothes. But the range is sti in honeymoon mode, and as yet unhindered by the usua probems of broken size ratios and fragmentation. Jeff & Co prices are substantiay higher than both Tesco and George, and whie the Sainsbury s customer is arguaby better off, it remains to be seen just how much impact a 19-store proposition wi have. Asda has more arge-spaced stores than either Tesco or Sainsbury s and with exceent prices and ranges wi remain the biggest appare seing supermarket group for the foreseeabe future. However, Tesco is aggressivey expanding space dedicated to cothing and pans to se its ranges from 140 superstores and 46 hypermarkets by next year. Utimatey the emergence of stronger cothing ranges within the supermarket sector wi inevitaby increase the pressure on aready strugging midde-market payers. Source: Compabiity Report, Retai Week, 8 June 2001 Brand name The store exterior and brand name is the initia impression that a customer wi have of a store. Branding is aso an important portabe communication too which can be utiized on the retaier s bags and packaging of its own-abe products. A brand name which is we known and associated with high satisfaction eves imparts an improved image and added vaue to the product or the store. This can ead to store oyaty or consumers insisting on the product by brand name and being ess price sensitive (Chapter 12 discusses branding in great detai). These days a retai brand name may be a nationa brand or an own-abe brand. Brand names can be famiy brands where each of the company s products adopts the same brand name. Umbrea brands which use a corporate brand symbo are being used to project a consistent image across countries. Nesté s brand poicy, for exampe, uses umbrea and sub-umbrea branding; corporate branding takes pace with Nesté, Carnation, Maggi, C&B, Chambourcy, Buitoni, Findus, Friskies, Herta and Libby s, whie sub-branding is used for Nescafé, Nestea, Nestum, Svetesse and Lean Cuisine. Additionay, individua product brand names such as Nido, Mio, Crunch and KitKat are used, where each product is branded differenty. It is argued that it is difficut to create marketing success across a wide range of products owing to the probem of providing compex brand vaues to dissimiar products. Marks & Spencer was renowned for having buit their success on an umbrea own-brand, St Michae, which was associated with added vaue but which may now be weaker than in previous times. Some companies opt for individua brand names such as those associated with the Debenham s organization. The individua brand name approach aows the retaier to search for the most appropriate brand name; its weakness is that the promotiona budget for each brand has to be sufficienty arge to support that brand. With individua branding, a company is abe to position brands and products at the cheaper end of the market without the brand damaging the image of the rest of the company s brands. In addition, if there is bad pubicity for one of the company s brands then the other company brands do not necessariy suffer. 122

138 A breakdown of retaiing as a product With umbrea or famiy brands there is a spin-off effect for each of the brands from the expenditure on any one brand. Conversey, if one of the famiy brands attracts poor pubicity, because of association there wi be damage to the other brands. For famiy branding, carefu attention has to be given to the quaity contro of the products. One other benefit of famiy branding is that each product brand performance (PBP) can be measured against the overa famiy brand performance (FBP). That is to say, when FBP is divided by PBP and the quotient shows an increase over time, without good reason, it may mean that the product brand needs modification, revitaization or a detaied review. Product eves The product can be thought of as being an amagam of four different eves the core product; the faciitating product; the supporting product; and the augmented product. A product incudes everything that the customer receives and this incudes the basic eve of the core product which is made up of the deivery of benefits and features. We know that consumers buy products for the benefits they deiver to them, as this is the basic outcome vaue assessment associated with the purchase. Every retai product is a package of probem-soving services that wi be successfu if the package is vaued enough. A hoiday consumer in a trave agency is ooking for the benefit of reaxing in the sun and having no hasse in the journey or stay. They eave the detai to the trave agent. As Levitt pointed out, the buyers do not buy quarter inch dris; they buy quarter inch hoes. Marketing staff have to uncover the subte benefits that the consumer seeks when utiizing a retai distribution channe or purchasing a retai product. There are aso the different features that are the tangibe aspects of the product which hep to differentiate it from competitors. Adding in the right features increases the probabiity that a purchase wi occur. The features wi be the size of the entrance, the aises and the fixtures and fittings of the store. The faciitating aspects of the product in a store must be present for the customer to utiize the services of the core product. This wi be the service and goods such as checkout and credit card faciities, if cothing then mirrors and fitting room, signage and easy access around the store, acceptabe merchandise. Core products require faciitating products but do not necessariy have to incude supporting products. In fact the discounter stores ensure that their cost-eadership strategy is adhered to by having ony a minimum of supporting products. Such extras as a pay area for chidren, baby change faciities, higher empoyee numbers operating fast checkouts, free gift wrap service, free deivery, and so on are a supporting products which may be panned into the product offer. The augmented product incudes aspects of atmosphere and the interaction of the customer with the company. Retaiers shoud take the opportunity to consider factors such as the appropriateness of in-store music at different periods in the week as we as at weekends when the market profie of their customers may change and the need for supporting services wi vary e.g. gift wrapping service, oyaty programme benefits, etc. Retai outets in London are now incorporating advanced thinking as to what can be offered as an augmented product. There are MTV booths for maes to reax in whie femaes shop, and there are additions such as juice bars and DJ booths that are abe to bring about change in consumer attitudes as to what is expected as a shopping experience. 123

139 The retai marketing mix and the retai product STORE LAYOUT The store is a product in its own right. The customer s product decisions can be enhanced, or ruined, by the type of panned store ayout. Stores shoud be designed to faciitate the movement of customers, to create a panned store experience and to aow the optimum presentation of merchandise. The traffic fow of customers has been infuenced through the cever design of dispays, aises, signage and overa ayout. This aso invoves the fu use of the foor area to utiizing obscure and unproductive areas. The retaier s goa has to be a store ayout which refects the brand position of the store and ensures the most effective use of the space. It aso has to be designed on a proactive rather than a passive basis. This is because the understanding of how customers shop for specific categories of merchandise shoud be incorporated into the way it is exhibited or dispayed within an overa store ayout. Donovan and Rossiter (1982) found that the effect of store-induced peasure is a very dominant determinant of either approach or avoidance behaviour as we as in-store spending patterns. The resuts of their study indicated that arousa, or the feeings of aertness and excitement created by means of storeinduced emotion ed to increased time spent in the store by customers and aso produced a higher wiingness to interact with saes personne. Proactive panning shoud therefore be based upon the manipuation of the in-store experience rather than accepting a passive, totay random experience for customers. Proactive panning accepts and responds to the data showing that store ayout can infuence the customer s shopping behaviour and perceptions. It is we known that the use of different ayouts and aise design wi infuence the patterns of traffic fow past the principa merchandising groups. The correct dispay of merchandise in a highy frequented area can dramaticay increase saes; conversey, a poor dispay wi have a negative effect. There is aso the time factor reated to any shopping trip. Those stores with an appropriate number of checkouts for the square area of the store may infuence the shopper to spend onger browsing and purchasing if they beieve the checkout time is efficient. Customers have to fee happy and comfortabe in an environment if they are to reax and stay for any ength of time. Customers are more ikey to want to enter and shop in a store when their senses are satisfied by the way the store environment has been panned. The ambience of the store has to be right for that store s positioning. For exampe, a discount store with narrow aises, high density merchandise, bod signs and oud music has consistency with the rest of the marketing mix and this reinforces the perception of ow price. There is a whoe variety of ayouts avaiabe for consideration but the retaier s choice shoud be determined by the merchandise, the size and type of space avaiabe and cost invoved. Layouts can contain one or a combination of the foowing: Grid pattern ayout is characterised by the regimentation of the ayout into ong rows of parae fixtures, with straight aises. If the aises are too short, the customer wi ook to the next aise so for maximum effect the aises have to be ong enough so that the customer ooks at the merchandise on the sheving as they pass. The ayout produces a maze effect as it constrains the customer: they are unabe to pass through the rows because there is no opportunity to move at right anges unti the end of each row. The merchandise counters are arranged to produce ong barriers to cross-aise 124

140 Store ayout Fig. 5.4 Grid store ayout for a chemist traffic fow. This channes the customer past different store sections. Supermarkets or retaiers of fast-moving product ines normay adopt this format. Free-fow ayout is based upon an irreguar pattern with some ogic of attempting to create a fow but which aows the customer the choice of whether to move between the fixtures or not. The design aows for more unstructured fows of store traffic. It aows for more reaxed customer shopping and for impuse purchases as customers are drawn to areas they are interested in. This type of ayout stye is to be found in many cothing stores. Boutique ayout is a variation of the free-fow ayout pattern whereby the departments or sections are arranged in the form of individua speciaity areas that can cater for specific customer requirements. This approach is more ikey to be adopted by speciaist or department stores. Exampes of the ayouts described are shown in Figs

141 The retai marketing mix and the retai product Fig. 5.5 Free-fow ayout 126

142 Store ayout Fig. 5.6 Boutique-stye ayout 127

143 The retai marketing mix and the retai product Atmospherics The act of a retai purchase entais a number of socia and psychoogica states reated to the pace and time of that purchase occasion. These are based upon: the environmenta and physica aspects of pace which incude atmospherics and visibe components of the store and the store s ocation; the socia surroundings which invoves the interaction with other shoppers in terms of judgements of their characteristics and appearance and whether the retai outet is crowded or not. Crowding can affect behaviour in different ways. Consumers earn to cope with crowded retai outets by aocating their time by postponing, rescheduing, aborting or focusing their purchase behaviour; the tempora aspects of the occasion in terms of the time of day, week or year which may be based upon a seasona aspect to the shopping experience such as Easter or Christmas. This wi ead to different eves of crowding, visua and ofactory changes; the objective of the shopping trip wi affect the emotiona state of the individua as a routine shopping task is not the same as one where high expenditure or importance of purchase is present; the predisposition of the individua wi aso affect the purchase behaviour. For exampe, a specific mood state wi ead to distinct purchasing behaviour. The above five factors need to be understood as a composite whoe as each wi affect the other and provide an overa synergy which wi have an impact on the type and timing of the retai purchase. Atmospherics can enhance the shopping experience through environmenta changes which affect the emotiona response of customers. Atmosphere is perceived through the different eements in the same store environment which are panned to interact with an individua s senses. This shoud be understood as a hoistic experience where each part of sensory marketing works in combination with the other atmospheric eements. Sensory triggers create a number of changes in the customer s emotions which can infuence the type and amount of demand for different types of merchandise in the store. The main sensory mediums are: Visua coour, brightness or variation of ight, size, shape, texture. Aura voume, pitch, beat, harmony recognized/favoured music. This is based upon the notion that music is composed of at east three primary dimensions: a physica dimension (voume, pitch, tempo, rhythm), an emotiona tone, and a preferentia dimension (the degree to which a shopper judges they ike the music). Ofactory scent, freshness merchandise such as eather, bakery items, food, etc. This comprises ambient scent which shoud be distinguished from non-ambient scent. Ambient scent is the scent that does not originate from any particuar object but is present in the environment whie non-ambient scent is given off by objects. Both are controabe by the retaier. Scent incudes the affective quaity of the scent (i.e. how peasant it is), its arousing nature (i.e. how ikey it is to evoke a physioogica response), and its intensity (i.e. how strong it is). Tactie softness, smoothness, shape surface and dispay area by fee/touch. 128

144 Store ayout Fig. 5.7 Stages reated to sensory marketing The use of space, coour, was, piars, foor coverings, ighting, music, scent and so on can be controed by the retaier. The combinations of these panned physica messages is known as atmospherics. Atmospherics can be defined as: The changes made to the design of buying environments that produce specia emotiona effects that subsequenty enhance the ikeihood that a purchase wi take pace. The type of merchandise offered and the method of its dispay down to the stye and pose of mannequins, reinforce this. Atmospherics are created by the combination of a whoe series of cues and stimuants to produce the desired ambience and emotiona response from the group of target customers. The emotiona state of the shopper wi ead to an increase or decrease in the panned eve of purchases. It is essentia to know what factors stimuate and pease consumers as the resut wi capture individuas for onger periods in a store and make them more susceptibe to merchandise offers. Figure 5.7 indicates the inks which drive the stages of retai atmospherics. Therefore, the design of stores has to strive to produce an efficient ayout with the quaities of ambience that attract members of the target market. The foowing ist of factors is usefu but not exhaustive: 1 Space must be used effectivey, with territoria areas panned to break up the store into ogica saes sections and functiona areas such as changing rooms, restaurants and pay points. The store s ayout has to be panned for optimum circuation around the store. It shoud not be forgotten that the entrance to a store, both outside and inside, has to transform the customer s attitude and to create a promise of the experience to come. 2 Layout shoud be panned to encourage customers to circuate in specific patterns so as to visit as many merchandise areas as possibe in order to achieve the optimum productive ayout. The retai ayout ogic has to be easiy comprehensibe so that the potentia customer quicky understands and assimiates the route they can negotiate past the merchandise. This is often achieved by the use of different foor coverings or textures which act as cues to the customer. It may aso be accompished through the use of cear appropriate signage which refects the positioning of the retai outet. 3 Stimuants to the senses to improve saes must aso be panned. Music can be changed to suit the type of shopper in the store such as paying younger background music just after the schoo day ends. Faster or sower music wi affect the speed at which shopping occurs; nationa music, such as French or German tunes, payed in a supermarket wi increase the saes of a particuar country s wines. Cassica music wi ead to saes of more expensive wines. Another option avaiabe is to vary the tempo of the music, at different times of day or in different areas, to infuence the pace of in-store 129

145 The retai marketing mix and the retai product traffic movement. For exampe, when a higher turnover of customers is required in the restaurant around unchtime, increasing the tempo of the music wi achieve this behavioura effect. As evidence of the arousa effect of music, Vanderark and Ey (1993) found that high tempo and high rhythmic content in the music ed to an increase in physioogica arousa among consumers. Whie the effect of music can be beneficia, many stores do not have music apart from at the Christmas shopping period. Yach and Spangenberg (1990) conducted research in a department store setting where they compared the effects of foreground music (top 40 music payed), and background music (instrumenta easy istening), in reation to a no-music contro group. It was found that younger shoppers (under 25) perceived that they had spent more time shopping in the easy istening condition, whereas oder shoppers perceived that they had shopped onger when top 40 music was being payed. From the resuts, the authors concuded that encountering atypica environmenta factors (e.g. unfamiiar music) might adversey infuence consumers time perceptions. In addition, the fragrances and scents of perfumes, eatherwear, housepants and so on may infuence customers to purchase. The aroma of fresh bread, pastries, cheese, coffee, chocoate, etc. can stimuate saes and some stores or restaurants extract the aroma, pumping it outside their buiding to attract the passing pubic. Supermarkets may position a gondoa of fowers in the entrance of the store to provide customers with the wecome sight of the booms and the fragrance of their scent. Spangenberg et a. (1996) examined the effect of ambient scents in a simuated retai environment. The concusion was that the subjects had more positive evauations and behaviours of the environment in the scented rather than the unscented group. One other interesting finding was that the type of scent did not matter, as even effectivey ight scents were abe to generate enhanced perceptions. Moreover, the intensity of the scent (within an acceptabe range) did not ater the overa resuts. 4 Lighting is an important mood setter and very usefu in the production of a desired ambience. Lighting can be soft, bright or produce coour washes. Merchandise can be highighted by directiona ighting or with a combination of ow-votage and energyefficient systems. Different types of ighting can be used in combinations to create interesting contrasts throughout a dispay area. The use of sophisticated ighting systems aows the retaier to adapt the ambience at reguar intervas. This can ater perceptions of the size of different areas, compement the merchandise by bringing out its coours and direct the attention of the customer s gaze. Gass sheving with ighting in a toietries area can communicate a bright, cean set of merchandise. One other important aspect of ighting is that in fitting rooms or where there are mirrors to view merchandise the ighting shoud be fattering. From a strategic marketing stance, it is important that in highy competitive retai sectors the ayout of the store is panned in order to refect the desired market position (see Chapter 10 on retai panning). The position has to be panned in conjunction with cear ideas as to how the atmospherics wi differentiate the store as a brand from its competitors. Store ayout panners must aso take into account who the target segments of the market are and what sort of buying experience they may seek from the store. For exampe, Boots utiize hard foors to enhance the image of ceaniness, and bue and white coours which are coo and have associations with heath and cinica practice. However, 130

146 Concusion MINICASE 5.3 M&S hopes tis wi revive with sound of music FT Marks and Spencer is to aunch a subimina attempt to ure back shoppers: paying background music in its stores. The strugging retaier has hed out against the high street canned music barrage, aowing its British shoppers to seek out sandwiches and knitwear in dignified sience. But M&S is so confident the initiative wi be a success, that it hopes shoppers wi be wiing to fork out for the soundtrack of their visit. The tunes on offer wi come from M&S-branded compact discs, suppied by Universa, the entertainment congomerate, and are on sae in about 160 stores. M&S is not the first retaier to offer CDs in an attempt to appea to customers who are put off by the thumping music and youth cuture of a traditiona record store. In the US, piped music CDs are becoming big business with Guess, Od Navy and Starbucks, the coffee house group, a getting in on the action. One of the first retaiers to make the discovery was Victoria s Secret, a ingerie company with neary 800 stores across the US. In 1988, it started seing compact disc and tape cassette compiations of the cassica music paying in its stores. Of the 11 cassica abums to have sod more than 1m copies in the US, five are from the Victoria s Secret coection. Source: Lisa Cifford, Financia Times, 26 Juy 2001 ighting is utiized to make the products stand out and provide effects that are more dramatic. Boots utiize gass sheving to dispay their gift items and cosmetics. This in conjunction with the ighting creates a quaity association for the dispays. The Body Shop have the fragrance of their merchandise but this is compemented by the use of bright, earthy coours such orange and dark greens, as we as mirrors and cever ighting to provide their own unique atmospherics. Boots uses a combination of ayouts. Grid patterns are utiized for everyday items such as shampoo and toothpaste whereas freefow ayouts may be adopted for other parts of the store. The Body Shop has adopted the free-fow ayout. Aspects of atmospherics and store ayout These may affect: the speed at which consumers move from one point to another in the store the degree of we-being fet by the staff working in the store environment the tota saes revenue, saes patterns and type of product sod the image the consumer has of the store and its merchandise CONCLUSION You shoud now be aware that marketing mix decisions have to be inked to achieving the objectives of the company or organization and shoud be couped to acceptabiity throughout the company. Whie marketing departments often ead in setting the 131

147 The retai marketing mix and the retai product marketing mix strategy they shoud not ignore input from others, nor shoud they fai to check with others that the strategy wi be workabe from an operationa standpoint. The marketing mix offers the range and spread of aternative strategies by which a retai marketer can infuence demand. For any retai marketer, whie the avaiabe range is very simiar the choice is not. The process of mix formuation and baancing is quite often unique to each organization because the way the mix is combined aows the company to provide the augmented product with which it wi compete with others. In the competitive retai marketpace, a business can be successfu ony if its compete marketing mix offer matches what the consumer wants. To be truy successfu, the offer has to be as good as but preferaby better than that of the competition. The marketing mix is panned and co-ordinated by marketers, so the onus is on marketing to contro the inputs in such a way that the overa effect maximizes the demand and satisfaction of the consumer. Product panning aows a retai company to understand and pinpoint marketpace opportunities so that the merchandise range can be co-ordinated to ensure that successfu products are maintained and undesirabe ones deeted. It aows for an understanding of the compexity of the retai product so that aspects of service and quaity are considered as part of the overa retai offer. This section on the retai product is brief as the foowing chapter (Chapter 6) is devoted soey to the important area of merchandise management. It discusses the different approaches to panning and controing merchandise in terms of the width and depth issues, the assessment of stock eves and issues in buying. EXERCISES The exercises in this section reate to the issues discussed in this chapter. It is suggested that you work through them before moving on to Chapter 6. 1 Go to the high street and seect two different types of sma-sized stores in order to create a foor pan of their ayout. Mark the way the entrance is shaped and types of merchandise that are in different areas of the store. Try to create this to scae. Aso, provide some anaysis as to the height of different in-store dispays. Provide a strengths and weaknesses anaysis of your findings. 2 Visit at east two arge department stores and note the way the overa marketing mix has been formuated. Do you think the product is we integrated with the in-store promotion, window dispay, pricing poicy, etc.? For exampe, does the tota retai product offer and experience match other visibe signs of the marketing mix? Produce a report to the manager on what changes are required to improve the current situation. 3 Create a ist of the atmospherics you woud expect to find in eading supermarkets. Now visit two different supermarkets and find what additions or subtractions need to be made to your ist. Based upon your findings you are required to write a report to a charity shop to offer advice on how to improve the atmospherics of the shop. 4 Choose two retai stores in the high street (such as Boots and The Body Shop). Visit the stores and provide a breakdown of the way the fascia, window dispay, atmospherics, staff uniforms, packaging and ayout create an image and positioning for the company using the foowing grid as a guide. Aso, provide advice on any areas in which improvement coud be made. 132

148 References and further reading Visit and make notes at: Make notes on: Boots Fascia The Body Shop Window dispay Learnt from study the concepts of: Type of materias used in store dispay Staff uniforms Atmospherics, etc. Practica aspects that any other company coud utiize to improve their business? REFERENCES AND FURTHER READING Be, J., Gibert, D.C. and Lockwood, A. (1997) Service quaity in food retaiing operations: a critica incident anaysis, Internationa Review of Retai, Distribution and Consumer Research, 7 (4), Betts, E. and McGodrick, P.J. (1995) The strategy of the retai sae, typoogy, review and synthesis, Internationa Review of Retai, Distribution and Consumer Research, 5 (3), Booms, B.H. and Bitner, M.J. (1981) Marketing strategies and organization structures for service firms, in Donney, J. and George, W.R. (eds) Marketing of Services. Chicago, IL: American Marketing Association. Borden, N.H. (1965) The concept of the marketing mix, in Schwartz, G. (ed.) Science in Marketing. Chichester: J. Wiey and Sons. Bowden, D. (1995) Probems with deivery deay on-ine shopping, Independent on Sunday, 4 June, 4. Britt, S.H. (1975) How Weber s Law can be appied to marketing, Business Horizons, February, Cifford, L. (2001) M&S hopes tis wi revive with sound of music, Financia Times, 26 Juy. Cohen, N. (1998) Leisure: the shop as a destination, Financia Times, 17 March. Comer, J.M., Mehta, R. and Homes, T.L. (1998) Information technoogy: retai users versus nonusers, Journa of Interactive Marketing, 12 (2), Compabiity Report (2001) Supermarkets sew up the cothing market, Retai Week, 8 June, Davies, G. (1993) Is retaiing what the dictionaries say it is?, Internationa Journa of Retai and Distribution Management, 21 (2), 3 7. Donovan, R.J. and Rossiter, J.R. (1982) Store atmosphere: an environmenta psychoogy approach, Journa of Retaiing, 58 (1), Gibert, D.C. (1990) European product purchase methods and systems, Service Industries Journa, 10 (4), Giigan, C. and Sutton, C. (1987) Strategic panning in grocery and DIY retaiing, in Johnson, G. (ed.) Business Strategy and Retaiing. Chichester: John Wiey. Institute of Grocery Distribution (1997) Trends in Grocery Retaiing the market review. Watford: IGD Business Pubications. Institute of Grocery Distribution (1998) Grocery Market Buetin. Watford: IGD Business Pubications. Kiran, W.K. and Kumar, V. (1995) The effect of brand characteristics and retaier poicies on response to retai price promotions: impications for retaiers, Journa of Retaiing, 71 (3),

149 The retai marketing mix and the retai product Koter, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principes of Marketing. 2nd European edn. Heme Hempstead: Prentice Ha. Kumar, V. and Karande, K. (2000) The effect of retai store environment on retaier performance, Journa of Business Research, 49 (2), Mattia, A.S. and Wirtz, J. (2001) Congruency of scent and music as a driver of in-store evauations and behavior, Journa of Retaiing, 77 (2), McCarthy, E.J. (1978) Basic Marketing: a manageria approach. 6th edn. Homewood, IL: Richard D. Irwin. Porter, M.E. (1985) Competitive Advantage. New York: The Free Press. Powe, T.C. and Dent-Micaef, A. (1997) Information technoogy as competitive advantage: the roe of human, business, and technoogy resources, Strategic Management Journa, 18 (5), Reichhed, F. and Sasser, W.E. Jr. (1990) Zero defections: Quaity comes to services, Harvard Business Review, 68, September/October, Reid, M. (1995) Survey of retaiing (2): stores of vaue computers are no onger enough. To stay ahead, retaiers must use them to innovate, The Economist, 334, 4 March, 334. Rhodes, E. and Carter, R. (1998) Eectronic commerce technoogies and changing product distribution, Internationa Journa of Technoogy Management, 15 (1, 2), Ries, A. and Trout, J. (1981) Positioning: The Batte for Your Mind. London: McGraw-Hi. Sirgy, M.J., Grewa, D. and Mangeburg, T. (2000) Retai environment, sef congruity and retai patronage: An integrative mode and research agenda, Journa of Business Research, 49 (2), Spangenberg, E.C., Crowey, A.E. and Henderson, P.W. (1996) Improving the store environment: Do ofactory cues affect evauations and behaviors? Journa of Marketing, 60 (2), Turey, L.W. and Miiman, R. (2000) Atmospheric effects on shopping behavior: A review of the experimenta evidence, Journa of Business Research, 49, Vanderark, S.D. and Ey, D. (1993) Cortisa, biochemica, and gavanic skin responses to musica stimui of different preference vaue by coege students in bioogy and music, Perceptua Motor Skis, 77, Yach, R.F. and Spangenberg, E. (1990) Effects of Store Music on Shopping Behavior, Journa of Consumer Marketing, 7 (Spring), Yoo, C., Park, J. and MacInnis, D.J. (1998) Effects of store characteristics and in-store emotiona experiences on store attitude, Journa of Business Research, 47 (3),

150 6 Merchandise management This chapter shoud enabe you to understand and expain: the definition and roe of the retai merchandiser; the deveopment of a merchandise pan; category management approaches; what is invoved in space aocation and range panning; inventory turnover contro. The deveopment and impementation of a merchandise pan is one of the most important phases in any retai strategy. This is because the primary objective of any retai organization is to ensure the sae of its merchandise. In order to be successfu, retaiers must make competent decisions over what is to be bought, in what quantities and at what time. The overa choice of merchandise aso presents a cear message to consumers about the type of company they are purchasing from. As such, the seection and presentation of merchandise enabes a key source of difference to exist which wi aow one store to differentiate itsef from another. There is an od adage which states goods we bought are haf sod. Whie true, this masks the fact that merchandise has to refect the different market segment needs and wants and there is a requirement for a sophisticated approach. This is often reated to IT appication. As Ody (1998) commented, the retaiers of today take integration as the name of the game based upon software and IT. This is reated to the need to manage merchandise with a transparent data fow from the buyer s aptop and digita camera to the panogram. Store ayouts are capabe of being downoaded to branches with the benefit of a seamess suppy chain back-up operation. In addition, the product and demand data from raw materias suppier to end-consumer is a regarded as part of the tota enterprise. WHAT IS MERCHANDISE MANAGEMENT? Merchandise management focuses on the panning and controing of the retaier s inventories. The roe has to baance the financia requirements of the company with a strategy for merchandise purchasing. We beieve the compex roe of merchandise management can be defined as: the panning and impementation of the acquisition, handing and monitoring of merchandise categories for an identified retai organization. 135

151 Merchandise management The definition stresses a number of key points. As merchandise has to be acquired for future purchase opportunities, forward panning is needed in reation to changing consumption tastes and demand. There is a need for acquisition from either whoesaers or manufacturers and for the merchandise to be handed in an appropriate way to ensure it is abe to be sod in perfect condition. As the financia aspects of buying merchandise can be treated as an investment decision, there is the fina aspect of monitoring a aspects of the process to ensure adequate returns are achieved. The compexity of modern retai operations often requires the grouping of the buying process into an individua category. This is normay structured to ensure that the buyer can understand different market segments such as those defined by age (infants, chidren s, youth, etc.) or by gender. In genera a category is an assortment of items that the customer woud broady perceive as being substitutes for each other whie refecting the extent of possibe variants. For exampe, a customer may substitute a pair of trousers for jeans but not for a swimsuit. This approach enabes a customer-ed focus on the assortment profie and the issues of the width and depth, quaity and cost-to-price impications. Category management, working with key brands, is a feature of modern retaiing. Cobb (1997) expains that at the point of purchase, the shop-in-shop concept, traditionay utiized to promote a singe manufacturer or brand, has been deveoped to improve category differentiation in the grocery mutipes. A prime exampe is at Sainsbury s where Cadbury, in partnership with the supermarket, deveoped a novety confectionery section in a Treasure Isand chidren s area. Other deveopments are the retaier s ink with Durace, to create a battery centre area. As brand eader, Durace commissioned NDI Dispay to work with the store group to create a speciaist merchandising system. The phases in deveoping a merchandise pan are isted in Fig In a marketinged approaches the consumer wi utimatey dictate the strategy options. In Fig. 6.1 there is no exception. (See Chapter 10 on marketing panning in order to understand the fu compexities of a panning approach.) The customer wi have expectations of an assortment profie with issues of choice (width and depth), sizes, quaity, excusivity, avaiabiity and cost (as indicated in points 1 and 2 in Fig. 6.1). The consequence of understanding the expectations is for these to be transated into a particuar structure for 136 Fig. 6.1 Merchandise pan considerations

152 Panning and cacuating inventory eves the buying organization (as indicated by point 3 in Fig. 6.1). If excusivity is required, then there is a consequent requirement for seective sourcing. If quaity is important, a great dea of quaity contro is necessary as part of the buying procedure. Whatever the approach decided upon, buyers wi be expected to source ony after extensive research and searching out a the aternatives. The next consideration is a financia one (point 4 in Fig. 6.1): having to meet company profit and market requirements before the merchandise stock is acquired (point 5 in Fig. 6.1). Some of the important merchandise decisions reated to this pan are discussed beow. Avaiabiity is an important concept. Avaiabiity is based upon the need to ensure that the eve of stock required meets the demand from the consumer. This requires an appreciation that a higher eve of cost is inked to increases in the eve of stockhoding. The importance of wanting to derive the avaiabiity measure is based upon knowing what orders wi be satisfied over a specified time span. This is typicay a percentage say 90 per cent of orders wi be satisfied. The notion of avaiabiity introduces a need to manage the reorder/repenishment cyces on an efficient basis. Of course, high eves of stockhoding wi require working capita to be tied up. On the other hand, improved stockhoding may increase saes due to the rapid fow of merchandise. The baance between these two factors needs to be carefuy assessed. In current businesses information systems have had a considerabe impact on the whoe area of avaiabiity. (This is discussed in Chapters 5 and 13.) The avaiabiity performance is inked to inventory turnover, which can aso be described as merchandise stock-turn. The inventory turnover concept aows us to work out how ong inventory is on hand prior to it being sod. Goods with a high turnover wi need to be panned differenty from those with a ow turnover. Retaiers can ca upon different ways to measure this: Net saes Average inventory at retai store Cost of merchandise sod Average inventory at cost Units sod Average inventory at retai store The inventory turnover concept aows a store to operate at a more optima eve. As an indicator of the differences which can exist, the Nationa Retai Federation of America (1991) found that the annua inventory turnover eve of arge department stores varied from 1.5 for home furnishings to 1.7 for footwear, eisure and home eectronics, 2.3 for cosmetics and drugs, and 2.9 for femae appare, infants and chidren s cothing and accessories. METHODS OF PLANNING AND CALCULATING INVENTORY LEVELS Basic stock method of panning inventory The merchandiser may have to pan to have a basic eve of stock derived by the basic stock method (BSM) when it is agreed that there shoud be a particuar eve of inventory 137

153 Merchandise management avaiabe at a times. The inventory with BSM wi meet saes expectations and aso aow for a margin of error. This approach is based on ensuring stock eves are not depeted and customers dissatisfied. It is especiay important if saes are higher than expected or if there coud be any probem with the shipment and deivery of stocks. However, this method is better suited to a ow turnover or when saes may be erratic. It has the advantage that stock can be added to over time rather than a of it being purchased in advance, but this method does not take into consideration stockhoding costs. The eve of the beginning of month stock (BOM) for a retaier can be cacuated by taking the figures for a season (say 6 months in this case) and working out the BOM as the panned monthy saes pus the basic stock. If this were based upon an inventory turnover of 2 and tota saes of then the cacuations woud be made as foows: Note: Cacuations are for a season. where Beginning of month stock (BOM) = Panned monthy saes + Basic stock (a) Average stock for season = Tota panned saes for season Estimated inventory turnover and (b) Average monthy saes = Tota panned saes for season Number of months and Basic stock = (a) (b) which is: (a) = or (b) = or From this we are abe to provide the basic stock cacuation as: which is The fina average basic stock requirement for the season is: = This means the retaier may require the foowing inventory: Beginning of retai Basic stock + panned monthy saes March = = Apri = = May = = June = = Juy = = August = =

154 Panning and cacuating inventory eves Percentage variation method An aternative method for determining panned stock eves, especiay when turnover is higher than 6 or more annuay, is the percentage variation method (PVM). The method is recommended when stock is quite stabe since it resuts in panned monthy inventories that are coser to the monthy average than other techniques. If the retaier faces fuctuations in saes but does not want to ensure that a given eve of inventory is avaiabe at a times then this approach woud be acceptabe. The technique assumes the monthy percentage fuctuations from average stock shoud be haf as great as the percentage fuctuations in monthy saes from average saes. This woud be cacuated as foows: Beginning of month panned inventory eve = Panned average monthy Estimated monthy saes stock for season Estimated average monthy saes Since the PVM utiizes the same basic components as the previous exampe we can utiize the same data: Beginning of retai Average stock for season + panned monthy saes average monthy saes March = /2[1 + ( / )] = Apri = /2[1 + ( / )] = May = /2[1 + ( / )] = June = /2[1 + ( / )] = Juy = /2[1 + ( / )] = August = /2[1 + ( / )] = The PVM is a better choice when the annua turnover rate is greater than 6 as the resuts wi fuctuate ess. Beow 6 the BSM method of cacuation woud be preferred. Weeks suppy method The weeks suppy method (WSM) for panning inventory invoves forecasting average saes on a weeky rather than a monthy basis. The WSM formua assumes the inventory carried is in direct proportion to saes. It is utiized by retaiers that need to pan on a weeky basis, such as supermarkets where saes do not fuctuate by significant amounts. The cacuation is based upon a predetermined number of weeks suppy that has to be inked to the stock turnover rate desired. In WSM there is a proportiona ink between the vaue of the stock and the forecast of saes. Thus, if forecasted saes doube then inventory vaue wi tripe. In order to understand WSM the foowing exampe can be considered: where and BOM stock = Average weeky saes Number of weeks to be stocked Estimated tota saes for the period Average weeky saes = Stock turnover rate for the period 139

155 Merchandise management Number of weeks to be stocked = Number of weeks in the period Stock turnover rate for period 26 Number of weeks to be stocked = = Average weeky saes = = BOM stock = = With the number of weeks suppy to be stocked at 13 weeks based upon the average weeky saes of , stocks may need to be checked on a reguar basis to ensure that there is no danger of stockouts or a buid-up of stock which wi increase hoding costs. It woud therefore be cear that this method requires both stabe saes and turnover for it to prove beneficia. 13 Stock-to-saes method One other method that can be empoyed is known as the stock-to-saes method. It is beneficia to utiize such an approach if a retaier wants to maintain a specified ratio of goods on hand to saes. The retaier has to use a beginning of the month stock-to-saes ratio. This ratio informs the retaier as to the amount of inventory required in order to sustain that month s estimated saes. A ratio of 2, for exampe, woud require a retaier to have twice that month s expected saes avaiabe in inventory at the beginning of the month. The method is not difficut to cacuate. Stock-to-saes ratios can be cacuated from a retaier s own historica resuts or from externa sources as ong as these are reiabe. A the preceding methods of estimating inventory requirements need to be understood in conjunction with a number of other factors. These are the eve of shrinkage, markdowns and empoyee discounts as these wi affect both the financia and avaiabiity aspects of the business. These reductions wi cause the retai vaue of the inventory to be ower than it was at the beginning and, therefore, the estimates shoud be incuded in the merchandise budget. Shrinkage is the difference between the amount of merchandise that is reported on the inventory stock system and what is avaiabe for sae or on the sheves. The difference in vaue coud be due to any one of a number of actions: shopifting, empoyee theft, vendor over-biing, distributor theft, paperwork errors, and breakage and spoiage. The effect of shrinkage is that the tota retai vaue of the merchandise is reduced. The eve of shrinkage may ater by merchandise type or by department and therefore adjustments cannot be made without some detaied understanding of the business. Markdowns are a owering of the prices of the merchandise so that the reduction (markdown) acts as a promotion: for specia saes periods or for moving suggish ines, because of damage or soiing of merchandise, due to end of range offers, or because of greater price competition from competitors or manufacturers who may have made adjustments to their prices. Empoyee discounts are part of panned reductions and offer vaue to the empoyee in working at the store. However, these saes shoud be recorded so that a such discounts are accountabe. 140

156 Merchandiser skis and profie MERCHANDISER SKILLS AND PROFILE The roe of merchandiser is pivota between the pursuit of the strategic objectives of the retaier and operationa activity. The merchandiser is responsibe for panning and controing stock ranges and repenishment. Successfu execution of the roe wi require cose iaison with, and support for, the retai buyer. Aso required is a hoistic view of the suppy chain and reguar interaction with centra functions such as management accounting and distribution, through to those operating at store eve. The effective merchandiser wi therefore need to be an effective communicator with appropriate interpersona skis. The nature of the job wi specificay require advanced numerica capabiity supported by PC iteracy, notaby in the use of spreadsheets and databases. Due to the compexity of merchandise management it foows that the post woud aso require administrative competence. There are a number of key areas to contro which reate to the need for attention to detai in order to ensure the pan is aways aigned to operationa objectives (see Fig. 6.1 and boxes summarizing requirements in the text that foows). Deveoping the first stage of the merchandise pan It requires: understanding the target market groups agreeing regiona and branch saes forecasts coecting information on competitors and any new branch pans taking into consideration branding and corporate poicy agreeing merchandise budget iaison and initia discussion with buyer(s) Whie a brief outine of the function of the merchandiser has been given, it shoud be noted that the parameters of the job vary widey between retaiers. The key common eement is the support roe to the buyer. It foows that an effective working reationship with the buyer wi be vita if the trading objectives are to be deivered on the shop foor. Beyond that, the extent to which the merchandiser is expected to be a reactive number-cruncher or a proactive trader, activey seeking and expoiting opportunities, wi vary. The budgeting process is the key driver as to the roe of the merchandiser. Budgeting seeks to quantify in financia terms the objectives of the retaier for a defined period of time. Once this financia pan or master budget has been devised, it can then be used to monitor the performance of the business. Retaiers need to buy merchandise that can be set at an acceptabe market price and aso provide a panned gross margin. There are two vaues as part of this process: the retai vaue of saes and the cost vaue based upon the purchase cost of the merchandise. The merchandiser has an important roe to pay in both panning and controing retai activity. In the eary stages it wi be necessary to anayse market research information and saes trends in order to produce agreed forecasts that can be incorporated into the master budget. 141

157 Merchandise management MINICASE 6.1 M&S PERFECT SOLUTION?: Can a cothes range with a back to basics approach spark a Marks & Spencer reviva? Marks & Spencer introduced 60 ines of womenswear, menswear and ingerie when it aunched its autumn coection two weeks ago in the hope that the range, caed Perfect, wi hep it hat a three-year free fa. The bastion of the British high street has aready tried its emergency parachute a major brand reaunch a year ago but it faied to open. And uness M&S can win back its core audience of women over 40, it wi continue to spira downward. Its most recent quartery resuts showed the company s descent is quickening. In the 12 weeks to Juy 7, M&S suffered a 9.1% year-on-year saes sump in its core business of cothing, footwear and gifts, compared with a 6.5% year-on-year fa in the previous quarter. Its market share has continued to fa and it must show that saes are bottoming out, says Richard Hyman at retai anaysts Verdict Research. The Perfect coection is an attempt to return to basics. The company describes the cothes as wardrobe essentias, timeess pieces. A 3m magazine and newspaper campaign for the range, created by Rainey Key Campbe Roafe/ Y&R, shows modes no onger size 16 wearing products from a roneck sweater to jeans against a pain background with the word Perfect embazoned next to them. The theme is repeated in the new M&S magazine, one miion in-store eafets and a maiing to 1.5 miion M&S Chargecard-hoders. The campaign wi aso give a strong nod toward textie innovation, for which M&S is justifiaby famous, in ads featuring its machine-washabe suits and jeans that never ose their shape. M&S group marketing director Aan McWater is brutay frank about the aims of this aunch. The demise of M&S has been cosey associated with adut cothing, and particuary womenswear. Getting it right is crucia. We have to get back to what we know best aspirationa quaity at accessibe prices. He reaises these caims wi be met by media and pubic scepticism. As one M&S marketing insider says: M&S is now ike the Dome. Nobody is interested in writing a positive story but McWater beieves the huge amount of work put in by the retaier in the past 12 months is cose to bearing fruit. Despite better-performing areas such as food saes grew 5.9% year-on-year in the quarter M&S continues to prioritise the recovery of its cothing business. UK cothes saes sti represent 3bn worth of business for M&S, we over 50% of its turnover. It has about 11% of the cothes retai market and this autumn wi se nine miion pairs of socks aone. But it desperatey needs to win back its niche in the middemarket of quaity cothing, particuary womenswear. The Perfect coection forms just part of the recovery pan. In June, M&S handed over its bra manufacture and promotion to Sara Lee Courtauds, which subsequenty hired Brookside and Ceebrity Big Brother star Caire Sweeney to front the bra range. In October, M&S wi unvei a range of cothing aimed at 25- to 35- year-od women caed Per Una. It has been designed by George Davies, the entrepreneur behind Next and creator of the successfu George kids cothing coection at Asda. The company is aso panning a resurgence in the chidren s cothing market. Last month it announced that it wi enter into a 6m joint venture with ong-standing cothing suppier Desmond & Sons. The new company, caed the Zip Project, wi be 75%-owned by M&S, with 1.5m input from Desmond & Sons. Three years ago, M&S had 9% of the cothing market for 0- to 14-year-ods. It now has 7%. M&S fightback comes after years of successbred compacency, which saw it sit back whie its market was eaten away by aggressive, agie retaiers such as Gap, Next and Benetton. It must aso defend its market share against a renewed onsaught from revived department stores Bhs and Debenhams, as we as the hee-snapping price-ed retaiers such as Mataan and Primark and the foray 142

158 Merchandiser skis and profie made by supermarkets such as Asda and Tesco into cothing. In a nutshe M&S history is : Christmas 1998 Disastrous trading figures hit share price. March 1999 New chief executive Peter Sasbury announces recovery pan and appoints James Benfied as marketing director. January 2000 M&S hires Aan McWater as group marketing director. February 2000 Luc Vandevede joins as chief executive. March 2000 McWater unveis new ook for brand and hires Rainey Key Campbe Roafe/Y&R. September 2000 First ever corporate brand advertising in 20m campaign. March 2001 Vandevede unveis business strategy to focus on UK. Apri 2001 McWater restructures marketing department for customer focus. Juy 2001 M&S aunches Simpy Food convenience stores. August 2001 Major press ad campaign for M&S foods. September 2001 Launch of the Perfect autumn coection and ad campaign. Source: Danie Rogers, Marketing, 13 September 2001 The merchandise budget becomes a too for the financia panning and contro of the investment the retaier has had to make in the inventory acquired. The master merchandise budget wi be required to offer a gross saes projection, stock eve requirements, retai reduction estimates and expected profit margins. Foowing this, a arge part of the merchandiser s function is the disaggregation of this figure into merchandise pans that are abe to meet the projected saes. The resutant process has three dimensions: the merchandise range itsef, the profie of stores in the group, and variations in saes demand over time. Managing variations in demand The merchandiser, as part of the above panning approach, needs to contend with the extent to which demand for product ines fuctuates. This was touched upon earier in this chapter with the discussion of avaiabiity and inventory turnover. There are ines which exhibit remarkaby constant eves of turnover, a year around. In such cases, the panning is comparativey straightforward. A good match between the retaier s faciity to meet demand and actua turnover wi meet customer expectations with the minimum of wasted resources. However, many merchandise categories wi exhibit a degree of seasonaity. The merchandiser has to have intimate knowedge of customers and the type of demand for the product being sod. The variations on the category ifestye whereby some products wi sustain demand for onger periods is an important aspect in deciding upon the merchandise pan (see Fig. 6.2). For exampe, a fad product wi generate a high eve of saes owing to a arge segment of the popuation requesting the item. However, the demand wi ony ast for a short time and perhaps not even for the whoe season. Hua hoops, yo-yos, Rubik s Cubes, Teetubbies and Batman toys are a exampes of this phenomenon. Given that a high number of fad items can be sod in a short time they can, or need to, be sod at substantia mark-ups due to their price insensitive nature and suppiers price increases based on their decisions to cash in whie the fad asts. Fads are difficut to predict and demand often paces a great dea of pressure on distribution chains as demand wi aways outstrip suppy. The ony way to dea with a fad is to recognize the signs of its importance as eary as possibe. The fashion product demand cyce wi ast for severa seasons athough saes may vary from season to season. The demand depends on the type of customer and the product 143

159 Merchandise management 144 Fig. 6.2 Merchandise category ife-cyce anaysis categories. Men s suits wi have a different demand curve to that of teenage cothing. Stape merchandise wi provide continuous demand over an extended ife span. Most food products and househod ceaning items are exampes of stape products. Seasona merchandise wi be characterized by fuctuations in demand according to the time of year. In addition, both the fashion and stape merchandise categories wi normay have seasona variations of demand based upon the season and the weather. The merchandise manager wi find the stape category to be the easiest to manage because it offers a reiaby repeatabe saes history on which to base predictions of panned stock. The inventory system for fads and fashion merchandise requires much more carefu appraisa. CATEGORY MANAGEMENT It is fairy obvious that seing space is a key resource in retaiing given that it wi be finite and of specific shape and dimension. For the same reasons that airines and hoteiers appy yied management techniques to their seats and rooms, retaiers seek to optimize the use of seing space, in order to maximize profitabiity. An important characteristic, as with other services, is that the retai offer is perishabe. Unsod merchandise at the end of a trading day represents an opportunity that has been ost for ever. Perhaps other stock ines woud have sod? We wi never know. An indication of the importance of category management can be found by examination of IGD figures. IGD (2001) have pointed out that 75 per cent of consumer/shopper brand decisions are made in front of the fixture and often within three seconds. Therefore, the category offering has to be managed to maximize saes and profits. This reies on creating ranging and merchandising, pricing, new product introductions and promotions which are based upon the approach to marketing focused upon the consumer, as outined in this text. A definition of category management is offered as foows: Category management is reated to decisions over groups of products that are seected and paced to satisfy use occasions or consumption patterns. This is based upon strategic retaiing principes that attempt to maximize saes and profits and may aso incude trade partnerships. The impication here is that decisions concerning the fina assortment, and its dispay, wi have a direct impact on the success of the business. WH Smith is attempting to boost

160 Category management saes of high-tech products. In 2001 the retaier unveied Eectronics Zones in 20 of its UK stores. The zones bring together WH Smith s mobie phone, consumer technoogy and home entertainment products in one area. Divided into two sections, the zones cover in-the-home and on-the-go product categories. The retaier is attempting to increase saes of mobie phone, consumer technoogy and its home entertainment products that were previousy spread throughout stores. At the crudest eve, profitabiity is a function of both profit margin and the rate of sae, or rate of stock-turn as retaiers woud define it, for each individua ine stocked. In the case of a singe ine, there wi be a trade-off between the two. The retaier sets a seing price, which in turn sets a profit margin. Customer take-up at that price and margin, as we as the way the customer perceives the category, determines the rate of stock-turn and the gross profit reaized. Discount retaiers set keen prices with thinner margins in anticipation of reativey high saes voumes. A premium retai offer wi command a higher seing price with a heathier gross profit margin, but usuay at the subsequent expense of physica saes voume. Either strategy can be effective and can deiver increased profitabiity. Refecting that gross margins are an incompete measure of operating profitabiity, retaiers have deveoped techniques to account for the differing cost structures behind product ines. Direct product profitabiity (DPP) was deveoped specificay to support space aocation decisions from absorption costing. The argument here is that a more accurate picture of an individua product ine s contribution to profitabiity coud be identified by absorbing overheads as part of the cacuation. For exampe, some products are more abour-intensive than others and shoud therefore bear more of the abour cost. Some ines have higher eves of storage cost by virtue of specia temperature requirements or security measures, and shoud therefore absorb more of these overheads. The resuting DPP for the individua ine coud then be used to inform merchandising strategy. Such an approach is ogica, but compiing such information for an accurate picture carries cost impications of its own and it has imitations. Most significanty, the anaysis is concerned with individua ines rather than the product mix in tota. Category management is the current approach to assortment decision-making. It adopts an expicit customer perspective and takes a hoistic view of product groups. For a given category of products, the merchandising poicy has to meet the range needs of the target customer without unnecessary dupication. Product ine proiferation detracts from the operating efficiency of the retai business. Two simiar products aongside each other on the shef are ikey to impact on each other s rate of stock-turn. From the retaier s perspective, it may not be worthwhie to be stocking both. In consequence each individua product ine has to justify its pace in the range in terms of meeting customer needs. However, it shoud be noted that there is the potentia for confict between retaier and suppier. The primary objective of the suppier wi be to ensure that they are successfu in getting their own ines onto retai sheves. For the retaier, the issue is whether any ines reay add to the offer, or whether a rationaization woud make the business more efficient without compromising profitabiity. Category management woud be reativey straightforward if saes voumes remained constant over time, which of course they do not. For exampe, retaiers need to pan fufiment for promotions to meet customer expectations efficienty. In the first instance, the promoted ine needs to be avaiabe. Whie this is fundamenta, it is worth emphasizing. If there is one retai service faiure worse than being out of stock, it is to promote an 145

161 Merchandise management offer heaviy and then be out of stock. However, the panning shoud extend beyond meeting customer expectations of avaiabiity to the secondary impications such as the impact on saes of other ines within the category. Effective category management takes a hoistic view in panning promotions, with the intention of meeting customer expectations without creating unnecessary inefficiencies in the system. Supported by information systems this practice has become more accurate over time. Category management is often exercised within a suppy chain partnership context. Such partnerships between retaiers and key suppiers have emerged in recent years in recognition of the substantia common interests shared by each. After a, they are both serving the same consumer. If we can eiminate cost from the suppy chain atogether, then everyone wins. What had been trading reationships characterized by short-term objectives and reativey adversaria deaings have shifted. Partnerships have onger-term perspectives where the trust between retaier and suppier has increased. In such a context, key suppiers are keen to be invoved in category management, as it has strengthened their position in what can be seen as a batte over space aocation on the saes foor. Karonis (1998) indicated that category management is now about creating coser reationships between suppiers and retaiers. This is identified to require a muti-discipinary approach to products that inevitaby eads to increasingy compex processes which have to be managed and controed. Karonis has isoated the chaenges facing each component in the traditiona retai suppy chain as foows: Product deveopment and sourcing: regiona consumer preferences must be identified and products deveoped or sourced to satisfy these unique needs. Suppier management: this historicay difficut reationship becomes even more compex, as anguage, cutura, and commercia impediments are introduced. Buying: negotiating prices based on the true profit contribution is made more difficut by currency fuctuations, extended transportation channes, and commercia practices unique to each cuture. Merchandising: retaiers must create the right mix of product to appea to oca needs, and sti have rapid response processes in pace when the mix must be changed or repenished. Distribution: this must be more diverse, with typicay onger channes to move product from source to consumer. It aso needs to accommodate market-specific packaging and environmenta needs. Retai operations: again, there is a need to taior product presentation and service offerings to each specific market. RANGE PLANNING A retaier s stock range can be described in terms of its width and depth, with the extent of each determined by company poicy. This is sometimes termed the assortment. The width wi reate to the number of categories that are found in the merchandise ine and different generic casses of product or merchandise carried. A wide and narrow stock assortment is normay where there is itte choice in brands, styes, etc. within an individua range. Stock-turn coud be higher for a broad merchandise assortment, but margins wi be sim in order to encourage custom. 146

162 Range panning The depth reates to the sizes, styes, coours, and prices within a particuar generic cass of product. There are speciaist shops, such as the niche boutiques, which offer a ot of depth but with a narrow product range. We coud aso compare the typica UK grocery superstore carrying upwards of individua ines, with the more restricted ines of the Continenta hard discounter. The retai offer of each business is substantiay different, with the respective stock ranges of each being an integra part of their strategy. The superstore is seeking to charge a premium price for added vaue as perceived by the customer. It is important to disguise the premium, and the eading operators are skied at promoting a imited part of their ranges on a price basis to create this effect. The profitabiity comes from offering a very extensive range of ines, some with comparativey sow rates of stock-turn, at heathy profit margins. The number of different ines a retaier stocks in store is often referred to as the variety of the merchandise mix. Obviousy department stores wi have many more ines and variety than a store such as Bay or Carks seing quaity footwear. The extent of the range is a key part of the customer s perception of added vaue. In the case of the hard discounter, the offer is extremey competitivey priced the key concern of the target customer. Profitabiity stems from achieving a very high rate of stock-turn, and by maintaining management emphasis on keeping costs to a minimum. Product ine proiferation woud be the undoing of this discount strategy, as it is not what target customers expect and woud impact on stock-turn and costs. In extreme cases, such as toys and ingerie, most of the annua turnover is concentrated in a very few weeks of the year. This represents a significant chaenge to the merchandiser in range panning. Treading a course between meeting customer expectations and not wasting resources wi not be easy. Stock needs buiding against an anticipated rise in demand. This wi have impications for suppy chain management. Distribution networks have imits in terms of capacity. Peak trading wi pace massive physica demands on the warehousing and transport system and on store staff handing the merchandise. There are other exampes of the centra roe that range panning pays in retai strategy. Of particuar interest is the attempt by some mutipe chains to become category kiers ; that is, to meet a customer needs within a particuar category of merchandise. The category kier is normay a arge store that concentrates on one category, thus making it possibe for it to carry both a broad assortment and a deep seection of merchandise, couped with ow price and moderate service. A good exampe of this is the US retai brand, Toys R Us. Deveoping the range panning and merchandise aocation pan It requires: understanding the seection process of consumers deciding upon core and seasona merchandise agreeing the range e.g. stye, size and coour mix depth and width taking into consideration the saes-to-stock eve targets and cacuating the optimum eve of stock by utiizing one of the stock inventory panning methods reating the range pans to individua stores and possibe promotiona pans briefing the buyer(s) on agreed source 147

163 Merchandise management The range wi need to take into consideration the space constraints imposed upon the merchandise manager. If breadth and depth are important then this requires both stock space as we as dispay space to separate merchandise. There is aso a need to ensure that any move into providing more depth does not affect turnover. To provide more depth the retaier wi have to stock more variations of the product for smaer retai segments; this may mean turnover coud deteriorate and stock eves woud be difficut to contro. Any decision over the range and amount of inventory to stock has to be foowed up by the determination of the source. In agreeing the source there shoud be some consideration of previous saes performance, acceptabiity of the design or brand name, manufacturing and product quaity, reiabiity of deivery and service, assurance of abiity to provide further stock if required, and cost of items. With some high fashion ines, the buyer may want to know who is being suppied and may even specify that the contract wi deny their competitors the purchase of a simiar range. In summary, range panning needs to be customer driven. The merchandiser needs to identify which product attributes are most important to the customer and pan accordingy. In under-performing retaiers, probems are often most apparent in their ranges as a direct consequence of osing touch with their customer. The types of depth and width assortment profies of narrow and deep, square and broad and shaow are more easiy understood using a graphic iustration: see Fig The main factors that need attention when panning width and depth of assortment are those of estimated saes and profit performance. Many merchandise ines wi be far more successfu if given adequate promotiona support. Merchandisers wi attempt to evauate the significance of the offer of different types of assistance with the promotion of different items. This can assume many different forms incuding advertising aowances, co-operative advertising, free dispay materias, in-store demonstrations or videos, consumer saes inducements such as specia offers, coupon redemptions, free sampes, and contests. Aso any major advertising carried out by the manufacturer to support the brand, or product, wi be an important consideration. 148 Store grading Taking a very simpistic approach, store grading can be reated to the gross saes forecast. The gross saes projection for the company needs disaggregating across the portfoio of stores. Each store wi therefore have its own budgeted gross saes figure. Part of the merchandiser s job wi be to see that the merchandise pan for the store wi meet the projected target. Rather than produce a unique pan for each store, it is common practice to grade the stores. As shef or dispay space is the key yet imited seing medium, this grading is normay conducted on the basis of foor saes area. However, it shoud be recognized that this must inevitaby be a crude device as, depending on the ocation, there wi be smaer stores capabe of achieving much higher than average saes densities and arger units with the reverse characteristic. An extreme exampe of this woud be the Marks & Spencer store at Marbe Arch or Timberand in Bond Street (both London), where the saes density achieved is uniquey high. Store grading can be a major source of controversy between store operations management and centra merchandise functions. From the perspective of store management,

164 Range panning Fig. 6.3 Assortment profies for differing merchandise strategies Source: Cook and Waters, 1991 MINICASE 6.2 Tie Rack extends ranges in bid to reposition brand Niche fashion retaier Tie Rack pans to reinvent itsef as a uxury accessories brand, beginning with a review and widening of its product range. The 145- strong chain wi expand its womenswear range from mainy sik scarves to incude handbags, jeweery and hats. Its tie-focused menswear offer wi aso be deveoped to incude goves, pus sik and cashmere goods. A spokeswoman said: We define ourseves as being in the fashion accessory business. It was therefore a natura progression to expand the offer to cover the fu range. The retaier has rued out branching further into cothing. Instead, Tie Rack aims to become a styeconscious accessories house. The changes are being driven by Tie Rack owner and scarf and tie manufacturer Frangi, which bought Tie Rack for 22.6 miion after the chain saw heavy osses in Founded in 1981, the chain was hit by competition from mainstream retaiers and changes in men s cothing as the dress-down trend took off. The spokeswoman said: In re-engineering its core proposition, Tie Rack is evoving with the time. We are moving from a successfu 1980s retaier to a stye-conscious accessories house catering to the pervasive change in society. Price points wi remain the same and no store refurbishments are panned for the near future. Despite specuation, Tie Rack s name and branding wi be retained. Source: Rita David, Retai Week, 11 May

165 Merchandise management crude grading may be perceived as yet another exampe of how head office is out of touch with what is happening at the sharp end. This iustrates the need for effective iaison between stores and the centra buying function. This iaison wi be an important part of the merchandiser s remit. It wi invove making sure that a reevant oca characteristics are accommodated in the merchandise panning, whie reaizing the efficiency benefits that accrue from store grading. Deveoping the contro mechanisms of the merchandise pan It requires: an understanding of comparative frequency of store visits, based upon the browsing of, or items purchased by, the target market groups forecasting saes of range items and profitabiity monitoring stock eves and avaiabiity of new stocks and repenishment eves assessing vaue of merchandise through shrinkage, markdowns, empoyee reductions iaising with the buyer(s) to discuss the performance figures expanding or reducing merchandise categories, based upon saes performance SPACE ALLOCATION Beyond the determination of category composition the retaier is faced with decisions concerning space aocation and in-store presentation of the assortment to the customer. The assignment of store space to a category has a twin effect. Firsty it aows for efficient shopping and so attracts customers to the store and, secondy, it wi affect the eve of saes to these customers once in the store. This is not just for the sought category but aso for the aternative categories which offer potentia saes. The improved effect on category performance revenue can resut from ensuring increased visibiity as we as methods aimed at capturing customer attention. For a retaiers such decisions are centra to the retai offer. As we note in the section on category management in this chapter, there are yied management approaches that couped with recent advances in information systems can be used to support space aocation decisions. In essence these seek to estabish a reationship between space aocation, saes voumes and, utimatey, profitabiity. However, there are other constraints which affect the decision, some of a very practica nature, and utimatey the retaier wi seek to optimize the ayout. There is a need to know: Are products easy to ocate individuay and as part of a basket of goods? How ong does it take to obtain and purchase a category? Is the range broad enough to provide a satisfactory seection? Are other retaiers offering a superior ayout of categories? Space aocation and financia performance (margin, profit, activity based costing, oss through waste, damage, shrinkage, etc.). Mutipe retaiers have become progressivey more sophisticated in their space aocation decision-making and this provides a good exampe of the trend away from a short-term 150

166 Space aocation trading perspective towards onger-term retai brand buiding. This is perhaps exempified by the Tesco organization in the UK. The founder of Tesco was a fine exampe of a very successfu trader, an intuitive retaier who had a deep understanding of the grocery business and whose initia phiosophy was to pie it high, se it cheap. From this origin, Tesco has evoved a strong retai brand, supported in part by a consistent in-store presentation. Beyond the financia emphasis of yied management techniques, space aocation wi be driven by competitive strategy and constrained by practica operationa and merchandisereated factors. There are ceary differences in the saes generation abiities of store space (positions near the entrance or checkouts, for instance, being more visibe and prominent than those in a back corner) but simpe rues of thumb are not adequate. To faciitate the stock repenishment process the ogic woud suggest that proportions of avaiabe seing space shoud refect market shares, for both inter- and intra-category decisions. This approach wi ead to an even run-down of shef stock, which is easier to manage. However, this overooks space easticity. Increasing the space of some categories or product ines wi generate a disproportionatey high increase in saes. For merchandise with above-average profit margins, this is attractive because the store s gross margin wi be pushed upwards. A recent exampe from the UK grocery sector is the chied ready meas category. The combination of quaity and sheer convenience with this fast food offers tremendous added vaue to today s time-pressured consumer. Canny retaiers have recognized the potentia from aocating disproportionate seing space to the chied ready meas to ever saes and profits. Conversey, some product ines wi be reativey unaffected by changes in space aocation. For some commodity items with reativey thin margins there wi be the opportunity to reduce seing space without adversey affecting turnover. Such products can be stape ines, which customers expect to find and, significanty in space panning terms, wi go ooking for. The use of market shares to determine space aocation is aso fawed when it comes to new product aunches. One of the objectives that category management seeks to achieve is a smooth new product aunch. New products, which by definition have no market share, wi aways be a potentia source of confict between suppier and retaier. Suppiers know that success is absoutey dependent on retaier support, meaning the aocation of seing space. On the other hand, retaiers need to be convinced that taking seing space from estabished ines to accommodate a newcomer wi deiver a net benefit. Fixture ayout Space panning decisions are supported by dedicated software packages at both fixture and store eve. Intuitive expertise sti features highy, particuary when the situation demands a radica change or where a high eve of novety is present. According to Davies and Ward (2000) systems to support space aocation and ayout decision-making are most advanced at the fixture eve. Panograms are maps of the vertica pane of the in-store sheving or units, the view the customer sees. The panogram offers a medium for communicating the dispay of a range ayout to the distributor or acts as a guide to the store. Proprietary software such as ACNiesen s Spaceman is used to devise panograms centray before dissemination to stores, thus ensuring a consistenty merchandised retai offer. These software programs provide a visua representation of the on-shef merchandise. 151

167 Merchandise management Fig. 6.4 A bueprint panogram 152 Effective fixture ayouts are driven by severa considerations. In terms of competitive strategy, the retaier aims to meet the expectations of its target customer. For exampe, the presentation of simpe commodity groups on supermarket sheves is very traditiona and perhaps appropriate for a troey-customer shopping the whoe store. However, the time-pressured individua, shopping on the way home from work and ooking for a soution to tonight s What s-for-dinner? probem, wi not be best served by having to shop the whoe store. Shef ayouts wi have to accommodate ogica product adjacencies or recognize what ines the customer is expecting to find in cose proximity. IGD (1998) have indicated that a category strategy document shoud be provided which contains sections such as Impact of category roe on range and space strategies; Consumer specific strategies (e.g. for vaue or heathy ranges); and Intended range architectures of the stocking hoding units based upon differences by store and ocation. What is required is an anaysis of how customers define various category eements and their purchase fit. This requires some mapping research and anaysis as to the way shoppers categorize through segmentation and grouping of possibe purchases. This can be combined with data anaysis of transactions to provide a bueprint panogram that wi refect the optimum aocation of space and position to different merchandise (see Fig. 6.4). A bueprint wi need to be based upon the dimensions of fixtures and wi need to be checked to ensure it meets operationa considerations and is abe to provide the required financia returns. The bueprint has to consider the physica dimensions of products, packing types, weight(s) of product, and any specia requirements. Prior to impementation of the space aocation a panogram can be produced which indicates visuay the packaging as a ive image of what the fina fixture unit wi ook ike. Temporary shifts in space aocation can be empoyed as part of promotiona strategies. By impication product promotion wi stimuate saes and the associated voume increases may pace too great a demand on norma shef capacities. Given the significance of avaiabiity in meeting customer expectations of retai service there is a need to

168 Merchandise assortment and support co-ordinate space panning with promotiona strategies. The use of off-shef dispays wi hep maintain suppy and serve as a promotiona eement in itsef. This wi need to be co-ordinated with the inventory management function, as the voume necessary for a promotiona dispay wi often exceed standard repenishment eves. Practica constraints wi have a substantia infuence over fixture ayout. The physica dimensions of the product, the number of items per case and repenishment methods wi each have a bearing on efficiency, both operationay and in terms of space utiization. In-store ayout Space panners have to strike a baance between meeting the expectations of target customers and the pressure to be efficient in their ayout of stores. Typicay, retaiers of fastmoving consumer goods adopt grid-stye ayouts (see Chapter 5). Grid ayouts are extremey efficient in their use of the avaiabe seing space, but can convey negative impressions of utiity, tediousness and confinement to the customer. Retaiers need to pan the space between aises, around service counters and at entry/exit areas in order to reduce anxiety eves in the customer without unnecessary waste. In retai environments, where purchasing is more discretionary and customers need to be encouraged to be more reaxed and to browse, then a free-fow type of ayout wi be more appropriate. The instore ayout can be instrumenta in creating an ambience that wi be conducive to the conversion of browsers into shoppers. For some customers this wi be an important added vaue of the retai offer. MERCHANDISE ASSORTMENT AND SUPPORT Having devised the range pan to take account of the nature of the merchandise, the spread of stores in the company portfoio and the variations in demand over time, the roe then becomes one of monitoring actua saes performance against the budget. The merchandiser needs to be proactive in seeking out opportunities to maintain and improve the rate of stock-turn. This requires sophisticated anaysis of merchandise category performance. If demand exceeds the projected figures, there is the prospect of missed opportunities and disappointed customers. Eary warning of this situation may aow some degree of remedia action but, depending on the category, this may be imited. At the very east, the higher than anticipated saes voume wi give the buyer greater freedom to increase suppy, and, if necessary, from different sources. The ower than anticipated saes voume of the under-performing category wi raise the prospect of markdowns. The merchandiser has a key part to pay in the markdown decision-making process. In purey financia terms, retai profitabiity stems from both the gross margins reaized on each product ine and from the frequency with which the business is abe to turn the product ine over, that is the rate of stock-turn. Therefore, in marking down a product ine by reducing its seing price, the retaier is accepting a ower gross margin in return for an anticipated increase in the rate of stock-turn. The key point is to recognize that gross margin is ony reaized when the stock is turned over or sod. A retaiers have to execute markdowns. The merchandiser s ski and expertise is to know when and by how much to mark down in order to achieve the desired effect. Again, this requires carefu monitoring of performance and a proactive rather than 153

169 Merchandise management reactive approach. Given the direct financia impications, strict contros are vita. The markdown poicy of the retaier wi seek to support positioning strategy. Customer perceptions of reduced merchandise are a key consideration and the pubic profie of the bargain-bin cannot be aowed to compromise image. So the merchandiser has to strike the baance between stimuating stock-turn with price reductions, and not undermining the perception of added vaue that the retaier has to preserve in order to command its fu price on the remainder of the stock range. NEGOTIATING THE PURCHASE When a the different aspects of the merchandise have been assessed and the source has been evauated and carefuy chosen, the retaier has to negotiate the purchase and its terms. This can be carried out through centraized buying where co-ordination takes pace to achieve scae of purchase discounts based upon fu-time buying speciaist inputs. However, centraized buying can ack the fexibiity of responding to oca market needs or ensuring that good communication takes pace between the buyers and the store units. Decentraized buying may take pace at the oca eve based upon geographic market needs. There has to be some contro with this approach as it can ead to inconsistency of the store offer and a oss of economies of scae for purchasing. Some retaiers structure the buying function with speciaist buyers in one or a few merchandise ines and aso generaist buyers who can buy across a number of ines which need ess speciaist knowedge. The speciaists can become experts in the merchandise areas reated to their fied and so identify the best suppiers as sources for the company s product offer. The contro of quaity, cost and deivery are necessary starting points for any discussions. A new or different type of order wi require a negotiated contract specifying a aspects of the purchase. Aternativey, where reguar orders are aready agreed and reorder needs to take pace, there wi be a uniform contract with the standard preagreed conditions forming the basis of the agreement. However, the purchase terms shoud be stipuated whatever the type of contract. These shoud invove cear documentation of aspects such as deivery date; quantity to be purchased; method of deivery or storage, and who shoud bear the reated charges; price and payment terms, incuding any discount for eve of order or returns aowed by the retaier; advertising or merchandising support from the suppier; the stage in the process as to the tite and ownership responsibiity; and so on. CONCLUSION Merchandise management requires a systematic approach as we as adherence to the concept of marketing. The marketpace is uncompromising when merchandise seection does not refect consumer tastes and trends. In addition, a company has to ensure that the optima eve of stock is hed to improve cash fow and profitabiity. Merchandise management has to be underpinned by a merchandise pan to ensure the chances of success are maximized. This shoud be reated to: marketing considerations; merchandise strategy options; type of customer base; financia considerations; and merchandise assortment search. The roe of merchandiser is centra to the pursuit of the strategic 154

170 Exercises objectives of the retaier, and the operationa activity surrounding panning and controing stock ranges and repenishment. Finay, no pan wi be abe to succeed uness the negotiating and contracting skis of those invoved ensure that quaity, deivery and cost are acceptabe to the consumer. EXERCISES The exercises in this section reate to merchandise management. It is advised that you work through them before moving on to Chapter 7. 1 If you had to pan the merchandise stock changes for a food retaier during the Christmas period what woud you recommend? What considerations did you make in coming to your concusions? 2 What checkist of questions woud you ask the merchandise manager, to hep you make your seections, if you had just been appointed to act as the buyer for chidren s wear for a eading department store? 3 Discuss the impications of width and depth considerations for a speciaist outet such as a eading women s fashion boutique and compare these to a eading DIY home improvement retaier. 4 You are asked to draw up a ist of requirements for the seection of a merchandise manager. With the information in this chapter and from other sources what woud you recommend? Use the foowing grid as a guide. Recommended characteristics: type of personaity management skis inteectua abiity experience others (ist) Now identify and discuss a priority ist of characteristics you woud recommend, incuding the reasons for incusion on your ist. 5 Supermarket ayout exercise: Supermarket ayouts typicay foow a grid pattern. This has the advantage of being a very efficient use of space. Customers are encouraged to shop the entire store, traveing the ength of every aise. This behaviour may be true for the weeky famiy shopping, but many customers wi be more seective over their chosen route. As a resut the perimeter of the seing area, particuary the first side wa and the back wa, wi have the highest voumes of shopper traffic. Identify factors that wi hep determine the in-store ocation of the foowing supermarket product categories and indicate where in a grid ayout they shoud be ocated: Wines & spirits; Pet foods; Fresh foods; Paper goods / Tissues & towes; Confectionery; Frozen foods; Fresh mik; Househod / ceaning; Cothing 155

171 Merchandise management REFERENCES AND FURTHER READING Boye, K.B. (1987) Direct Product Profit A Primer. Food Marketing Institute Research Dept., USA. Branigan, L. (1998) The Internet: the emerging premier direct marketing channe, Direct Marketing, 61 (1), Cash, R.P., Wingate, J.W. and Friedander, J.S. (1995) Management of Retai Buying. London: John Wiey. Christopher, M. (1992) Logistics and Suppy Chain Management Strategies for Reducing Costs and Improving Services. London: Pitman Pubishing. Cobb, R. (1997) Space exporation, Marketing, 17 Juy, Cook, D. and Waters, D. (1991) Retai Marketing: theory and practice. Engewood Ciffs, NJ: Prentice Ha. Corstjens, J. and Corstjens, M. (1995) Store Wars. Chichester: J. Wiey. Cox, R. and Brittain, P. (1993) Retai Management. London: Pitman Pubishing. David, R. (2001) Tie Rack extends ranges in bid to reposition brand, Retai Week, 11 May, 3. Davies, B.J. and Ward, P. (2000) Grocery Space Aocation: The Executive Viewpoint, Contemporary Issues in Retai Marketing Conference, 8 September, Manchester. Davies, G. (1993) Trade Marketing Strategy. London: Pau Chapman. Harris, D. and Waters, D. (1992) Retai Operations Management A Strategic Approach. Engewood Ciffs, NJ: Prentice Ha. Hi, T. (1991) Production Operations Management Text and Cases. 2nd edn. Engewood Ciffs, NJ: Prentice Ha. IGD (Institute of Grocery Distribution) (1998) ECR Range Seection and Merchandising Process. Letchmore: IGD Business Pubications. Johnson, M. and Pinnington, D. (1998) Supporting the category management chaenge: how research can contribute, Journa of the Market Research Society, 40 (1), Karonis, J. (1998) The suppy chain: sma needs, big soutions, Financia Times, 17 March. Lewison, D. (1994) Retaiing. 5th edn. New York: MacMian Coege Pubishing Company. Lucas, G., Bush, R. and Gresham, L. (1994) Retaiing. Boston, MA: Houghton Miffin Co. MacDonad, M. and Tideman, C. (1993) Retai Marketing Pans. Oxford: Butterworth-Heinemann. Martin, C. and Parfett, M.C. (1992) What Is EDI? A guide to eectronic data interchange. 2nd edn. Oxford: Butterworth. Muhern, F.J. (1997) Retai marketing: from distribution to integration, Internationa Journa of Research in Marketing, 14 (2), Nationa Retai Federation of America (1991) Merchandising and Operating Resuts of Department and Speciaity Stores in New York: Financia Executives Division, Nationa Retai Federation of America. Ody, P. (1998) A transformation in retaiing: information technoogy is heping to transform retaiers, Financia Times, 3 June. Porter, M. (1985) Competitive Advantage Creating and Sustaining Superior Performance. New York, London: The Free Press. Risch, E.H. (1991) Retai Merchandising. New York: Macmian. Rogers, D. (1998) Barcays offers on-screen inks, Marketing, 21 May, 2. Rogers, D. (2001) M&S PERFECT SOLUTION?: Can a cothes range with a back to basics approach spark a Marks & Spencer reviva?, Marketing, 13 September. Senn, J.A. (1995) Information Technoogy in Business. Engewood Ciffs, NJ: Prentice Ha. Shipp, R.D. (1985) Retai Merchandising. 2nd edn. Boston, MA: Houghton Miffin Co. Smith-Bohinger, M. (1993) Merchandise Buying. Needham Heights, MA: Ayn & Bacon. 156

172 7 Retai pricing This chapter shoud enabe you to understand and expain: the concept and meaning of price and price sensitivity in retaiing; methods used in the pricing of the retai product; the price and vaue comparison; approaches to markdown poicies. The pricing poicy seected by a retaier wi usuay be directy reated to the resutant eve of demand over a period of time and, with the right margins, to the profitabiity of the enterprise. For the retaier, pricing decisions are critica because without adequate margins the business wi not survive for ong. As a business, the retaier has to seek cash fow, profitabiity and growth in order to improve their market position. The importance of seecting the right strategy is growing as battes among retaiers to increase market share are fought on the basis of offering quaity, seection and avaiabiity at competitive prices. To be successfu, retaiers are having to forge partnerships with manufacturers and introduce technoogy in order to gain cost advantage without compromising quaity. Given this situation it is not surprising that cost, margin and price comprise the most important eements of the marketing mix for most retaiers. This is especiay the case given the existence of discount store formats, the entrance of Continenta discounters and cheap sources of suppy. For others, such as convenience stores, price is sti important even if it is secondary to the benefits of ocation and the opening hours for trading. The current situation is that in the competitive retai marketpace, price is a major strategic weapon in the batte with the competition. UNDERSTANDING PRICE AS A CONCEPT Price may be usefuy described as foows: Price is the monetary vaue assigned by the seer to something purchased, sod or offered for sae, and on transaction by a buyer, as their wiingness to pay for the benefits the product and channe service deivers. This definition ceary separates the way the retaier treats pricing as a cash fow or income generating function from the view of the customer, who sees price as more than money. The purchase for the customer incudes the compexity of emotiona and functiona benefits derived from the product and the brand. This means that vaue for 157

173 Retai pricing the customer is a compex set of perceptions. This is discussed in more detai ater in this chapter. We beieve that of a the eements of the marketing mix, good pricing decisions are the hardest to make. This is because prices for retai products and channe services have to take into account the compexity created by seasonaity of demand and the inherent perishabiity of the product due to factors reated to fashion or being past the se-by date. There has aso been a major infuence on the grocery sector by the aboition of resae price maintenance (RPM). This in turn has ed to the offer of oss eaders and more compex pricing poicies, in order to achieve optima overa profit. In conjunction with this, consumers are now pressurizing retaiers to change their pricing poicies to offer greater vaue for money. A retaier s pricing poicy must be consistent with the overa objectives and reputation of the business. This coud be in financia terms such as saes, profits, return on investment, etc. or as pricing s roe in the growth and expansion of the business. There may aso be broader objectives such as the number of saes periods, tota number and range of prices to be made avaiabe and positioning of the store and merchandise in reation to prices. These pricing goas are important as they provide the consumer with an image of the retai outet based upon its approach to pricing. In addition, pricing has to be integrated with other aspects of the marketing mix and take account of the target market. According to research carried out by Datamonitor (1996) the pricing initiatives of the major mutipes create distinct differences which pass on specific images of the company brand. ASDA s cataogue and price promotions have reaffirmed the company s position as the most vaue ed mutipe and this can ead to ong-term oyaty. Tesco s and Safeway s promotions have not ony ed to oyaty but aso created a fu-scae customer database. On the other hand, Sainsbury s price promotions are mainy used as an aid to stores facing oca competition. PRICE SENSITIVITY The understanding of the way different price points affect demand or how demand operates between price points is an important consideration for the setting of retai price poicy. Within retaiing there are aso major differences between market segments, such as youth markets and upper income groups, whose tastes may dramaticay change from one period to another. Quite often the reative easticities of demand for these segments is dissimiar. There is a range of different factors that affect price sensitivity which deserves discussion. First, however, we need to understand the demand curves which iustrate the different market reactions to price change, known as eastic and ineastic demand (see Fig. 7.1). Easticity is a key eement in the understanding of the demand process. It is defined as the ratio of the percentage response in the quantity sod to a percentage change in price or one of the other marketing mix eements, such as the expenditure on advertising. It therefore measures the sensitivity in quantity demanded to a change in the demand determinant. Mathematicay, easticity can be cacuated as foows: Easticity = Percentage change in quantity demanded Percentage change in any demand determinant 158

174 Price sensitivity Fig. 7.1 Price easticity of demand For price easticity the denominator is simpy changed to a percentage change in price. The coefficient of price easticity is neary aways negative because the price and quantity are inversey reated. This means that when the price fas, the quantity demanded tends to rise; and when the price rises, demand tends to fa. Thus the retaier woud be interested in the size of the coefficient as a coefficient of more than one indicates that demand is eastic (if price rises, demand fas significanty) and ess than one that it is ineastic (if price rises, demand fas but ony sighty). From this it foows that the mark-up on highy competitive merchandise tends to be ow because the demand for such items is price eastic. In genera, retai mark-ups shoud vary inversey with price easticity of demand if profits are to be maximized. Factors affecting price sensitivity A number of factors wi affect the price sensitivity of products. From a marketing viewpoint a deeper understanding of price sensitivity assists with an understanding of the different retai segments and the deveopment of strategic panning. The main factors when considering retai pricing are isted beow. Perceived substitutes effect Buyers are more sensitive the higher the product s price is in reation to another product or substitute they coud purchase. Therefore, the consumer may choose a substitute or forgo the purchase if they beieve the overa vaue is unacceptabe. For exampe, oca residents may avoid an area with higher priced shops frequented by tourists who are unaware of the aternatives. Unique vaue effect Buyers are ess sensitive to a product s price the more they vaue any of its attributes that differentiate it from competing products. For exampe, many customers are oya to Heinz or Nesté products because they perceive them to offer superior benefits. Importance of purchase effect If the risk of the purchase increases then the price wi not be the most important aspect of the purchase. This occurs when the item is an important present or when there is a 159

175 Retai pricing need to purchase medicines. The greater the importance of the product, the ess price sensitive (more ineastic) the purchase wi be. Difficut comparison effect Buyers are ess sensitive to price when they find it more difficut to compare aternatives. This may ead to a demand for the more estabished brands, or greater store oyaty, in order to reduce the perception of risk. Price quaity effect A higher price may signa that the product is of superior quaity. The resut may be ess sensitivity to price. This is not a concusive effect as it appies to some products, whie others may generate different reactions. For exampe, whisky at a higher price may signa improved quaity but very few peope woud think higher priced petro offered any quaity advantage. Expenditure effect Buyers become more price sensitive when the expenditure is arger, either in absoute money amounts or as a percentage of their income. This is most prevaent in ow income househods in which a expenditure is carefuy controed. This effect is aso stronger and more ikey to occur in times of recession. Fairness and transparency effect If the buyer beieves the price fas outside a band of what woud be judged reasonabe and fair then they become more price sensitive. With some types of products it is reativey easy to judge the offer of aternative brands and products and therefore easy to switch demand to cheaper aternatives. At certain times aternatives are not easy to find. Consumers wi perceive retaiers, or the brands they stock, to be ripping-off customers if they expoit situations of shortage by being greedy. For exampe, street vendors are often seen to be seing drinks or ice creams at highy infated prices when the temperature is extremey high. MINICASE 7.1 Reduced prices based upon the grey market FT They caim they are waging a war against artificiay high prices. But when supermarket chains advertise designer products at reduced prices against the wishes of the brand s owner they are sending out subte messages about their core business. The impication is that everything ese you buy in the store is sod at competitive prices, says a supermarket executive, who co-ordinates purchases on the grey market, where stores obtain brandname goods. Food retaiers are increasingy waking up to the promotiona advantages of using this market. Asda reinforces its owprice image by seing fine fragrances at up to 50 per cent ess than department stores and caims to be a eading campaigner for consumer interests as a resut. Recenty, Tesco said it had gone to extreme engths to find Raph Lauren shirts and T-shirts to se at ess than haf price. Both stress they cannot 160

176 Further factors infuencing pricing promise a consistent suppy of such products, since up-market brand owners refuse to distribute to mass-market food retaiers. It is difficut for a retaier to get a cear idea of how the grey market works, says a arge chain, because traders keep their sources cose to their chests. The market s secrecy makes it difficut for anyone to gauge the size of the grey economy. Tesco estimates ast year it sod about 20m of grey market products. Source: Peggy Hoinger, Financia Times, 1998 Update from Chris Tighe, Financia Times, 12 Apri 2001: Asda to use grey market Asda pans to source more grey market goods, and has this week put on sae its biggest range yet of cut-price designer sungasses. The retaier said the sungasses were ordered before ast Thursday s andmark European Court opinion on cheap imported brandname goods. However, it said the ruing was encouraging, and the timing of its aunch of a big designer sungasses range was not a coincidence. We wi be ooking to source further items within the grey market; it s a about giving the consumer the best vaue we can, said the supermarket chain. Last week, in a ega opinion triggered by Tesco s sae of Levi s jeans at cut prices, the European Court said in an initia ruing that primary responsibiity for deciding whether makers coud bock cheap imports ay with domestic courts. However, the compex opinion, which ed both Tesco and Levi to caim victory, was not a fina ruing. The choice process of the consumer based upon price is quite a compex matter and each of the effects discussed above may be working in conjunction with each other. Whie price may be an indicator of quaity, the consumer is capabe of choosing between severa offers. The consumer is abe to judge the materias used in the manufacture of the product, the brand name and reputation, and after-saes service guarantees. On the other hand, the consumer may be ignorant of such factors and therefore wi rey on a trusted retaier or brand. Price transparency is a concept which is often used given the growth of e-commerce. Price transparency refers to the abiity of a consumer (whether at the whoesae or retai eve) to have knowedge of the prices of a given good or service which may appy for a variety of outets. Unti recenty the differences in retai prices based upon such cost factors as distribution and margin appied have not been transparent. This is because of the ack of information, distance to aternative shopping ocations, etc., a of which have hampered the abiity of the consumer to engage in widespread comparison shopping. The advent of increasing use of the Internet has given consumers the abiity to price-shop by means of the cick of a mouse. Therefore, retai pricing poicy has to respond to price transparency as the knowedge of the customer is now far better as to where to acquire vaue for money. FURTHER FACTORS INFLUENCING PRICING Price sensitivity is ony one of the factors which a retaier has to consider in their approach to pricing. A retai company in formuating price poicy decisions has to consider a range of infuences, incuding the foowing aspects: 1 The perishabe nature of some products, such as high fashion items or those with seby dates, is infuentia. Products which cannot be sod on a future occasion ead retaiers to engage in various forms of ast-minute tactica pricing or seasona saes. 161

177 Retai pricing 2 The competitive nature of the industry paces emphasis on setting prices at competitive eves or retaiers coud face osing saes. 3 The market is voatie due to: short-run fuctuations in internationa costs; the need to stock saeabe items; probems of suppy; shrinkage rates; the need for an adequate return for each square metre of foor space or page in a cataogue. This requires sophisticated forward panning. 4 Cost contro is an important part of pricing poicy. Many retai enterprises have high fixed costs and yet need to set competitive prices. This can make them vunerabe to financia coapse or takeover if costs are not controed. 5 Seasona demand eads to peak and ow season periods which require demand management pricing to cope with the need to shift od stock or improve cash fow situations. 6 Price is associated with the psychoogica aspects of both quaity and status. It is therefore aways important to gauge the way prices or their change wi be perceived by different target segments. 7 Intermediaries may infuence prices through changes in costs of suppy, bank charges and interest rate changes, increases in wages because of nationa minimum wage rates, etc. 8 Pricing aso has to take into account the egisation that affects the way prices are dispayed. For exampe, from March 2000 the retaier has been required to dispay the unit price of certain products which are sod by voume (i.e. price per 100m, 100g, etc.) in addition to the seing price. This affects window dispays, price tags and communication via POS as these wi require unit pricing cacuations of products sod by voume in addition to any other price information. APPROACHES TO PRICING THE RETAIL PRODUCT Pricing poicy has to consider a the potentia infuences and factors affecting the market and therefore the scope facing the retaier is remarkaby wide. The choice made wi probaby be one, or a combination, of the foowing. The major difference is between the cost-oriented and demand-oriented approach to pricing. Cost-oriented pricing Cost-oriented pricing is reated to the costs a retaier incurs when purchasing a product or service for sae to their customers. Cost-oriented pricing refers to setting prices on the basis of an understanding of costs to the retaier. Cost-pus pricing For the cost-pus method this wi be in reation to either margina costs or tota costs incuding overheads. 162

178 Approaches to pricing the retai product The approach coud be to: seect the target market; determine the cost of the goods in store storage costs, seing costs, shrinkage estimates, overheads, etc.; determine the ceiing price above which the retaier woud be offering expensive prices compared with those of competitors; appy the mark-up, given that the possibe range has been identified in order to achieve profit objectives. There may be some discretion for pricing individua items within a department or section as it is the overa profit which is important. A percentage mark-up is then normay appied to reach the fina seing price. This may be expressed as a percentage of cost or of seing price. It shoud cover operating expenses and provide the desired eve of profit. For exampe, if we assume a retaier purchases a dress at 60 and prices it at 90 then the mark-up on cost ( 30/ 60) expressed as a percentage is 50 per cent and the mark-up on seing price ( 30/ 90) is 33.3 per cent. Some minor adjustments may take pace, such as bringing the price to fine-tuning the fina price for psychoogica and other reasons. Knowing the cost breakdown of the product is extremey important and it is essentia to have cacuated the operating cost of each retai outet or page in a cataogue. This aows the marketer to know what the net effect of any tactica price reduction wi be. The weakness of cost-oriented pricing as a method is that it does not give adequate consideration to demand for the product, what prices the marketpace wi bear, or the different price eves of the competitors. Rate-of-return pricing Another cost-oriented method is that of rate-of-return pricing which provides the company with an agreed rate of return on its investment. Whereas the cost-pus method concentrates on the costs associated with the running of the business, the rate-of-return method concentrates on the profits generated in reation to the capita invested. This approach ignores the need to ink the pricing poicy to the creation of a saes voume which is arge enough to cover overheads or to ensure that demand wi remain consistent over time. Cost-pus or rate-of-return methods of pricing are not appropriate for those retai products which have to survive in a highy competitive marketpace. Demand-oriented pricing Demand-oriented pricing takes into consideration the factors of demand rather than the eve of costs when setting price. In times of shortage of products from candes at the time of power cuts, to vegetabes out of season prices are usuay raised to take advantage of higher demand and scarcity of suppy. Discrimination pricing Discrimination pricing, which is sometimes caed variabe or fexibe pricing, is often used when products are sod at two or more different prices. Quite often students, the unwaged and oder peope are charged ower prices than other consumer segments at 163

179 Retai pricing attractions or events. A garage wi offer different prices for servicing company cars as opposed to private cars. A customer known to a retaier may be given a persona discount as part of a fexibe approach to pricing based upon a persona reationship with that individua. Discrimination pricing is often time reated, for exampe cheaper drinks charges in happy hour periods or cheaper mea prices in the eary evening prior to the high demand periods. For price discrimination to be successfu it is necessary to be abe to identify those segments which, without the price differentias, woud not purchase the product. To obtain a high fow of business, a DIY retaier wi often discount to those customers who offer significant saes demand. This means that sma businesses may benefit from voume discount rates and those individua customers buiding their own extension, for instance, may be offered a specia one-off discount rate. Discrimination may aso be based upon increasing the price of products which have higher potentia demand. For exampe, if the product is a fad product (for further expanation see Chapter 6) then it is normay in high demand; usuay demand is so strong that it outstrips suppy. Therefore, such products as Pokémon or Teetubbies dos coud be set at a higher price based upon an increasing eve of demand. Another exampe of this is exhibited on specia ceebration dates, such as Mother s Day or Vaentine s Day, when the price of fowers or pants is raised. Backward pricing This is a market-based method of pricing which focuses on what the consumer is wiing to pay. The price is worked backwards, as the name suggests. First an acceptabe margin is agreed upon. Next the costs are cosey monitored so that the price which is deemed to be acceptabe is abe to be matched. If necessary an adjustment is made to the quaity of the product offer or service to meet the cost-ed needs of this technique. Retaiers seing on a price-ed basis often insist that their suppiers meet specified costs, even if this compromises some aspects of the quaity. This approach can be associated with price ining. Price ining is a method of simpifying the merchandise comparisons for the customer by estabishing a number of ines within price points for each cassification. Once the price ines have been determined, the retaiers purchase goods which fit into each ine. For exampe, for men s shirts the price ines coud be 25, 35 and 45. In order to be a successfu trader the monetary difference between the price ines has to be arge enough to refect a vaue difference for the consumer. Such steps of change in price and vaue enhance the abiity of the saesperson to convince the customer to trade either up or down. The seection of price ines has to be based upon the strength of consumer demand for the bands. The benefit of imiting the number of price ines is that a retaier can achieve broader assortments, which eads to increased saes and fewer markdowns. For exampe, a retaier which stocks 180 units of an item and has 6 price ines woud have an assortment of ony 30 units in each ine. On the other hand, if the units were divided among ony three price ines there woud be 60 units in each ine. By utiizing such an approach a retaier may speciaize more easiy in reation to ines and so create a more defined store image for its merchandise. The advantages of price ining are: saes voume can be increased by the provision of arger assortments at each price ine; there is greater carity of price offer for the customers; 164

180 Approaches to pricing the retai product saespeope can offer stepwise change to the customer to convince them to trade up or down; ine concentration aows for improved dispays and promotiona messages; with improved effectiveness of pricing there may be fewer markdowns; the buying process is improved as buyers have to focus on the retai price point and buy backwards ; contro may be easier with greater price co-ordination and fewer pricing variabes. Skimming pricing Skimming is utiized when there is a shortage of suppy of the product or the brand has been associated with added vaue and, therefore, demand wi not be dampened by charging a premium price. Market skimming poicies can ony occur where there is a heathy potentia demand for the product on offer. Top fashion houses deaing in haute couture or cosmetics companies with strong branding utiize this approach. Leader pricing Some retai items may be priced very competitivey so as to sacrifice profit on specific items in order to generate more overa demand for other items. These are often known as oss eaders if they are sod beow cost but in reaity retaiers sedom make a cash oss on the items even though they are heaviy discounted. The eader items are normay sod near to cost rather than at a oss. However, a supermarket may se turkeys as oss eaders at Christmas in order to achieve extra saes of other Christmas hoiday provisions. The purpose behind the use of eader prices is to increase store visits, purchases and the perception of good vaue. The items chosen for incusion as oss eaders shoud be widey known and bought on a frequent basis. The objective woud be to price the item ow enough to attract numerous buyers. In addition, if information is made avaiabe as to the vaue of the offer, the promotion wi usuay be far more successfu. The approach is often empoyed by supermarkets which feature eader items on a reguar basis. As with a forms of price promotion, there is an obvious need for retaiers to monitor and evauate their usefuness. In offering eader pricing, the danger is that customers may be seective in what they purchase. If customers are imiting their purchase to the ead item or if that item competes with other items in the store, the price promotion may need to be revised. Competitive pricing Competitive pricing is empoyed to match the market prices of competitive retaiers. This is a technique which requires knowedge of actua costs as matching the prices of a more efficient retaier may ead to osses on particuar items. It aso requires an understanding of the importance of the pricing poicies of the competition from a consumer s perspective. Competitive pricing is a reactive rather than proactive form of pricing as a retaier with a strong brand image does not necessariy need to match competitors offers. Market penetration pricing Market penetration pricing is simiar to competitive pricing but is adopted when a company or brand wants to estabish itsef quicky in a market. Prices are set beow those of 165

181 Retai pricing the competition in order to create high initia acceptance for the company s retai offer. A company seing fast-moving consumer goods (FMCGs) may use market penetration pricing in the first coupe of years and then, when the product becomes estabished, wi sowy increase the prices. In 1996 there was a-out war between the food retaiers and major oi companies over the price of petro, based upon various supermarkets trying to obtain a major market share. It is estimated that the petro price war of 1996 cost Tesco 30 miion and 2000 independent companies were forced out of business. According to an artice in SuperMarketing (1996), at the height of the price war the average gross profits were ony 0.03p a itre and these rose to 5.5p a itre when the war subsided in Juy of the same year. The penetration strategy quicky estabished a 21.5 per cent share of the petro market in the UK for the combined supermarkets. Psychoogica pricing This is sometimes referred to as odd pricing. Retaiers wi often price products beow a round figure, changing a price from say 10 to 9.95 or 9.99 to foster the perception of the price as being beow that at which the customer is wiing to buy. Just as 9.95 may appear to be significanty ess than 10, so a price of 488 may seem more on a 400 eve than a 500 eve. However, there is no concusive evidence that such pricing poicies make any significant difference to profits. Everyday ow pricing A number of retaiers now adopt the strategy of everyday ow pricing (EDLP). This strategy stresses the use of a pricing poicy with the continuity of prices at a eve between the norma own store price and the price of the deep discount competitors. The term ow does not mean owest ; it simpy refers to a price position which is competitive and, therefore, can remain stabe. A number of retaiers who operate EDLP do not beieve in markdown poicies and saes but attempt to generate a-year-round demand by setting the prices at the right eve. One of the most we-known retaiers to have adopted this strategy is Toys R Us. EDLP is a strategy which is open to arge operators who have significant economies of scae and buying power. EDLP can offer a number of benefits, as the foowing ist attests: 1 Perception of fairness. Many customers have become increasingy sceptica about the mark-up and markdown strategies of retaiers. There has been a trend by consumers to wait for sae periods or to attempt to get the best bargains by shopping around for promotions. EDLP aows retaiers to withdraw from sae period pricing wars and to concentrate on creating a market position that imparts a perception of fairness of pricing. 2 Reduced advertising. The stabe price poicy of EDLPs eiminates the need for communication of sae or specia price offers. Instead, the retaier can use the budget to concentrate on improvement of image or the buiding of reationship marketing schemes. 3 Improved customer service management. If the poicy is set to banish sae periods then the demand created is ess seasona and voatie, and saes staff are abe to spend adequate time in deaing with customers. This wi improve the customer s perception of the eve of service they receive. The ack of high demand sae periods aso has the benefit of aowing staff eves to remain reativey constant. 166

182 Pricing and the reationship to vaue 4 Reduced stockouts and improved inventory management. With more even demand for the products it is easier to contro the stock situation. EDLP reduces the arge variations in demand and, therefore, periods of stockout when customers may fee dissatisfaction with the retaier s service. 5 Increased profit margins. If a retaier can impart to the customer an image of fair pricing then, athough the prices may be generay ower, the overa effect can be to increase turnover and consequenty profitabiity. EDLP has some major benefits to recommend it; however, it woud not be appropriate for a retaiers. Some retaiers woud find it difficut to maintain ow prices for a continuous period because of a ack of economies of scae in buying or the competitive nature of their business. Aso, retaiers seing goods which have a strong fashion content are more ikey to want to set initia prices at a high eve as this is good business practice. Fashion goods are often priced differenty because if a subsequent sae is created for this type of merchandise, it often creates a high eve of excitement. The motivation to purchase created from the sae enabes the retaier to move a arge amount of merchandise in a short period. Therefore, adoption of EDLP is not a sensibe strategy for a types of retaiers. In order to be cear, the differences are that an EDLP store can be treated as being positioned at one end of the continuum and a store which offers promotiona pricing, sometimes known as the HILO store, is at the other. The category management poicy of these approaches differs. For exampe, the EDLP store wi often stock a arge number of items but based upon a smaer seection of brands and arge format. Technicay, we can generaize the EDLP stores as having a ow fixed utiity (ess assortment, being ess convenient) but offering a high variabe utiity (ower prices). Fixed utiity refers to costs and benefits that are essentiay independent of the specific items purchased on a shopping trip, whie variabe utiity refers to factors that change according to which items are purchased. EDLP is more ikey to appea to the cost-conscious customer whie the HILO format offers a high fixed utiity. The HILO benefit is based upon a convenient format, high quaity service and good assortment of products. However, it is more ikey to offer a ow variabe utiity because these stores tend to have higher prices. In contrast to the EDLP store, the position of the HILO store is one where competition revoves around better service and assortment for which higher prices are charged. PRICING AND THE RELATIONSHIP TO VALUE Whatever pricing poicy is adopted, a company has to take into consideration the potentia consumer s perceptua assessment. In deciding to buy a product a consumer has to be wiing to give up something in order to enjoy the satisfactions of the benefits the product wi deiver. This concept is more compex than it seems. The majority of consumers are ooking for vaue when they buy a product and vaue is derived from the functions of quaity and price, as we as the added vaue of the image or brand. This may be expressed as: Quaity Vaue = + Image Price If a consumer beieves the image and quaity of a product is good they wi be wiing to make greater sacrifices in order to purchase that product. This expains how first-cass 167

183 Retai pricing trave continues to be successfu on different forms of transport such as trains, aircraft and cruise ships, and why eading brands are abe to attract higher prices. The interreationship between price, quaity and vaue pays a significant roe in store patronage and the buying behaviour of customers. Vaue was grouped into four categories by Zeitham (1988). These are: vaue as ow price; vaue as whatever is wanted from a product; vaue as the quaity one gets for the price paid; vaue as what one gets for what one gives. Zeitham describes vaue as a trade-off between saient benefit components and sacrifice components. Benefit components according to Zeitham incude intrinsic attributes, extrinsic attributes, perceived quaity and other reevant high abstractions. This means vaue is a judgement about superiority and benefits deivered. Therefore, having the owest price is not a sufficient strategy as the best route to retai marketpace success. If prices change, this can affect the consumers quaity perception. A price reduction may be associated with a beief that the company is in financia troube, that it wi have to cut service and quaity, or that prices are faing and if one waits, a price wi come down even more. The vaue of the product is thought to have decreased because quaity, by association with the changes, is observed to have faen by a greater ratio than prices. The foowing shows the perception that the new vaue is at ony haf the eve of its former position: Quaity Vaue then if V Q2x / = = Price Px then 1 / 2 V = Q / P The above reationship indicates that the quaity of the merchandise or service is perceived to drop by haf its former position whie price remains the same. With the assumption that this is the same factor of x then vaue as judged by the consumer drops to haf its former vaue. This indicates the importance of not deaing with price in isoation from other factors. Aternativey, a price increase may be interpreted as the way the company is going to pay to improve the quaity and service of the retai offer. However, some consumers may simpy think that the company is being greedy and that quaity has not improved. This means the consumer may judge the vaue to have faen. The outcome quite often depends on how the retaier expains the increase in price to the consumer. To ensure the maximum chance of success for the pricing poicy adopted there is a need to check each stage of the procedure, as in Fig This figure identifies the important considerations required for the successfu evoution of a pricing poicy. Other costs and therefore pricing impications There are other costs which a retaier needs to bear in mind when attempting to judge how competitive the store product price may be. These can be based upon: consumer trave costs such as the need to purchase petro to trave to a store in a distant or out-of-town ocation; 168

184 Pricing and the reationship to vaue Fig. 7.2 Pricing poicy considerations 169

185 Retai pricing any parking charges reated to a shopping visit to town; the eve of traffic congestion in getting to the store; whether there is a free transit scheme to a oca store or whether a park and ride scheme is avaiabe; pricing mix changes which affect price in terms of the provision of oyaty rewards or trading stamps. Any change in these is, in effect, a change in price and cost; the need for muti-purpose visits to a store or ocation. MARKDOWN POLICY CONSIDERATIONS FOR RETAILERS Price competition is an important feature of the grocery marketpace. Prior to its merger with Somerfied, Kwik Save sparked off a grocery price war in 1995 when it announced a nationwide promotion cutting up to 15 per cent off the price of one in ten of its top brands (Cope, 1995). Whie rivas such as ASDA dismissed Kwik Save s actions as a panic move, others promised to retaiate. Netto, a Danish discount operator, said it woud match the prices if any of its ines were directy undercut. Kwik Save had been under pressure in the grocery market where it was caught between the arger superstore operators and the aggressive Continenta discounters such as Adi, Netto and Lid. Virtuay a retaiers wi have occasion to utiize price markdowns. It is typica for markdowns to be used as part of a cearance sae in order to provide space for new merchandise. However, whie the ist beow indicates that there are a number of reasons to use markdowns, it shoud be remembered that other eements of the marketing mix can be used to increase saes, or aternativey merchandise may be carried over into the new season. In the use of price to increase demand, markdown reductions of the origina price may be necessary due to a number of reasons: competitor activity affecting demand; inadequate origina pricing poicy; merchandise did not meet consumer needs or preferences; economic or seasona probems; overstocking of merchandise or poor stock keeping; quaity of merchandise inferior due to manufacture or damage; probems of seasonaity and poor timing of offer; merchandise became shop-soied or damaged on the shop foor; need to reease the dispay space for other merchandise; the seing space or dispay of the merchandise had been inadequate or in the wrong ocation; a poicy decision taken to deveop improved customer goodwi through markdowns; an error by the buyer with regard to stye, fashions, research of market, etc.; an initia markdown being too sma to achieve desired saes resuts; saes staff not being briefed propery or encouraged to se od as we as new ines. 170

186 Markdown poicy considerations for retaiers A retaier has to be cear about how any downward adjustment to origina prices (markdowns) shoud be handed. This is important as markdowns are a consistent feature of retai marketing. For exampe, merchandise which sod originay for 50 may have to be reduced to 35 prior to the generation of adequate saes. In such a case the markdown is 30 per cent ( 15/ 50). However, some retaiers prefer to express the markdown as a percentage of the new seing price. In the case given above this woud be 42.9 per cent ( 15/ 35). Expressing markdowns as a percentage of the new seing price is often adopted as it can be more easiy reated to the method of accounting for the markdown for an entire department over a period of time. Markdown percentage on net saes = Markdown amount Net saes For exampe, if a department achieved net saes of after 2000 worth of markdowns, the markdown percentage of net saes woud have been 20 per cent. Most retaiers that rey on a high inventory turnover wi endeavour to use an eary intervention for markdowns. However, there are a number of considerations which need to be addressed when utiizing markdowns. There is consideration of the frequency and timing; retaiers have to be aware of the negative consequences for excusivity, image and quaity of the type and number of saes or other promotiona price reduction events. An eary markdown poicy may move the buk of the stock more speediy, imit shop-soiing, free up space for the new merchandise and enabe the remaining stock to be better presented. A ate poicy may aow more stock to be sod at a higher profit and coud hep maintain a more positive image for the retaier. If a markdown is used at a ate stage it wi necessitate a onger stockhoding period, but the price cut shoud be arge enough to ensure that the remaining merchandise is moved quicky. Whatever the poicy, markdowns shoud be of a sufficient size to attract those who woud have bought the merchandise but rejected it on the basis of price. The size of the markdown is important. A sma markdown may be ineffective and a arge one may make the customer question the vaue of the merchandise it may be fet that the retaier had previousy been greedy. A reduction of 20 per cent is sufficient for the customer to notice the difference. Whatever approach is decided upon, a retaier shoud not aow unauthorized ad hoc reductions to be made. In some situations it may aso be beneficia to remove the od prices, to retain the image of the store and to ensure that customers who bought previousy are not dissatisfied. In other situations, however, the need to encourage customer perception that the new markdown prices offer a bargain is important. In September 1996 Tesco aunched their Unbeatabe Vaue campaign, during which they offered discounts on 600 products and chaenged shoppers to find the same product on sae for ess at a competitor s outet (Atwa, 1996). This competitive pricing strategy was backed up by an extensive interna and externa marketing campaign aimed at communicating the offers to their target market. Other retaiers who wished to remain competitive had to react to this initiative in order to have a competitive stance. A companies reacted to varying degrees, with the most notabe response coming from Sainsbury. The setting of price cannot be soey concerned with the consumer. Care and attention has to be given to appraising the reactions of both the consumer and the competition. Due to the high risk nature of some sectors of the retai industry, a price 171

187 Retai pricing Fig. 7.3 Price cutting considerations advantage which takes share from a competitor may often provoke hostie repricing reaction. In Fig. 7.3, if company A attempts to increase its market share by price cutting it wi need to take share from companies B and C (Fig. 7.3(a)). This is a situation in which C and B react by cutting their own prices. The outcome is that the market shares remain simiar and may, as in Fig. 7.3(b), ead the market to grow in voume, but perhaps not in overa revenue. The ong-term resut is that the market remains extremey unstabe due to smaer margins being appied. In this situation a company has to ensure that it has a high voume of business in order to exceed its breakeven point. Price cutting poicies have aways been a feature of retai businesses in the UK and this has ed to the coapse of many smaer companies which coud not compete effectivey with companies which had advantages of stronger buying power. CONCLUSION Price is a very important eement in the marketing mix as it has to be set at the right eve to ensure retaiers have the capabiity to generate profits. It aso represents an essentia ingredient for the customer as price is a about the offer of vaue and benefits as part of the retai exchange process. It wi be found that some retaiers utiize EDLP but the majority sti use price adjustments in order to create the right eves of demand for the ever-changing market conditions of the modern marketpace. EXERCISES The exercises in this section reate to the issues discussed in this chapter. It is suggested that you work through them before moving on to Chapter 8. 1 Examine the pricing strategies of different retaiers. Make a ist of branded and own-brand products which you can compare, using the foowing grid as a guide. 172

188 References and further reading Visit and make notes at: Tesco Sainsbury Boots convenience store others (ist) Note prices of simiar brands/own-brands, by retaier, of: shampoos/toietries over-the-counter medicines branded perfumes heath products How were price and offers dispayed? What is your assessment of the different pricing poicies by company? 2 Visit a store when it has embarked upon markdowns. Try to assess the eve and effectiveness of the different methods and, from discussions with staff, assess the reasons for the markdown poicy. 3 Write a report to the marketing director of a arge department store about the benefits, or otherwise, of taking an approach where pricing wi be based upon a poicy of everyday ow pricing. 4 Read about price sensitivity and then create a short questionnaire that wi measure the importance of some of these points when a person purchases an expensive eectrica good of your choice. Now ask a young as we as an oder group of peope the questions and then write a report as to the importance of the concept and the differences found. REFERENCES AND FURTHER READING Aba, J., Lynch, J., Weitz, B. and Janiszewski, C. (1998) Interactive home shopping: consumer, retaier, and manufacturer incentives to participate in eectronic marketpaces, Journa of Marketing, 61 (3), Atwa, K. (1996) Sainsbury s cuts prices to counter Tesco scheme, Marketing Week, 13 September, 6. Be, D.R. and Lattin, J.M. (1998) Shopping behavior and consumer preference for store price format: why arge basket shoppers prefer EDLP, Marketing Science, 17 (1), Betts, E. and McGodrick, P.J. (1995) The strategy of the retai sae, typoogy, review and synthesis, Internationa Review of Retai, Distribution and Consumer Research, 5 (3), Bois, K.J. (1994) Discounts in business marketing management, Industria Marketing Management, 23, 84. Carson, P.G. (1983) Fashion retaiing: the sensitivity of rate of sae to markdown, Journa of Retaiing, 59 Spring, Cope, N. (1995) Kwik Save starts price war, Independent, 3 May, 34. Coriss, L.G. (1995) Differentia responses to retai saes promotion among African-American and Ango-American consumers, Journa of Retaiing, 71 (1), Cox, A. and Cox, D. (1990) Competing on price: the roe of retai price advertisements in shaping store price image, Journa of Retaiing, 66 (4), Datamonitor (1996) Loyaty Discount Schemes. Report. Juy. Dickenson, P.R. and Sawyer, A. (1990) The price knowedge and search of supermarket shoppers, Journa of Marketing, 54 Juy,

189 Retai pricing Hoinger, P. (1998) When prices are not back and white: food retaiers are increasingy waking up to the promotiona advantages offered by the grey market, Financia Times, 16 May. Kawani, M.V. and Chi, K.Y. (1992) Consumer price and promotion expectations, Journa of Marketing Research, 29 (1), Kiran, W.K. and Kumar, V. (1995) The effect of brand characteristics and retaier poicies on response to retai price promotions: impications for retaiers, Journa of Retaiing, 71 (3), Koter, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principes of Marketing. 2nd European edn. Heme Hempstead: Prentice Ha. Kumar, V. and Pereira, A. (1997) Assessing the competitive impact of type, timing, frequency, and magnitude of retai promotions, Journa of Business Research, 40 (1), Levy, M. and Howard, D.J. (1988) An experimenta approach to panning the duration and size of markdowns, Internationa Journa of Retaiing, 3 (2), Manning, K.C., Bearden, W.O. and Rose, R.L. (1998) Deveopment of a theory of retaier response to manufacturers everyday ow cost programs, Journa of Retaiing, 74 (1), Nage, T.T. and Hoden, R.K. (1995) The Strategy and Tactics of Pricing. Engewood Ciffs, NJ: Prentice Ha. Ortmeyer, G., Quech, J.A. and Samon, W. (1991) Restoring creditabiity to retai pricing, Soan Management Review, 33 (2), Schinder, R. (1991) Symboic meanings of a price ending, Advances in Consumer Research, SuperMarketing (1996) Reief as petro war coos, SuperMarketing, 11 October, 14. Tighe, C. (2001) Asda to use grey market, Financia Times, 12 Apri. Zeitham, V.A. (1988) Consumer perceptions of price, quaity, and vaue: a means end mode and synthesis of evidence, Journa of Marketing, 52 Juy,

190 8 Retai communication and promotion This chapter shoud enabe you to understand and expain: the importance of setting SMARRTT objectives; communication modes; the concept and appication of advertising, PR and saes promotion; the growth and use of reationship marketing and oyaty schemes; persona seing in the retai context. Retaiers communicate to their customers on a continuous basis through the store atmosphere, the products and services, promotiona iterature, advertising and other promotiona means. Retai promotion is the descriptive term for the mix of communication activities which retai companies carry out in order to infuence those pubics on whom their saes depend. Retaiing promotion wi have the main objective of infuencing consumer perceptions, attitudes and behaviour in order to increase store oyaty, store visits and product purchase. However, the important groups which need to be infuenced are not simpy the target market group of current and potentia customers. There is a need to infuence trade contacts such as agents and suppiers as we as opinion formers such as journaists and writers. Even oca, nationa and internationa poiticians and important professiona groups may need to be infuenced. SETTING OBJECTIVES As there is a range of promotiona methods which can be empoyed by the marketer, it is important to define what the promotion has to achieve. The marketing objectives need to be ceary defined so that the most effective types of promotion can be utiized. The mix strategies coud specify a need to achieve awareness; to inform; to educate; create purchase action; improve oyaty; change the perception of the customer, etc. Figure 8.1 expains how promotiona objectives may be deveoped. The promotiona objectives shoud have some precise terms for the purposes of carrying out the promotion and then monitoring the resuts so-caed SMARRTT objectives. SMARRTT objectives wi provide Specific, Measurabe, Achievabe, Reaistic, Reevant, Targeted and Timed resuts aong the foowing ines: 1 The target audience or market has to be identified (by segment, geographica spread, and for what stores). For exampe, identifying parents of schoo-age chidren iving in London. 175

191 Retai communication and promotion Fig. 8.1 Deveopment of promotiona objectives The specific product (goods and service) to be promoted has to be identified. For exampe, identifying chidren s schoo-reated products for a back-to-schoo promotion. 3 Specific goas shoud be set, perhaps that saes wi increase by x in specific departments or across the store, or that attitudes to the store or brand wi become more positive for the 40-pus age group. To continue the back-to-schoo exampe: to target an increase in saes of for each London store for chidren s wear and for schoo-reated equipment. To fit with the SMARRTT objectives these goas have to be achievabe in that the company has to deiver to the objectives; aso reevant to the task required, e.g. changing attitude or educating if this is required. 4 The time horizon of when the expected effect wi have occurred shoud be stated. For exampe, the objectives have to be achieved by September of a specified year. Taking up the exampe used in the ist above, a SMARRTT objective woud therefore be: To ensure that the parents of chidren between the ages of 4 and 16, within 7 mies of each London store, are communicated with and receive information on the back-to-schoo chidren s offers. Subsequenty, saes for these products wi increase by for chidren s wear and for schoo-reated equipment by 1 September.

192 Setting objectives SMARRTT objectives Specific: Objectives have to be precise and cear enough to offer direction as to the expected outcome. Measurabe: Objectives need a quantifiabe outcome measurement statement against which an evauation can take pace. Achievabe: Objectives shoud be achieved and therefore budgets/resources need to be adequate. Staffing or suppy probems may restrict achievements. Reaistic: The expectations of what the promotion can achieve have to be reaistic. Promotion can ony achieve so much and therefore expected changes in attitude to a brand, or demand for a retai offer, may not be reaistic. Reevant: Objectives have to be appropriate to the task set. Targeted: A objectives need to be tied in with statements reated to achieving resuts in the target audience(s). Different target audiences may need separate objectives. Timed: Objectives have to be written with consideration of effect or change within a time frame of achievement. Promotiona budget approaches The second important step in any promotion campaign is to agree the budget. There are different approaches to agreeing budgets that may be based upon a number of criteria. It is important to reaize that there is no one best method to set budgets. This is because promotiona campaign measurement is not straightforward given that there is often a time ag between the campaign and any resutant demand patterns. Aso other eements in the marketing mix wi affect the demand for the retaier. Various factors determine the overa promotion budget but any decision has to take into account existing or potentia saes of the company. The most common approaches are objective-and-task, affordabe method, percentage of saes method, and competitive parity method: Objective-and-task whereby the budget is reated to the communication objectives. If the retaier needs to create awareness, change attitudes or buid brand then these objectives become the necessary tasks against which the budget is determined. Affordabe method where the first step is to produce a budgeted period forecast of the expected saes and company costs, excuding the promotiona expenditure. The difference between the surpus expected and the desired profit aows for a decision over the communications budget based upon what can be afforded. This approach treats the promotion budget as a cost of business and does not encourage retaiers to spend against the ikeihood of future probems or as an investment to increase saes. Percentage of saes method is an approach where the communications budget is set on the basis of a predetermined percentage of the forecasted saes. The weakness is that the method assumes the historica percentage is sti reevant for the current retai marketpace. It aso reies on accurate forecasts which provides for the chance of 177

193 Retai communication and promotion unacceptabe error. In addition, if a retaier wants to buid preference for a new store or a new format then a system of budgeting based upon the percentage of saes method may not raise the necessary budget to achieve the short-term task of ensuring awareness and acceptabiity. The other probem is that the method wi provide for ower budgets when there is a downturn in the market, or because of a oss of saes based upon increased competitor activity that takes away business. This may ead to further saes decine as ess and ess money is spent on the company s promotion effort. Competitive parity method aows the setting of the budget based upon both the share of market of the retaier and aso the estimated expenditure eve of its competitors. This method does not aow for specific marketpace opportunities as the parity eve of expenditure wi be hed and consequenty a strategic penetration of the market may not be achieved. COMMUNICATION EFFECTS There is aways the need to pan to achieve the most effective response from the target market. An important part of the promotiona effort is the buiding of brand and product awareness. Sometimes it wi take a ong time for the consumer to earn about the brand and the type of products which wi be on offer. A promotiona campaign shoud aim to provide knowedge of the product, to ensure that the consumer wi fee favourabe towards the product and buid up a preference for it. Any campaign has to se the benefits that a customer woud be seeking in a credibe way so that the potentia customer fees conviction and is more ikey than not to make a purchase. Figure 8.2 shows how a promotiona campaign shoud aim to create increased demand through awareness and information. It aso shows that the deveopment of a positive image for a product creates a more price ineastic demand curve (see Fig. 7.1 for an iustration of the basics of easticity), which means that the product is more resiient with regard to price rises and does not have to rey on having ow prices. P 1 Q 1 is existing demand before a campaign has been deveoped to create more awareness in the target audience. At P 1 Q 2 demand has increased because more peope are aware of the company, the product and the benefits it can deiver. At P 1 Q 3 the campaign has been panned to improve the image of the company or product so that more status is derived from the transaction process. This changes the shape of the demand curve it becomes more ineastic. Fig. 8.2 Promotiona effect on demand 178

194 Advertising Advertising and saes promotions are the most widey used forms of promotion. Because of the intrusive characteristic of these forms of promotion most consumers reate ideas of marketing to the use of advertising or saes promotion. The other main forms incude pubic reations and persona seing. Retai promotion can be defined as any communication that informs, infuences and prompts the target market about any aspect of the retai sponsor. ADVERTISING The term advertising incudes any paid form of non-persona communication through the media about a product that has an identified sponsor. The use of payment differentiates advertising from pubic reations for which no payment is made for the time or space to convey a message. The media may incude teephone directories, guides, newspapers, magazines, radio, teevision, direct mai, Web pages and biboards. Advertising is normay associated with mass communication, where a broad target market is to be contacted. Advertising is used to achieve a whoe range of objectives that may incude changing attitudes or buiding image as we as achieving saes. Advertising is often described as above-the-ine promotion with a other forms of promotion being termed beow-theine. The difference between above and beow the ine is simpy academic now as the emphasis is on both areas, for exampe saes promotion and advertising working together to achieve the greatest impact. Moreover, in decisions over communication pans, it is the cost-effectiveness that matters most. The use of different combinations of what has traditionay been known as above and beow the ine has burred the meaning of the terms and there are many promotiona strategies which can be seen to erase the ine or, as it is known, pass through the ine. With direct mai being used to buid awareness and TV being used to se products direct to the consumer, there is a great dea more fexibiity in the use of different promotiona mediums. Communication theorists have proposed severa modes to expain the way advertising works and each have some simiarity. The basic underying approach is to theorize that the individua wi first move to a knowedge state or awareness state on the basis of information gained through experience and methods of communication. Attitudes are then formed and the importance is to move the potentia purchaser to a behavioura action phase of purchase through desire and conviction. One mode known as the DAGMAR mode (Defining Advertising Goas for Measured Advertising Resuts) describes the sequence of stages through which the prospective customer has to move: unawareness; awareness; comprehension of the offer; conviction; action or inaction. Through advertising, the retaier wi make the potentia customer aware of the store and its range of offers. As part of the advertising communication process, information has to 179

195 Retai communication and promotion be ceary transmitted so that it can be decoded and comprehended propery. The process is then to make the offer credibe so that the potentia customer can be moved to a favourabe attitude to the store or product. The act of purchase may then foow. Advertising has the potentia to affect a arge number of peope simutaneousy with a singe message. The secondary effect of advertising is persona communications among consumers. This is known as the two-step fow of communication. The first step in the process is the communications fow from media to opinion eaders the individuas whose attitudes, opinions, preferences and actions affect others. The second step is word-of-mouth communications from opinion eaders to others (foowers). This communication can occur through persona conversation between friends or with work coeagues based upon communication about the store or its offers. It can aso occur through non-verba communications when someone dispays newy bought merchandise in their home or by means of the abes on or in their cothes. One impication of the need to achieve as much benefit as possibe from the two-step mode is the requirement to reach and infuence opinion eaders. Types of advertising There are many different forms of advertising. Whie different, each one produces a highy pubic exposure of messages and concepts to the genera pubic. The very pubic nature of this confers a egitimacy and acceptance of the retaier or brand. Consumers are aware that the advertising is an expressive and targeted medium by which individuas can fee they share a set of underying vaues which refect their invovement with the retai offer or store. Some of the different types are as foows: Product advertising Product advertising is aimed at enticing peope to the store in order to consider specific merchandise. Product advertising wi feature the promotion of merchandise that is new, excusive, and superior in aspects of quaity and design as we as creating awareness of compete assortments or specia merchandise events. It is aimed at creating awareness of the product, its avaiabiity and benefits. Markdown event advertising This is used to create some excitement about a specia period of ower cost offers for products. It is ikey to be more successfu if the reduction is beieved to be part of a genuine sae of products which in the past had been fairy priced. 180 Institutiona advertising This type of advertising is used to se the store or shopping ma as a peasing pace to shop. With the use of institutiona advertising, the store attempts to reinforce the image of one or more of the foowing: a eader in fashion, fair prices, wide merchandise seection, superior service or quaity, a eisure experience or somewhere to enjoy visiting. There is now a trend to advertise a shopping centre rather than individua outets. The communication emphasis is on the avaiabe range of shops, ease of parking or other

196 Advertising consumer benefits. The frequency of this type of advertising increases at peak demand times such as Christmas. Co-operative advertising This is used where manufacturers fund part of a promotion by suppying eafets or advertising materia for use by the store. The store can add its own address to readyprepared printed materia and carry out mai drops or other methods of distribution. Aternativey, a manufacturer may agree to share equay the costs of an advertising campaign. Manufacturers are keen to have their brands stocked and sod; therefore, they often enter into joint advertising schemes with retaiers. Co-operative advertising may invove a combination of one or more retaiers in an area as we as the manufacturer. In addition, co-operative promotions may we extend to agreements to provide joint branded window dispay materia and point-of-sae materia. Retai promotion in reation to that of manufacturers There are differences between retaier and manufacturer advertising strategies. Retai advertising is often based upon short-term objectives with the emphasis on vaue or price of the products on offer. This is unike manufacturers approaches; they often attempt to buid favourabe attitudes or improve the image of the brand or organization over an extended period of time. Whereas a manufacturer wi need to create awareness of its brand across major market areas, a retaier may have more geographicay concentrated target markets. Therefore, a retaier has to take into account oca habits, conditions of the marketpace, avaiabiity of oca media and have a cear idea of the housing areas where potentia customers are iving. The expense of some forms of advertising is excessive for exampe, TV advertising is extremey expensive due to production as we as transmission costs, and therefore ony the arger companies or franchisers wi use this medium. The aternative use of direct marketing is often a more cost-effective form of promotion for smaer, more geographicay dispersed retaiers. Window dispays Window areas offer a major opportunity to provide a distinctive image for a store, to promote seasona activities and merchandise, or to create interest and capture the attention of the pubic. Think about the Christmas period in any arge city centre. It is not simpy Christmas street decorations which offer the most fascination. It is often the cever automatons and figures which are used as window dispays to bring peasure to both chidren and aduts aike. Some store fronts are configured to aow arge dispay areas with either straight, anged or arcade stye designs. Some frontage designs dispense with the whoe of the buit area of the shopfront and window so as to offer a arger saes space and to provide views of the interior dispay areas. In any type of window the use of good ighting is essentia to show the dispay to best effect and to reduce the effect of gare on the outside of the window. Whatever the shop front design, it shoud act as a funne to induce the potentia customer to enter the store. 181

197 Retai communication and promotion Design of shop windows Windows shoud have simpe cear messages as woud a poster, and the design shoud convey the personaity of the brand or store. Passing consumers have ony a short attention span for the window so it shoud not be confusiong in any way. For upmarket retaiers a minimaist, simpe approach with a focus on a singe communication, emotion or product wi provide a powerfu image. The approach is used by retaiers such as Prada and Versace. The utiization of dressing the window space with simiar props, mannequins or garments creates impact through repetition. This is often utiized by French Connection and Gap. Interest is produced by movement based upon ive events, technoogy based upon changes in ighting, projection of images on screens, etc., or mechanica use of props or products. In this integrated communications age the windows must be consistent in their message and positioning with other communications. Lighting through coour and graduation or changes in intensity can provide dramatic effect. It aso has to be panned to take into account the strength of the dayight. The window has to be changed to create interest and reationships with the consumer that provides information as to what is the fashion change or new ook they shoud be informed of. The window area wi need to be thought about in terms of the ogic of positioning and grouping of dispay materia and merchandise. There is far more impact gained from the grouping of products in simiar categories. Saes can aso be enhanced by recognition about how purchases may be primary and secondary. As such the dispay accessories that may aso be purchased aong with a main purchase of furniture or an outfit can provide increased saes and a more peasing dispay. Like any promotiona medium specific areas wi attract more attention and so shoud be utiized for the most important dispays those near eye eve, away from corners or piars, or on moving dispays. The window dispay shoud be changed on a reguar basis and this shoud aways be panned in advance of the event so that the theme is agreed and the assignment of space is controed. MINICASE 8.1 Get the most out of window space Innovative and we-targeted window dispays can give stores a competitive edge Many retaiers are turning to a ess-trumpeted marketing medium to back their above-the-ine activity their store windows. Fashion brands are at the forefront of the trend, integrating windows into their overa marketing strategy to raise brand awareness as much as show off their atest coections. French Connection, for exampe, used its store windows to sidestep a ruing by the Advertising Standards Authority ordering the remova of posters around London and censoring TV ads for its fcukinky promotion. Fashion retaiers are not aone in making fu use of their windows. WH Smith s store window at the Bue-water shopping compex in Kent was created by design agency Fitch in the stye of a magazine cover. The window appeas to consumers on two eves LED screens feature news fashes, whie tri-graphics 182

198 Advertising biboards with three rotating posters promote the shop s atest offers. Research by Hauch Research Internationa found that the window draws consumers to it with a wecoming impression that excites them and makes them want to discover more in-store. But not a behavioura anaysis supports the conviction of design agencies and retaiers in the power of windows to ift footfa and infuence purchase decisions. ID Magasin research suggests that ony 7% to 9% of passing traffic wi notice a typica window, with even the most entertaining grabbing the attention of ony 18% of passers-by. Rather than the window, it suggests the most important eement of the store front is the view through the door. So how can retaiers ensure they get the most out of their investment? ID Magasin managing director Siemon Scame- Katz beieves more work integrating behavioura anaysis into design wi pay off. The bottom third of a window has the greatest impact, he expains, but how many designs take that into account? Retaiers woudn t spend money on TV sots without working out what they were doing first, but that s what happening with windows. For retaiers, deciding which products to showcase is often based on what s hot and what fits with the audience. Unike fashion, which changes on a seasona basis, music is a fast-moving business and windows change every week to feature new reeases, says Simon Dornan, PR and events manager for Virgin Megastore. They are the first pace many customers ook to see what s new. We are steered by what s new and what is appropriate to Virgin customers. Bob the Buider was popuar, but he woud never feature in a Virgin window. But not a retaiers have such a ceary defined audience. The window design for book and music retaier Borders requires a carefu baancing act, according to marketing manager Matt Tayor. Its windows feature new reeases and an extensive backist. Whie we have many sma products to promote, it is essentia to keep the window cear and simpe. We want it to tak to peope passing by as we as those on the other side of the street. Technoogy is changing the way many POP agencies approach window design. A recent Borders promotion invoved pied-up TVs showing The Perfect Storm, whie Eectronics Boutique recenty used enticuar panes the ayering of images to create the impression of movement from different anges to support the aunch of strategy game Back & White. And the Soane Group is introducing interactive touch-screen technoogy to aow customers to interact with dispays by touching the actua window gass. Sefridges strives to remain at the forefront of window design and head of creative services David Snaith beieves getting peope to interact at the street eve brings them into the store and reinforces the theatre of the Sefridges shopping experience. It recenty used pasma screens and rea-time video from Japanese street scenes to support its Tokyo Life spring promotion. In addition, movement sensors infated arger-than-ife Japanese dos as peope passed and one section of its Oxford Street window was turned into a 24-hour Japanese-stye convenience store seing a range of authentic products. Liywhites teamed up with Adidas to ure consumers in-store earier this year when it provided Samantha Tominson, a 25-year-od runner, with a iving space in a converted window in the run-up to the London Marathon. With a bedroom, sitting room and training area, the athete went about her daiy routine in front of thousands of passers-by for two weeks. The exercise, which aimed to drive shoppers to the third-foor officia marathon and Adidas store, proved a tremendous draw, both during the dispay and foowing the marathon, when the athete returned to te shoppers how she had got on. It s not just stores that benefit from high street windows. Since the 80s, retai banks have used them to push products and reinforce their brands. Sheena Booth, marketing and communications manager at Roya Bank of Scotand, is responsibe for the company s retai merchandising and design. She expains that for banks, effective windows are ess about attracting footfa than raising brand awareness. We try to keep the design as simpe as possibe, whie putting products in the window that reay appea to new customers highy discounted mortgages or a strong credit card proposition. In a ot of cases, that wi be a price-ead proposition. We aso want it to be corporate-ooking, as new customers want a bank they can trust. Source: Beinda Gannaway, Marketing, 2 August

199 Retai communication and promotion Fig. 8.3 Push versus pu strategy for a retaier Push versus pu promotion strategy The promotiona decisions have to consider whether the company chooses a push strategy or a pu strategy or a baance of the two. A push strategy invoves pushing the consumer through the channe by directing the marketing activities to promote the store or benefits of the channe (see Fig. 8.3(a)). As retaiing is a channe service, this approach is unike that of more traditiona forms of product marketing as it is the channe service which is promoted. The pu strategy is where marketing promotion activities are targeted to the consumer to induce them to buy the retaier s merchandise or services (see Fig. 8.3(b)). Retaiers may enter third party agreements for promotion whereby the cost of the promotion is shared between the retaier and the manufacturer to encourage more saes of the manufacturer s product. With the growing use of reationship marketing and the compiation of customer databases, retaiers have been concentrating more on push rather than pu strategies. Companies are increasing their efforts to seect the most appropriate target groups to direct offers at. This aows marketing programmes to be more finey targeted, with iterature for sae periods, specia events or offers being taiored to suit the individua customer group. MINICASE 8.2 Persuading viewers to pay for services coud be tough FT It has been a perpexing year for foowers of interactive teevision (itv). Whie there have been signs that the viewing pubic is finay waking up to the opportunities offered by the technoogy, operators have appeared as far away as ever from making the services pay. In the UK, word eader in digita teevision, this year was heraded as the coming of age for itv when two high-profie interactive events captured the pubic s imagination. Neary 3m peope used their remote contros to vote contestants out of the Big Brother gameshow and another 2m interacted with the BBC s coverage of the Wimbedon tennis championship, which aowed viewers to choose the match they wanted to watch. Both programmes demonstrated the abiity of itv to enhance the viewing experience and proved there is a mass market for services which are simpe and either usefu or fun. 184

200 Advertising What remains to be seen is whether anyone wi make very much money out of these services. Forrester Research forecast that itv woud generate wordwide revenues of 9bn by But this year has seen that potentia caed into question. Just two months before the success of Big Brother and Wimbedon, British Sky Broadcasting, a goba eader in itv, announced a retreat from some services, tacity admitting its strategy had faied. Sky had invested heaviy in Open, a home shopping porta that aowed viewers to buy goods and services with the cick of the remote contro. Open was the eading exampe of the so-caed waed garden mode of itv that invoved a imited group of retaiers and service providers paying Sky arge sums for excusive access to the porta. Viewers were frustrated by the ack of choice and found the technoogy cunky and inconvenient, having to switch away from teevision programmes to use the service. Sky and its retai partners found the economics did not stack up. Open was quiety cosed. In future, Sky s interactive services wi be integrated with teevision content rather than separated from it. The waed garden approach was totay misguided from the start and is outdated, says Caes Loeberg, creative director at Rubus, the e-business consutancy. Some in the industry sti beieve the future of itv is on the internet, which has none of the constraints of a waed garden. The web can be deivered to the teevision by teephone or cabe, with viewers operating it by keyboard. ITV Digita, one of Sky s pay teevision rivas in the UK, is among the broadcasters to have introduced the internet to the sma screen, but it has been itte more successfu than its waed garden competitors. Web content is not right for TV, says Mark Neid, anayst at PA Consuting. It ooks ghasty and is virtuay unusabe. The faiure of both services to attract arge numbers of users cast doubt on the abiity of teevision to match the internet as a vehice for transactions. It had been argued that so-caed t-commerce woud outstrip e-commerce because teevision sets are more widespread than PCs and peope are more comfortabe using them. Many sti accept this argument. But others point out that, whie the PC is a ean forward medium, which peope interact with for services or information, teevision has peope in ean back mode, passivey waiting to be entertained. Just because you sit in front of the computer and do your banking does not mean you want to sit in your ounge to conduct your finances. It makes as much sense as buiding a financia centre in an amusement park, says Mr Loeberg. The esson of Big Brother and Wimbedon was that for interactivity to be a success, it must be an extension of teevision s existing roe as an entertainment. Service providers saw itv as a chance to se things. However, for subscribers it has to add vaue and give them a reason to stop watching EastEnders to go to the Tesco site. The interactive experience must be reated to what is actuay on TV, says Dennis Jones, of ICL, which heped buid services for NTL and the BBC. Viewers have quicky adopted services such as Sky Sports Extra, which aows peope to seect which footbaer they want to watch during a match. Big Brother viewers were offered a choice of camera anges and peope are abe to take part in ITV s Who Wants to be a Miionaire? quiz show from their front room. However, there is sti hope that income wi emerge from itv. Broadcasters are reying on it to support them as their audiences are fragmented in the muti-channe word and revenues from traditiona advertising decines. Retaiers and advertisers aso have a stake in t-commerce working as the broadcasting andscape is transformed and itv becomes the most direct way to market to viewers. Advertising wi sowy disappear from the sots inserted into programmes as digita TV deivery becomes more non-inear, thanks to TiVo (the persona video recorder) and video-on-demand. Advertisers wi choose instead to deiver their message through interactive programmes, says Patrick Bossert, of KPMG Consuting. Assuming reguatory approva, retaiers coud se food during a cookery programme or DIY equipment during a home improvements show. Viewers might eventuay be abe to buy a dress worn by a soap star by cicking on the screen. Teevision operators, content providers and retaiers share the spois. The key to successfu t-commerce, most anaysts agree, is the abiity of viewers to make impuse purchases. TV viewers want products and services presented on a pate. A they want to do is seect and agree, says Mr Neid. When KBHK, a San Francisco broadcaster, screened a rock concert by Meissa Etheridge recenty, 22 per cent of the audience ordered a CD through the teevision during the show. It is isoated hits such as that which makes Sky sti confident of reaching its target of generating 50 per subscriber per year from interactivity by Much of it is expected to 185

201 Retai communication and promotion come from betting, set to be one of the most successfu services by aowing viewers to pace bets on the outcome of ive sports events. Betting, TV-po voting, and merchandise saes around big ive events wi drive the future of transactiona revenue from TV programming, says Mr Bossert. There wi be no overnight revoution. The video recorder took neary 10 years from aunch to househod necessity, he points out. Mobie phones and CD payers took 7 years each, so why are companies expecting hockey-stick shaped revenue growth curves from interactive teevision? But the foundations for itv s ift-off are taking pace. By the end of this year, more than 40 per cent of peope in the UK where digita teevision subscriptions outstrip internet connections wi have access to interactive services. Source: Andrew Ward, Financia Times, 5 September 2001 SALES PROMOTION Saes promotion invoves any paid non-persona marketing communication activity, other than advertising, which offers an incentive to induce a desired resut from potentia customers, trade intermediaries, or the saesforce. This is sometimes referred to by the term saes incentive. Saes promotion campaigns wi add vaue to the product because the incentives wi generay not accompany the product but wi typicay be offered as mai drops or as coupons to be cut from newspapers, etc. It is usua for a saes promotion campaign to be used as a temporary offer to the customer in order to stimuate an immediate response. For exampe, free sampes or money-off vouchers and offers are frequenty used in saes promotion campaigns for brands or companies which need to improve demand at certain periods. Incuded in these campaigns are dispays, contests, sweepstakes, coupons, frequent user (oyaty) programmes, prizes, sampes, demonstrations, referra gifts and other imited duration seing efforts not incuded in the other techniques see the summary of types of saes promotion in Tabe 8.1. Most incentives are panned to be offered on a short-term basis ony. Saes promotion is often used in combination with other promotiona toos in order to suppement the overa effort. However, it has to be remembered that it is sometimes difficut to terminate or change specia promotions without causing adverse effects. Loyaty programmes are an exampe of this (see the foowing section on reationship marketing). A saes promotion (or series of promotions) aso has to take account of the ikey effect it may have on the image of the brand or outet due to the negative perception change which may occur because of an association with bana and frivoous promotions. Exampe: McDonad s In 1999, McDonad s ceebrated its anniversary with a free BigMac promotion. The specia offer of buy one get one free, which was advertised extensivey in the nationa press, resuted in a saes promotion offer that was so popuar it caused major probems for the company. The food retaier ran out of suppies of BigMac and had to apoogize to the pubic for the shortage. However, there was the extra pubicity surrounding the incident which may, or may not, have been beneficia to the company. To evauate a saes promotion the retaier shoud consider: the cost of the promotion in empoyee time, as we as for the cost of any merchandise, giveaway items or promotiona iterature; 186

202 Saes promotion Tabe 8.1 Summary of types of saes promotion Type of saes promotion Point-of-purchase/ point-of-sae Contests Sweepstakes Coupons Frequent shopper Prizes Demonstrations Referra gifts 2 for the price of 1 Branded giveaways Sampes Premiums Specia events Description Retaier or manufacturer dispays for the window, foor and counter to enhance impuse purchase Reinforcement of brand or outet through competitions (ski games providing sogans, doing puzzes, etc.) for prizes Simiar to contest but winner chosen by chance, by fiing in appication form, rather than ski Specia discounts are advertised with a coupon being cut out and redeemed as part of an at-store purchase. Modern approaches utiize opticay read coupon cards at checkout Customers are rewarded by points or stamps for repeat purchase or tota amount spent Simiar to frequent shopper programmes except retaier offers prizes whereby a piece of a set, such as a gass or part of a tea set, is gained on predetermined threshod purchase eves Products or services are shown in use, or what they can achieve and the benefits they give are demonstrated, for exampe, demonstration of a foot massager to customers Presents or gifts are given to existing customers who introduce new custom. Often used by direct saes retaiers such as those seing books or tapes and CDs Extra items of merchandise added to pack free of charge to increase saes Items such as pens, caendars, shopping bags, etc. with the retaier s ogo are given to customers Free sampes of products, tastes, smes given away to customers Merchandise item given free of charge or at substantia reduction for traffic-buiding or increase in store visits or to encourage saes. Sef-iquidating premiums are when the customer pays something towards cost Fashion shows, autograph sessions with ceebrities, art and craft exhibitions, schoo hoiday activities, topica oca interest dispays. Retai store openings are often inked to a specia event 187

203 Retai communication and promotion the increase in saes and profit, or improvement in awareness, based upon the campaign; whether the campaign had secondary effects of switching demand from other retaier products; whether there were any additiona saes outside of the promotion, due to customers being attracted to the store. It is not aways easy to isoate the above effects from other factors, but it is aways important to make some assessment of the benefit of different types of promotion. RELATIONSHIP MARKETING AND LOYALTY SCHEMES The retai marketpace is maturing and due to a sowdown in growth is becoming more competitive. Against this backdrop, retaiers have sought out different ways of improving saes and profits. In order to address these probems retaiers are adopting reationship marketing (RM) schemes which aim to: buid greater customer oyaty and retention; deveop methods of creating onger-term reationships; ead utimatey to increased saes and profits. RM has been defined by Gronroos (1990, 1991, 1994a, 1994b), who has consistenty argued for the importance of ensuring that reationships with customers shoud be continuousy deveoped. Gronroos (1994b, p. 9) deveoped his definition in which he described the objectives of RM as being to: Identify and estabish, maintain and enhance and, when necessary, terminate reationships with customers and other stakehoders, at a profit so that the objectives of a parties invoved are met; and this is done by a mutua exchange and fufiment of promises. This definition incudes many of the aspects of importance in RM but does not necessariy embrace the whoe range of concepts utiized in RM. Gronroos argues that a marketing strategies ie on a continuum ranging from transactiona to reationa marketing, where reationship marketing can be judged in terms of measures of customer retention rather than market share. Christopher et a. (1996) have deveoped the idea of a adder whereby reationships deveop as part of growing customer oyaty (see Fig. 8.4). The growth of retai reationship marketing schemes Eary methods of buiding oyaty were carried out by sma shopkeepers who coud get to know their customers personay and reward some of them with specia services or attention and even discounts or gifts at times such as Christmas. As companies began to grow, it became increasingy difficut to identify who were the most vauabe customers and to coect and retain accurate information. In the 1950s the Co-op ed the way with cash dividend schemes for the 12 miion members who reguary shopped at Co-op stores or benefited from the door-to-door services of the Co-op. Then, in 1963, Tesco introduced Green Shied stamps as an incentive scheme. This ed to many of the smaer traders having to foow their ead in order to 188

204 Reationship marketing and oyaty schemes Fig. 8.4 The reationship marketing adder Source: Payne et a., Reproduced with permission retain business. More recenty, petro retaiers introduced point or reward schemes in order to create more reguar custom. However, the deveopment of oyaty cards by Tesco is a major departure from any previous marketing promotion scheme operated in the UK. This is because the oyaty card is abe to provide instant and accurate feedback information on individua customers and their purchase patterns; this subsequenty aows more individuaized reationship marketing to take pace. In the UK from 1995 onwards the major grocery retaiers embarked upon the deveopment of oyaty cards for their retai operations. The schemes are designed to ensure that a customer is retained and remains faithfu to a particuar retaier. The Tesco scheme was aunched in 1995 and quicky buit up a customer base of an estimated 9.5 miion. Wanting to go even further, in 1996 Tesco aunched Cubcard Pus which aowed customers to pay a set amount of money into the Cubcard scheme each month by standing order and for the cost of a cardhoder s shopping to be deducted automaticay from their Cubcard account. Any baance on the account earns interest; credit is extended for arger expenditure in any month with ow rates of interest charged. Loyaty card schemes Tesco: aunched Cubcard in 1995; has 14 miion cardhoders Sainsbury s: aunched Reward Card in 1996; has 17 miion cardhoders ASDA: aunched ASDA Cub Card in 1996; abandoned 1999 Safeway: aunched ABC card in 1995; dropped points coection

205 Retai communication and promotion This strategy by Tesco aimed at winning new customers was quicky foowed by defensive strategies from other grocery retaiers who needed to retain their own existing customers. This situation is very simiar to what happened in the airine industry with frequent fyer programmes. These programmes brought major competitive advantage in the eary stages of introduction but ended up by providing itte advantage to the retaiers when a airines created simiar schemes (Gibert, 1996). Incentivized reationship marketing has become more prominent during the 1990s foowing the aunch of oyaty card schemes. The Tesco scheme coects detais of the transaction and cub member at the checkout. Money-off vouchers are then maied out to customers participating in the scheme. The vaue of the vouchers is proportiona to the money having been spent. In addition, other vouchers may be targeted and sent to incentivize the saes of own-brand or other product ines. Aternativey, other retaiers reward customers for their oyaty through the coection of points which entite them to moneyoff products, free items and other incentives such as Air Mies or charity donations. A oyaty scheme wi coect information such as name, address incuding postcode, sex, date of birth, househod size, chidren s dates of birth, ownership of consumer durabes, preferred pace(s) to carry out shopping, pet ownership, etc. Once this information is coected, the card customer data on househod type and size can be reated to the postcode geographic data and then matched to the use of the card the EPOS saes data. The record of purchase wi provide information about time and frequency of visits, expenditure patterns, products and brands purchased as we as the success of any specia offers. The combination of this data wi aow for data mining and data extraction for further promotions; improved decision-making for new store deveopment; targeted marketing via direct mai to promote sae periods, or to tempt back a apsed customer by the use of different promotions. Reationship marketing schemes are normay buit around communication with members through magazines. With the arger schemes, the membership magazine may be targeted to different groups, such as students, pensioners or other ife-cyce groups. This aows a company to target specific segments with information and offers which are attractive to that particuar group. The RM process heps to advance reationships to higher eves unti advocate status is achieved. This is where the customer as advocate is not ony oya but aso champions the company, the empoyees and the service to others. RM shoud not be confused with brand oyaty based upon commitment to the product; RM is a far more compex and wider aiance and association. The rationae for RM is that it makes business sense to focus on ong-term financia benefits which may accrue once a customer has been won for the first time. This is because it has been estimated that it is five to ten times more expensive to recruit a new customer than it is to retain an existing one. This is based upon the estimated cost of prospecting, advertising and seing, commission, product sampes, credit checking, administration, and database management. The true vaue of retaining customers is that it enabes the costs of conversion of the prospect to be set against the revenues earned over the onger term. Saes and profits improve in direct proportion to the ength of time a reationship asts. 190 Lifetime vaue anaysis Customers wi represent a diverse set of purchasing and spending patterns. However, it is important to be abe to make marketing decisions which refect the worth and potentia

206 Reationship marketing and oyaty schemes MINICASE 8.3 Points don t aways mean prizes in oyaty card ottery Is the game up for the supermarket oyaty cards? Safeway seem to think so, after announcing two weeks ago that its ABC cardhoders wi not be abe to coect any more points from the end of this month. The scheme wi ive on, to provide access to Shop and Go and Coect and Go, but without a points eement, it is effectivey dead. Safeway says it wi save 50 miion by dropping the buk of the scheme, and wi instead spend 80 miion on price cuts which, it caims, customers prefer. Certainy, Safeway says it has gained customers and seen a 6 per cent growth in ike-for-ike saes since its atest price-cutting offensive in October. But what about the rest of the big four supermarkets? Tesco was the first to aunch a nationa oyaty card in 1995 with its Cubcard, and Sainbury s, despite initia scepticism, foowed suit the foowing year with its Reward Card. Meanwhie, Asda ast year canceed its oyaty card tria to concentrate on its Roback campaign. A spokeswoman for Sainsbury s says that its Reward Card is very much a part of the chain s future strategy. Last week, it underined its commitment by offering 500 points to Safeway customers who hand in their ABC cards to any Sainsbury s store. But the argument from many in the industry is that such cards do not actuay buid oyaty, and a shopper with a Tesco Cubcard in their waet is aso ikey to have a Sainsbury s Reward Card there as we. The point of oyaty cards in the first pace was for a store to differentiate itsef from its competitors, but when everyone offered one, the cards ost a their vaue, says Verdict director Mike Godiman. In fact, a report on customer oyaty by Verdict shows that the two supermarket chains with the most oya customers are Morrisons and Asda, neither of which offer oyaty cards. Perversey, offering customers cash incentives may actuay make them ess oya, in that they wi move the moment a higher bribe is offered by a competitor. Aside from rewarding reguar customers, the main aim of oyaty cards was to monitor who buys what products. The ong-term goa was one-to-one marketing, with data used to target customers with specific promotiona information geared to their preferences. As Marcus Evans, Carson Marketing Group deveopment director, argues it is this information and how it is used that reay buids oyaty. The card is ony part of the vehice that aows you to observe a customer s behaviour. But it is the communication behind the programme between the store and customer that generates the rea oyaty. But Godiman beieves the supermarkets have not effectivey used the vast amounts of data coected. Up unti now, the information they have coected has not been expoited, but with new technoogy they shoud be abe to target promotions at the individua, he says. Investec Henderson Crosthwaite food anayst David Stoddard beieves the growth of e-shopping coud spe the end for the oyaty card. He says: If e- shopping takes off, and it is my beief that it wi, then the supermarkets wi have to adapt to retain customer oyaty. Tesco is aready moving in this direction. Foowing its dea with software company Autonomy, it pans to offer a personaised shopping service to its Internet customers based on data coected from its Cubcard. Mark Runacus, managing director of Reationship Marketing Group, which operates Sainsbury s Reward Card scheme, thinks that athough the physica oyaty card may disappear in the future, the fundamentas of oyaty schemes wi not go away. He says, New technoogy may mean we won t have to carry a piece of pastic around, but there wi be something to repace it that wi enabe us to tak to the customer and make the appropriate offer. Source: Jose Riera, Retai Week, 19 May 2000 of any one customer. In order to take such decisions there is a requirement to assess the worth of each customer over a period of time. The anaysis which aows this is known as ifetime vaue (LTV). Lifetime vaue aows for the measurement of the tota worth to the organization of its reationship with a particuar identified customer over a period of time with the amounts discounted to provide a net present vaue. In order to make a cacuation of LTV the retaier has to estimate the costs and revenues of each reationship. 191

207 Retai communication and promotion 192 The costs wi be reated to the acquisition, credit cearance, communication and any rewards or incentives given during any one year. The period of time that the reationship is expected to ast is discounted for infation to provide a reaistic rea vaue of each customer. This is to compare it to an investment that coud have been made in an interestbearing deposit account. The anaysis wi revea the profie of customers who provide high returns as we as those who are costy for the company to service. The LTV information wi aow for improved decision-making regarding: the assigning of appropriate acquisition aowances as a refection of the onger-term benefit of certain individuas. The profie of these individuas is utiized to identify and segment the targeting strategy; improving media strategies in order to acquire higher LTV individuas. Database anaysis wi provide information as to the optima aocation of marketing communications budgets in recruitment campaigns; providing seection poicies for customer marketing programmes. LTV anaysis wi aow a division of customers into graded eves of worth to the retaier. This aows for different rewards and privieges to be given to the different eves or categories of customer. It aso aows for the cutback in communication for those individuas who represent ony breakeven or oss when marketing costs are taken into consideration. which individuas to contact and reactivate from the apsed category. The database can identify the timing and worth of purchases made by individuas. If a previousy higher spending individua indicates apsed behaviour, a winback poicy may be triggered. As such a reactivation aowance can be agreed based upon the ikey return of the individua and their future revenue potentia; the asset vaue of each individua in the reationship scheme. This can provide the rationae for different marketing initiatives based upon the potentia behaviour of individuas or groups to these initiatives. The design and impementation of a reationship marketing scheme Research by Dibb and Meadows (2001) examines the appication of reationship marketing in retai banking. In carrying out the research they utiized a checkist that aows us some insight into the requirements of such schemes. The ist incuded among other items the need to measure: Detais of the nature of data coection, management and anaysis. An expanation of how the data coection process is managed by the bank; primary and secondary data gathering. A discussion of the quaity of existing customer records and how they are used. Examination of the way in which avaiabe data are used to buid customer reationships. For exampe whether data anaysis eads to a better view of segmentation and the customer base; knowedge of customer profitabiity and ifetime vaue. Review of whether customers actuay want to buid reationships with financia services businesses... probems that have been encountered and the progress made... Examination of the critica success factors and performance measures for reationship marketing. The paper aso examined aspects of the technoogy appications used by the bank (such as identifying ife events based upon house moves and saary increases) as we as the

208 Reationship marketing and oyaty schemes staff s methods of handing reationships (such as contact programmes and customer service reviews). The paper offers a comprehensive overview of the current stage of reationship marketing in the retai banking sector. RM requires the effective acquisition and retention of customers for the buiding of a more efficient operation and, utimatey, a stronger competitive position. Acquisition is based upon the traditiona approach to marketing with the identification of customer needs, deveopment of a retai offer to satisfy those needs, and then the targeting of prospects. The movement from acquisition through to retention (based upon Gibert, 1996) is described in the foowing seven steps of events: 1 Acquisition different marketing methods are used to acquire customers (sometimes termed prospects), which then require reationship marketing to ensure effective retention. Customer profiing is important and therefore individuas may need to be given an incentive to part with their persona information required for a reationship scheme. 2 Identify more about the customer through database anaysis of habits and ifetime vaue. 3 Improve and make the retai outet/offer/service more attractive based upon active feedback processes. 4 Inform through communications programmes to buid customers knowedge of the company (this may need to be based upon what the customer wants permission marketing where they opt to receive certain types of communication). 5 Tempt customers through specia targeted offers to purchase more reguary, try different products, etc. 6 Retain the customer by deveoping and deivering different forms of oyaty schemes and rewards. 7 Measure ifetime vaue, which shoud identify a range of customer types. Those providing high LTV wi have higher oyaty and wi provide increased customer vaue to the company, which shoud resut in higher profits and the abiity to make increased investment in further acquisition of new members to the scheme. The foregoing process can be viewed as an increasing outward spira which as a resut of the iterative process of increases in profits and subsequent reinvestment paces the company in a stronger and stronger position. Defining oyaty When attempting to understand oyaty there are two approaches that can be identified (Javagi and Moberg, 1997). 1 A definition of oyaty provided in behavioura terms, usuay reated to the number of purchases and measured by monitoring the frequency of such purchases. 2 A definition of oyaty in attitudina terms, incorporating consumer preferences and disposition toward brands to determine eves of oyaty. The first of these is not straightforward in retaiing, as the behavioura measures have to be estabished based upon variabes such as the ength of time and means by which oyaty shoud be measured. For exampe, if two purchases are made for high priced 193

209 Retai communication and promotion Fig. 8.5 Assessment of customer database products over a year is this different from a arger number of ower priced purchases? The weakness of the behavioura approach is that patronage can be generated through habit, convenience, income constraint or ack of aternative choices. However, there may be customers we want to retain and deveop on a seective basis because we know from profiing them against a database that they wi provide onger-term ifetime benefit. In order to provide higher eves of profit, through oyaty, retaiers need to ensure that they concentrate on deveoping a number of key areas that impact upon oyaty. These are: improve perception of perceived vaue; maximize customer satisfaction in order to create greater commitment and bonding; and ensure that any critica episodes in the interaction with customers have a positive outcome. A retaier has to consider the activity of customers against the profitabiity and potentia of their business over the onger term. When setting up a oyaty scheme the matrix in Fig. 8.5 can hep the retaier decide upon what actions to take for the different categories of customer. It shoud be obvious that the greatest effort needs to be appied to those customers who potentiay can deiver the highest returns. Loyaty shoud not be confused with satisfaction. However, a high eve of satisfaction is a necessary yet not sufficient reason for oyaty as higher eves of satisfaction may reduce the reason for defection or disoyaty. Satisfaction does not aways resut in retention or oyaty yet on the other hand dissatisfaction does not aways resut in defection (O Maey, 1998). Hart et a. (1999) offer a number of reasons reated to the decisions for setting up oyaty schemes: buiding asting reationships with customers by rewarding them for their patronage; gaining higher profits through extended product usage and cross-seing; gathering customer information; de-commodifyng brands (i.e. differentiating from the crowd); defending market position (against a competitor s oyaty scheme); and pre-empting competitive activity. 194

210 Reationship marketing and oyaty schemes We shoud be aware that oyaty schemes are not the same as reationship marketing schemes because many oyaty schemes are run as if they were a sophisticated form of saes promotion. This is in contradiction to the need to create coser bonds and change attitudes based upon the communication and promotiona campaigns of RM schemes and marketing campaigns. A good reationship scheme woud utiize a oyaty scheme as a reinforcing rather than eading component of the marketing effort. The withdrawa of the main Safeway ABC oyaty scheme has been attacked on the basis that the company faied to embrace the need to maximize the benefits of its scheme in terms of data gathering and profiing. The withdrawa of the Safeway scheme was foowed by a cear intent by Tesco and Sainsbury to stay with oyaty schemes as both companies offered 250 and 500 points respectivey for any ABC scheme member to switch membership. It woud be usefu if we were to define oyaty. Loyaty is a state of mind which predisposes an individua towards a particuar retaier and eads to a higher than norma proportion of expenditure to be devoted to the retaier s offers. To understand oyaty there are a number of aspects that are important. Those deaing with brand oyaty are covered in Chapter 12 on the management of a retai brand. In essence there is a hierarchy of oyaty and a customer can be paced in different positions for different retaiers. 1 True oyaty this is where a singe retaier may be used to satisfy a retai need and this retaier wi dominate the purchase behaviour uness the first choice does not have the required product in stock. 2 Latent oyaty occurs when the customer fees an eement of oyaty yet wi not buy from that retaier on every occasion. 3 Spurious oyaty where itte difference is perceived between retaiers there is often inertia which keeps a customer oya based upon habit. When there are few reasons to become oya inertia is the weak bond which retains the customer. Banks are notorious for having spurious oyaty as it is found that ony about 10 per cent of customers describe themseves as oya yet very few customers switch their bank accounts each year. 4 No oyaty is a state whereby customers in a specific retai category wi move around from retaier to retaier as there is itte benefit and difference perceived between any of the outets in the marketpace. Reichhed and Sasser (1990) described the need to ook after existing customers as their research of more than one hundred companies in different sectors reveaed improving retention can improve profits from 25 per cent to 85 per cent by a reduction in defection by 5 per cent. The anaysis of a credit card company indicated that owering the defection rate from 20 per cent to 10 per cent doubed the ongevity of the average customer s reationship from five to ten years and more than doubed the profit stream. Therefore, any increase or decrease in oyaty can produce dramatic impacts on the financia return of an organization. It is for this reason that reationship and oyaty schemes have been adopted to improve the profitabiity of businesses. 195

211 Retai communication and promotion Fig. 8.6 Churn triad Reationship marketing or oyaty schemes have a number of benefits for the retaier: The retaier can accuratey track the purchasing habit of arge numbers of oyaty scheme members and this enabes the acquisition of important data which can be utiized for panning and promotiona purposes. This wi aow for the acquisition, monitoring and retention of vauabe customers. A good scheme wi ead to repeat purchases through targeted incentives and benefits to visit the retai outet and make purchases. It can hep buid business with existing customers. The scheme wi act as a promotion for acquiring new customers and they, in turn, can te others about their experience. This reies on good staff morae to deiver the eve of service that wi hep buid oyaty. The customer may be wiing to pay higher prices if the overa scheme enhances the purchase experience. Customers wi not take as much notice of aternative offers and promotions if they are aready inked into a worthwhie oyaty scheme. A number of companies are affected by the probem of churn, which is the rate at which customers are ost to competitors each year. Churn is reduced by having switching costs such as a number of reward points which cannot then be added to achieve a reward or prize; or a penaty cause such as if an individua changes their mortgage to a competitor they wi need to pay a set number of months interest. Churn is part of the competitive environment where companies forever try to attract new business from their competitors. Figure 8.6 indicates the dynamics of this situation. 196

212 Reationship marketing and oyaty schemes Tabe 8.2 Mutipe use of oyaty cards (November 1997) Cards hed by Tesco Cubcard Sainsbury Safeway ABC Argos Premier company name A (%) (%) Reward card (%) card (%) Points (%) Tesco Sainsbury Safeway* Argos Boots Homebase M&S Source: Institute of Grocery Distribution, 1998 Note: * Safeway scheme abandoned 2000 Loyaty cards Loyaty cards normay fa into either the magnetic strip or the smart card category. Reationship schemes are often card-based oyaty programmes using the former type. The cards are inexpensive to produce. Each time a magnetic strip card is used the card identifies the purchaser so that other detais of the transaction can be captured within the company database, providing historica information on each card member. Smart cards are more expensive to produce and have a chip on the card on which data is stored. They can be taken from transaction to transaction which means the oyaty scheme can be shared between a number of companies. Boots have introduced a card, containing a microchip, for the 12 miion members of its scheme. A card-based oyaty scheme can be expensive to set up; a retai company wanting to coect information on a miion of its customers wi have to pay from 5 to 10 miion on creating the system and then bear the cost of the annua data capture which can be around 75p for each member. The worry is that a growing number of customers wi beong to severa card schemes and this wi diute the impact of individua schemes. In 1997 it was estimated that there were 55 miion active oyaty programme participants in the UK, indicating a crossover between many of the schemes (IGD, 1998). Tabe 8.2 indicates that 35 per cent of Tesco cardhoders wi aso beong to the Sainsbury Reward Card scheme and that 30 per cent of Sainsbury cardhoders aso beong to a Tesco scheme. With the figures in Tabe 8.2 in mind, we need to ensure that we reaize that there are different types of shopping occasion. It was found by Which? Magazine (1996) that customers are more oya to those stores where they do most of their shopping and are more ikey to embark on secondary top-up shopping for daiy essentias such as bread or mik. Therefore, the penetration of the market in the use of cards refects this type of activity. This is because the convenience of the ocation is a major determinant in the oyaty process, not simpy the fact that someone has joined a oyaty scheme. The use of different cards is expanding and as shown in the information box there are many different varieties of pastic cards in use. These cards are repacing the use of cheques as a means of carrying out transactions. 197

213 Retai communication and promotion Pastic cards According to APACS (2001 website) there are neary 120 miion bank and buiding society pastic cards in issue in the UK, with over 85 per cent of the adut popuation hoding one or more pastic cards. Pastic cards have numerous uses as isted beow: Affinity card: A credit card that enabes the card issuer to provide a donation to an organization (normay a charity) every time the card is used. ATM (Automated Teer Machine) card: Aso known as a cash card, cash dispenser card or cash machine card. A pastic card used in an ATM for cash withdrawas and other bank services. Charge card: A pastic payment card which requires the cardhoder to sette the account at the end of a specified period. Cheque guarantee card: Aso known as a cheque card. These are issued by a bank or buiding society to guarantee settement of cheques to third parties or to support the encashment of cheques at a financia institution up to a specified vaue ( 50, 100 or 250). Most debit and some credit cards may aso function as cheque guarantee cards (mutifunction cards). Around 54.2 miion pastic cards carry a Domestic Cheque Guarantee Scheme function. Chip or smart card: Aso known as an integrated circuit or smart card. A chip card hods detais on a computer chip instead of a traditiona magnetic strip. Credit card: A pastic payment card that enabes the hoder to make purchases and to draw cash up to a pre-arranged ceiing. The credit granted can be setted in fu by the end of a specified period or in segmented payments, with the baance taken as extended credit. The hoder is sometimes charged an annua fee. Debit card: A pastic payment card which is inked to a bank or buiding society account and used to pay for goods and services by debiting the hoder s account. Debit cards are usuay combined with other faciities such as ATM and cheque guarantee functions. Eectronic purse: Aso known as a pre-payment card. This card has a stored cash vaue which can be used to purchase goods and services it is an aternative to cash. The card can be disposabe or re-oadabe. Mondex and VisaCash are both eectronic purse products. Loyaty card: Cards issued typicay by retaiers to promote customer oyaty and aow customers to earn rewards or discounts, e.g. Tesco Cubcard. Payment card: A generic term for any pastic card (credit, debit, charge, etc.) that is used on its own to pay for goods and services or to withdraw cash. Purchasing card: A payment card issued to businesses, companies or government departments to make suppier and/or trade payments. Store card: Aso known as a retaier card. A pastic payment card that can be used ony with a specified retaier or group of retaiers. Trave and entertainment card: A pastic payment card that operates simiary to a charge card, e.g. American Express and Diners Cub cards. 198

214 Persona seing PERSONAL SELLING Persona seing is an attempt to gain benefit through face-to-face or teephone contact between the seer s representative and those peope with whom the seer wants to communicate. This may be based upon saes activity in-store, evening cas to try to se services or products, or saes cas by paid saespersons either to companies or to private individuas. Whatever situation occurs in the buyer seer reationship, trust is an important aspect of any interaction. This may be trust in the saesperson, trust in the company, attitude towards product, communication openness, oyaty intention and oyaty behaviour. Trust is a perceived credibiity of the company and its staff. In the buyer and seer reationship, trust is frequenty considered fundamenta to the successfu outcome of highy priced products. This is because trust affects the credibiity in the communication between seer and customer, a of which creates commitment and greater oyaty intention and oyaty behaviour. The importance of persona seing differs among retai businesses on the basis of the type of merchandise offered. A retaier offering ow-risk, ow-price goods, which are promoted, need ony empoy saes staff who can compete the transaction and dea with minor enquiries. The typica information required wi be the current poicy on reductions or specia offers, guarantees or possibe methods of payment. Whie the demeanour of the staff in this situation is important, there is itte saes negotiation ski required to concude the transaction. However, it shoud be noted that the trend is towards retaiers reducing the number of saes personne by offering greater sef-seection of products in order to save on saes staff costs. In a store where there are highy priced or more compex items for sae the customer has to cope with not ony finding a saesperson to reate to but aso one who has expert information. Such retai saes empoyees are often viewed as order takers but they shoud be viewed as order procurers. This is because for higher risk purchases customers utiize and seek out expert advice and hep. Groom (1998) has argued that the saes assistant is now making a comeback because the need for good advice is more important to the fashion shopper. Situations where it is important to have trained staff are: where the item has to be made to fit the customer s specific requirements, for exampe a wedding dress or made-to-measure cothes; where the product is technicay compex and the range is wide, for exampe a computer or a video camera; when the product is expensive in reation to the individua s income, such as an overseas hoiday; when fexibe pricing is practised and negotiation over price takes pace, for exampe car saes. The importance of the service aspects of retai were discussed in Chapter 4, with the oneto-one contact of the saesperson being seen as key to the way the retai company is judged. For this reason saes staff have to be carefuy seected and then we trained. The intention of persona seing is to: obtain a sae. Often customers enter the retai outet after acquiring information and the saesperson needs to persuade them to purchase; 199

215 Retai communication and promotion Fig. 8.7 The retai seing process stimuate saes of impuse buy purchases by bringing attention to extra requirements; compete a successfu transaction with the customer; eave the customer satisfied and we informed, no matter whether a transaction has or has not occurred; create good customer reations. The rationae for persona seing, as isted above, means that there shoud never be a roe confict between whether a saesperson shoud be straightening and foding stock as opposed to engaging any customer entering the department in a conversation. To reduce any confict fet by the saesperson, the high service retaier shoud reinforce the message that the customer is aways the priority for attention. The overriding vaues of the retaier the commitment to exceence in seing have to be reinforced through compiments, incentives and rewards, and training. This training shoud incude aspects of merchandise manufacture, buying and contro as we as seing techniques. A saesperson can ony se convincingy if he or she understands fuy the product and its benefits. Seing is a process of steps whereby the saesperson buids up a persona obigation for the customer to make a purchase. This seing process is a series of moves and countermoves to ensure that the offer is acceptabe (see Fig. 8.7). The retai seing process is made up of a number of the steps outined in Fig. 8.7: preparing, anticipating a prospective sae, approaching, presenting, deaing with concerns, gaining commitment and estabishing reationships. A these are inked into the feedback process of active istening and response. This is because the approach aows the saesperson to reate to the individua needs which wi be specific to that customer. Most saespeope think their job is to tak rather than to isten, but it is ony through istening that a good saesperson can provide the right offer and arguments to achieve the sae. The advantage of persona seing is that a saesperson can adapt the communication 200

216 Pubic reations of benefits to be gained to the specific needs of the customer. The feedback process of istening to the customer s needs aows the saesperson to be fexibe in their approach. This is made easier in a seing situation because the persona contact produces heightened awareness and attention by the customer. However, the saes functions of retaiers have to be carefuy handed because ess skied staff, who ack empathy, wi be judged as being pushy. A saesperson wi use questions to focus both on what the customer is ooking for and on why, when something is offered, they may have objections to it. An open-ended question which requires the customer to expain their response in some detai is often preferabe to a cosed question which wi require ony a yes or no answer. Open questions such as, What are you ooking for today? are far better than, May I hep you?, which can prompt, No thank you. Asking for the reasons for a purchase, or what the feeings and attitudes are to any merchandise shown wi aow the saesperson to seect an appropriate type of offer. PUBLIC RELATIONS Pubic reations is non-persona communication which changes opinion or achieves coverage in a mass medium, which is not paid for by the source. The coverage coud incude space given to a press reease or favourabe editoria comment. Pubic reations (PR) is important not ony in obtaining editoria coverage, but aso in suppressing potentiay bad coverage. A company which has good inks with the media is more ikey to have the opportunity to stop or moderate news that coud be damaging to the company. Consumer affairs teevision programmes quite often berate retaiers for poor service or dangerous products. More recenty, the use of cheap chid abour in the production of merchandise for Western markets has become a newsworthy subject. This a requires sensibe pubic reations reaction in order to retain a positive image for the retai company and industry. The major benefit of PR is that it can promote and enhance a company s image. This is very important for service-based companies that are reiant on a more tangibe positive image in order to be successfu. PR is a highy credibe form of communication as peope ike to read news stories and wi beieve them to be ess biased than information provided in advertisements. However, editoria decisions over what is communicated wi mean pubishers have contro over the message, its timing, pacement; and therefore coverage is out of a company s hands. Benefits of obtaining good PR effort and coverage are: perceived to be impartia and acts as a neutra endorsement of the retaier; credibe and beievabe as it is not identified as a paid form of promotion; heps to buid image of a brand and deveop favourabe opinions by the drip effect of the information provided; can generate increased saes; aows for a cost-effective means to promote seasona merchandise and new company or saes initiatives; and can possiby imit or neutraize negative or hostie opinions. 201

217 Retai communication and promotion PR activity can either be panned or unpanned. Panned activity means the retaier attempts to retain contro over the activity and news reease. With unpanned activity, the retaier simpy reacts in the most beneficia way to the chance of some pubicity or to suppress a negative news item. Larger retaiers wi have a pubic reations agency or inhouse department. These wi attempt to infuence the company s pubics. The pubics are made up of those important to the retaier customers, sharehoders, empoyees, suppiers, oca community, the media and oca and nationa government. Panned pubicity wi invove sending press reeases and photographs to the media (trade papers, oca and nationa press, radio and teevision), organizing press conferences for more newsworthy events, sending etters to editors of journas or oca newspapers, organizing different creative stunts to acquire the right tone of media coverage, and making speeches (or writing artices) on informed retai issues in order to be perceived as a weinformed company. Pubic reations activities Media information reeases / contact / speeches Production of PR materias (video, CDs, Web information, press kits, corporate identity materias, etc.) PR events, media conferences and newsworthy stunts Advertorias (which require PR copy aong with an advertisement) In-house and customer magazines Faciity visits to store etc. Sponsorship and donations Lobbying The media are interested in their own circuation, istening and viewing figures and, therefore, to be successfu a PR has to be newsworthy and of benefit to media interests. New and unusua information on new products or technoogy, expansion and deveopment pans, human interest stories about staff and their achievements a written up and compemented by photographs may be paced in trade and oca press. Finay, the overa PR efforts shoud be monitored. Measurement may be based upon the actua activity to acquire the coverage such as whether the conference worked, how many attended and whether they were the right peope, was it cost-effective, etc., or the resuts of the activity such as the amount of coverage produced. Coverage is assessed in terms of the range and number of media, number of coumn centimetres or mentions or position in the pubication. It can aso be checked for accuracy of the editoria produced against the initia communication sent and importanty the number of adverse as opposed to favourabe mentions. The media coverage can be assessed against important pubics targeted or more basicay as to whether the readership, istening or viewing pubic of the coverage matched that of the retaier s target groups. 202

218 Pubic reations MINICASE 8.4 POINT OF PURCHASE: POP designers add creative ingenuity Point-of-purchase (POP) materia is growing up, becoming more innovative and daring. Whie POP once accounted for ess than 5% of marketing budgets, it now typicay takes between 10% and 20%. Whie the technoogy behind much POP materia is not new, it is cheaper than ever and being used in innovative ways. Whether it s internet access points in banks, fridge sound chips, enticuar ads, fashion or sports on pasma screens in bars and stores or interactive kiosks, the point of sae has never seen so much action or, indeed, interaction. With retaiers inking POP to customer databases through oyaty cards, the medium is coming into its own. And shoppers wiingness to interact with instore terminas is great news for marketers. Simpy stacking high-tech products on sheves doesn t se them; demonstrating what they can do, does. Consumers wi interact with a device if it offers tangibe vaue. Some may be nervous of computer-powered kiosks, but technophobia wi continue to decrease as word-of-mouth spreads news of the benefits of what s on offer, and the PayStation generation grows up. In the meantime, retaiers such as Virgin s V Shops are training staff to offer assistance to interested but wary shoppers. V Shops aso uses its interactive terminas to offer a saes route for the huge stock of products that cannot be accommodated in-store. On the back of its 14m investment, Boots now sees 1.5 miion customers a month using its kiosks, 50% of whom buy more because of them. Noeeen Kershaw, Boots Advantage Point controer, says: We re ooking at using the kiosks as a key way of taking directy to the customer in-store. Shoppers wi be abe to book services such as opticians appointments, tak to customer services, access product databases and information, and take part in third-party offers and promotions. Boots is aso ooking at instaing touch points throughout the store, such as a hair diagnostics point in the hair care section. And Kershaw wants to ink the in-store information to Boots web site to give customers access from home. According to Phiip Evason, commercia director at Inter.Act Eectronic Marketing, the company behind Boots and Sainsbury s terminas, targeting is the key to kiosks success. Peope may have a shopping ist, but we give them a reason to do more go to new categories, try something different and buy more. We don t do that indiscriminatey; we know who the customer is and what they have bought before. The vaue of that eve of targeting is that you can afford to be incrediby generous with your offers because you know who you re speaking to. As it seeks to improve customer interaction with its services particuary PC banking to the PC undercass NatWest is providing free internet cickstart terminas in branches. John Ryan was behind the design and initia ro-out of ten units and has trained meeter-greeters to overcome consumer nervousness. As we as attracting footfa, NatWest cickstart is geaning information on existing customers. We can find out what peope are ooking for from the internet once they ve been introduced to it, says branch manager Mark Mackey. It heps us work out how NatWest can better hep them. At the moment, interactive media remains costy, imited in appication to areas of high footfa or highvaue products. But enticuar devices, that appear to move as you ook at them, offer some of the benefits raising awareness and communicating a message at a fraction of the cost. As a technoogy, enticuar is not new, but it has come a ong way since smiey-face bike stickers. Posters can now offer 3D images that protrude three inches and appear to move. They can aso carry a few seconds of a commercia. A pastic serrated ens magnifies one of a seection of fimstrips and the image moves according to the changing position of the viewer. Rob Key, marketing manager of Photobition, the design agency behind Sefridges bink-and-you ve-missed-it enticuar storefront window, says the medium is an extremey powerfu communicator because it catches you unaware. You think you re ooking at something static and then it changes, taking you by surprise that s a reay powerfu attention grabber that never wears off. On Oxford Street, 70% of passers-by stopped to ook at the Sefridges window or waked back for a second take. Saes rose in the featured women s fashion departments. Other devices, using reated technoogies, aim to grab attention in a simiar way. Nike recenty used Media Vehice s 3D Imager in its fagship London Nike Town store to appear to suspend a spinning sports shoe in mid-air. For mainstream POP appea, it is hard to beat the rapidy proiferating pasma screen. V Stores uses them to attract shoppers to its interactive kiosks, whie Sefridges has ten of these utra-styish fat 203

219 Retai communication and promotion screens in its London store broadcasting a mix of brand imagery and fashion. Pasma s potentia. Argos is currenty triaing Dynamex Technoogies digita signage system in its stores. The agency s managing director, Frank Jones, thinks pasma screens wi soon be an everyday part of the shopping experience. There are other technoogies coming aong, but it wi be the derivatives of pasma screens and the pricing that wi be important, he says. As the price drops, every store that has a message wi have one or more screens. Not a POP deveopments are taking pace off-shef. In Japan, eectronic shef-takers show ads next to the product. Martin Law, chief executive of Fords Design Group, beieves that for a the high-tech noise, most activity is as it aways has been straightforward merchandising cabinets and dispays. Fords research suggests that 55% of consumers rate shef dispays most highy in terms of POP materia which grabs their attention. It gives information on the shef which is where peope are ooking for it, says Law. Indeed, POP works best when it makes the shopping experience easier. Gade made sure its activity covered both bases when it aunched Duet earier this year. It used The Aroma Company s Poparoma device, a unique pump-action mechanism for dispensing fragrances at the fixture. A 3D dispensing tray raises the product up and the dispenser s button is shaped and textured ike a chid s tricyce hooter. We deiberatey shaped it ike that so peope woud know what to do with it, says The Aroma Company managing director Simon Harrop. It s successfu because the consumer can interact with it, which draws them to the product. As POP deveops, the various creative eements wi begin to merge. It s not enticuar, pasma or interactive that matters, but communicating with an information-hungry, discerning consumer base, which means that effective POP must anticipate and respond to changes in the way consumers react to brands. However innovative the soution, POP materia must continue to create a tangibe ink between the brand and the purchasing decision. HOW TO INNOVATE Set a cear brief, incuding quantities and budget detais. POP works best when a cient provides sufficient spend to an activity to avoid stretching the budget too thiny; Don t rey on gimmicks; they might affect a response from the consumer the first time, but it won t work the next; Buid in fexibiity for update and store demands; Tak to the designers, but aso the users and producers they re a in touch with different parts of the market; Merchandising and dispay, aong with packaging, is the ony three-dimensiona part of marketing. Use every eement of that extra dimension for fu impact; Interactive POP can be unwecoming; make sure store staff are trained and abe to hep customers; Avoid using technoogy for technoogy s sake. The best POP is interactive anyway; you don t aways need to use computers and microchips to attract consumer attention. Source: Beinda Gannaway, Marketing, 24 May 2001 OTHER IMPORTANT PROMOTIONAL TOOLS Within the fied of promotion, there is the important area of visua merchandising. Advertising may encourage consumers to visit the store but the retaier s dispay may make the difference between making a sae or not. The use of visua merchandising incudes visua materias and window dispays used in retai outets to stimuate saes. Visua merchandising is non-persona in-store presentation and exhibition of merchandise, aong with printed forms of communication. The approach is to: ensure maximum product exposure; provide dispays which enhance product appearance and create interest; provide saes and product information such as dispay cards and posters; aow for storage and security of stock; generate additiona saes through impuse purchases or by reminding the consumer of what is on offer based upon a message which is directy reated to the product. 204

220 Other important promotiona toos Fig. 8.8 Effectiveness of the four major methods of promotion If retaiers rey on sef-service of items then a seection dispay such as those found in greetings card or music shops is required. Seection dispays are generay open to faciitate easy browsing and inspection. Retaiers use seection dispays to exhibit their everyday assortments of convenience or shopping goods. Effective use of this approach requires a ogica grouping of the merchandise by its usage. Ease of seection through uncompicated, we-organized arrangements wi increase saes. There are aso specia dispays which are paced in we-exposed ocations to bring some interest to the store. These can offer a dramatic impact by the use of dispay equipment and merchandise. Point-of-purchase promotiona dispays are a particuar type of specia dispay which wi be on the counter, in the store window or other reevant paces. The visua dispay may incude banners, counter cards, end-aise stands, video-screen dispays, foor-stand dispays, troey advertising and shef extenders. However, they aso incude in-store broadcasts and interactive kiosks. The point-of-purchase objectives may be to attract attention, to remind the customer of a need or ink to other forms of promotion, differentiate the store s image and attract more custom. For exampe Hugo Boss instaed a 106-inch teevision screen in its London outet to mix fragments of sporting events with its atest fashion coections. As this coud be seen from outside the store it achieved an increase in store visitors. There is a growing use of sponsorship and direct marketing which do not comfortaby fit into the other four promotion categories (see Fig. 8.8). Direct marketing is a method of contacting customers and prospects in a direct way with the intention of generating an immediate and measurabe response. In the 1990s the use of reationship buiding and ong-term retention became of increasing importance for direct marketing. In order to make direct contact with the customer base there is a requirement to have a database which wi aow for: individuaizing the communication and coecting data on transactions so that measurement of response can be provided. The use of direct methods can aso be based upon not having information regarding the contact address teetext, direct response advertising. However, most do have a contact address cataogue company maiing, direct maiing, Internet e-mai, and teemarketing by phone. Sponsorship is the materia or financia support of a specific activity, normay but not excusivey sport or the arts, which does not form part of the sponsor company s norma business. As Meenaghan (1998) has pointed out, throughout its reativey brief 205

221 Retai communication and promotion history commercia sponsorship has changed in many fundamenta ways. Most evident has been its deveopment from a sma-scae activity to a major goba industry. Sponsorship is treated much more seriousy today, with sponsors adopting sophisticated panning, seection and evauation procedures for their sponsorship programmes. Banks have utiized sponsorship extensivey to promote and enhance their corporate images. A range of direct se companies, by cever utiization of retaiers oyaty-scheme database address ists, is using direct marketing more extensivey. The main method is direct mai which is posta communication by an identified sponsor. This is being expanded into database marketing based upon reationship marketing principes and an increasing use of teephone saes campaigns. Direct methods of contacting prospective customers are used to: encourage store visits from new customers; increase saes when there is a unique or specia merchandise offer to be made; take fu advantage of using the information from one department to cross-se other aspects of the store or its services; buid oyaty programmes in order to retain customers and increase revenue; improve the image and competitive position of the store in reation to the competitors; send out specia offers for ow season or saes periods in order to increase in-store traffic and saes. There is sometimes resistance to too much direct mai as it is often associated with junk mai. Good direct marketing seects the target carefuy and provides the correct offer. Finay biboards, sometimes referred to as poster sites, are used as either permanent painted sites or covered in prepared poster advertisements which can be frequenty changed. The space is normay avaiabe on a renta basis, depending on the site and time of year. The use of this form of promotion can be beneficia if ocated near to the store, on a transport route which services the store or area or on the vehices themseves. The costs are reativey ow, based upon estimates of numbers of passing observers. However, car drivers, those traveing on pubic transport and the waking pubic need to have a short, cear message if the medium is to be successfu. It is aso important to reaize that if the site is not iuminated then in the winter there wi be ess opportunity to see the message than at other times of the year. CHARACTERISTICS OF PROMOTIONS Each of the promotiona eements discussed above has the capacity to achieve a different promotiona objective. Whie persona seing has high potency for achieving communication objectives ony a reativey sma number of peope can be contacted. Therefore, advertising is a better method of reaching a high number of peope at ow cost. Pubic reations is more credibe than advertising but there is more contro over what is communicated through advertising messages and these messages can be repeated on a reguar basis. When it is difficut to raise advertising budgets, pubic reations is a ower cost aternative but it is difficut to contro the timing and consistency of PR coverage. Saes promotions, such as eafet drops which offer retai price discounts, may produce an 206

222 Concusion initia tria for a product for instance, the purchase of a product which is being aunched into the market but this type of promotion is most suitabe if used ony for a short-term period. Each part of the promotions mix has its own strength and weakness. Whie this may incude the factors of cost, abiity to target different groups, and contro, there are other important considerations. Figure 8.8 indicates the reative strengths of each of the four forms of promotion: advertising, persona seing, PR and saes promotion. They are compared with each other based on the eve of awareness of the communication and its comprehension, as we as whether it can buid conviction and succeed in creating action. Integrated marketing communications It shoud be obvious that many of the activities of retai promotion wi occur in different areas of the company and with different activities taking pace based upon the prediections of the individuas in contro. Therefore, whie it is obvious that co-ordination is required it is often not carried out in a systematic way. If it were, a eements of marketing communications coud work in unison to create a whoe that is greater than the sum of the parts. To ensure such impact is achieved there is a requirement for an integrated marketing communications (IMC) approach throughout the business. However, this wi ony occur if the various components of the marketing mix and communication effort are co-ordinated. Essentiay the use of IMC requires first that the area of marketing and possiby the company are integrated so that a fuy integrated effort wi foow. To achieve this the retaier has to provide guideines that direct the efforts in every part of the organization so that a aspects of marketing and communication offer reinforcement to each other. The benefits of IMC are: greater efficiency in resource aocations especiay as marketing costs escaate; provides competitive advantage; provides cearer guideines and direction for a company efforts; aows the new types of deveopment reationship schemes; partnerships, aiances, etc. to be co-ordinated with existing company practice; heps with aunch of technoogica change requirements Internet, kiosks, etc.; reaization that consistency and reinforcement of core messages are important; awareness that brand reputation and buiding has to have a co-ordinated approach. CONCLUSION Retai promotion invoves a compex series of communications to inform the target groups of the retaier s store and its offerings so as to increase demand and profits. There are a number of promotiona mix toos avaiabe to achieve this. They consist primariy of advertising, saes promotion, persona seing and pubic reations. Moreover, we shoud not forget that the store itsef wi pay a part in this process based upon its atmospherics and visua merchandising. Like other eements in the marketing mix, promotion does not work in isoation. Promotion is often used in conjunction with other constituents of the marketing mix, such as pricing markdowns, to stimuate the demand for products and subsequent store visits. Retai promotion is used to convey the store s 207

223 Retai communication and promotion current offer whether it is product, pace or price, or a combination of these. However, a consistenty good set of promotiona campaigns wi hep estabish a store s ong-term image. Each component of the promotion mix has unique advantages and disadvantages. The appropriate choice has to be based on which method is most suited to the marketing objectives at any one time. The argest proportion of a retaier s promotion budget wi be aocated to advertising and saes promotion. Advertising is used as a means to inform, persuade and remind customers that the retaier s merchandise and service offer is the one best suited to their individua needs. Saes promotion is used as a means to generate short-term increases in saes and, therefore, is an important part of the promotion mix. One other too is pubic reations, which does not require arge budgets to be successfu. Pubic reations aows the use of other media channes such as journaism, radio and teevision to act as opinion eaders for the personaity and image of the retaier s business and product offering. EXERCISES The exercises in this section reate to the issues discussed in this chapter. It is suggested that you work through them before moving on to Chapter 9. 1 Expain what is meant by a saes promotion. Either coect five exampes of different retai saes promotions to discuss and/or describe what types of saes promotion woud encourage you to buy, and why. 2 You have been asked by the manager of a chain of pet food shops to set up a reationship marketing scheme for the company. Draw up a pan for the recruitment, contact and communication with members and any other factors which you fee are important. Provide a timescae for the events in a fow diagram. 3 If you had to write the communications pan for a department store what are the key aspects of the pan you woud need to have agreed by management? Aso, what percentages woud you aocate from the budget to different aspects of the communication mix? 4 Coect at east three weeks of the oca newspaper and other oca magazines or pubications. Then carry out a content anaysis of the pubicity that different retaiers may have gained. This shoud be both quantitative and quaitative and the resuts shoud be assessed to provide a note of guidance on how retaiers can achieve good PR coverage. Quantitative Names of retaiers receiving coverage Amount of coverage (measure space) Number of times name of company mentioned etc. Quaitative Tone of copy (adjectives used good/bad) Image created, etc. 208

224 References and further reading REFERENCES AND FURTHER READING Aba, J., Lynch, J., Weitz, B. and Janiszewski, C. (1998) Interactive home shopping: consumer, retaier, and manufacturer incentives to participate in eectronic marketpaces, Journa of Marketing, 61 (3), Aaway, A., Mason, J.B. and Brown, G. (1987) An optima decision support mode for departmenteve promotion mix panning, Journa of Retaiing, 63, Fa, APACS (2001) Association for Payment Cearing Services, Betts, E. and McGodrick, P.J. (1995) The strategy of the retai sae, typoogy, review and synthesis, Internationa Review of Retai, Distribution and Consumer Research, 5 (3), Branigan, L. (1998) The Internet: the emerging premier direct marketing channe, Direct Marketing, 61 (1), Christopher, M., Payne, A. and Baantyne, D. (1996) Reationship Marketing. Oxford: Butterworth- Heinemann. Comer, J.M., Mehta, R. and Homes, T.L. (1998) Information technoogy: retai users versus nonusers, Journa of Interactive Marketing, 12 (2), Coriss, L.G. (1995) Differentia responses to retai saes promotion among African-American and Ango-American consumers, Journa of Retaiing, 71 (1), Datamonitor (1996) Loyaty Discount Schemes. Report. Juy. Dawes, J. (1998) Winning new customers in financia services: using reationship marketing and information technoogy in consumer financia services, European Management Journa, 16 (2), 249. Dibb, S. and Meadows, M. (2001) The appication of a reationship marketing perspective in retai banking, Service Industries Journa, 21 (1), East, R., Harris, P. and Wison, G. (1995) Loyaty to supermarkets, Internationa Review of Retai, Distribution and Consumer Research, 5 (1), The Economist (2000) Handcuffs on the high street: Siy shopping reguations in Europe, The Economist, 13 May. Fiorito, S., May, E. and Straughn, K. (1995) Quick response in retaiing: components and impementation, Internationa Journa of Retai and Distribution Management, 23 (5), Gannaway, B. (2001) POINT OF PURCHASE: POP designers add creative ingenuity, Marketing, 24 May. Gannaway, B. (2001) Get the most out of window space Innovative and we-targeted window dispays can give stores a competitive edge, Marketing, 2 August. Genger, C.E., Leszczyc, P. and Popkowski, T. (1997) Using customer satisfaction research for reationship marketing: a direct marketing approach, Journa of Direct Marketing, 11 (1), Gibert, D.C. (1996) Reationship marketing and airine oyaty schemes, Tourism Management, 17 (8), Gronroos, C. (1990) Reationship approach to the marketing function in service contexts: the marketing and organization behavior interface, Journa of Business Research, 20 (1), Gronroos, C. (1991) The marketing strategy continuum: towards a marketing concept for the 1990s, Management Decisions, 29 (1), Gronroos, C. (1992) Facing the chaenge of service competition: the economies of services, in Kunst, P. and Lemmik, J. (eds) Quaity Management in Services. Maastricht: Van Gorcum. Gronroos, C. (1994a) Toward a reationship marketing paradigm, Journa of Marketing Management, 10, Gronroos, C. (1994b) From marketing mix to reationship marketing: towards a paradigm shift in marketing, Management Decisions, 32 (2), Groom, A. (1998) Fashion: the expert shop assistant is making a comeback. Everyone interested in modern stye shoud rejoice, Financia Times, 30 May. Hart, S., Smith, A., Sparks, L. and Tzokas, N. (1999) Are oyaty schemes a manifestation of reationship marketing? Journa of Marketing Management, 15, IGD (Institute of Grocery Distribution) (1998) Grocery Market Buetin. Watford: IGD Business Pubications. 209

225 Retai communication and promotion Javagi, R. and Moberg, C. (1997) Service oyaty: impications for service providers, Journa of Services Marketing, 11 (3), Koter, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principes of Marketing. 2nd European edn. Heme Hempstead: Prentice Ha. Kumar, V. and Pereira, A. (1997) Assessing the competitive impact of type, timing, frequency, and magnitude of retai promotions, Journa of Business Research, 40 (1), Lam, S., Vandenbosch, M. and Pearce, M. (1998) Retai saes force scheduing based on store traffic forecasting, Journa of Retaiing, 74 (1), Meenaghan, T. (1998) Current deveopments and future directions in sponsorship, Internationa Journa of Advertising, 17 (1), O Maey, L. (1998) Can oyaty schemes reay buid oyaty? Marketing Inteigence and Panning, 16 (1), Payne, A., Christopher, M., Cark, M. and Peck, H. (1995) Reationship Marketing for Competitive Advantage. Oxford: Butterworth-Heinemann. Powe, T.C. and Dent-Micaef, A. (1997) Information technoogy as competitive advantage: the roe of human, business, and technoogy resources, Strategic Management Journa, 18 (5), Reichhed, F. and Sasser, W.E. Jr (1990) Zero defections: quaity comes to services, Harvard Business Review, 68, September/October Riera, J. (2001) Points don t aways mean prizes in oyaty card ottery, Retai Week, 19 May. Ries, A. and Trout, J. (1981) Positioning: The Batte for Your Mind. London: McGraw-Hi. Stern, B.B. (1997) Advertising intimacy: reationship marketing and the services consumer, Journa of Advertising, 26 (4), Ward, A. (2001) Persuading viewers to pay for services coud be tough, Financia Times, 5 September. Yoo, C., Park, J. and MacInnis, D.J. (1998) Effects of store characteristics and in-store emotiona experiences on store attitude, Journa of Business Research, 42 (3),

226 9 Retai distribution and suppy chain management This chapter shoud enabe you to understand and expain: management of the process of ogistics and distribution; channes and channe fows; growth of channe reationships and partnerships; distribution ogistics and stock contro; various distribution costs and their source; computerized repenishment systems; Internet appications and direct systems. The specia characteristics of retai businesses and the emergence of major retaiers in the marketpace have ed to specific forms of distribution or channe service. Prior to consumption, the retai product has to be both avaiabe and accessibe. This requires a suppy chain distribution system. A distribution system is the channe used to bring items to the pace of sae, or the means by which a retai suppier gains access to the potentia buyers of the product. More recenty the efficiencies of suppy chain management inked to IT have made major differences to the effectiveness of retaiers and their overa profitabiity. (Read Chapter 13 in order to understand the way IT has changed the whoe fied of distribution ogistics.) Aso, there is a major trend to disintermediation which is the bypassing of traditiona intermediaries and subsequent seing directy to fina buyers. For exampe, De Computer ses directy to fina buyers having eiminated retaiers from their marketing channe. With the ever-growing size and dispersa of traditiona retai operations, controing merchandise as part of store operations has been of paramount importance. This goes beyond an administration system; modern suppy chain management can achieve competitive advantage through shorter ead times for restocking, reduced inventory size and costs, improved management information and greater overa contro. Retaiing cannot be divorced from an understanding of the suppy chain as the foowing retai definition from Davies (1993) indicates: The management of resources to suppy the product and service needs of the endconsumer, encompassing the suppy chain of any physica products and the exchange processes invoved. The suppy chain incudes a the activities and exchanges invoved in extracting, processing, manufacturing and distributing goods and services from raw materias through 211

227 Retai distribution and suppy chain management to the end consumer. Suppy chain management requires a hoistic view of these activities and an innovative approach to their organization, in order to meet customer needs with the greatest efficiency. CHANNELS AND CHANNEL FLOWS There are different suppy chain structures based upon extended, imited and direct channes. The discussion of suppy chain management here wi concentrate on the extended channe of retai distribution, as this is the most prevaent. An extended channe (see Fig. 9.1) is where the manufacturer, whoesaer and retaier provide a chain of faciitating services in order to se the right product to the fina customer. The imited channe is when a retaier works directy with the producer and, therefore, can eiminate the whoesaer and the extra costs of this part of the chain. The retaiers of furniture, white goods, eectrica goods, and so on quite often dea directy with the suppier and create imited suppy channes. The fina aternative is the direct channe. In this case the product is sod direct by either the producer or retaier. By using different direct saes marketing promotions such as direct maiing, Internet services, teephone saes techniques, etc., the channe is kept direct and the extra charges and commissions are thus eiminated. This aows some of the saving to be passed on to the customer who wi purchase on the basis of ower price. It is important to reaize that whatever part of the chain is eiminated, some of the functions of that ink in the chain have to remain. Even if the retaier were to be dispensed with, some of the retai functions have to remain in order to achieve a transaction. Within any of the different types of channe the fow is not restricted to physica goods aone. Other types of fow of equa importance in ensuring the channe is successfu are as foows: physica fow the movement of goods and method of transport, from one part of the chain to another; ownership fow the transfer of tite for ownership/usage from one channe member to another. This is important for ega aspects of deivery, damage and storage by the producer and intermediary as we as for the fina customer; Fig. 9.1 The traditiona suppy channe for retai products 212

228 The suppy channe service fow if services are rendered as part of the process or the end product is a service or mainy service based, it is necessary to ensure that a the characteristics of the services are fuy understood (see Chapter 4); information fow there is a need for timey and accurate two-way information between a channe members; payment fow there is a necessity for agreed payment transfer terms based upon services rendered or goods deivered; promotion fow a fow of communication materia needs to be used to infuence both trade partners and consumers. The objectives of the promotion wi be to produce a positive attitude and image for the retaier. With the extended channe, the distribution of goods ( inventory ) by retaiers to consumers is achieved through the movement of goods to and from stockhoding points (normay warehouses) and then on to points of purchase (stores). In marketing terminoogy this part of the marketing mix is referred to as pace but the stages invoved in this chain may be referred to as distribution and warehousing or, more apty, as ogistics and suppy chain management. In the modern competitive marketpace, retaiers need to achieve high eves of customer satisfaction and service but at acceptabe costs. This has ed to the deveopment of increasingy sophisticated distribution systems to ensure optimum service for the suppy of goods to the customer. According to Davison (1995), arge, highy compex and often computerized warehouse faciities may hande severa miion cases per week (or in excess of miion worth of stock). Computerized stock management and information systems (for exampe, Tesco s Daas, Sainsbury s BRS, Safeway s SM3, etc.) which ink retaier communications direct to suppiers have been deveoped (for exampe, Tradenet) and transportation is subject to computerized contro systems (for exampe, Paragon). These comprise sophisticated ogistics systems that have become not ony a means of managing the suppy of goods to the customer but are key strategic toos. Many retaiers benefited from the introduction of new ogistics systems in the 1980s through increasing market share or increasing profitabiity. Companies which have benefited from such poicies are generay those which no onger consider distribution and warehousing as purey a support function or an operations headache. Rather than simpy a functiona suppy ine, the use of retai ogistics is now a vaued management area with its own operationa and strategic objectives. THE SUPPLY CHANNEL The suppy channe is the tota process by which products reach the end consumer as goods or services. This is a sequence of events that invoves strategic decisions over different resources and the maintenance of reationships a focused on deivering optimum vaue to the end consumer. Figure 9.1 indicates the components of the traditiona suppy chain channe. Such a chain is an arrangement between paired inks, where the emphasis has to be on controing and managing the reationships in order to move products through the process effectivey. This shoud be based on a strategic marketing and business need for the chain to achieve: 213

229 Retai distribution and suppy chain management reduced inventory and storage investment in the chain; improved end-user and customer service benefits through productivity and effectiveness (faster order cyce times, improved on-time shipment, ack of damage/defects, etc.); deveopment of strong reationa inks, and hence a strong chain, in order to buid competitive advantage; and ower procurement, transportation and unit costs which can be used to price more competitivey and to increase vaue-added benefits. As the whoe chain is dependent on the way any two of these parts of the chain interact there is aways a question of whether the working reationships wi be good and provide the service and economies required. In practice, it is found that the reationships are often ones of rivary, mistrust and secrecy. With the increasing use of mutipe channes of distribution, which are sometimes competitive, this can ead to deterioration in coordination and co-operation between channe members. None of these is conducive to a retaier being abe to provide increased added vaue from the suppy chain. What is required is a commitment by a parties to invest in continuous improvement in order to create mutua advantage. This is because channe competitiveness is an important focus for successfu retaiing. Uneconomic channes are characterized by unheathy support of existing traditiona practices; disregard of the importance of information and the need to share it; ack of entrepreneuria ideas regarding innovation, renewa and deveopment; an organizationa cuture of infexibiity and sow adoption of new ideas; and partia rather than major changes adopted. New channe forms and processes are emerging which are characterized by the expectation of ower margins and more vaue for the customer. This means channe success wi be based upon the degree to which the suppy chain is improved, regardess of the margins and practices invoved. The manufacturer The manufacturer or suppier processes raw materias into the finished consumabe artice. For efficiency of the chain manufacturers shoud not experience overproduction, aow defects, create waiting through shortage or be inefficient in the areas of transport and ogistics. Manufacturers need to be aware of the impications to the chain of the eements of time and cost reated to their part of the process. Suppiers may speciaize in the type of products that they process (for exampe, Birds Eye) or diversify into a wide product range (for exampe, Uniever). Suppiers of eading brands wi use a high eve of marketing, incuding saes representatives and advertising campaigns, in order to ensure that their products are given maximum pubic exposure. They may even reduce the cost of their products to encourage retaiers to have their products featured in high fow ocations within their stores. 214 The intermediary function The intermediary, the whoesaer, is in effect a distributor of goods from the manufacturer or suppier to the retaier. Whoesaers have traditionay been responsibe for hoding arge stocks of products, attempting to anticipate demands and seasona trends, etc.

230 Channe reationships and partnerships Traditionay the whoesaer has aso provided a warehousing function for both the suppier and the retaier. This ensures that the suppier does not end up with stockpies in the factory and is abe to continue or switch production; the retaier has simiary benefited from the use of this intermediary in the suppy channe by avoiding the need to hod arge quantities of stock. This enabes the retaier to free up capita, which woud otherwise be tied up in stock, for other purposes. However, modern mutipe store groups and supermarket chains have rendered the use of whoesaers unnecessary in the suppy chain by assuming the function of the intermediary. This has a cost-saving function. At each stage in the chain of distribution the cost price of a product is added to. This buid-up of extra costs may reduce profit margins for the retaier or increase the fina seing price to the customer. This is not in harmony with the norma retai objective which is to maximize saes and profitabiity. Additionay, each extra stage in the suppy chain makes it more difficut for the retaier to contro the service or the quaity of the fina product. The more inks that are invoved in the distribution chain, the ess contro there may be. This is aied to the risk of conficts over reationships with each partner attempting to maximize profit. The arger retaiers have, therefore, sought to extend their contro over the suppy chain and moved away from the use of the intermediary. This has been particuary so in the grocery sector, where currenty four grocery chains, Sainsbury, Tesco, Safeway and ASDA, account for a major share of saes in the UK packaged groceries market. The size of market share gives these companies enormous power over suppiers to negotiate discount prices and to absorb the roe of the former whoesae intermediary, whie ensuring the quaity and service of product to the customer. For such companies the traditiona suppy chain no onger exists. Mutipe retaiers with their ceary defined strategic objectives, extensive nationa coverage, centraized organizationa structures and highy accurate information systems have created ogistics networks which suppant the intermediary s roe of suppy in fiing gaps between production and consumption. GROWTH OF CHANNEL RELATIONSHIPS AND PARTNERSHIPS A number of interreated power reationships characterize the UK grocery sector. These range from mutua dependence to aiances based upon secondary suppiers. The reationships are aso affected by the concentration of market share in that suppiers are constrained in who they can dea with as the market is dominated by a imited number of mutipe-outet retaiers. The negotiating strength of retaiers has increased, and this is even more apparent when own-abe products are being offered with gross margins higher than manufacturers brands. The power that individua retaiers now exert is aso compounded by the centraization of decision-making, with fewer individuas at head office being invoved in deciding the fate of numerous different suppiers. This has meant that store managers have itte input to suppier choice and are freer to concentrate on personne and service quaity functions. Such deveopments have had the effect of fundamentay restructuring the suppy chain. This does not appy ony to food retaiers as the new methods of working have affected a aspects of retai. Driven by competitive pressure to improve efficiency and to deiver added vaue for customers, major payers in the suppy chain have been changing the way that they do business with each other. Retaiers and suppiers have started to recognize the degree of mutuaity between each of their own objectives. Traditionay, suppy chain reationships 215

231 Retai distribution and suppy chain management have been adversaria, exhibiting a high degree of confict; during the 1990s there has been a recognition that there are benefits in coser working reationships. However, there is aways a potentia probem for the arge suppiers, which use ogistics contractors, utiizing their power; this may ead to a situation founded on fear rather than mutua interdependence. Any trading reationship wi incude a measure of confict and of cooperation. This can be seen as a continuum extending from a singe transaction, with a very minima requirement for trust between the two parties, to a ong-term suppy chain partnership with a very high degree of trust, at the other extreme. Confict imposes additiona costs on the trading arrangements. Therefore, the aim is to move aong the continuum, reducing the eve of confict and increasing the co-operation so that costs are reduced and quaity improves. In pre-checkout scanning days, the retaier had privieged access to current saes data and woud use this as a weapon to counteract suppiers bargaining strength. We can contrast this with recent trends of using EFTPOS and EDI technoogy to deegate the entire repenishment administration activity to suppiers. Technoogy has had a major impact on distribution. Inventory management is now driven by the scanning of merchandise at the checkout. This aows saes for a outets to be coated and communicated straight through to the suppier, who wi be responsibe within agreed parameters for ensuring that fresh suppies arrive at retaier distribution centres to repenish outets. It is important to recognize that transformation to a partnership arrangement represents radica change. The previousy prevaiing adversaria cimate, with its reativey ow eves of trust, wi remain deep-seated. It is not reaistic to expect two organizations previousy engaged in a form of opposition to each other suddeny to adopt a spirit of openness, and exhibit faith in each other and the co-operative pursuit of mutua goas. Making such changes requires a fundamenta shift in the cuture of each organization. This is not achieved overnight and can be a sow process, fraught with difficuties. Leading proponents of suppy chain partnerships have been voca in their support. There has been itte pubic expression questioning the vaue of these trading arrangements. The existence of a partnership does not change the fact that some arge retaiers tend to be dominant in their respective sectors and are not afraid to exert their power over the suppy chain. In these cases, if the retaier wants a partnership, then a smaer suppier is unikey to object. The very term partnership conveys a message of mutua objectives, trust and co-operation. Whether the benefits of this strategy accrue on an equay mutua basis has yet to be proven. MINICASE 9.1 Amazon ooks for more fufiment Amazon.co.uk s effective takeover of the onine fufiment operation for bookseer Waterstone s might be yet another sign of the e-taier s dominance, but it coud pay dividends for both parties. In a market which has more commony seen the offine incumbents snapping up strugging dotcoms, Amazon has now struck a number of such deas. In Apri, Amazon.com struck a simiar dea with Borders, the second-argest book retaier in the US, whie in Juy, Amazon.co.uk announced that it was to se mobie phones through a co-branded site with Carphone Warehouse. 216

232 Retai ogistics The Waterstone s dea means that visitors to waterstones.co.uk wi be redirected to a mirror cobranded site within the Amazon.co.uk service using its web-framing format. Waterstone s wi provide the content, reviews and artices, but has washed its hands of a fufiment and customer service. Peter Mitche, business deveopment director at Waterstone s, expains how the muti-year dea was forged with the company keeping a firm eye on the exorbitant cost of waging an onine batte with Amazon.co.uk. Amazon has estabished a cear position of market eadership in onine book seing, he expains. So for us to start or continue investment in order to get to an economic scae of operations woud be a ong and expensive journey. But he doesn t beieve that it means Waterstone s wi be eft in the technoogica dust. He says the company wi gain the abiity to effectivey piggy-back on Amazon.co.uk as it deveops because the dea aows a form of future-proofing for us as Amazon buids onine. However, a teing factor in the dea is that a orders made through the Waterstone s web site wi be deivered with Amazon.co.uk packaging. Say Bain, senior researcher at retai research firm Verdict, cautions that this oss of contro over deivery and branding coud cost Waterstone s more than money. Fufiment is the key issue in getting consumers to continue to shop onine, and to give that away is a risky business, she says. The interface between the retaier and the customer is what retaiing is a about. Amazon.co.uk branding means that it wi ose presence with its customers. Robin Terre, managing director of Amazon.co.uk, comments that the dea refects an acknowedgement by some retaiers that their core competencies ie offine. Deas ike this and with Toys R Us and Borders show that the rea expertise of these strong offine brands is running physica stores, he says. They want to maintain an onine presence, but focus offine. Waterstone s Mitche admits that whie the company sees the vaue in onine channes, it had to concentrate on its core strength of offine retaiing. Our investment priorities need to be in maintaining the quaity of our stores, he says. This dea enabes us to maintain a vauabe transactiona faciity and not just a marketing patform. Phiip Robinson, founder of music e-taier CD- WOW, points out that the dea isn t a unique event, with the ikes of Superdrug, Wooworths and BOL a scaing back their operations. Waterstone s is being very grown-up and what it is doing is best for its sharehoders, he expains. However, there won t be many deas ike this, because a ot of brands woud rather pu out than team up with a competitor. He can t see the same thing spiing over into the music sector, athough there are white-abe fufiment operators around, as everyone has to make a margin at some point and prices woud end up too uncompetitive. Source: Mark Sweney, Revoution, 8 August 2001 DISTRIBUTION LOGISTICS AND STOCK CONTROL The customer s centra expectation of retai service deivery is one of avaiabiity. No amount of service enhancement or added incentives wi effectivey make up for an empty shef. As a customer, the utimate measure of a retai service is whether the goods or services are avaiabe as required. Modern retaiing is underpinned by a compex infrastructure that seeks to meet this centra customer expectation. A of this has its cost and, therefore, from a management perspective it wi be vita to deiver the retai service in an efficient manner. This is becoming increasingy important as profit growth cannot be easiy achieved when saes growth is not high; such extra profit has to be gained from improvements in productivity. The achievement of productivity gains is avaiabe from a retai ogistics system infrastructure which consists of severa eements, as is discussed in the sections that foow. RETAIL LOGISTICS The word ogistics is derived from the French word oger which means to quarter and suppy troops. Logistics has deveoped from the systematic panning required when arge 217

233 Retai distribution and suppy chain management 218 numbers of troops and their equipment move, to that of the moving of arge amounts of goods. Retai ogistics is the organized process of managing the fow of merchandise from the source of suppy to the customer from the producer/manufacturer, whoesaer/intermediary through to the warehouse, transport to the retai units unti the merchandise is sod and deivered to the customer. The massive increase in product variety in stores has created a need for improved ogistics and sophisticated systems. From a marketing point of view the system has to satisfy the customer based upon the od adage of getting the right product to the right customer in the right pace at the right time. This requires a starting point at the marketpace and then working backwards to ensure everything is put in pace to provide improved deivery, better service, ower prices through efficient ogistics and added vaue. Retai ogistics systems incorporate the foowing functions: the physica movement of goods; the hoding of these goods in stockhoding points; the hoding of goods in quantities required to meet demand from the end consumer; the management and administration of the process which, in modern compex distribution systems, is a function in its own right. A of this is based upon the aspects of: order processing; transport; storage; inventory. Christopher (1992) defined ogistics: Logistics is the process of strategicay managing the procurement, movement and storage of materias, parts and finished inventory through the organisation and its marketing channes in such a way that current and future profitabiity are maximised through the cost-effective fufiment of orders. Gattorna and Waters (1996) have added eements of information fow to this understanding but we beieve the infrastructure eements supporting avaiabiity for a customer can be more easiy identified as warehousing, transport, inventory and administration. The cost structure of each wi be considered next, but at this stage it is important to recognize the interreationships that exist between the eements. A hoistic perspective is essentia if management is to identify the optima organization and reaize the greatest efficiency for the system as a whoe. A ruthess pursuit of cost savings within one eement is fawed if the resut is simpy to push a cost burden on to another. A simiary hoistic view is required of the suppy chain in a vertica sense. Porter s vaue chain anaysis (1985) recognizes that as we as seeking to improve the interna inkages between the activities of the retaier, it wi be important to acknowedge the fit with the wider vaue adding system. Retaier activity shoud strive to add vaue for the customer. This wi not be reaized if, in seeking to pursue efficiency in the suppy chain eement under the direct contro of the retaier, costs are simpy pushed on to suppiers. The cost wi remain in the system and wi utimatey be borne by the customer. Managing retai ogistics requires a vision of the suppy chain big picture. How coud

234 Retai ogistics the cost structure activities be organized or reorganized to take cost out of the suppy chain competey and deiver better vaue for customers at the same time? Such an approach may see retaiers taking on an additiona cost burden to faciitate a saving for suppiers and, utimatey, a net saving for the customer. Here, there is a congruence in the objectives of retaiers and suppiers. The recent shift towards suppy chain partnerships is ogica as it is driven in part by the need to expoit the potentia for taking cost out of the suppy chain competey. This hoistic approach to retai ogistics can be iustrated by the trend in the 1980s and 1990s towards centraized distribution. Depending on voumes, retaiers have increasingy created centra or regiona distribution centres: a major investment in property, pant and equipment with associated overheads. Suppiers making individua direct deiveries to retai outets may then be repaced by suppiers deivering to the retaier distribution centres by the truckoad. The centre then breaks the buk to create store orders, which are then transported on the retaier s own vehice feet. Lead times are reduced and so are the eves of stock hed at retai outets. There are major cost savings and improved suppy chain efficiency deivers added vaue for the customer in the shape of the most recent product being avaiabe. Centraizing retai distribution represents a very significant redistribution of costs across ogistics eements and between suppy chain organizations, with substantia net benefit. The store staff are more aware of deiveries, stock is ess of a probem and stock space is kept to a minimum. RETAIL LOGISTICS THE COST STRUCTURE Many retaiers pursue distribution strategies which expicity or impicity acknowedge the importance of the tota distribution concept (TDC) which is based on the work of West (1989). In so doing they are taking a hoistic approach, strategicay and operationay integrating the functions isted beow. The TDC encourages everyone in the company to think in terms of a components of distribution from the moment of manufacture to when, in the case of the retaier, goods are sod through the checkout as an integrated inear mode. For exampe, when we think of some of the costs of inventory (see section beow), we shoud be aware that a of the tota distribution costs (see Fig. 9.2) must be considered in reation to each other. This wi often invove various trade-offs, for instance between service eves and quaity, or between margins and investment in systems. As such, optimizing a ogistics system is a difficut and demanding task as each component of the system is affected by the eve of investment the company is abe to make in it. TDC aows retaiers to extend their contro over the costs as we as suppy of goods to the Fig. 9.2 Tota distribution costs for the suppy chain Source: West, A. 1989, Managing Distribution and Change. Copyright John Wiey & Sons Limited. Reproduced with permission 219

235 Retai distribution and suppy chain management Fig. 9.3 Diagram of potentia transport inks Source: adapted from Foresight your service: future of retai ogistics Note: The direct ink from manufacturer to customer incudes eectronic deivery mechanisms in some retai sectors 220 consumer. This requires an understanding of the interaction of a parts of the ogistics process. These costs are discussed in the foowing sections. Transport Transport cost structures incude substantia fixed-cost eements, but perhaps incude greater scope to adapt capacity to match voume. Centraizing retai distribution has had the benefit of dramaticay decreasing the number of journeys made with ess than fu oads, thereby improving efficiency. The use of composite distribution faciities, where the same vehice handes merchandise categories requiring different storage regimes, has aowed for more frequent fu-oad deiveries to stores. Computer software now supports route panning, using iterative programmes to identify the optima schedues for each day s deiveries and thereby achieving ower costs. In addition, retaiers make use of back hau, where the trucks make coections from suppiers rather than return empty to the distribution centre. The marketpace is changing and additiona ogistic chains need to be considered given the introduction and growth of e-commerce. If the customer is to be incuded as a direct form of home deivery in the system then this has to be taken into account in transport panning. This may be based upon agreement between retaiers to operate common hauage services to reduce the cost per deivery. The schematic diagram for the wider picture of transport needs is shown in Figure 9.3. Faciities cost warehousing As aready identified, retai ogistics can be reduced to the areas of warehousing, transport, inventory and administration, each with its associated cost structure. Faciities costs are taken as the capita and running costs associated with providing warehousing infrastructure

236 Retai ogistics the cost structure Tabe 9.1 UK grocery retaiers usage of centraised distribution Retaier Safeway (Argy) ASDA * Co-op Retai Co-op Whoesae Boots Iceand J. Sainsbury Tesco Waitrose Source: Institute of Grocery Distribution, 1997 and 2000 Note:* Asda figure of 95 per cent is for 1999 and interna systems to store and pick stock. Warehousing has a high fixed-cost eement. The ack of fexibiity makes the initia decision to create warehouse capacity crucia. Spare capacity represents wasted resource and short-term measures to cope with insufficient capacity wi be expensive. Once created, the abiity of the business to match warehousing faciities to fuctuating demand wi be stricty imited. This is further accentuated if there is to be capita investment in automated merchandise handing equipment. A regiona distribution centre (RDC) is usuay ocated in a ow-cost area. Such a centre can hande a voume in excess of a miion cases of product a week as recent advances in information systems have had a huge impact on the efficiency of the operation. It is the appication of technoogies such as eectronic data interchange (EDI) that have faciitated a reduction of stockhoding at both store and distribution centre eve. The extent of channeing of suppies through RDCs may be gauged by the examination of UK grocery retaiers (see Tabe 9.1). Retaiers such as ASDA have moved from channeing 10 per cent of their suppies through RDCs in 1986 to over 90 per cent. Simiary, the competitive change in Tesco s position may be gauged from its major increase in usage of centraized distribution. Within an RDC, communication between the warehouse management system (WMS) and each operative is by radio ink, drasticay reducing the amount of trave within the centre. The WMS tracks the throughput of merchandise and the activity of each operative. This can aow for individua piece-rates which repace team-based bonuses. The wage bi is a major eement within the cost structure of an efficient distribution centre. Hence, with the need to match the abour resource with the voume throughput, annuaized hours contracts are now commonpace. This is not aways a straightforward task as warehouse staff are often unionized and the union hods power. Deveopments have to be carefuy negotiated and this has ed to oca agreements, often producing ocaized differences in working practices and sometimes ess efficiency. The costs and functions of inventory The first thing to note is that with steadiy increasing sophistication in many product categories and this is particuary the case in retaiing the costs of hoding inventory have increased. This, couped to the increasing concentration in retaiing, means that the end consumer currenty expects a wider range of products in smaer quantities. Irrespective 221

237 Retai distribution and suppy chain management of the type of inventory system used by the retaier, and regardess of set service eves, attitudes to distribution, etc., there wi be costs incurred as a resut of the maintenance and repenishment of inventory. The suppy chain has to consider the functions of inventory which are to satisfy demand at a eve of optima efficiency. However, this function may be in confict with suppying to geographic demand with speciaist merchandise; the need of the manufacturer to have ong not short runs for cost contro; poor product forecasts; and the need for safety stock to protect against suppy and demand fuctuations. Maintaining inventory is an investment which ties up arge amounts of capita. This has obvious cost impications for (retai) companies, regardess of their size. In accounting terms, the retaier must invest in a certain eve of the stock asset in order to service the needs of customers. Greater investment shoud ensure higher eves of avaiabiity and satisfied customers; insufficient investment runs the risk of poor avaiabiity and, by impication, customer dissatisfaction. It is cear that opportunity costs exist in the capita costs of inventory; the capita tied up in inventory coud be avaiabe for investment esewhere within the company or outside the company. For these reasons, systems have become based upon demand pu rather than suppy push, as demand pu aows for restocking to occur in reation to customer demand. One method of achieving this is through just-in-time (JIT) deiveries. (JIT is discussed in more detai beow as part of corporate repenishment systems.) As previousy noted, carrying stock invoves a eve of risk, which represents additiona cost to the business. Some of the costs associated with stock cannot be eiminated by systems such as JIT. There are costs which occur as a resut of damage, piferage, wastage, maadministration, etc. (that is, shrinkage) or markdown action occurring as a resut of inappropriate inventory hoding. Markdowns, particuary in fashion-reated sectors, can account for a sizeabe portion of turnover. It is cear that risk costs represent a significant cost of inventory hoding. 222 Administration costs Communications cost (see Fig. 9.2) is argey the administrative cost associated with order processing and eectronic data interchange (EDI). Inventory costs incude the direct capita costs of buying stock, the opportunity costs of carrying inventory by having capita tied up in stock which coud be otherwise invested in the company, insurance charges and, in some countries, a tax on stockhodings. Handing costs (see Fig. 9.2) may incude the risk costs of damage and spoiage that may be caused by the movement of stock through warehouse and transportation systems. Every time an item is moved or stored, a potentia for damage, piferage or deterioration exists. Packaging costs (see Fig. 9.2) wi be incurred by the retaier through the use of paet boards on which deiveries may be shipped and the use of shrink-wrap or cing-wrap fim to secure paets and ro-cages during transit. Management costs (see Fig. 9.2) refer to those costs which are incurred as a direct resut of contro systems and mechanisms which are buit into the retaier s ogistics systems such as security systems, temperature monitoring computer systems, etc. Stock management costs, which are essentiay the costs of controing inventory, are not easy to isoate. It may be reativey easy to identify the fixed investment cost of instaing an EPOS, or a computerized shef management (CSM) system of inventory contro but it is quite another matter to isoate the stock management costs. It is widey beieved that computerized inventory management systems have improved efficiency but it seems

238 Retai ogistics the cost structure equay ikey that such systems have increased stock management costs in achieving that goa. When one thinks of the pethora of expert support staff, the costs associated with eectronic transmission of data, the greater eve of contro (and therefore more time required) afforded to management, etc., it is difficut to argue otherwise. Administration costs wi occur for every part of the inventory, whether one of the top seing 20 per cent or the remaining 80 per cent of products stocked (the Pareto principe); a inventory has to be tracked and controed in terms of receipt, ocation and despatch, for exampe. Much of recent innovation in retai ogistics has been in pursuit of reducing eves of stockhoding in the suppy chain. Retaiers of highy perishabe products have perhaps most to gain from such deveopments and have ed the way. Retai distribution centres have been used for buk storage of product. This has reieved individua stores of the need to carry stock and, in efficiency terms, has represented an improvement on previous direct deivery arrangements. However, the technoogy now faciitates the stockess distribution centre. Via EPOS and EDI, suppiers can arrive at the centre with suppies exacty taiored to immediate store requirements. The stock is then cross-docked for shipment to outets on the same day. Using this just-in-time (JIT) strategy there is no need for buk storage or doube handing at the centre. Figures from IGD (1997) indicate that up to 98 per cent of the UK grocery mutipes have committed themseves to EPOS and EDI impementation. MINICASE 9.2 Batte of the newsagents distribution change What they don t reaise, says Vinod Pate, speaking for Britain s mainy Asian-run independent newsagents, is that the Pates can stop London. The target of Mr Pate s anger is WH Smith, the chain of newsagents that shifts neary a fifth of the 450m magazines that are sod each year in Britain s $1.8 biion market for magazines. WH Smith is accused of using its might to destabiise a deicatey baanced ecosystem. WH Smith wants to modernise the magazine suppy chain. Instead of a system which requires pubishers and their distribution companies to push their tites into the whoesae and retai networks, it wants one which ets retaiers pu ony those products they think their customers want to buy. The present system, says Robin Dickie, the managing director of the firm s retai business, is inefficient. Retaiers have to send back one in three of a magazines, which are then wastefuy puped. According to Mr Dickie, this costs whoesaers $24m and retaiers $54m. On top of this, he maintains, poory targeted distribution costs $35m 40m. To end these inefficiencies, WH Smith has decided to use its own whoesae operation, which aready suppies more than 40% of the market, to estabish a nationa distribution system. Some of the big retaiers, incuding Tesco, which has 7% of the magazine market, and Safeway, support it. Mr Dickie says there are no pans to change the way newspapers are distributed, mainy because there are far fewer tites. The pubishers hate the idea, because it essens their power to dictate tites and voumes. The other whoesaers hate the idea because it woud take business away from them. The reason for the Pates fury can be found in an anaysis of the impact on the newspaper industry produced by Pau Dobson, a retaiing professor at Loughborough University, on behaf of the Newspaper Pubishers Association. The Dobson Report, as it is reverentiay known, argues that WH Smith s pan wi dupicate the existing distribution network, thus increasing costs by about $20m. The distributors customers the retaiers wi end up paying those costs. He suggests that, in consequence, up to 8,000 retaiers wi no onger find it economic to se magazines or, as a resut, newspapers as we. Were the new distribution system to be extended to newspapers, the number of outets coud be cut by 12,000. He estimates that this coud cut magazine saes by $53m and newspaper saes by $97m. Source: The Economist, 2 December,

239 Retai distribution and suppy chain management Outsourcing It is common practice for retaiers to contract out some or a of the distribution activity. A strategic argument for this woud be to aow management to focus on those parts of the business where the retaier adds vaue for the customer that is, their core competence. It is potentiay more fexibe and spreads risk. From a financia viewpoint, the contractor shoud find economies of scae that may be enjoyed by both parties and passed on to the consumer. From the retaier s perspective it represents a form of offbaance-sheet financing, with the contractor obiged to invest in assets that are effectivey dedicated to the retaier s business. Many such contractors vans carry the ogo of the retaier but remain the contractor s property. COMPUTERIZED REPLENISHMENT SYSTEMS (CRS) The benefits of the new distribution systems are numerous and extend we beyond inventory contro and repenishment. The systems are becoming increasingy important in the competitive environment of mutipe retaiing. J. Sainsbury, Tesco and Safeway have amost 100 per cent of stores with EPOS scanning. In the variety chainstores, Bhs has been on fu EPOS for severa years, their EPOS system being directy inked to their repenishment through centra distribution centres at Atherstone and Dundee. Marks & Spencer aso have fu EPOS and have impemented a computerized inventory system, ASR (automatic stock repenishment), from an initia investment of 78 miion in 1988/89. The perceived benefits of these systems for inventory are shared and are simpe: a reduction of stockhoding through more accurate ordering and repenishment (which in turn gives better product avaiabiity to the customer and thus maximizes saes). There is aso the benefit of far more accurate saes data on which improved decision-making can take pace. It can be readiy seen that EPOS may serve repenishment. By accurate data capture obtained via EPOS, forecasting (for exampe, on the basis of experimenta smoothing) future merchandise requirements and inventory contro is faciitated. This enabes both more accurate and more economica buying. It aso affords greater contro of stockhoding through greater inventory contro, by the remova of the human error associated with other forms of stock contro. 224 CORPORATE REPLENISHMENT POLICIES Corporate retai panning often invoves formaized ogistics poicies reated to distribution networks, warehouse systems, information systems, and repenishment systems. These poicies aow the head office of a retai organization to be responsive to operationa needs, which incude genera as we as oca patterns of demand, and new market opportunities. Companies that have buit into their corporate strategies the ogistics of distribution have created dramatic improvements in their return on investment whether that investment be fixed (warehousing, vehices or other equipment) or current (inventory, accounts due and cash). Corporate repenishment (CR) has thus become an integra part of the corporate strategy and is instrumenta in enabing the achievement of financia and strategic objectives. Corporate repenishment poicy is a broad poicy based upon the organization s repenishment ethos reated to a systems approach. There are two types of stock contro

240 Corporate repenishment poicies systems: the push strategy, where quantities of stock are pushed into stores in anticipation of demand; and the pu strategy, where merchandise is pued through the suppy chain to repenish saes at stores, and a minimum stockhoding is panned to be retained in the store. Systems have been deveoped in the 1990s to encompass quick response or just-in-time (JIT) methods, where the pu strategy becomes the eading method to ink inventory to actua customer demand. The channe then becomes a continuous repenishment system triggered by accurate eectronic information from the use of EPOS and EDI. As such, JIT systems aow for restocking to occur in reation to customer demand. JIT is a phiosophy as much as a technique; it is based on the premise that no products shoud be made or moved unti there is a downstream requirement for them based upon feedback from the suppy chain. Within retaiing, the fundamentas of JIT are often known as quick response (QR). The ogic is that demand is captured as cose to the fina customer as possibe, aowing a ogistics response to be made as a direct resut. Quick response wi thus incude the manufacturer in a verticay integrated suppy chain so that a means of JIT are triggered based upon changes in consumer demand patterns. Quick response is a series of technoogies which comprise the eectronic scanning of product codes, the appication of EDI, and the identification and tracking of goods in the suppy chain. The main users of QR are the grocery mutipes but other companies such as Benetton and Arcadia (formery The Burton Group) deveoped the systems at an eary stage (Dapiran, 1992). Advantages of corporate repenishment (CR) There are four different beneficiaries of corporate repenishment systems: 1 the customer; 2 store management; 3 the company; 4 suppiers. The advantages for each of these groups are discussed beow. The customer The customer is abe to receive an improved eve of service as the goods are avaiabe at the point of sae, where and when the customer needs them. When items are advertised they are in stock and this adds to customer goodwi as stock is assured through the system. Stores can, and do, order promotiona ines in some manua ordering systems. However, across a chain of stores it is unikey that a reevant managers wi order sufficient stock eves or indeed pace orders at a to meet the promotion, product introduction or range change needs, at the right time. Aso, in emergencies, substitute products and so on can be sourced more effectivey in advanced CR systems. Through economies of scae and inventory savings made by being abe to carry ess safety stock the retaier can pass on savings to the customer. The retaier is abe, through feedback from saes systems and the resutant fow of accurate saes information, to forecast buk buying requirements more accuratey. This aows the retaier to obtain greater discounts from suppiers, so making savings which can be passed on to the customer. 225

241 Retai distribution and suppy chain management Store management Store management, through corporate repenishment, may be reieved of the timeconsuming task of stock checking and ordering if the CR is we designed. Under automatic stock repenishment through EPOS and centra distribution, store management may be competey freed from stock and ordering worries. This means that they have more time to manage resources and impement company poicies. Under highy computerized goods receipt systems other duties, associated with shrinkage and deivery security, may aso change significanty. It is beieved that automated systems wi mean that managers wi not worry about stock situations. This is possibe but it must be reaized that a basic function of store managers is to ensure stock counting is accuratey recorded, whether they or a head office buyer is responsibe for ordering stock. In EPOS repenishment, stockouts occur for a variety of reasons: unpredictabe shifts in demand; product unavaiabiity; poor data capture contro; oss of information or computer faiure, etc. In such a situation it is incumbent upon store managers to ensure that major stockouts are communicated as soon as possibe to the head office buyer or aocator so that remedia action may be taken. EPOS merey removes the task of physicay ordering stock; it does not remove the manager s responsibiity to ensure that maximum customer service, through product avaiabiity, is achieved. To achieve this, accurate information input by stores on stockhoding is vita. Even with EPOS systems information can be corrupted by poor data capture, by incorrect codes being entered at the checkouts, or by staff coding artices or merchandise incorrecty. The company The company benefits from maximizing service and minimizing costs. The centra contro of inventory repenishment can be managed to keep the amount of stock to an acceptabe eve. CR avoids dead stock being buit up through discontinuity of buying or ordering by store-based management. The main benefit is that reduced stockhoding figures prevent capita from being tied up; it may be freed for the expansion and deveopment of the business. Because of the abiity to contro stockhoding, previousy used warehousing and store space is no onger required for that purpose. This enabes retaiers to maximize store foor seing space. In a sef-service environment you cannot se stock that is in the warehouse. In conjunction with centra warehousing, economies of scae can be made through composite transport systems. Whether it is an agency or own-transport network, corporate repenishment enabes improved utiization of the transport feets and improvements in service. Given the constraints of suppier-fed deiveries, marketing may aso benefit from corporate repenishment. It can be assumed that stock wi be aocated and received into stores to coincide with advertising, other promotiona activities and videos, coupons, competitions, etc. Advertising products which are not avaiabe in stores is a major faut a possibiity that can occur in any type of repenishment system. CR ensures that it is not eft to department managers, some of whom wi due to other pressures be unabe to meet the requirements of the promotiona activity. 226

242 Internet and direct distribution systems Suppiers It is far easier for a suppier to cope with one order for upwards of 300 stores than for each store independenty to pace orders. Consequenty, the suppier can deiver economicay the quantity required in good time. Simiary, it is much more desirabe to organize this through centra distribution warehousing (CDW). Phoning, faxing or using traditiona forms of pacing orders is time-consuming and often inaccurate. To dea with one eectronic system of ordering is desirabe to the suppier as we as to the retaier. However, orders may aso be paced by the buyers professionas who are speciaists in their fied, knowing the merchandise and seasona trends. Therefore, from the suppier s point of view, it is preferabe not to dea with store-based management who have numerous responsibiities to perform and ordering is ony one of a ist of urgent priorities. INTERNET AND DIRECT DISTRIBUTION SYSTEMS In addition to more traditiona methods of channe management, there has been a change of distribution strategy to increase saes through direct channes. Large retaiers now offer many of their products onine through the Internet. Whie this is an important trend, retaiers ong-term strategies are sti hard to discern. In 1995 J. Sainsbury was an eary mover by announcing it was offering wine on the Internet. However, the service was not straightforward as consumers had to be inked to the Internet and, after choosing onine, had to confirm the order and pay for it by teephone. Any e-commerce system has to provide convenience and wi have to be backed by a service that is cost-effective. This affects a of e-commerce from goba product offerings to weeky shopping items. The decisions wi revove around many issues: When shoud deiveries be panned for Monday to Friday or six or seven days a week, and shoud there be evening deivery services? Is there to be a boundary of deivery by mies or time? What is the time standard requirement for deivery in hours or days? Is there to be a deivery charge and wi this be a banded or standard cost? What is the minimum order vaue of product(s) that wi be transported direct? Shoud there be a centra pick-up point or home deivery? Ordering is possibe via a number of media the Internet, private onine services, interactive teevision and even specia in-home devices. However, the routine business of deivering goods efficienty coud prove to be a probem. For exampe, big retaiers are used to shifting paets of products by orry but the packing and deivering of singe items quicky is much more difficut and expensive. Therefore, any need for home deiveries may ead the retaiers to make aiances with parce companies, the Post Office, or even oca dairies. Retaiers offering grocery items or reguar purchases may need to consider how extra fufiment costs can be passed on or absorbed. Eary adopters may we be prepared to pay a itte more for a home deivery service, recognizing the additiona vaue of the saving in time and persona transport. In any assessment of the cost of deivery there is a need to examine the process in detai to ensure efficiencies in the cost of the assemby of each order as we as the geographic density of deiveries. This is because the 227

243 Retai distribution and suppy chain management deveopment of e-retaiing capabiities wi need to bear the costs of e-fufiment and sti offer vaue for money. Such costs may invove aspects of communications technoogy; automated picking technoogy, unattended goods coection devices; mixed centre RDC and oca deivery transport ogistics. CompuServe, the US-owned onine information system, announced its UK Shopping Centre in Subscribers who paid a sma monthy charge coud buy books from WH Smith, CDs from Virgin and cameras from Dixons. Because CompuServe is considered more secure than the Internet, the retaiers ask customers to enter credit card numbers directy into their computers. The resuts of the eary schemes have been commented on as positive. WH Smith, Sainsbury s and Tesco reported the service to have been effective (see Chapter 13 on IT and retai for further discussion of the possibiities of the Internet). The question underying any change in channe eve is why anyone woud need a superstore if manufacturers started seing their we-known brands onine. This woud mean that arge food retaiers may treat onine shopping as a threat as we as an opportunity. Logistica probems wi aso have to be overcome. These wi not be on the high-tech ordering side as the probems of security for customer and retaier have been argey overcome through sophisticated encryption systems; and devices such as an inteigent agent that wi search out the best vaue on the Internet have aso been deveoped. Distribution based on trave retai In an increasingy competitive word it has been necessary for most companies to consider different forms of distribution. The abiity for companies to se direct either from their pace of ocation or through direct marketing methods currenty exists. Some stores combine direct marketing, by use of advertisements, cataogues, teephone saes or eectronic media, with their retai outets. The structure of distribution channes in tourism is iustrated in Fig In the UK there is the opportunity to have access to a wide network of around 7000 trave agency distribution outets. The need for trave agents first arose in the 1950s 228 Fig. 9.4 Structure of distribution channes in tourism

244 Internet and direct distribution systems because of the rapidy expanding operations of airine/ferry businesses. Transport providers required a means of distribution for their products that was more cost-effective than estabishing individua networks of booking offices around the country. Their subsequent deveopment was a direct resut of the increasing consumer demand for incusive tours from hoidaymakers who were argey uneducated and unsophisticated, and therefore ooked to experts to faciitate the process. These agents charge commission on the saes they make and they need to hod a stock of the companies brochures or saes iterature. The trave retai agent ses a product that is both intangibe and perishabe and this is very different from some of the more traditiona types of retai. The bookings made for trave abroad, from the UK, are mosty organized through either high street trave agents for hoidays or by speciaist business trave agents for business trave. The UK has a different pattern of purchase from that of the rest of Europe where most bookings are made direct rather than through agents. In many European countries, twice as many bookings are made direct than in the UK. The Internet has many impications for a areas of business and every sector of society. Its effect can be seen aready in the precarious baance of trave distribution. Saes channes for trave were once cear-cut but are now more compex. Disintermediation does not appear to be essening the trave industry s compicated distribution network, and if anything is adding to it. To date there has been a ack of conversion of the British hoidaymaker to buying direct. There is itte doubt that, for many, the convenience of using an agent is an important eement in the buying process. This is because a trave agent may offer greater opportunities for one-stop shopping, aowing the parae purchase of insurance, car hire, rai trave to the airport, traveer s cheques, and so on. The trave agent offers a number of benefits which may have ed to the reason more traveers have not booked direct (Gibert, 1990). The information box summarizes the possibe reasons for customers to continue to use trave agents. However, with Expedia and Traveocity now widey known and accepted, the use of more direct systems of booking is expected to make inroads into traditiona forms of distribution. Possibe reasons for the use of retai trave agents and imitation of use of direct channes Easy accessibiity: to a range and choice of brochures to product components of visas, traveer s cheques, insurance, etc. to booking points in every main town and city to an aternative agent as we as products and brands Convenience: for obtaining information and advice for making the purchase and payment for the hoiday for making compaints and being represented if things go wrong s 229

245 Retai distribution and suppy chain management Habit: peope can get into a pattern of behaviour which becomes habit forming. Ony a major campaign by direct mai operators coud change this habit Security/risk: consumers fee more secure when deaing with a reputabe operator or agent. Those who buy from the Association of British Trave Agents (ABTA) fee they obtain ABTA protection and that products which are offered have been vetted Environment/atmosphere: trave agents offer an environment which is part of the hoiday experience. The trave agency environment is the perfect setting for persona seing methods which are a powerfu means to generate bookings Economic: because trave agents compete on price or added vaue, and tour operators have the smaest of margins, there is itte difference in the price between trave agents and direct se CONCLUSION The movement of goods is a feature of retaiing. This movement is becoming of greater importance as a means of creating advantage over competitors. The use of technoogy, buiding reationships and driving down costs is important. Each provides an area of focus that a retaier has to consider in reation to their competition. For a company to be successfu it has to deveop a differentia advantage, which wi distinguish the company s offer from that of the competition. Ony when a company has buit an advantage in distribution and other aspects of the marketing mix wi it find that store visits increase and profits rise. The advantage may be based upon many aspects of the business but in distribution important considerations are cost reductions in order to create vaue for money and higher profits, and product avaiabiity and quaity through overa distribution ogistics. EXERCISES The exercises in this section reate to the issues discussed in this chapter. It is suggested that you work through them before moving on to Chapter Write a report to the director of a retai chain of trave agencies with your findings regarding whether the trend in the use of the Internet wi affect the future business of the company and if so what they shoud do to counteract any threats. 2 Write a note to the director of a arge retai company to expain the way that any new computerized ogistics or repenishment systems coud affect his managers who have to adopt the new systems. 3 Write a report on the reasons a retaier may outsource distribution activity. If there are benefits to outsourcing what type of retaier woud you not expect to outsource and what are the reasons for this? 230

246 References and further reading 4 Partnership functions are increasing in importance. Comment on this and provide some arguments, which your manager coud use, to convince others that the trend is important and that your company shoud foow suit. REFERENCES AND FURTHER READING Aba, J., Lynch, J., Weitz, B. and Janiszewski, C. (1998) Interactive home shopping: consumer, retaier, and manufacturer incentives to participate in eectronic marketpaces, Journa of Marketing, 61 (3), Betts, E. and McGodrick, P.J. (1995) The strategy of the retai sae, typoogy, review and synthesis, Internationa Review of Retai, Distribution and Consumer Research, 5 (3), Booms, B.H. and Bitner, M.J. (1981) Marketing strategies and organization structures for service firms, in Donney, J. and George W.R. (eds) Marketing of Services. Chicago, IL: American Marketing Association. Bowden, D. (1995) Probems with deivery deay on-ine shopping, Independent on Sunday, 4 June, 4. Bowby, S. and Foord, J. (1995) Reationa contracting between UK retaiers and manufacturers, Internationa Review of Retai, Distribution and Consumer Research, 5 (3), Branigan, L. (1998) The Internet: the emerging premier direct marketing channe, Direct Marketing, 61 (1), Christopher, M. (1992) Logistics. London: Chapman and Ha. Christopher, M. (1997) Marketing Logistics. Oxford: Butterworth-Heinemann. Christopher, M., Payne, A. and Baantyne, D. (1996) Reationship Marketing. Oxford: Butterworth- Heinemann. Comer, J.M., Mehta, R. and Homes, T.L. (1998) Information technoogy: retai users versus nonusers, Journa of Interactive Marketing, 12 (2), Cooper, J., Browne, M. and Peters, M. (1994) European Logistics: Markets, management and strategy. Oxford: Backwe. Dapiran, P. (1992) Benetton goba ogistics in action, Internationa Journa of Physica Distribution and Logistics Management, 23 (4), Davies, G. (1993) Is retaiing what dictionaries say it is?, Internationa Journa of Retai and Distribution Management, 21 (2), 3 7. Davison, J. (1995) Lecture Notes on Distribution Management. Guidford: University of Surrey. Debridge, R. and Oiver, N. (1991) Just in time or just the same, Internationa Journa of Retai and Distribution Management, 19 (2), 20. The Economist (2000) The batte of the newsagents, The Economist, 2 December. Fernie, J. (1995) Internationa comparisons of suppy chain management in grocery retaiing, Service Industries Journa, 5 (4), Fernie, J. (1997) Retai change and retai ogistics in the UK, past trends and future prospects, Service Industries Journa, 17 (3), Fernie, J. and Sparks, L. (1997) Logistics and Retai Management. London: Kogan Page. Foresight Your Service, Future Modes of Retai Logistics. London: Retai Logistics Task Force, DTI pubication. Foresight Your Home, New Markets for Customer Service and Deivery. London: Retai Logistics Task Force, DTI pubication. Gattorna, J.L. and Waters, D.W. (1996) Managing the Suppy Chain A Strategic Perspective. Basingstoke: Macmian. Gibert, D.C. (1990) European product purchase methods and systems, Service Industries Journa, 10 (4), Institute of Grocery Distribution (1997) Trends in Grocery Retaiing the market review. Watford: IGD Business Pubications. Institute of Grocery Distribution (1998) Grocery Market Buetin. Watford: IGD Business Pubications. Institute of Grocery Distribution (2000) Retai Logistics, Watford: IGD Business Pubications. 231

247 Retai distribution and suppy chain management Koter, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principes of Marketing. 2nd European edn. Heme Hempstead: Prentice Ha. Muhern, F.J. (1997) Retai marketing: from distribution to integration, Internationa Journa of Research in Marketing, 14 (2), Porter, M.E. (1985) Competitive Advantage, New York: Free Press. Powe, T.C. and Dent-Micaef, A. (1997) Information technoogy as competitive advantage: the roe of human, business, and technoogy resources, Strategic Management Journa, 18 (5), Rhodes, E. and Carter, R. (1998) Eectronic commerce technoogies and changing product distribution, Internationa Journa of Technoogy Management, 15 (1, 2), Rogers, D., Daugherty, P.J. and Stank, T.P. (1992) Enhancing service responsiveness: the strategic potentia of EDI, Internationa Journa of Physica Distribution and Logistics Management, 22 (8), Schary, P.B. and Coakey, J. (1991) Logistics organization and the information system, Internationa Journa of Logistics Management, 2 (2), Sheombar, H.S. (1992) EDI-induced redesign of co-ordination in ogistics, Internationa Journa of Physica Distribution and Logistics Management, 22 (8), Smith, D. and Sparks, L. (1993) The transformation of physica distribution in retaiing: the exampe of Tesco pc., Internationa Review of Retai, Distribution and Consumer Research, 3 (1), Sweney, M. (2001) Amazon ooks for more fufiment, Revoution UK, 8 August. Wamsey, A. (1998) New media choice: The Gap web site, Marketing, 19 February, 15. West, A. (1989) Managing Distribution and Change. London: John Wiey and Sons. 232

248 10 Methods and approaches to retai strategy and marketing panning This chapter shoud enabe you to understand and expain: the reason why retai companies shoud adopt panning; probems which may occur due to a ack of panning; the purpose of a marketing pan; the structure of a marketing pan incuding SWOT, PEST anaysis, segmentation and strategic decisions over competitive positioning; the need to create ownership of pans through invovement of staff. The pace of change is unrestrained and nowhere is it more unrestrained than in retai. In the past 30 years we have witnessed a dramatic increase in competition in the marketpace. Within this turbuent arena some retaiers manage to stand out from the crowd due to their abiity to create successfu marketing changes through we-devised pans. A panning options have to be considered within the ight of their feasibiity and acceptabiity in the marketpace. This is not to say that panning is not part of our everyday experiences; panning is simpy part of daiy existence whether it be for socia or business purposes. We a have to pan to some extent in order to be successfu in ife. Very few Oympic medaists coud be successfu without a panned programme of training and events eading up to their Oympic finas and achievements. Whether it is for examinations, sports events, going on hoiday or organizing a party, the use of panning eads to a greater certainty that the event wi be a success. Without the right approach, and a sensibe pan, aternative courses of action wi have sedom been considered and, consequenty, there is the ikeihood that an individua, company or organization wi not function as we as might be expected. Knee and Waters (1985) have referred to the way retai management is aeged to have a propensity for the butterfy spirit and approach to probem-soving rather than adopting a ceary defined approach. If a retai company is to remain competitive, continua improvement in systems of panning and increasingy sophisticated approaches to strategic panning are necessary. Panning is the most important activity of marketing management. Retaiers need to pan for merchandise, inventory contro, ogistics deveopment, pricing, promotiona campaigns, store ocation and ayout, positioning of the business, branding, growth and deveopment of the business and other functiona activities. The pan, which needs to ensure that the previous areas are considered, shoud provide a common structure and act as a focus for a of the company s management activities. It is, therefore, essentia for us to understand marketing panning in its context as a key function of management. 233

249 Methods and approaches to retai strategy and marketing panning Tabe 10.1 Comparison of strategic emphasis for different-sized retaiers Areas for consideration Strategic options Property Physica distribution Inventory management Opportunity Large retaier Segment and market to arge target audience based upon price, assortment, quaity, oyaty scheme Managing and deveoping the property portfoio and making ocation choice wi be a core activity. There is a constant need to acquire and deveop prime ocations Use of third party contracts so have to ensure they offer added vaue EPOS can be afforded and inked to MIS to improve marketing, reduce stock-turn and minimize costs Due to higher resources the abiity to deveop retai initiatives such as Web presence, oyaty schemes, outof-town or internationa deveopment Sma independent retaier Seect niche markets, identify gaps in the market, provide speciaist sourcing/ merchandise, and give exceent service Need to find cost-effective ocations with an emphasis on agreeing the right ease conditions and rent reviews. Eary seection of a ocation in the improving areas of a town/city may be important in reducing the burden of high rent Combination of sef and contracted services with higher ratio of costs invoved Less sophisticated IT back-up and need to carry high stock eves to ensure good service eves which increases costs Lack of resources focuses the panning on the short-term buiding of the business. This may be based upon surviva in a time of recession as a high debt burden is common Panning in retaiing is based upon a number of approaches. Retai panning often occurs in cyces due to the seasonaity of much of retai activity. Any marketing pan is normay reated to company activities which are concerned with a future horizon of one to five years, whereas ong-range pans dea with timespans over five years. There are aso strategic pans which are concerned more with externa environmenta infuences, and opportunities, and ess with the detai of functiona company marketing activities. Strategic pans are normay either medium or ong term and marketing pans typicay cover the short or medium term. The purpose of creating different types of retai pans is to improve the overa business both currenty and for the future, and to ensure that customers continue to be satisfied with the retai experience and offer. The size of retaier may pace a specific emphasis on the strategic possibiities which are avaiabe as detaied in Tabe The retai industry provides for a combination of different products and services from the sma oca convenience store to the arger high street chains, major food retaiers, banks or buiding societies. It can incude the fast-food outet and the petro forecourt. The concept of change and surviva is as important to sma businesses as to arger organizations such as Marks & Spencer or Sears. That change wi occur, and with increasing speed, is the most predictabe aspect of contemporary business ife. It woud therefore seem sensibe to try to become famiiar with the underying trends and forces of change which impinge upon retai business activities. This enabes the management of change towards desired objectives rather than the organization being driven bindy before the 234

250 Probems that may arise if retai panning is ignored tide of market forces. We have ony to remember retai probems such as the demise of Athena and Rumbeows to reaize the importance of cear business panning. The ong-term surviva of any company is dependent on how we the business reates to its environment. In spite of its dominant market share, Sears British Shoe Corporation faied to understand the changes which were taking pace in shoe-buying behaviour. The company introduced eementary notions of market segmentation that faied to address the substantia probems it was facing because of increasing competition in that market. A retaiers have to devise forward pans of where a company, an outet or product woud be best paced for the future. The pan therefore needs to specify the changes that have to be made, needs to aow for the expoitation of any short-term advantages, and has to demonstrate the appication of anaysis and reason as part of the panning procedure. The Sears Group in the UK demonstrated a ack of consistent focus in the moves it made. It entered and withdrew from the menswear market, became market eader in sports goods with the Oympus chain, and then divested this business and other parts of the organization when probems arose in the retai marketpace. PROBLEMS THAT MAY ARISE IF RETAIL PLANNING IS IGNORED A range of probems may be faced if retai panning is ignored. For exampe, this coud invove a variety of difficuties and/or missed opportunities: faiure to take advantage of potentia retai growth markets and new marketing opportunities such as the Internet and the expansion of the financia services market; ack of maintenance of demand from a spread of markets and erosion of market share due to the actions of competitors for exampe, competition for supermarket chains from the deep discounters such as Adi, Lid and Netto; customers expectations are not met and service deivery weakens as amost occurred at Granada Rentas; increasing demand probems in ow demand periods such as when the economy is weak and eves of confidence are ow when consumers spend ess; ow eve of awareness of the competition s strategies whereby there is no strategic response; poor image associated with the shop/group name or brand for exampe, when the Forte Group was unaware of the intentions of Granada, which eventuay took over the hote group. Companies such as MFI and Ratners suffered this probem; ack of support for co-operative marketing initiatives; decine in quaity eves beow acceptabe imits; difficuty in convincing suppiers of the strengths of the company; disiusionment and ack of motivation of empoyees. As can be seen from the above, there are many potentia probems which face retai organizations when there is a ack of panning. This happened to Arcadia, the former Burton Group, the UK s argest menswear retaier, which had dated outets and a poor image in the 1970s and 1980s. The probem was that the company misjudged the decining market for men s suits and the emergence of a demand for a wider product range of 235

251 Methods and approaches to retai strategy and marketing panning eisurewear, jeans and other forms of casua cothing. A major change of direction needed to be panned in order to modernize the stores, improve the merchandise, promote the changes and identify with the changing market needs. Whie panning cannot guarantee success, it can make the organization ess vunerabe to market forces. Day-to-day probems can be more easiy avoided if more attention is given to panning activities, especiay in reation to cash fow, fixed cost and expansion pans. It has been argued that much of retai management has been reactive, opportunistic and dedicated to crisis firefighting than to ong-term anaysis and panning. Retai companies need to pan to have word-cass service or at east distinctive competence in order to be successfu. This means that, through sensibe panning, companies wi attempt to associate their brands or company name with service exceence in order to estabish a reputation for meeting or exceeding customer expectations. The methods of service deivery have to be panned to achieve superior systems and support the nature of the business. Companies which rey on ad hoc initiatives or fai to manage their future wi find that their future has been managed for them. Even though the jeweers Ratners suffered major probems due to bad pubicity and over-expansion, no company can ignore the significance of the way this retaier grew through its panned pricing poicy. Ratners is a esson that retaiers need to ensure that high margin products shoud be bought at the appropriate cost and sod at competitive prices. Each company wi adopt a different approach to the task of panning, based upon the way senior executives see the purpose of marketing pans. The vaues of any company may be said to fa somewhere aong a continuum which runs from a simpe wait and see, through a more rigorous prepare and predict stance to companies at the opposite end of the continuum who want to make it happen. A company wi benefit more from a future that is made to happen because the cear direction provides fewer surprises for the workforce and paces ess pressure on other company resources. At present, great importance is paced on buiding brand strength and, if appropriate, own-brands. This is because of the reaization that retai brand strength can aow a company to be more successfu in new ventures such as oyaty schemes or financia services. The German men s cothing company Hugo Boss has managed to deveop a strong emotive brand based upon a systematic approach to research, deveopment and promotion. Brands that are strong are said to be eastic and can have a spin-off effect on new products or services. This is important for retaiers who wish to expand. THE PURPOSE OF A MARKETING PLAN It shoud now be cear that panning is an important activity for any company. We now need to reinforce the essentia points which bring vaue to a company. Some reasons for panning foow: To provide cear direction to the overa retaiing operation based upon a systematic, written approach to panning and action. The panning system aows direction by virtue of requiring a written mission statement and a set of objectives to be estabished, which can be transmitted to the workforce. This provides cear eadership principes and aows the workforce to know how their own efforts are essentia to the achievement of desired resuts. 236

252 Reasons for poor panning experiences To co-ordinate the resources of the company. This eiminates confusion and misunderstanding so that there is maximum co-operation. Tasks and responsibiities may be set which carify the direction and objectives of the company. To ensure there is a united effort, recommendations have to be presented in such a way that they can be fuy understood at a company eves. The pan then acts as a master guide which wi underpin a endeavours and decision-making. The pan shoud ead to greater empoyee cohesion and make everyone fee part of a team in which each individua beieves they can make a vauabe contribution. To set targets against which progress can be measured. Quantified targets for quantity of merchandise sod or revenue generated provide the focus for individua, departmenta or company performance. Some companies wi set targets at achievabe eves whereas others wi set targets at a higher than expected eve in order to stretch empoyees to gain better resuts. To minimize risk through anaysis of the interna and externa environment. The panning procedure aows managers to identify areas of strength and weakness so that the first can be expoited and the second surmounted. In addition, threats and opportunities can be assessed. To assess targeting by examining the various ways of targeting different retai market segments. This aows for different marketing mix strategies to be appraised prior to their impementation. To provide a record of the company s marketing poicies and pans. This aows managers to check on what has been attempted in the past and to evauate the effectiveness of previous programmes. It aso provides continuity and a source of reference for new managers joining the company. To focus on onger-term action in reation to business objectives so that the company pans to be in the best current position to achieve its future aims. This aows management to deveop continuity of thought and action from one year to the next. Given that you have understood the previous information in this book, it wi be accepted that company objectives shoud be based upon reevant market-centred opportunities. It is the responsibiity of retai marketers to identify these opportunities and to have devised a system of panning which may ead to their expoitation. REASONS FOR POOR PLANNING EXPERIENCES The standard approach to panning can be found in most textbooks to foow a series of simpe steps. However, the true art of panning is to understand both the human aspects and the procedura necessities of panning. A poor panning experience may be a function of one or a combination of the foowing issues or probems. 1 One major probem which is difficut to resove is if there is weak support for the pan from senior peope and the chief executive. Any panning requires senior management support if it is to be treated seriousy by empoyees. 2 The system of panning which is adopted may not suit the company. There is often the separation of different panning functions from each other that eads to a ack of integration. Therefore, the system often has to be designed to match the company and to achieve harmony between groups. 237

253 Methods and approaches to retai strategy and marketing panning The panning system is often bamed when the weakness is actuay poor panning and management. Sometimes there is confusion over data or panning terms. The requirement is for a pan to be compied which carifies times and responsibiities for different actions and meetings. 4 Unexpected environmenta changes may create adverse effects on the company s performance. Panning is then often bamed for not having incorporated such a scenario. Pans need to be fexibe and updated when necessary. 5 The vaues of the management team wi impy different acceptance eves of the pan and, utimatey, its success or faiure. There is often hostiity towards pans because of the feeing of a ack of invovement in the panning process. This often occurs when the panning is eft soey to a panner or it becomes an annua ritua. 6 Probems occur when there is an over-abundance of information which has to be fitered for its reevance. Too much detai in the eary stages can produce what is often referred to as paraysis anaysis. There is a need to decide what is important and what is not. It is distressing that companies which have recognized the need for a more structured approach to panning, and have subsequenty adopted formaized procedures found in the iterature, sedom enjoy the advantages that are caimed for organizations which embark on panning. In fact it is often panning itsef which is brought into disrepute when it fais to bring about the desired changes within a company. The probems faced in marketing panning have ed to a growing body of iterature which indicates companies shoud do what they are good at, rather than embark upon higher eve panning exercises. This coud be a retrograde step because companies shoud attempt to take the most ogica direction and not be hampered by interna faiings of the human resource aspects of impementation, ack of panning expertise, or disregard of the invovement of others in the panning process. The argument put forward here is that an understanding of the socia aspects of the company is a prerequisite for successfu panning. It is necessary for those invoved in panning to recognize the need for invovement of a departments in the company in the formuation of the pan. This wi ensure various personne are more ikey to be motivated towards its successfu impementation. Such motivation is vita to success, quite apart from the vauabe knowedge and expertise which key personne bring to marketing pan formuation. The reaity of this is that most accompishments, in service industries, are made through peope. The contro of schedues, budgets, monitoring performance or corrective decisions can ony take pace with the invovement of peope. Each empoyee who has responsibiity requires cear objectives against which to judge whether tactica action needs to be carried out. It is important to ensure that pans are not prepared within the vacuum of one department or by a marketing team who beieve they are an eite. We-structured management meetings may offer a setting where deiberation, responsibiity and authority are shared and taken by a. This precudes dogmatic assertions about the particuar methods of preparing and organizing marketing panning. The marketing panning system offers a structured and market-ed approach to organizing and co-ordinating the efforts and activities of those invoved in deciding on the future of an organization. However, there is no one right system for any particuar company as companies differ in size and diversity of operations, as may the vaues of senior management, and the expertise of those invoved in the panning exercise.

254 Reasons for poor panning experiences MINICASE 10.1 THE BODY SHOP Has The Body Shop ost its direction for good? The Body Shop has evoved from a singe retai outet into a goba brand on the back of products such as best-seers Nut Body Butter and Vitamin E Moisture Cream and a brand positioning as a sociay responsibe cosmetics retaier. It now has 1841 outets across the gobe, incuding 294 in the UK. Yet over the past few years, not everything has proceeded entirey smoothy. Two years ago, the company restructured dramaticay and founder Anita Roddick took a back seat as Patrick Gournay of Danone was brought in to turn around the company. Yet a poor Christmas, when saes of Body Shop s gift packages traditionay boost annua figures, forced the company to issue a profits warning. The company reveaed annua profits down 55% from 28.8m to 12.8m, as we as a 1% drop in ike-for-ike saes in the first seven weeks of Gournay admits The Body Shop has made mistakes most notaby poor impementation of its pan to boost revenue from new products. We tried to do too much too quicky, not respecting our brand heritage, said Gournay. It woud have been better to have a sma number of big ideas than a big number of sma ideas. In the UK, The Body Shop finds itsef operating in a much more competitive marketpace than at its aunch 25 years ago. Its excusive green proposition has been argey eroded, with most high street retai chains now fieding their own natura cosmetics and toietries ranges. And a price and promotiona batte on toietries has eft its products more expensive than its rivas. The company s attempts at innovation suggest it is targeting a younger audience, yet there are no signs this has succeeded. It core customer base is sti getting oder. The Body Shop is undeniaby one of the word s best-known brands and the ony goba brand to set out its sta on environmenta and socia issues. In the past 25 years it has opened up a new agenda for business and aowed peope with simiar attitudes to express themseves openy without being ridicued. When you ook at what is going on today, The Body Shop s vaues now seem even more contemporary than they were when it started consumerism, socia justice and environmenta issues are now firmy on the agenda across the word. But where the brand has perhaps taken a wrong direction is that the reationship between its vaues and products appears to have been watered down. As a consequence, its reationship with customers has been affected. I think this is at the heart of why the brand is appearing to founder a bit. Anita Roddick is one of the word s great marketers, but as her invovement has essened The Body Shop has ost a bit of passion and heart. The Body Shop is a goba company, but has a turnover of just 375m with a imited management structure to match the chaenges it faces on many different fronts. It operates in 49 markets and has 1841 outets gobay. This brings inevitabe probems with franchisees, for exampe which require management firefighting. The strong pound has proved a particuar chaenge, with consequent margin pressures making its products seem rather pricey amid growing competition. In the eary- and mid-90s, The Body Shop rested on its aures whie top management aowed itsef to be diverted by wider goba issues. It is sti paying the price, both in the US and in the UK, where Boots, Superdrug, the supermarkets and new entrant Lush have made significant inroads. The company s instore design is distinctive and idiosyncratic, but aso outdated. Attempts have been made at an update, but haven t reay worked. It was right to divest much of its manufacturing in 1999, but it has been foowed by product revoution, rather than evoution, which has seen it aienate its core market without bringing in new consumers. [The need is to] make the brand phiosophy more obvious in-store; given that Anita has scaed down her invovement, find a team whose hearts beat as passionatey as hers to get NPD back on track. The Body Shop marketing expertise was based on the beief that actions speak ouder than words it sti hods true, but the company seems to have forgotten it. Source: Harriet Marsh, Marketing, 10 May,

255 Methods and approaches to retai strategy and marketing panning THE STRUCTURE OF THE MARKETING PLAN The construction of the marketing pan is characterized by a range of headings which have been deveoped by different theorists. Some authors offer a ist of sections with the first headed SWOT issues or situationa anaysis, the second headed statement of objectives and goas or setting objectives, the third is strategy or marketing programming, and the ast is monitoring or contro. We prefer to use different stages which are more easiy understood by managers and students. The stages are: 1 What is it we want? 2 Where are we now? 3 Where do we want to go? 4 How do we get there? 5 Where did we get to? These stages are represented in the mode in Fig For an understanding of the mode it is important to reaize that the system is not aways inear, as woud appear from the seemingy hierarchica stages. Quite often the process needs to invove an interpay between the various stages, with the fexibiity to move backwards as we as forwards in an interactive process. We shoud aso understand that refinements of the pan take pace as understanding of the interconnections improves. We shoud not presume that anything cose to perfection wi appy unti a number of drafts have been competed. The approach to retai marketing panning is described in the foowing six main sections: 1 the corporate mission and goas; 2 externa and interna audit; 3 business situation anaysis; 4 creating the objectives; 5 providing an effective marketing mix strategy; 6 monitoring the pan. 240 THE CORPORATE MISSION AND GOALS It is important to understand what is expected of the pan from the ong-term goas set at corporate eve. A cear mission statement enabes the retaier to concentrate on core business objectives and what it wants to accompish. Mission statements often wi have terms such as: focus on our customers ; our foundation is our peope ; we strive for quaity ; renewa and innovation is our mantra ; we offer responsibe and ethica approaches. The mission statement is a confirmation of what business the company is in from a consumer viewpoint and aso acts as a guide for empoyees to know what the purpose of the company is. For exampe, the statement coud stress: serving customers better than the competition and supporting the oca community and empoyee needs through exceence in retaiing. The mission statement then represents the overriding goa of the

256 The corporate mission and goas Fig A mode of a marketing pan 241

257 Methods and approaches to retai strategy and marketing panning company or organization. It is a statement of what the company wants to accompish within chosen markets for the stakehoder groups it wi serve. The mission statement is a cear expression of what the company or organization wi attempt to achieve from the strategic intent and inputs in the marketing pan. It encapsuates the broad vision of the retaier and faciitates the identification of both the marketing objectives and goas. The goas of a mission statement may be based upon the vaues and objectives of the key sharehoders, board directors or senior managers. In some situations, goas are set ony after the estabishment and evauation of the marketing programmes. This is a parochia, programme-ed method of panning where management does not attempt to meet higher eve corporate goas within the panning process because managers are more prepared to sette for what they beieve wi work rather than what shoud be made to work. A decision to agree easier targets may mean that a company, or organization, wi not investigate as broad a range of aternatives, objectives and strategies as their competitors who may be driven to ensure eadership and competitive supremacy. Companies need to invent and reinvent themseves in the modern competitive age and therefore the mission statement shoud offer some guide as to the direction of this. The mission statement of Boots is: To be the word s eading retaier of products and services that hep make our customers ook good and fee good. Whatever approach is taken, the most effective form of panning has to create a baance between setting corporate direction and ensuring empoyee commitment to that direction by the process of their invovement (see Fig. 10.6). If goas are dictated to empoyees by a top-down approach there is very itte sense of ownership of the pan, which can ead to a corresponding ack of motivation. As wi be reaized from Fig there can be a baanced approach through the combination of bottom-up and top-down processes. UNDERSTANDING THE FORCES OF INDUSTRY COMPETITION The pan has to be formuated in reation to those forces which impinge on the ikeihood of success. Prime among such forces is competition. The pan cannot exist in isoation of other factors. As Porter has argued (1980), it is easy to view the competition too narrowy and too pessimisticay. Porter views intense competition as natura, with the state of competition depending on the reationship between five basic forces (see Fig. 10.2). Porter argues that it is the coective strength of these forces that determines the utimate profit potentia of any industry. The mode has become widey known as the five forces mode of competition. Any panning approach has to answer key questions about the marketpace. The use of the five-forces mode provides an anaysis that wi hep resove such questions as: What are the key factors at work in the competitive environment? Are there any underying forces that need to be uncovered? Is it ikey that the forces wi change and if so at what pace? What is the position of particuar competitors in reation to these competitive forces? What can management (marketing) do to infuence the competitive forces affecting their business and sector. 242

258 The forces of industry competition Fig Five forces governing competition in an industry Does the anayses provide an understanding of whether some industries or sectors are more attractive than others? The forces of rivary among existing competitors are: 1 the outcome of rivary; 2 the bargaining power of buyers; 3 the bargaining power of suppiers; 4 the threat of new entrants; and 5 the threat of substitute products or services. Each of these forces, in turn, can be broken down into its constituent eements. The foowing discussion of these forces heps with our understanding of the retai industry and carifies the considerations we must take into account. 1 Rivary among existing competitors Factors which might affect the nature of competitiveness or the jockeying for position by the use of tactics in the industry incude the foowing: the degree of concentration in the industry, and the number and reative size of the competitors; fights for market share if industry growth is sow; the extent and nature of product differentiation; whether fixed costs are high or the product perishabe; capacity in reation to demand and characteristics of demand; 243

259 Methods and approaches to retai strategy and marketing panning high exit barriers keeping companies competing even though they may be earning ow or negative returns. 2 Bargaining power of buyers The bargaining power of the buyers (that is, demand for the products or services whether it is the retai company acting as buyer from suppiers or whether it is the retai customer) is reated to the foowing features: the degree of concentration reating to the reative importance of eves of demand on the customer side by comparison with those of the competing suppiers; the reative significance of the produce or service to customers in terms of quaity, expenditure and service; the reative ease and cost of changing to new suppiers (switching costs); the amount of information possessed by buyers; the abiity of buyers to integrate backwards; profit eves of buyers; the extent to which buyers want differentiated products. 3 Bargaining power of suppiers Factors reevant to the suppy side of the industry wi be simiar to those mentioned on the customer side of the industry and, thus, incude: the structure of the suppier side reative to the producer industry; the degree of produce differentiation/substitutabiity; the potentia for forward integration; the reative importance of the industry demand to suppiers; the feasibiity and cost of producers switching suppiers. 4 Threat of new entrants The ease, or difficuty, with which new producers may enter the industry affects the degree to which the structure of the industry can change due to the extra competition and the desire to gain market share. The seriousness of the threat is dependent on the type of barriers to entry and on the way existing competitors wi react: the extent to which there are economies of scae; the amount of capita required to capture customer oyaty and create brand identification; the capita required for inventories and absorbing start-up costs; the earning curve benefits which ower costs experienced by existing companies; the eve of customer switching costs; the existence of government reguation and ega imitations and barriers. 244

260 Externa and interna audit 5 Threat of substitutes the avaiabiity of substitutes and wiingness of buyers to purchase substitute products which have the same functiona capabiity; the impact on profits of cose substitutes; the impact of the comparative price and quaity of substitutes. The above approach to industry anaysis can aow a retaier to understand the pressures on the industry and the ikey effect on the prospects for short- and onger-term success. More specificay, a retaier is abe to take into consideration its true competitive position with regard to its opponents and can identify the possibe strengths and weaknesses resuting from the current state of rivary in the industry. It may then proceed to consider what eve of importance shoud be attached to the marketing panning process in order to provide a competitive advantage and a position from which to achieve its financia objectives. EXTERNAL AND INTERNAL AUDIT An externa and interna audit is carried out as part of the broader process of market anaysis to determine the opportunities existing in the retai marketpace. It is necessary to gather enough reevant information about the externa and interna company environment to be abe to construct a business and market picture of current and future pressure and trends. One important part of marketing panning is knowing what to anayse. Executives have to be carefu that they do not have too imited a focus in terms of the environment. Checkists of necessary information are one way to stop companies scanning the environment based upon what they intend to do, rather than in reation to what they coud or shoud do. The information coected shoud, at the very east, form the basis of a PEST investigation. PEST anaysis is an examination of the Poitica, Economic, Socia and Technoogica changes which may affect the company and the pan. The information gathering utiizing PEST is part of an interna and externa audit which coud invove the business/economic environment and the market environment discussed in more detai beow. Business/economic environment Poitica: Economic: Socia: Technoogy: taxation, duty, reguation, poicies, oca authorities, statutory hoidays, Sunday trading, opening times, panning permission for buidings infation, unempoyment, fue costs, exchange rates, average saaries, market environment (see market environment ist beow) demographics, hoiday/eisure time entitement, vaues (consumerism), ifestye, mae/femae roe changes, deay of first chid, education, workforce changes innovations, new retaiing systems, home technoogy, eectronic fund transfer, Internet, distribution systems, stock handing mechanisms and contro 245

261 Methods and approaches to retai strategy and marketing panning Market environment This is an expansion of the economic category above. Tota market: Companies in the market: Product deveopment: Price: Distribution: Promotion: size, growth, trends, vaue, industry structure, barriers to entry, extent of under- or overcapacity of suppy, marketing methods eve of investment, takeovers, aiances, promotion expenditures, redundancies, profits, expansion pans, trading formats trends, new product types, service enhancements eves, range, terms, practices patterns, trade structure, poicies expenditure, types, communication messages The information isted above shoud be gathered on the basis of how it affects the company and service. For exampe, it wi be found that shops in singe-site positions are disappearing and that ocation in areas where the fascia brands wi have puing power is becoming more important. The task is then to anayse and ascertain the way forward. Identification of objectives may be intuitive and based upon a good idea, or systematic through researched evidence, or based upon tria and error from what has been earnt from past events. BUSINESS SITUATION ANALYSIS Once sufficient interna and externa information has been coected it is necessary to carry out an anaysis of the business situation, to identify the major Strengths Weaknesses Opportunities Threats facing the company. This is the so-caed SWOT anaysis. There is aso the need to check these against information provided from PEST anaysis. The systematic anaysis carried out at this stage provides for the formuation of a number of assumptions about the past performance, future conditions, product opportunities, resources, and service priorities which a ead to the possibiity of a range of strategic options for an organization within the retai industry. The anaysis may utiize a number of approaches reated to ife-cyce assessment or portfoio anaysis. These are discussed ater and describe how to form a cearer understanding of the current position of the retai business which wi ead to guidance in the seection of specific objectives and strategies. The research feedback, from the earier phase of panning activity, shoud have highighted customer satisfaction or dissatisfaction with the current retai offers and services. It wi aso have highighted what it is that the competition is doing we, and may indicate the existence of market gaps. For a store, decisions may need to be taken about the merchandise. This may incude the width of assortment (number of different product categories carried) and the depth of assortment (the variety of products carried in a 246

262 Business situation anaysis specific category). Scanning what is happening in foreign markets wi sensitize the panners to what may become new trends or ideas in the home market. The point is that the overa anaysis shoud be far-reaching to ensure that the best possibe company options are assessed. SWOT anaysis A framework of information shoud be created which is divided into the categories of strengths, weaknesses, opportunities and threats facing the company (SWOT). This wi aow further assessment of the information coected and form the basis of a summary of a the main issues which wi have been examined. Each of the SWOT points coud be fed into the objectives of the pan. For exampe, if it were found that a weakness existed in the attitude of the target market to the brand or in the ack of knowedge the target market had of the organization, this coud become part of the pan as a promotiona objective. The exampe of a SWOT matrix in Fig is for a hypothetica bank which operates traditiona branch retaiing. The SWOT anaysis may ead to short-term operationa imperatives. For exampe, a SWOT anaysis coud be a guide for a merchandiser as to how the existing product ines wi need to be extended or deeted. It coud act as a guide to the buyers to achieve certain price, quaity and specification objectives for the retai brand, or even indicate to dispay peope that the different window and in-store promotions need to be more consistent by season across a outets. Assessment of the retai operation has to take pace in reation to the position of the company in its ife-cyce stage (see Chapter 1 for a further discussion of this concept). The ife-cyce figure (Fig. 10.4) and matrix (Tabe 10.2) provide our approach to the current retai situation and the strategies which may be appropriate at any one stage of the ife cyce based upon a consideration of the competitive position of retai companies. The phases can be characterized as: Fig Exampe of a SWOT matrix 247

263 Methods and approaches to retai strategy and marketing panning Fig UK retai ife cyce Tabe 10.2 Management of ife-cyce position based upon market strength/weakness Stages/competitive position Birth Growth Maturity Decine Dominant Fast business growth expected due to competitive strength and focus Defend position and buid in strategy of cost eadership and technoogica superiority Aggressivey defend position and renew efforts of eadership strategies and taking share Continue to defend position Find way to reaunch retai concept Favourabe Need to deveop strengths of differentiation, cost contro, and focus Need to improve tota business to ensure growth within the industry sector Ensure focus and marketing is maximizing returns by attacking eaders weaknesses Pan turnaround Retrench Divest Contro costs Weak Improve to ensure growth wi occur Find niche Require a major turnaround or new focus of the business Start to harvest returns or pan improvements Take quiet route Harvest Withdraw 248

264 Business situation anaysis Introduction Sow growth of demand, need to target innovators/eary adopters, monopoy or few rivas for first movers, technoogy important. Growth and shakeout Expansion at acceerating pace, need to target eary adopters, facing competitive retai services/formats, and diffused technoogy. If growth decines some of the weakest rivas wi drop out. Maturity Primary demand does not expand, the market becomes fragmented and a few powerfu rivas dominate, technoogy becomes standardized. Decine Zero growth occurs and competitors may eave the market, technoogy becomes outdated. As an exampe, the ife cyce for retai can be generaized for different types of business, as iustrated in Fig for the UK. Retai, ike any other industry, can be seen to have stages that refect different forms of competition. High street retai outets which are reiant on cothing and footwear, such as Marks & Spencer, Bhs and Littewoods, have suffered in recent times and a more genera shakeout is occurring. The department and variety store retai sector can be characterized by saturation where ow eves of demand from the consumer imit the strategic opportunities. Retaiers in this sector have to fight to maintain market share and those that are more successfu at cost contro and brand buiding wi probaby win out. Once the position of an individua business (or its category type) is cear, then the strength or weakness of that retaier s position wi dictate the most ogica objectives and consequenty point to the possibe strategies which coud be chosen. This is made cear in Tabe Portfoio anaysis A portfoio approach aows for the anaysis of an organization s current position in reation to the marketpace, its own companies or products. Exampe: Dixons manage their portfoio Dixons business divisions have prospered within a portfoio management approach. The business has traditionay been made up of high street and out-of-town (Dixons, The Link, Currys, PC Word), and Freeserve, Internet and e-commerce (Dixon s Onine). The deveopment of Freeserve in 1998 and the subsequent fotation of 20 per cent of Freeserve in 1999 has created the argest UK porta site with over 2 miion users. The money raised and the success of investing in growth markets such as PC Word has aowed the company to expand internationay (Ekjop, the Norwegian market eader in eectrica retai marketing, was purchased in 1999; Ei system, the eading speciaist retaier in Spain, was purchased in 2000, and a 15 per cent stake in Kotsovoos, the eading Greek eectrica retaier, in 2000). The company understands the opportunities in the marketpace as can be judged by its deveopment of The Link, which in 2001 had 260 outets speciaizing in mobie phone saes, and the expansion of tax-free outets at different airports. Through the years Dixons have divested those businesses which did not fit the portfoio for exampe, probems with Sio, the company s US eectrica retaier, were deemed so great that a divestment strategy was adopted; and the mai order division of VTG acquired in 1993 was disposed of in order to focus on the retai side of the business. In order to pan more effectivey Dixons regrouped its business into the four retaiing divisions of high street, out-of-town, PC Word and Freeserve. 249

265 Methods and approaches to retai strategy and marketing panning Fig Market growth market share portfoio anaysis matrix 250 A commony used technique for consideration of the growth and share of an organization is the Boston Consuting Group Matrix (BCG). Portfoio anaysis has been described as a famiy of techniques with BCG as the most famous (Abe and Hammond, 1979). This is even more true two decades on with the BCG approach being used by a arge number of panners in different marketing settings. This approach aows an organization to cassify the position of each of its retai strategic business units (SBUs) on one axis in terms of their market share reative to competitors and on the opposite axis to position annua industry growth. By creating a measurement based upon the scaes of each of these axes, a spatia pot is derived which by the use of the creation of quadrants paces each pot in a specific category. As part of the anaysis, a company may identify which SBUs are dominant when compared to competitors, and whether the areas in which the company operates are growing, stabe or decining. The two-by-two matrix describes four types of position as: star, question mark, cash cow, and dog (see Fig. 10.5). Stars These are SBUs or products with a high market share in a fast growing market and, importanty, offering good prospects for growth. As such, the objective woud be for an investment in any SBU or product to fa into this quadrant. One objective is to buid on the strength of the position and/or to hod on to it in the face of any competition. If the organization has a baanced portfoio, the transferring of money from a cash cow (see Fig. 10.5) SBU coud be contempated if this woud create higher returns in the ong run. Question marks These are SBUs or products where there is some question about their position. Spatiay there is the potentia for high market growth, but there is aso ow market share. The objectives woud be to investigate further the possibiity of any future movement, in the market or from the competition, creating a new position of either a star or a dog. If

266 Business situation anaysis the question mark has the possibiity of becoming a star, and if the organization has a cash cow, then money shoud be transferred to buid the question mark position with the objective of creating a star. Aternativey, a poor outcome for the anaysis may mean the objective has to be one of becoming a niche retaier or even divestment. If the unit of consideration were merchandise and certain items fe into this area, there may need to be an expansion of shef space for the merchandise and the use of in-store promotion. Cash cows This categtory is where the SBU or product is enjoying the benefit of a high market share but in a ow or zero growth market. The objective woud be to expoit the strong, positive cash fow situation but not to devote any investment into the SBU or product apart from that necessary to ensure its maintenance. The objective is normay to hod the position and harvest money that can be used to grow other parts of the business. Dogs These are SBUs or products with a ow market share and static or no market growth. The inference is that any future earnings are bound to be ow and itte or no profit wi be made. The objective woud be either to create a niche area for activity or to withdraw from this area of business by seing out or panning cosure. If the unit of consideration were merchandise and certain items fe into this area, there woud be a case for reducing or removing the area of shef space for the merchandise. Each of these spatia areas aows an identification of what strategies may be most appropriate. This aows objectives to be decided upon which are in the ong-term interests of the organization as a whoe, so that a baanced approach is taken which considers a aspects of an operation. The assumption is that the higher the market share of any strategic business unit the better its ong-term marketpace position, because of the probabiity of economies of scae, ower costs and higher profitabiity. In Fig the vertica axis identifies the annua growth rate percentage of the operating market for the SBUs, companies or products being assessed. It does not normay exceed a growth rate of 12 per cent but it depends on the market being anaysed. The ogic of its incusion is reated to the notion that any organization in a situation where there is high market growth wi have derived benefit from the buoyant deveopment in the marketpace. However, for a retaier, the costs of operation may not decine because of this situation as some merchandise, for stores in a star position, may require prime store sites in order to achieve the optimum eve of saes. Reative market share is the horizonta axis and is used because it provides the unit of measurement as an indicator of the abiity to generate cash based upon the reative position to the market eader. The measure of market share is expressed as a comparison to that of the argest competitor. This is important because it refects market share reative to the eader and shows the degree of power the market eader has over others in the market. For exampe, if company A had a 25 per cent share of the market and its competitor B aso had 25 per cent, there is itte advantage. However, the market situation is dramaticay different and more favourabe to A if it is the market eader with a 25 per cent share and its cosest competitor has a 12.5 per cent market share. The horizonta axis provides a reative ratio to the market eader and, therefore, the exampe 251

267 Methods and approaches to retai strategy and marketing panning given woud create a 1:1 ratio in the first exampe and 2:1 in the second. These ratios are potted on the horizonta axis against the market eader s share to refect the individua positions of dominance for different units of measurement. The axis can be divided on any scae which makes sense for the market being considered but shoud enabe the reative positions, across the range of the axis, to be potted. As there is the use of a market eader share figure, the eft-hand end of the scae wi be no arger than 1 as no other SBU, product or company can exceed the size of the eader s share. A certain amount of caution has to be appied to the indiscriminate use of portfoio anaysis. At the outset it shoud be reaized that portfoio anaysis has more dimensions than simpy market share and market growth. In fact, one of the difficuties is to decide upon the scaes for the axes. Once these are agreed, it may be difficut to obtain competitive data. With a BCG approach the spatia positioning outcome of any anaysis is not necessariy reated to profitabiity, as a high market share coud be based upon ow profitabiity if prices are ower than the competition or vice versa. In addition, a higher market share for a retaier or a product may refect a disproportionate amount of promotiona expenditure which in turn coud be creating unacceptabe cost impications. There are conceptua and practica probems in defining both products and markets when using the matrix. Whie teephone banking for a bank may be a star, the main business for the bank coud be suffering due to the impact of buiding society and grocery retai activity. Finay, a market which is growing may not be a good environmenta fit, or suit the business strengths of the SBU or company. None of these weaknesses indicates there is a major probem with the BCG matrix or its principes, simpy that it has to be utiized with some degree of caution. The human resources considerations for successfu panning The invovement of different departments wi hep reduce resistance to future changes or tasks. Continuous concern about the human aspects of panning can provide a greater possibiity of the pan s success. The panner or panning team shoud be aware that they are ony a technica service to a wider team. However, care must be taken not to make the system too open as to be in danger of creating anarchy. On the other hand, the system shoud not be too cosed, as this eads to bureaucracy and apathy. Good panning is a combination of quaitative and quantitative factors based upon creative as we as anaytica and ogica thinking. As Abert Einstein once remarked, When I examined mysef, and my methods of thought, I came to the concusion that the gift of fantasy has meant more to me than my taent for absorbing positive knowedge. Creative thinkers bring specific benefits to the panning process. They enabe: chaenges to norms and assumptions and the abiity to question what others automaticay accept as true; the focus on chance and the unexpected rather than safe answers; a group to deveop new ways of atering famiiar ideas into unconventiona approaches and so provide new ideas and means of thinking of situations; individuas to make associations and so combine seemingy unreated events, topics and ideas; retai product, service and promotion ideas to be updated and revised; 252

268 Business situation anaysis Fig Invovement eves for marketing panning panners to keep the panning function from being too boring by bringing humanistic vaues to the whoe process. One vita behavioura consideration of any pan, which affects a aspects of the company, is that it shoud not cash with the company cuture. Such a cash may be overcome by ensuring that staff vaues are incorporated into various stages of the panning cyce and the panning method. The invovement of the fu range of staff eads to a situation where the company cuture vaues of staff are refected in the bottom-up comments. This heps to ensure that the pan is created as part of a process which makes it compatibe with the company cuture. As you are now aware, we stress that companies have to pan for the invovement eve of staff as we as for the market. Figure 10.6 provides one approach to deaing with marketing panning invovement eves. One other important aspect of infuence when incuding a cross-section of peope in panning is their capabiity to hinder or hep the pan. Within any company or organization, a manager s competence to pan wi refect the eve of activity, the degree of preoccupation with other business, career goas, and their experience and abiity to think conceptuay and anayticay. These attributes are inked to other managers vaues and the cutura cimate within the company, which may be more or ess responsive to change and adaptation, and the wiingness to adhere to and use the panning system. 253

269 Methods and approaches to retai strategy and marketing panning A pan when competed shoud be read and understood by as many peope as possibe throughout the company. This is often not possibe due to ack of time among busy executives and the compexity of the pan. To overcome the probem, a pans require the addition of a good executive summary written in cear, concise anguage which wi ensure that the most saient points and important themes are communicated. The summary shoud be cogent and ogica and shoud concentrate on objectives, main target markets, opportunities and threats, key strategies and timings. MINICASE Eeven wants to cut it the UK way: The US store chain hopes to copy British success with portabe food FT Jim Keyes, chief executive of 7-Eeven, has just returned from an unusua fact-finding tour in the UK. His mission: to discover the secret of the high-quaity packaged sandwich. Portabe fast food is hard to find in the US, he contends: You can t throw a McDonad s in your briefcase and eat it three hours ater. Mr Keyes spent a week touring British supermarkets and the Prêt-à-Manger sandwich chain for inspiration, and is confident that the mode can be emuated in the US. The expansion into fresh food is part of the group s strategy to offset a ong-term decine in tobacco saes but coud aso hep counter the impact of the US economic downturn. The group has begun to take a more aggressive approach towards merchandising. Mr Keyes argues that the chain s technoogy can provide manufacturers with information about what shoppers want. Recenty, for exampe, the group spotted that customers who bought Kraft s Crysta Light powdered soft drinks were buying botted water to mix it with. It suggested that Kraft make a botted drink, and secured an excusive dea to se the 20oz bottes. Mr Keyes says this inverts the reationship between retaiers and suppiers to create a demand chain management system that aows it to introduce 50 new items a week to its 5,700 US stores. The retai industry has not been very proactive with manufacturers, he says, but 7-Eeven s experience showed that we have a ot more strength with manufacturers than we gave ourseves credit for. In search of repacement revenues, he has setted on fresh food. This accounts for just 6 10 per cent of US saes, but Mr Keyes is encouraged by 7-Eeven s Swedish stores, which have expanded fresh produce saes from 4 per cent to 25 per cent in five years. Such improvements may aow 7-Eeven to ask for a higher royaty from franchisees. About 3,300 of its US stores are operated by franchisees, who pay 7-Eeven between 0.25 per cent and 1 per cent of saes. Mr Keyes says 7-Eeven s history has taught him to be seective. After a period of over-expansion in the 1980s, the group was privatised through a everaged buyout in October Caught out by its $4.5bn debt burden and doube-digit interest rates, it was rescued by its Japanese icensee, and has retreated from areas where it has itte critica mass. Mr Keyes is comfortabe opening stores a year, but says this company has some credibiity buiding to do before boder moves can be on the agenda. Source: Andrew Edgeciffe-Johnson, Financia Times, 25 Juy, 2001 CREATING THE OBJECTIVES This stage invoves communicating the company s objectives, which are a combination of what is expected of the company by its sharehoders or directors, and an evauation of 254

270 Business situation anaysis the options emerging out of the first three steps. For a sma company, the objectives are often ess ambitious than for arger concerns, but in terms of achieving market success, no ess important. If at the earier stage of anaysis it was found that waiting times in the shop were affecting frequency of visits in a negative way, then the retaier has to have the foowing objectives: improve the retai operation s service eves; enhance the waiting time experience; inform customers as to the ikey time they wi have to wait; apoogize and give a reason for the deay; ensure the customers can judge the progress of their turn in being served. These objectives wi be transated into tactics or operationa changes but, as a starting point, it is necessary to know what the main objectives are. At a ater stage, changes coud be made simiar to those at Disney where those queuing for rides can watch TV, isten to music, are organized so that they can see peope moving and are given approximate waiting times. In busy booking offices or shops, customers can take a numbered ticket that wi guarantee their pace in the queue without anyone ese pushing in. The objectives shoud emerge as the most ogica course of action the company ought to embark upon, given the anaysis which has occurred in the preceding stages of the pan. We have to ensure that the objectives incude not ony saes voume and financia objectives, but aso broader marketing objectives. Objectives shoud aso incude the expected market share achievements because the performance of the company may ony reach reaistic eves if certain budgets are made avaiabe. At this stage of panning it is possibe to circuate the assumptions and forecasts to different stores, functiona units and company divisions. These shoud be offered as a range of aternatives. For exampe, if you have assumed the market wi grow at X per cent and this wi create Y with a specific strategy, then it is aso wise to create aternative scenarios. You shoud estimate saes at ower and higher rates than expected, so that the potentia impact on profits can be assessed. For exampe, a rate of growth of X + 2 per cent (where X is the expected demand) may create a profit of 1.3 Y, or aternativey X 2 per cent may give 0.5 Y. Managers may need to invove their team in discussions about the reevance of the materia created from the previous environmenta scanning stage to ensure agreement to expected demand eve. One danger in panning is that arge companies often set ony financia objectives for exampe, in terms of growth rate in earnings per share, return on equity or investment and so on and ignore or forget to set marketing objectives such as the seection of specific segments as target markets and the improvement of merchandise seection, brand image or consumer awareness. Retaiers have to estabish and maintain a distinctive image in their chosen markets. This image is created ony if objectives are set which recognize the need for appropriate physica and attitudina attributes. These goas need to be reated to retai design, ambience, the ocation decisions based upon surrounding area, and the impact of the retai window area and front of buiding. The use of promotiona techniques and customer service strategies a enhance the position and image of a retai company. 255

271 Methods and approaches to retai strategy and marketing panning Objectives are often compex. For exampe, an objective may be to increase saes revenue, which coud be achieved in a number of ways, such as: increasing average transaction vaues; converting browsing visits to purchase behaviour; increasing the frequency of customer visits; improving merchandise seection or pacing merchandise in proximity to corresponding mix and match items; increasing hours of trading, such as Sunday opening. Another exampe coud be an objective to create improved productivity. This coud be achieved in various ways: increasing saes and contribution per retai empoyee; introducing technoogy to provide efficiencies; increasing throughput of distribution faciities; redesigning the store ayout to improve customer fow; improving stock contro. Retai companies invove many abour-intensive operations and wi often set objectives of reducing costs through greater use of technoogy or systems design. MFI, the furniture retaier, attempted to increase operating efficiencies and saes productivity. There was an investment in systems in order to reduce staff numbers, to improve stock contro and merchandise and warehouse space. In addition, store ayouts were improved and visua merchandising introduced. The initia changes aowed the company to improve substantiay on its previousy weak saes and profit resuts. In the current marketpace, retaiing technoogy is advancing swifty with inventory contro, automated checkout faciities, vending machines, etc. Any change due to technoogy innovation has to be carried out with due concern for the marketing impications of that improvement. Any reduction in persona service may be interpreted as a decine in the standards of service. Therefore, objectives need to be a baance between the aspirationa and the reaistic, so that the company attempts to improve its market position within acceptabe risk imits. Growth objectives The aternative objective inputs, as shown on the marketing pan schema in Fig. 10.2, are based upon the possibiity of the seection of growth strategies, borrowed from the work of Ansoff (1988), whereby a company is attempting to expand by adopting a specific strategy from those of penetration, market deveopment, product deveopment and diversification. Companies may want to attack the market share of others by penetrating the market to increase their own share of that market. This takes pace within the company s current markets and normay invoves a more aggressive use of the marketing mix. The company may attempt to increase existing customer usage rates or attract competitors customers. For exampe, VISA used promotion in an attempt to get their cardhoders to use their card whie on hoiday and in preference to those of competitors. Some of the 256

272 Business situation anaysis current arge DIY outets started as home improvement speciaists with initia inks to paint and wapaper stores. These companies reaized the growth potentia of the whoe DIY marketpace and wanted to take market share from their competitors. To back up the setting of the objective of market penetration, there shoud be some evidence from the anaysis that there is buoyancy and growth in the marketpace. Saes can be increased by reaching non-users of the outet or service, attracting competitors customers and raising the frequency of store visit of existing customers. Larger organizations or companies wi try to increase saes through market deveopment by attempting to se current products in new markets. As an objective, this is often inked to those retaiers which are ocated on a oca or regiona basis and want to widen their market by geographica expansion. Companies may deveop their markets by expanding internationay, as did the IKEA group, for instance. Market deveopment may aso invove the addition of new ocations, such as McDonad s outet openings to compete at airports, at tourist attractions, and even within office buidings. Market deveopment is reated to the objective of a retaier wanting to widen its market, attract new market segments or convince the customer that the business has been repositioned and offers new benefits. Rapid market deveopment may be achieved through franchising. Franchising is the method by which a company (the franchisee who owns the right to a brand name) wi se, for a fee or a royaty, access to the company s suppy of merchandise and the right to trade under the company s name to a franchisor. There wi aso be a transfer of know-how to those individuas who are deemed suitabe to run a franchised operation. The most famous franchises in the UK are Benetton, The Body Shop and Tie Rack. There are advantages to the franchisees as promotion is carried out on a nationa basis, the niche market is aready estabished through cear marketing strategies, and suppy chains are highy deveoped. Exampe: Diversification deveopment at Tesco Tesco Persona Finance (TPF) was aunched in Juy 1997 and is a joint venture with Roya Bank of Scotand. Products incude Cubcard Pus, a grocery budgeting account. A Tesco Visa card was aunched in Juy 1997, Tesco Instant Access Savings Account in September 1997, home insurance in Apri 1998, oans in May 1998, pensions in June 1998, trave insurance in Juy 1998, ISAs in Apri 1999, pet insurance in October 1999 and mortgages in June The joint venture has over 1 miion customers, 1.6m accounts and is aready profitabe. In addition, Tesco is Britain s argest independent petro retaier, with 325 petro stations, incuding Express sites, and has 12.5 per cent of the market for petro sod in the UK. Source: Tesco company accounts, 2001 Company objectives may aso incude product deveopment or diversification. Product deveopment is a sensibe objective for retaiers which have strong brands and a good market presence. One of the reasons own-brands have been successfu is reated to the market presence of those companies which have introduced the concept. Companies often deveop new ideas for retaiing which need to be panned as new product deveopment. An exampe of new product retai deveopment is the advent of factory outet shopping centres. This type of outet started as an American concept and was deveoped during the 1990s in the UK. Factory outets shoud not be confused with 257

273 Methods and approaches to retai strategy and marketing panning discount centres. They are groups of shops, normay away from town centres, speciaizing in the seing of seconds or end-of-ine goods, usuay under a named manufacturer rather than the retaier. Diversification is an objective inked to a desire not to become dependent on one type of retai business. Diversification has occurred where retaiers have created mai order operations and vice versa. We have aso seen the diversification of retaiers such as Virgin into the airine business or Marks & Spencer into food; the diversification into food set a positioning for the M&S business which differentiated it from a other supermarkets rather than M&S appearing to move into ine with them. The company panned and impemented a high quaity and vaue added range of premium priced food products targeted at affuent consumers. Integrative growth Growth, as an objective, can aso be achieved through integrative growth, which is based upon the three areas of backward, forward and horizonta integration within the suppy chain. An objective to increase saes by incorporating one or more eves of the suppy chain into the business woud be based upon integrative growth. If this were based upon backward integration, company changes woud need to invove taking ownership or contro of the suppy aspects of the suppy chain (for exampe, a retaier acquiring a whoesaer or manufacturer). In the case of horizonta integration, the retaier woud seek ownership or contro of competitors at the same eve within the marketing channe; mergers, acquisitions and takeovers are the ogica outcome of this objective. Forward integration is often the objective of manufacturers who want to gain greater contro of their distribution through the deveopment or acquisition of retai businesses. For exampe, British Airways, American Express and the tour operator Thomson with the Lunn Poy brand, have opened a number of trave shops to ensure they can have some presence and contro of saes in the high street. 258 Competitive advantage When retai companies decide upon strategies which may ead them towards market success they need to consider generic routes to competitive advantage. Porter (1980) describes the three generic strategies of cost eadership (a company that seeks, finds and expoits a sources of cost advantage providing for a standard, no fris package); differentiation (a company seeks something distinctive to set it apart from others that can bring in good profit returns typicay having attributes that are different from the competition); and a focus strategy (a company seects a segment of the market and targets that to the extent of excuding other segments). Cost eadership Using Porter s terminoogy, the discounters such as Adi and Lid from Germany, and Netto from Denmark entered the UK market in the ate 1980s and eary 1990s with a cost eadership strategy. The ony way for them to prosper was through the achievement of competitive advantage by sustaining ower prices than the competition. This paced a great dea of emphasis on their being abe to reduce and contro the costs of their operations. Cost eadership can be adopted by ow cost retai operations which are

274 Business situation anaysis aiming to penetrate the market and expoit experience curve effects. The ow cost supermarkets and discount warehouses have taken this approach. Low priced retaiers need to: choose to ocate outets on smaer sites that are ess expensive than their competitors; provide an outet design which has no avish faciities and where stock can be moved straight into the saes area, on paets, with boxes that can be opened when they are needed; streamine a systems and empoy a minimum number of staff. However, the staff may be paid more to ensure that muti-skiing and productivity gains are achieved; keep stockhoding to a minimum; deveop many outets to achieve improved economies of scae. Cost eadership normay requires economies of scae and the abiity to contro costs better than the competitors. Cost eadership woud not be a viabe strategy for a sma retai operation such as a hairdresser because oca competitors coud probaby offer a simiar range of prices. Smaer companies can grow on the basis of cost eadership if they identify segments which offer ower costs. For exampe, in insurance and banking there are ow cost cients who sedom compain, take up ess time for any transaction, and are wiing to communicate by etter or phone. Such an approach wi eiminate many of the costs associated with the running of a traditiona retai business. An exampe is the Abbey Nationa attempting to attract savers to its posta service savings account by offering competitive interest rates. By creating this service, Abbey Nationa can gain the advantage of owering costs and freeing up its branches to dea with other types of transaction. Differentiation Differentiation, as a generic strategy, invoves a company deveoping a product or service that is unique or superior in some way. Retaiers that achieve differentiation through quaity are often abe to charge higher than average prices. As indicated earier, one major success story is that of Marks & Spencer. In the eary 1990s Marks & Spencer were achieving a 40 per cent share of tota saes for their range of quaity food products. This diversification occurred with a service design back-up to ensure that their food arrived in the freshest of conditions and was then stored at optima temperatures. This reinforced the commitment to differentiate on quaity which is the hamark of the positioning of their overa retai offer. A bank coud differentiate itsef on the basis of its service by offering to pay for the instaation of modems and terminas in the homes of its most important customers to enabe them to have instant access to their accounts and investments. Focus There is often a need to ensure that a business has a cear focus because that is precisey the way a customer needs to have the offer positioned in their mind. Focus, in reation to the retaier, aows the retai offer to be more precisey defined in terms of price, quaity and range. This wi enabe a retaier to be singe-minded in creating a highy focused retai mix offer. The success of Mothercare in the eary stages was that they buit a reputation 259

275 Methods and approaches to retai strategy and marketing panning on the positioning sogan, Everything for the mother-to-be and chidren under 5 and then put together a product range and marketing poicy which refected this. When Mothercare attempted to extend the range to teenagers, it transpired that the baby shop image had been such a strong focus that these younger consumers resisted the change. As indicated, with a focus approach companies concentrate their efforts on specific segments of the market. This may be because they have insufficient resources to concentrate on a broader market base. Tie Rack, Knickerbox, Accessorize and Sock Shop are exampes of such a strategy. However, this does not precude Tie Rack having a sma part of its stock as socks. This can aso be a dangerous position. Sock Shop made the mistake of underestimating both the strength of the competition from companies such as Marks & Spencer and the imited size of the market for socks. Athough the niche approach has its attractions in terms of being abe to concentrate on a focused offer, there is aways danger inherent in such a singuar and exposed position. If success occurs there is a risk of being attacked by stronger companies and of not being abe to find aternative competencies in order to survive a strong marketing assaut. Each of the above ways of gaining advantage can be successfu, but companies have to be cear about their strategy or they wi become stuck in the midde and fai to achieve any advantage. Customers wi not have a good reason to utiize a particuar retaier who is either unfocused, offers no cost advantage or has an undifferentiated store or service image. There are a number of operationa areas where retaiers shoud pan to create sustainabe competitive advantage. An adaptation of the artice by Knee and Waters (1989) provides the foowing ways that advantage can be gained: strong customer oyaty; good ocation; suppier partner reationships; technoogica superiority; ow cost efficiencies. In addition, we shoud aso add a further point higher quaity staff, as they are an asset that can provide advantage. The retai business is based around the performance of staff as part of interpersona reationships. Over 90 per cent of Waterstone s staff are graduates; given the nature of the business, this is an idea fit both for giving informed advice and for the abiity to deegate management functions and buying decisions. (The importance of a service cuture within retaiing was deat with extensivey in Chapter 4.) Companies are attempting to meet the chaenges to improve operations and some, such as Marks & Spencer, have buit competitive advantage over many years through the reationships they buid with their suppiers. Another area mentioned above is the use of information technoogy. In the retai industry, IT is in widespread use as its appication to merchandise contro aows for the more efficient use of retai space, improved inventory contro and the coection of detaied customer information. The advantages are to be gained by those companies who have deveoped their systems to create greater efficiencies and customer satisfaction than their competitors. Location advantage is very important for both arge and sma companies. The Savie Row taiors gain a great dea of advantage from their ocation; it provides a focus for 260

276 Business situation anaysis their excusive services, provides synergy of image, and signas the quaity and price positioning of the outets. Retai market segmentation One important part of the anaysis stage of marketing panning is the seection of the most desirabe target markets. Arising from the SWOT anaysis wi be the objective to target specific sub-markets aso known as segments. The target market wi consist of a group of customers sharing some simiar characteristics towards which the retaier wi direct its products and services. For exampe, Harrods wi have a different target market from that of Littewoods and the positioning of the stores wi be panned to appea to the main segments who wi shop at each type of outet. Market segmentation is based upon the breaking down of a arge heterogeneous market into smaer subdivisions in which there is some simiarity of character. In practice, there is aways the probem of identifying a arge enough group of customers with ceary differentiated needs so that a retaier can position its outets and offer to that group. The consequence is that the retaier has to think ceary about the image, ayout and service eves of the store in order to achieve the most advantageous position against its competitors. Retaiing, by its nature, incudes a whoe range and type of different customers. Even some of the niche retaiers, such as new entrants, The Perfume Shop and Games Workshop, or more traditiona companies seeking a reviva such as Sock Shop, appea to a cross-section of the pubic who have very itte in common. The determination of the retaier s choice of segments to target reies on the company resources, the nature of rivary and competition, and the voatiity or stabiity of the marketpace. We beieve that market segmentation, in the context of retaiing, can be defined as: the process of dividing the tota retai market into subsets, whereby the potentia segments have characteristics in common which ead to simiar demand needs for a type of store format, product and service. It woud foow that retaiers shoud be concerned with the examination of the marketpace to identify those groups which can be differentiated on the basis of shopping habits, desired shopping experience, and demand patterns and needs. The genera trends in society have ed to a number of changes which create viabe opportunities for retaiers. Changes in disposabe income for the younger groups in society ed to the emergence of the opportunity for positioning of brands such as Miss Sefridge, River Isand, Top Shop and Top Man. In addition, the accent on heathy iving has given rise to speciaist shops such as Hoand & Barrett. The retaier has to decide upon the coverage of the target market. This can be any one of a seection from a broad mass market, a seective market segment strategy, or aiming at two or more mutipe segments. Exampe: Arcadia s portfoio approach to segmentation Arcadia Group s portfoio has been panned for the mass market and covers menswear, womenswear and chidrenswear. Each brand is carefuy positioned to provide coverage of specific market targets. With the exception of Wade Smith (now sod) which stocked designer abes, a of the group s chains offered own-brand offers. Outfit, the out-of-town chain, retais own-abe products from the other brands within the group. 261

277 Methods and approaches to retai strategy and marketing panning Arcadia Group: Product offer and own-brands, 2000 Chain Product offer Target market Brands Dorothy Perkins Womenswear year ods Dorothy Perkins; Secrets; DP Petites; DP Maternity; DP Denim; Liza Bruce; Whistes Express; DPL (DP Leather) Evans Womenswear Size 16+ women SeVen; East Coast; Essence; Petites; Sixteen47; Active VIII; Design; Images Top Shop Womenswear year ods Topshop; Moto; TS Design Principes for Women Womenswear year ods Principes; Principes Petites; The Coection at Principes; The Coection at Principes Petites Wais Womenswear year ods Wais; W.woman Richards Womenswear year ods Miss Sefridge Womenswear year ods Miss Sefridge Warehouse Womenswear year ods Warehouse Top Man Menswear year ods Moto; Wison; Jibe; Boc & Tacke; Nico Burton Menswear Menswear year ods Burton Menswear; Atantic; Centaur Atantic Sport; Jonathan Adams; Principes for Men Menswear year ods Principes For Men; PFM Sport; The Coection Hawkshead Womenswear/ Menswear/ Chidrenswear Outdoor and casuawear Hawkshead Racing Green Menswear/ Womenswear year ods Racing Green Outfit Womenswear/ Menswear/ Chidrenswear year ods Burton Menswear; Dorothy Perkins; Evans; Topshop; Topman; Miss Sefridge; Wais; Warehouse; Racing Green; Hawkshead; Principes Wade Smith Menswear/ Womenswear year ods Designer brands SU214 Menswear/ Womenswear year ods SU214; Moto; Designer brands Source: Retai Inteigence, 2001 Note: Entries in itaics have either cosed or are being cosed. Wade Smith has now been sod 262

278 Business situation anaysis Retai outets seing genera products, such as supermarkets and chemists, wi target the broader mass market. This is because their trading success ies in offering a wide range of popuar items at vaue-for-money prices. By contrast, a speciaist retaier can attempt to identify a new segment, or adopt an upmarket or downmarket position. Anita Roddick is the cassic exampe of someone who identified a gap in the market one which she successfuy expoited with The Body Shop range of natura products merchandise. In the 1980s George Davis successfuy used ifestye and age segmentation for the Next group of outets. The product was then chosen to refect the individua s status, ifestye, gender and age, with a higher quaity standard to the cothes which was reinforced by above average prices. Foowing the success of positioning stores to target specific groups, a number of retaiers decided to adopt segmentation strategies based upon different aspects of ifestye. There were severa successfu approaches at this time, incuding those of Habitat, Harrods, Laura Ashey and, more recenty, IKEA. A current ifestye change is towards being heathier. The medica profession and a number of magazines and newspapers have heped to change attitudes to both eisure pursuits and eating habits. These trends wi, in turn, have repercussions on fashion and merchandise seection as we as provide an opportunity for new product deveopment: for exampe, Boots having speciaist boutiques for heath care. Department stores are ikey to judge mutipe segments to be a viabe business aternative. This is because they suppy distinct groups of customers for whom they choose to provide specific goods and services. Department stores are often subdivided within the store, thus creating different shopping experiences for different segments. However, they wi design a restaurant to cater for the needs of a the targeted groups. Psychographic segmentation Within retaiing the need to understand psychographics is increasingy important. This is because individuas from the same socio-economic group can have vasty different preferences and purchasing behaviour. Lifestye is a term for the way individuas or groups ead their ives based upon differences determined by their attitudes, opinions and interests. The modern consumer s behaviour can be found to refect the ifestye they have, or aspire to. As society becomes more affuent there is the possibiity for individua consumption patterns to be personaized. This aows an individua to seek out a set of brands and embark upon shopping habits that provide symboic meaning to others about their ifestye. For exampe, a person with concerns over the environment may be more ikey to shop at The Body Shop. Different ifestyes aso set the cutura norms by which individuas define their aspirations towards certain consumption behaviour. Massive queuing to patronize the premises of McDonad s foowed the first retai premises opening in Moscow. This is because McDonad s is an utimate icon of what it means to have an American or Western ifestye. Psychographic segmentation can be understood in different ways: At a stabe eve, as the individua s system of evauation based upon personaity and attitudes. At an intermediate eve, as the vaues of the individua based upon their opinions, activities and interests. At a weak eve, as the individua s ifestye refected in the purchasing habits they demonstrate and the resuting use or consumption patterns of these. 263

279 Methods and approaches to retai strategy and marketing panning The use of psychographic anaysis has to be constanty updated as socia forces wi affect the way individuas act and react in their shopping habits and purchasing behaviour. There is therefore a need to track emerging trends within society. Hasson (1995) identified a number of socia forces that wi affect ifestye habits: sef-deveopment affirming onesef as an individua; hedonism giving priority to peasure; pasticity adapting to circumstances; vitaity expoiting one s energy; connectivity reating to others: cicking in and out; mixing cutures; ethics searching for authenticity and meaning in ife; beongings defining socia inks and cutura identities; inertia activey, or more often passivey, resisting change. Each of the above is thought to infuence and shape our society and in particuar European society. Approaches to retai segmentation The identification and seection of segments wi require judgement based on the anaysis of different data. The main method of segmentation is to seect a segment (target market) with the best potentia from a range of criteria. Then the objective is to create product benefits, features and promotiona messages which wi appea to the needs of the seected segment(s). A number of characteristics are examined when deciding upon target groups. For exampe, K Mart in the USA describes its target market as midde-cass (ABC1), vaue-conscious consumers. It is geographicay ocated in mid-range shopping centres and offers both nationa and K Mart brands for sae. On a geographica basis, retaiers in America wi pan significant variations in the product mix due to geographica segment differences, e.g. between West Coast and East Coast consumers. The size, type and tastes of the popuation within any geographic area may be different from other areas and, therefore, require a different marketing mix (see Chapter 3 on consumer behaviour in retai for further discussion of some of the segmentation characteristics profied in Tabe 10.3 and the foowing text). The approach iustrated in Fig utiizes the ist of segmentation characteristics given in Tabe 10.3 and disaggregates the detai in steps 1 and 2 so that a possibiities can be considered. In step 3 the information is anaysed, then aggregated and assessed. The retaier wi then make a decision in step 4 based upon the consideration of a combination of factors, incuding the segment s potentia saes voume and profits, the retai competition of those companies currenty seing to the segments, as we as the company s abiities and objectives. Therefore, the retaier attempts to assess the needs of different sub-groups to see if it can offer now, or in the future, a form of distribution service that wi prove successfu. In order for segmentation to be successfu, inteectua rigour must be appied to the segmentation procedure. When a target group is identified it is prudent to use a checkist, such as the retai segmentation checkist shown in the box, to ensure that the segment offers a viabe opportunity for the company. The check is based upon whether 264

280 Business situation anaysis Tabe 10.3 Some genera characteristics of segmentation variabes Characteristic Geographic Demographic Psychographic Usership Type of shopping occasion Attitudes Benefits sought Typica cassification By differences in the distances individuas ive and have to trave in reation to the ocation of the store. Type of shopper Country, area of country: north, Midands, south, coasta; County, TV areas: urban, suburban, rura areas, city, town, postcode or type of house By age group, gender, education, famiy ife cyce, ethnic group, socio-economic cassification of househod based upon A, B, C1, C2, D, E cassifications Lifestye Personaity type introvert, extrovert, high/ow ego drive, green consumer, heath consumer, independent, group worker Non-user, current user, past user, potentia user, heavy user, medium user, ight user, merchandise preferences Store type, reguar, specia occasion Convenience, speciaity, comparison shopping, pace of shopping Towards product area, toward brand Towards usership and use situations Utiity, convenience, uxury, economy, etc. Fig Steps in seection of target market 265

281 Methods and approaches to retai strategy and marketing panning the segment is identifiabe, measurabe, accessibe, substantia, sustainabe, actionabe and defendabe. Retai segmentation checkist Is the segment identifiabe and measurabe? There is the need to identify different types of retai consumers and how different types of marketing mix activity wi affect sub-groups. If any changes occur, such as an expansion into oyaty schemes, wi the potentia market segments (there are severa being targeted see Chapter 8) be measurabe in the ocaity of a store? Is the segment accessibe? The segment requires that individua buyers may easiy visit the store or be contacted through promotiona messages. Aso, with new forms of retaiing utiizing eectronic means of transaction, accessibiity of segments is a key consideration. Is the segment substantia? The segment must be arge enough to provide a viabe eve of business and profit. The Body Shop started in the area of Brighton and its success in targeting a particuar ifestye group was substantia enough to support expansion throughout the country. Is the segment sustainabe? The choice of segment has to take into account whether the demand wi ast. Fashion and ifestye market segments are prone to change and demise. Is the segment actionabe? Are there any impediments in putting together a oca or nationa marketing mix so that the target market can be reached with a specific retai offer, positioning and message which fits with the pans of the company? A retai group may want to target a segment in order to offer a specific range with acceptabe width and depth at acceptabe cost, but the reaction of the segment especiay on a oca store basis shoud dictate the fina offer. Is the segment defendabe? Can the target market be defended against competitor activity if the competitors aso target the same group? In a sma catchment area wi increased retai rivary cause any viabiity probems for the retaier? The approach to segmentation seection is as wide as marketers make it. There is no singe way which wi prove successfu. For exampe, the genera ist of segmentation variabes shown does not incude retaiers segmenting by size (Evans, High and Mighty, Long Ta Say). Even when a segment has been identified, customers needs and attitudes are mutifaceted and, as such, they move from one segment to another as part of their shopping behaviour. In the postmodern fragmented market composed of an array of different retai experience choices and images there is a weakening pattern of predictabe behaviour. For exampe, a consumer may buy groceries in a ow cost outet yet go to an Armani store for their cothing. Such behaviour is an expression of a mutipicity of seves and a ess static consumer which makes it more difficut to carry out successfu segmentation. These consumer changes need to be understood in reation to the symboic meaning of positioning which is described in the foowing section. 266

282 Business situation anaysis Positioning the retai offer As part of the segmentation anaysis, sub-groups wi emerge as the idea customers to market to. Because of the potentia of these segments they wi form the target groups for the business. The target groups wi need to be satisfied with the retai offer. Thus there has to be a cear understanding by consumers of where the company wants its business to be positioned. Positioning is a marketing term which is used to describe the process of estabishing and maintaining a distinctive pace for a business in its marketpace. There is no easy approach to positioning as different consumers wi ook for something meaningfu to them. The retaier has some basic aternative choices but other positions, such as ifestye-ed choices, are an option. Positioning can be on the basis of: the type of service given, or the merchandise sod, by the retaier; the deivery of benefits and probem soutions for retai consumers; the different usage occasions of the service or merchandise; the specific retai category of the service or merchandise; in an opposite position, or gap, to that of another retaier. There has to be compatibiity between the product offer and the segment being targeted. Marks & Spencer achieved this with the successfu aunch of food as we as home furnishings. However, if M&S had aunched a cheaper range of furniture simiar to that of the MFI position they woud have confused their customers and compromised their existing position as a service and quaity-oriented retaier. The successfu strategy of MFI in seing cheap furniture is not a strategy M&S woud want to adopt because it woud not fit with the existing spatia positioning of its current retai offer. Achieving strength of positioning To achieve success at positioning there is a need to ensure the position has carity, is credibe, has consistency over time and wi remain competitive. This is expained as foows: Carity. It is important to reaize that positioning is about communicating a message to the consumer so as to spatiay pace the retai service offered in their mind. This has to be a cear message with no confusion. If the message is not cear the consumer wi not understand what the brand or offer is about. A positioning strategy requires a cear message that most peope wi understand. Credibiity. A positioning message has to be beievabe. If we caim that our retai company offers better service than it deivers in reaity, consumers may we utiize it a first time but never again. They may we fee cynica about the company caims if they find the deivery does not match the promise. This is particuary vita in the case of services where it is not possibe for customers to sampe an offering very easiy. Aso, customers have a preconceived set of reative positions aready in their mind and therefore they have earnt what is possibe in terms of any caim to a specific position. Consistency. It has been pointed out that positioning is a about creating an image in the mind of the consumer. Ceary for this to be achieved the message has to be consistent. If a company changes its communications poicy there wi be no cear messages and the pubic wi not be abe to visuaize the positioning the retaier is attempting to 267

283 Methods and approaches to retai strategy and marketing panning 268 occupy. Of course, it is possibe to change positioning but this takes time to achieve. A good exampe from the motor trade is that of Vovo. Vovo was aways positioned as being a very safe car. This was a good position first because there were customers who wanted that and secondy because the product actuay deivered it through safety design. In addition, Vovo was consistenty at the top of crash test safety resuts. However, Vovo was aso perceived as a company that produced very boring cars. In order to reposition the brand the company then embarked upon the production of both high performance and more styish cars. Vovo knew the strength of its position and attempted to retain its safety image. The communication is, We sti make safe cars, but they are fun as we. This is part of a gradua repositioning of the brand and whie change is occurring the message remains consistent from the customer s point of view. Competitiveness. In any decision over position there needs to be a strategic decision which positions the company reative to that of the competition (we are friendier, arger, offer more vaue, have better service, are more modern, safer or whatever) and this has to be accepted by the customer. Positioning the brand with a set of attributes that the customer does not care about is never going to be effective. The seection in terms of position is based upon how the retaier wants to be perceived by its target group of customers in terms of any one of the factors which it decides is of importance. Any positioning has to take into consideration the three generic strategies of Porter (1980) which are to decide upon ony one approach, be it cost eadership, differentiation or focus. A company has to be cear about where it needs and wants to be positioned in the marketpace. One way of ensuring this is to create a perceptua map that refects the current marketpace. This is one of the customary ways a panner woud pot the company s retai business in reation to the competitors. The pots woud be based upon customers and empoyees perceptions of where a particuar store or retai service woud be ocated on the perceptua map. This approach coud be used to identify gaps in the market based upon customer desires or ack of competition in certain market positions. The identification of gaps in the marketpace may offer opportunities for new retai formats or product deveopment. There is a wide range of poar opposites which coud be utiized for the ends of the continuums such as high to ow vaue for money; traditiona to modern; wide to narrow range of merchandise, etc. The most simpe positioning can be achieved through spatiay potting price and service eves, as iustrated in Fig High vaue ow price and high service position If a retai business is to provide a high service and ow price there is a need to examine the business very cosey. This is because the cost of deivering a high service has to be recouped and reativey ow prices do not usuay aow sufficient margins to achieve this. More recenty, changes in retai have opened up opportunities for retaiers to fi this position. The new retai format of the category kier has aowed this position to be fied because of the abiity of retaiers to buy in buk, therefore ensuring merchandise costs are ow. Such a format aso aows the category speciaist to se in high quantity, thereby achieving high enough revenue to make the operation viabe. The use of eectronic systems for saes is another area where costs can be controed more easiy and after-saes service eves may therefore be panned to be high.

284 Business situation anaysis Fig Retai price and service positioning map Service-oriented high price and high service position This position is based on providing a very high eve of service and charging the customer higher than average prices. In order to be successfu within this spatia position, there has to be a segment of the market wiing to pay higher prices for the benefit of receiving superior eves of quaity and service. The concern of managing this position is whether the higher prices offer perceived vaue or not. Many companies wi attempt to ensure that prices are competitive and this may mean a side of position towards a more centra area, nearer to where the axes cross. This more centra position provides itte differentiation and can cause probems, as it is open to attack from the other quadrants. Positioning as a strategy has to be cear to both the consumer and the retaier s empoyees. Price-oriented ow price and ow service position The ow price and ow service position is based upon a no-fris retai operation which eads on price as the means to generate saes. Such a position fits with the theory regarding the whee of retaiing, which was covered in Chapter 1 of this book. The exampe given was that new forms of retaiing enter the market as ow cost, no fris, ow margin operations. However, unike the deveopment process associated with the theory whereby retaiers attempt to move upmarket, the modern ow price retaier understands the strength in occupying this position. The deep discounters deveop their strategies to ensure that they wi remain securey situated in the ow price and ow service position 269

285 Methods and approaches to retai strategy and marketing panning 270 over the ong term. This is a highy competitive position to occupy as competitive buying, cost contro, management systems and ean organization structure a need to be constanty monitored to ensure a sound basis for ong-term surviva. Such efficiency is not necessariy based upon minima investment. A high initia investment in technoogy is required to ensure that just-in-time inventory and management systems are avaiabe and utiized. A price-ed position can ony be achieved if the retaier is reentess in driving down costs, with the cear goa of increasing margins whie retaining ow price eves and market share. Poor vaue high price and ow service position The east viabe position to occupy is one where a high price is charged for a ow eve of service. This position wi ony be fied when a retaier can survive due to a ack of competition for a particuar good or service. For exampe, some rura grocery shops are run by oder peope who give poor service because they have ost interest in the business. However, they have higher costs because of sma orders to their suppiers which are passed on as higher prices to customers. The shop is caught in a spira of decine, with the more mobie peope shopping esewhere whie the od and ess mobie groups wi continue to have to pay the higher prices. Positioning in the mind of the consumer To be successfu in positioning a retaier has to understand how to modify the perception of the consumer by improving, reinforcing or defending a company or store s position in the marketpace. Ries and Trout (1986) argue that positioning has to be correcty addressed, as it is the ony way to counteract the confusion created by the communication junge. According to Ries and Trout, the best approach in our over-communicated society is the over-simpified message. This has to happen at the right time and as such the secret of positioning becomes the organized system for finding the window in the mind. Ries and Trout contend that: Positioning starts with a product. A piece of merchandise, a service, a company, an institution or even a person...but positioning is not what you do to a product. Positioning is what you do to the mind of the prospect. That is, you position the product in the mind of the prospect. Thus communications strategies are important and any attempt to achieve success with the retai mix has to ensure some consideration of the importance of producing a favourabe image in the mind of the target consumer. Positioning shoud be couped with the exercise of segmentation as this aows for a more rigorous approach which considers differentiated targeted segments rather than a tota market coverage. Mataan is successfu in its chosen position as it offers a cear retai proposition to its customer base. The typica questions to be asked for positioning are: 1 What are the distinctive features and benefits, rea or perceived, that wi be considered in utiizing a channe or retai outet? 2 What are the perceived positions of the main channe or retai competitors? 3 Given the changes in the retai marketpace, and the strengths and weaknesses of our position, what is the idea positioning strategy to adopt?

286 An effective marketing mix strategy 4 What is the most appropriate marketing programme to maximize the chance of achieving our chosen position? Koter (2000) identified that there are four possibe positioning errors a company has to ensure it does not make. These are adapted to be appied to the case of positioning in retaiing: Underpositioning: The retai brand is not we known and is just another entry into a crowded marketpace. Severa e-commerce brands have suffered from ack of knowedge as to the product proposition and positioning of the channe. Overpositioning: Potentia customers may have too narrow an image of the retai brand. For exampe, Tiffany s diamond rings may be thought of as outside the budget of the average consumer when in fact they have a range of rings to suit each eve of purchase. Confused positioning: Buyers might have a confused image due to a retaier making too many strategic changes in positioning and changing its communications campaigns. Marks & Spencer are currenty attempting this but many consumers are confused as not a stores are repositioned and the communications campaign does not provide a cear message. Doubtfu positioning: Customers may not find the positioning credibe due to a mismatch of the communications caims in reation to the features, prices and company. In summary, the use of market positioning is to ensure that the target customers have a cear reason to use a company s shops rather than those of the competitors. The positioning creates a retai offer which is reevant and of vaue to the different segments, but it is one that needs to be communicated to those segments through promotiona campaigns and store design so that the position is both reinforced and ceary recognized. Finay, a strong position in the minds of the customers creates marketing advantage because it carifies the reason why someone frequents the company s stores and it may be one that competitors wi find difficut to copy. PROVIDING AN EFFECTIVE MARKETING MIX STRATEGY The success of the marketing pan reies on creating the right marketing mix strategies for achieving the objectives (see Chapter 5 for a cear expanation of the different aspects of the marketing mix). The use of the marketing mix of price, product, promotion and pace with its specia emphasis for retai invoves baancing the marketing mix to achieve the highest expected probabiity of meeting the pan s objectives. However, mix strategies have to be checked to ensure that they are acceptabe. This is because they aso invove uncontroabe factors such as the reaction of competitors, or changes that may occur in a market due to shifts in fashion, or effects due to changes in the economy. If it is found that there are no probems with the objectives and the pan is to be adopted, there has to be some assessment of whether the objectives can be achieved within specific time constraints. Competitors may be abe to react more quicky or the company may find it too difficut to change in a short period of time. The abiity to change is often reated to the avaiabiity of resources. It is necessary to question whether the resources avaiabe are sufficient to achieve the objectives (in terms of budgets, personne, technoogy, existing outets, service improvements, brand buiding). If, after 271

287 Methods and approaches to retai strategy and marketing panning 272 evauation, it is decided the strategy is unacceptabe there is a need to review and revise the pan s objectives. Agreeing the marketing mix strategy has to be inked to aying down task-reated programmes which wi aocate budgets and create responsibiities and timings for the pan s impementation. There is an important need to ink panning with budgeting and monitoring, which wi aow for the adoption and execution of an effective marketing mix strategy to achieve the objectives of the pan. The contro and managing of budgets and panned performance are deat with in the next section. MONITORING THE PLAN A business needs a mechanism to monitor the achievements of the marketing pan so that actions can be taken either to get the pan back on course or to take advantage of new opportunities. As such, there is a need for the provision of assessment, as we as measurement methods which wi monitor progress towards the achievement of the overa objectives of the pan. Retai businesses are characterized by their diversity and wide range of goods with differing quaities and attributes. However, a managers are required to make appropriate decisions on the basis of saes and performance and deviations from the initia objectives and targets. Managers need to decide if these fuctuations are either acceptabe or unacceptabe, based upon the effect of over- or under-performance on overa company performance. Effective monitoring of performance wi aow for the review and amendment of the pan on a continuous basis, to faciitate decisions, such as the introduction of tactica action if saes are behind target. Effective contro hinges on the quantity, quaity and timeiness of the information made avaiabe. The information has to fow on a reguar basis to decision-makers in a form that enabes ease of understanding and the carrying out of effective response. The retai industry has invested in integrated systems, such as EPOS and EDI, which provide for a continuous fow of financia and stock/saes pattern data. This has aowed for the modeing of different performance indicators. These may incude forecasts of ikey demand factors or purchase eves, as we as assessment of the effectiveness of regiona or nationa saes promotion, price changes and store campaigns. Saes measurements are the basic measure of evauation based upon saes transactions. With this information a company can anayse saes in terms of cash voume by period or market share, or by ocation or aocated space. Retai companies reguary use cash voume saes as the figures aow a common denominator of saes, costs and profits. However, changes in retai prices, either up or down, wi affect saes figures and may not refect the actua saes position. Tota saes figures are more usefu if broken down by size and pace of geographic unit, saesperson, product code, price incuding any discount, customer type and time of the transaction. It is aso beneficia to have detais of the timing and type of any promotion which may have affected demand. Figure 10.9 indicates the measures that are often utiized to assess previous retai decisions. It is aso necessary to monitor softer aspects of the business, such as brand awareness and customer satisfaction. If these weaken, attention shoud be paid to them; they are usuay eary signas of future probems reated to the financia performance. An exampe of how the monitoring of retai products may ead to important change is to be found in the video games market. The video games market was fooded with too many games tites by Nintendo, Atari and Sega. Consumers became confused and disappointed by the

288 Exercises Fig Retai performance measurement indicators numerous ookaike products having simiar names. By monitoring customer reaction, companies such as Nintendo were abe to withdraw from the market a high percentage of their games to aow space for new product introductions. This aowed the games market to recover after the fad period of the 1980s. CONCLUSION The marketing pan is a structured guide to action. It acts as a systematic discipine for data coection, objective setting and ogica anaysis of the most appropriate direction for the organization, retai unit or its merchandise to deveop. If a marketing pan is to be accepted by a concerned, then the compiation of the pan has to invove a eves of personne. This is because marketing pans require company-wide commitment if they are to be successfu. The pan has to refect the dynamic nature of the marketpace and, as such, the pan needs to be thought of as a oose-eaf binder rather than as a tabet of stone. This means the pan acts as a working document which shoud be updated to take into account opportunities or probem situations. Finay, any worthwhie pan wi contain the expected resuts for the business based upon different periods of operation. Panning functions have to incude the means by which the business wi measure its performance in a quantifiabe manner that is timey, reevant and accurate. This wi aow the pan to achieve its objectives and enabe management to function more effectivey in its decision-making activities. EXERCISES The exercises in this section reate to the contents of this chapter. It is advised that you work through them before moving on to Chapter Read the newspapers over a four-week period (Financia Times, trade papers, The Economist, etc.). Write down the changes that arge retai companies are making and aso what may be happening, by appication of a marketpace PEST anaysis. Try to reate your findings to what is 273

289 Methods and approaches to retai strategy and marketing panning contained in the approaches to the compiation of a marketing pan as outined in this chapter. You shoud aso try to identify the ink there may be between the theory and the practice of the changes taking pace. 2 Think about your own experience in doing things you initiay did not want to do. Why did you subsequenty agree to do them? How do you think the pans in a retai company coud be adopted more effectivey throughout the company utiizing the ideas in this chapter, further reading and from your own experiences? 3 Identify the different market segments and their reasons for the use of a post office, buiding society and a bank. Is there anything you may have earnt from this exercise which may assist the bank to change to attract new segments? What woud be the outcomes of any repositioning the bank may adopt? 4 List some of the retai changes that have taken pace in recent years. How can a medium-sized retaier deveop an improved competitive position through the use of a panning approach? Use the foowing grid as a guide. List competitive changes, for exampe: greater use of oyaty schemes more direct channe operations differentiation through improved service more women working deveopment of the Internet others (ist) What woud you need to know about your competitors and the marketpace in order to deveop an improvement in competitive position? REFERENCES AND FURTHER READING Abe, D.F. (1982) Metamorphosis in Market Panning in Cox, K.K. and McGinnis, V.J. (eds) Strategic Market Decisions. Engewood Ciffs, NJ: Prentice Ha. Abe, D.F. and Hammond, J.S. (1979) Strategic Market Panning Probems and Anaytica Approaches. Engewood Ciffs, NJ: Prentice Ha. Ansoff, H.I. (1988) The New Corporate Strategy. New York: John Wiey and Sons. Baker, L. (2000) Youth obsessed retaiers must ook to an oder group of big spenders, Independent, 25 Apri, 15. Coins, A. (1992) Competitive Retai Marketing. Maidenhead: McGraw-Hi. David, R. (2001) Tie Rack extends ranges in bid to reposition brand, Retai Week, 11 May, 3. Davies, G.J. and Brooks, J.M. (1989) Positioning Strategy in Retaiing. London: Pau Chapman. Edgeciffe-Johnson, A. (2001) 7-Eeven wants to cut it the UK way: The US store chain hopes to copy British success with portabe food, Financia Times, 25 Juy. Gonzáez-Benito, O., Greatorex, M. and Muñoz-Gaego, P.A. (2000) Assessment of potentia retai segmentation variabes: An approach based on a subjective MCI resource aocation mode, Journa of Retaiing and Consumer Services, 7 (3), Hasson, L. (1995) Monitoring Socia Change, Journa of the Market Research Society, 37, Hooey, G.J., Saunders, J.A. and Piercy, N.F. (1998) Marketing Strategy and Competitive Positioning. Heme Hempstead: Prentice Ha. Jaworski, B.J., Stathakopouis, V. and Shanker Krishnan, H. (1993) Contro combinations in marketing: conceptua framework and empirica evidence, Journa of Marketing, 57 (1), Knee, D. and Waters, D. (1985) Strategy in Retaiing: Theory and appication. Oxford: Phiip Aan. 274

290 Reference and further reading Knee, D. and Waters, D. (1989) Competitive strategies in retaiing, Journa of Long Range Panning, 22, December, Koter, P. (2000) Marketing Management: the miennium edition. 10th edn. Engewood Ciffs, NJ: Prentice Ha. Koter, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principes of Marketing. 2nd European edn. Engewood Ciffs, NJ: Prentice Ha. Marsh, H. (2001) THE BODY SHOP Has The Body Shop ost its direction for good? Marketing, 10 May. McDonad, M. and Tideman, C. (1996) Retai Marketing Pans: How to prepare them: How to use them. Oxford: Butterworth-Heinemann. McGodrick, P.J. (1998) Spatia and tempora shifts in the deveopment of internationa retai images, Journa of Business Research, 42 (2), Pamer, A. (1994) Principes of Services Marketing. Maidenhead: McGraw-Hi. Porter, M.E. (1980) Competitive Strategy: Techniques for anayzing industries and competitors. New York: Free Press. Quinn, J.B., Mintzberg, H. and James, R.M. (1988) The Strategy Process Concepts, Contexts and Cases. Engewood Ciffs, NJ: Prentice Ha. Retai Inteigence (2001) UK retai report, no. 119, Apri, 113. Ries, A. and Trout, J. (1986) Positioning: The batte for your mind, New York: McGraw-Hi. Waters, D. (1994) Retaiing Management: Anaysis panning and contro. London: Macmian. 275

291 11 Retai ocation strategies and decisions The chapter shoud enabe you to understand and expain: the importance of retai ocation decision-making; the different types of retai trading areas; theories which expain the historica patterns of retai ocation; a range of anaytica techniques for assessing the suitabiity of a retai ocation; different approaches to property deveopment. It is often said that within the retaiing industry ony three things matter: ocation, ocation and ocation. The ogic of this is that if the right site is acquired, success shoud be a simpe matter of opening for business. It is not that straightforward; seection of merchandise, sound pricing poicy, ayout and presentation, as we as other retai marketing factors are aso required as prerequisites for success. For exampe, the customer service poicies may be the reason a customer wi return again and again. A probem coud be a weak strategic approach if the fit between ocation and the format panned wi not meet customer expectations. This shoud highight the point that whie this chapter deas with ocation strategies and decisions there is the need to consider a whoe range of marketing issues. Having identified the importance of marketing factors, the actua seection of the ocation site has to be carried out utiizing a systematic approach whereby there is ogica acceptance or rejection. This is because of severa issues: 1 consumer choice: the ocation is often the most important consumer behaviour consideration in a customer s decision of where to shop; 2 the need for competitive advantage: the decision over where to deveop a retai outet wi be of strategic importance because retaiers can gain ong-term competitive advantage if they deveop in the best ocation; 3 consideration of trends: any decision on ocation has to consider the recent socia and structura changes greater use of the motor car, the importance of out-of-town shopping centres, regiona shopping areas, the growth of mutipe retaiers, the power of retaier brands, and so on; 4 high investment: deveopment of a retai site is accompanied by high investment and renta costs and ong ead times, which require decisions regarding ong-term financia impications; 5 property asset: it is important to seect carefuy as the fina property assets of a company can be vaued as high as their annua turnover; 276

292 Retai ocation strategies and decisions 6 decining number of sites: there are a restricted number of new sites for deveopment and, within government poicy guideines, ess opportunity to obtain panning permission easiy. The dimensions of ocation decision-making are extensive. Locationa decisions engage the different discipines of strategic marketing, the geography of retaiing, town panning, operations research, consumer behaviour, and economics. If a company has a weak approach to ocation anaysis it may not just be a financia diemma but coud threaten the ong-term progress of the retaier. As pressures mount on the avaiabiity of sites and the propensity of oca authorities to aow deveopment, retai companies have to become better at both the poitics and the technica aspects of panning. The obtaining of panning permission is being severey restricted in the UK. The panning poicy guideines issued by the government (Department of the Environment, 1996) has the objectives of: 1 sustaining and enhancing the vitaity and viabiity of town centres; 2 focusing retai deveopment in ocations where the proximity of business faciitates competition from which a consumers are abe to benefit and maximizing the opportunity to use means of transport other than a car; 3 maintaining an efficient, competitive and innovative retai sector; and 4 ensuring the avaiabiity of a wide range of shops, empoyment, services and faciities to which peope have easy access by a choice of means of transport. The above guideines are to be utiized on a regiona panning basis, with oca considerations taken into account. However, deveopers and oca authorities have to prove that they have thoroughy investigated a centra sites prior to the contempation of a greenfied site. In the ight of the increased market or poitica pressure and the resutant government guideines, Tesco embarked upon the deveopment of smaer stores (see Tabe 11.1). This strategy of different-sized stores, deveoped in different ocations, aso has the advantage that each format is serving a different consumer demand. Whie the out-oftown, or edge-of-town superstores offer one-stop shopping services for weeky outings, Tabe 11.1 Tesco Group, UK store deveopment programme (tota stores buit) Store format and size Tota deveoped 2001 Superstore ( sq. ft) Compact superstore (< sq. ft) Metro store (c sq. ft) Express store (c sq. ft petro station site) Source: Tesco Group annua reports 277

293 Retai ocation strategies and decisions 278 the smaer in-town stores offer top-up shopping faciities. In this way, they are compementary formats within Tesco s portfoio. Even if aowed by the authorities, the deveopment of a new superstore often has a negative impact on other stores owned by the company that are operating in the wider area due to cannibaization of demand. Long-term strategies have to take into consideration the dynamics of change. Transformation is ever present, as Schier (1994) has shown in his exporation of retai changes. Schier identified three different phases of a move away from the town centre. The first wave he identifies as the 1970s, when supermarkets enjoying high demand had to find extra space for suppy and at ower rents. This ed to out-of-town deveopment as it offered good growth potentia. The second wave was in the 1980s, when the retai parks aided the movement of DIY, furniture, carpets and eectrica goods from the town centres foowing the pattern set by the supermarkets. The third wave was identified as the mid-1980s, when retaiers such as Marks & Spencer and other comparison retaiers moved out of town. Fernie (1995) added to this understanding when he identified the new wave of factory outets and warehouse cubs that aso had an impact on retai format and concentration. These waves are quite interesting as the retaiers were proactive in these strategic ocation seection procedures and were not infuenced by government egisation. It is important to reaize that ocations are ony successfu when the consumer decides that there are benefits in utiizing them. This means government pressure may attempt to stop deveopment in specific areas but at the end of the day viabiity rests on satisfying the needs of the customer. Any retai ocation decision requires sophisticated anaysis. Once the strategic direction is cear, retaiers can increase the size of existing premises, refurbish, reformat premises, buid new stores in or out of town, internationaize or acquire other companies, etc. Figure 11.1 gives a strategic overview of a supermarket s format choices avaiabe and how smaer units are expanding the fastest. GEOGRAPHIC LOCATION DECISIONS How then can a retaier find an optimum ocation? In the past many ocation decisions woud have been made on the basis of intuition or, more ikey, the avaiabiity of a particuar property or going concern. Panning today requires some idea of popuation shifts, consumer mobiity and increases in discretionary income as each wi affect shopping habits. With the appication of technoogy a number of deveopments have taken pace. Technoogy can aid in ocation decision-making: anaytica techniques such as SLAM (store ocation assessment mode) aow the assessment, profiing and comparison of market opportunities; the screening of potentia sites; the definition of catchment areas; and modeing of the possibe impact of competitor strategies (Simkin, 1989, 1990). Cark (1993) has attempted to outine the future usage of geographica information systems with the prediction that they wi be integrated more with financia and strategic panning. A starting point for the understanding of ocation decisions is based upon the ocation area. There are zones or ocations which attract higher eves of custom than others. The ocation decision may take into consideration the broader considerations of the region, which woud invove a arge section of the country or county; or the market area, which woud be a geographic sector containing zones, of which one woud be the primary trading zone (see Fig. 11.2) which provides the major customer base for a retai outet.

294 Geographic ocation decisions Fig Strategic choice and ocation decision aternatives Regions may contain many specific types of consumers due to average incomes, density of popuation, cimate, geography, and type of economic deveopment for exampe, rura or industria. From a strategic panning perspective, some retaiers concentrate on dominating or being successfu in regiona markets prior to any expansion. Decisions regarding regiona markets are based upon the strategic posture of a company; whether it wants to achieve dominance and eadership in the region or whether it wants to be a foower or market niche retaier. The typica assessment of regiona markets is based upon the use of secondary information sources because other, more sophisticated, approaches are very expensive. 279

295 Retai ocation strategies and decisions Market area is a geographic area that wi contain the potentia customers of a specific retaier or shopping area. This is based upon three zones which take the retai outet or shopping centre as the epicentre from which bands emanate, based upon access, distance and traveing time. Whie these may be treated as concentric rings (see Fig. 11.2), due to the effect of different road routes and oca geography the pattern is somewhat ess reguar. The zone pattern wi aso be affected by the ocation of the competition as we as ease of fina accessibiity and parking in the primary zone. The market area is made up of the foowing three zones: 1 Primary trading zone where the majority of customers wi be based (60 65 per cent or higher if it is a oca retai outet such as a video renta or convenience store). 2 Secondary zone which can be any distance from two to seven mies, or under 20 minutes drive time, from the outet. 3 Fringe or tertiary zone which wi incude those who occasionay shop there as an aternative to oca shopping. This zone depends on the type and size of outet, and the aternative size and experience to be enjoyed in other market areas. Typicay, this zone can extend as far as 50 mies when there is a ack of acceptabe aternatives. Figure 11.2 describes the market area breakdown for a store. The store coud be ocated in any one of a number of sites across a wide area. If we ook at this more carefuy, and examine the use of and in a city, there wi be different pressures which wi ead more of the major retaiers to ocate in the centra district area than on its outskirts. Figure 11.3 indicates how the city coud be divided. As wi be discussed ater, retai deveopment in different areas wi occur due to the benefit of mutua physica ocation, speciaization of district, rent effects, and probems of oading and unoading. The physica, socia and business eements of the city wi determine and support a specific type of retaiing deveopment. This wi ead to speciaized and use patterns emerging as retaiers, deveopers and other and users compete for sites which wi be the most favourabe for them. The resut of competitive bidding is a and use pattern which wi form the spatia patterns most capabe of supporting an urban environment. A group of spatia modes is provided in Fig which offers a basic way to describe the distribution of and for different business and socia uses. Concentric zone approaches stress that a city wi deveop by forming different concentric urban zones focused around a centra business district. Growth occurs as each zone expands out into the next zone. This approach recognizes that as the residentia areas move further out from the centre some of the existing shopping faciities, 280 Fig Market area zones

296 Geographic ocation decisions Fig The nature of spatia deveopment in cities near the business centre, are iabe to be repaced by new retai faciities in the outying areas. Sector approaches pace the stress on understanding residentia areas but take into consideration the importance of commercia areas in reation to residentia deveopment. The approach utiizes a wedge pattern of deveopment which occurs in reation to major transportation routes and through the creation of sector rent patterns. The mode is dynamic. High rent residentia areas are beieved to move away from the city and to pu the city in the direction of such movement. In this movement, the stronger and more sophisticated retaiers are most ikey to foow the high rent areas and move from the business area of the city. Mutipe nucei is an approach that accepts that different types of activity wi tend to group together: shopping centres, business districts, residentia areas, and so on. The nucei effect is created by: the mutua need for cose proximity of different activities; the need for accessibiity of shopping; the different abiities to afford higher rents; any significant physica aspects of the and such as steep his or rivers affecting spatia deveopment. 281

297 Retai ocation strategies and decisions No urban area wi conform exacty to any of the above approaches, but in tota they hep us to understand the deveopment of different districts some of which wi be deveoped for retaiing activities. The underying ideas derived from the above approaches can be deveoped in greater detai by reference to the spatia distribution theories discussed in the next section. EXPLANATIONS FOR THE SPATIAL DISTRIBUTION OF RETAIL ACTIVITIES The spatia distributions of different retai activities have been evauated as to their ocationa pattern, size and function of shopping centres and districts, the aggomeration of simiar retai outets and retai intra-spatia arrangements. Emerging from this approach, it is cear that there are three main spatia patterns which describe most cases of retai ocation. These are: centra pace theory; bid rent theory; the principe of minimum differentiation. Each of these theories may be found to have specific imitations but, in combination, they hep to expain the existence of specific variations of hierarchica patterns to retai ocation. Centra pace theory Centra pace theory attempts to expain the existence of city and town shopping districts or regiona shopping centres, based upon a description of their size, retai function and reative positions to one another. The centra pace theory proposes a hierarchy of retai centres. A arge retai centre that offers a variety of different retai functions is surrounded further out by smaer centres with ess choice and speciaist retaiers, which in turn are surrounded by smaer centres comprising basic goods retaiers. The centra pace theory is based upon the premise that as distance to a retai centre increases, demand for a product wi decrease due to the increased cost of transport. Eventuay the demand wi drop to zero as this is the cut-off point past which consumers wi not trave further to obtain the product. This distance is often termed the market area or range of a good. Concurrent with this, a retaier wi not trade if the eve of demand is too ow. This eve is known as the threshod and its eve wi differ according to the product offered. High threshod products are reativey expensive and infrequenty purchased for exampe, jeweery and furniture. Low threshod products are reativey inexpensive and purchased on a reguar basis for exampe, groceries. If the market range of a good exceeds the threshod then it can be made avaiabe by retaiers at a profit. This is because enough potentia consumers exist who are wiing to trave to acquire the product or product range. Thus, it is predicted that there wi be many retaiers of ow order goods which are based upon ow threshod and ow range criteria. This means that there is a oca demand for frequenty purchased, inexpensive goods because consumers are not wiing to trave very far to obtain them. At the same time there wi be ony a sma number of retaiers offering high order goods which are based upon high threshod and high range criteria. The demand for high order goods is 282

298 The spatia distribution of retai activities Tabe 11.2 Consumer changes which may affect the basic assumptions behind centra pace theory Centra pace assumptions of consumer Modern retai consumer Trips are reguar to purchase sma amounts, especiay those with product perishabiity Purchase response is based upon price and product range The use of arge refrigerators and freezers aows ess frequent purchases from superstores or retai centres Non-price factors are increasingy a more important determinant of the purchase decision Improved road systems, increased numbers of cars and drivers per famiy aows mutipurpose trips and greater distances to be covered There has been an increase in eisure shopping Retai innovation has taken pace, with themed and purpose-buit faciities creating retai experiences which appea to different types of consumers Trips are home ocation based and often singe-purpose trips to the nearest shopping district where goods are avaiabe The shopping visit decision is based upon the necessity of the trip The consumer treats each shopping area as a simiar experience, i.e. a retaiers are assumed to adopt a uniform retai strategy based upon infrequenty purchased and expensive items, for which the consumer wi trave onger distances in order to assess and make a purchase. As a way of generaizing the reasons for the spatia pattern of existing retai sites, the centra pace theory heps our understanding of the different shopping districts to be found in deveoped countries. However, the basis of the theory requires a simiar pattern of retai outets equidistant from their counterparts. However, this approach does not account for the aggomeration of retai outets where centres exist based upon a high number of simiar retaiers. For exampe, within two district centres there may be an aggomeration of footwear and fashion retaiers in each of the high streets. Additionay, one centre may have deveoped an aggomeration of eectrica retaiers whie the other has deveoped a speciaization in antique retaiers. The overa functiona composition of the two areas may be considered to differ and, therefore, this contradicts the underying premise of centra pace theory. The theory is a usefu too to appy in order to generaize about the existence of shopping areas and the hierarchica distribution of retai outets but, in order to expain some spatia patterns, more detaied anaysis is often required. For exampe, consumer changes may be affecting the patterns, as shown in Tabe Bid rent theory Bid rent theory attempts to expain the interna spatia organization of panned and unpanned shopping districts. The theory assumes that retaiers woud aways prefer to ocate in the city or town centre, but this in turn increases the rents and costs of these ocations. Because of the increased costs, ony some types of retaiers are abe to afford such prime sites and so different types of retaiers wi be found further out from centra ocations (see Fig. 11.4). Centra pace theory, as discussed above, describes the hierarchy 283

299 Retai ocation strategies and decisions Fig An iustration of bid rent principes Source: Brown, 1992, p of retai centres but bid rent theory assumes that the spatia composition of retai outets is based upon the economics of and vaue theory. In reaity, the use of and is based upon a whoe range of different factors, incuding and-use panning reguations, individua choice and decision-making, and perhaps even chance. Bid rent theory is based upon the premise that a economic activities aim to be ocated in the city centre as it is the most accessibe ocation. The theory assumes that different types of and use are segregated by the amount of rent that a prospective tenant can pay and that competition ensures that, in the ong run, a sites are occupied by a retai activity capabe of paying the highest possibe rent; as such, it is argued, the and is empoyed to its maximum utiity. The important premise is that and use is based upon access, because consumers wi seek out the most accessibe ocation. As with other neocassica economic approaches to ocation, it is grounded on the assumption that an ineastic suppy of and exists and therefore and does not become readiy avaiabe as the demand for it increases, or vice versa. It aso assumes the existence of uniformy priced trave which wi be as easy to make in any direction, and that and can be acquired through an open and fair competitive bidding process where the highest bidder wi acquire a site. Under these circumstances the price a bidder is ikey to pay wi depend on the use which wi be made of the site. For exampe, a commercia user wi earn more from the and and therefore pay a higher price than an industria user, and an industria user wi in turn pay more than a residentia user. This assumes that a pot of and can be equay used for each of the above purposes. In essence that is sedom the case.

300 The spatia distribution of retai activities Fig Intra-centre adaptation of bid rent theory Source: Scott, 1970 In a city centre ocation there is normay a better transport service and network than in the outying areas. The highest market potentia and optimum access is reated to a city ocation for both consumers and the abour market even though city centre congestion may cause secondary probems. This is why the more centra the ocation the more desirabe the pot, and consequenty the higher wi be the price as different users wi compete to purchase the and. As the economic activity that can gain most utiity from that site wi be abe and wiing to pay the highest price, it foows that the and wi naturay attract that form of activity. The resut is that bands of activity wi occur in concentric patterns emanating from the city centre (see Fig. 11.2) as the different forms of economic activity naturay segregate themseves from each other. Retaiers require access to consumers more than any other and use function and this wi ead to retaiers being prepared to pay very high rents for city centre ocations. The bid rent demand from retaiers fas away quite sharpy as the distance from the city centre increases. This is because the potentia in outer city areas is non-existent or too ow for major retaiers. In contrast, the demand curves for commercia and residentia use are more eastic since there is a wiingness to accept poorer access in return for ower cost which produces a shaower demand curve. The two-dimensiona Fig can be associated with the three bands iustrated in Fig. 11.4: 0 D 1, commercia use, D 1 D 2 industria use, and D 2 and beyond for residentia use, where each activity wi produce a concentric pattern at varying distances from the city centre. Figure 11.5 indicates how the retai sector wi be further segmented into different demand schedues, with some types of retai activity being more wiing to bid higher rents in order to obtain a centra ocation. Department and speciaity stores seing women s cothing, for exampe, are ikey to attach far greater importance to having a centra ocation than woud a convenience store or grocery retaier. 285

301 Retai ocation strategies and decisions Figure 11.5 indicates how the gradient for some retaiers is steeper than for others; for exampe, variety stores as opposed to furniture retaiers. This refects the reative importance attached to a centra ocation by specific types of retaier. The difference in rents paid per square foot is because retaiers understand their own marketpace needs and are unwiing to pay prices beyond the attractiveness of the site to their potentia customers. Empirica evidence supports the genera assumptions associated with bid rent theory, but and may aso be affected by panning restrictions on types of use and the type of buidings constructed. On the whoe the principes of the theory are a usefu way to understand the historica spatia ocation of different types of business emanating from a city centre. 286 The principe of minimum differentiation The principe of minimum differentiation describes the intra-centre aggomeration of simiar retai outets. It is found that many retaiers choose to ocate near simiar types of retai activity in order jointy to attract a higher fow of customers. In addition, some retaiers wi aim to ocate near compementary rather than simiar retai functions, in order to maximize the demand from potentia customers. Bid rent theory is based upon the assumption that a economic activities aim to be ocated in the city centre because the centre is the most accessibe ocation. This assumption does not expain why some retaiers seek sites that are near to their competitors, or stores providing a simiar product offer, rather than choosing to be sited in the city centre. This means proximity to compementary activities is sometimes more important than the benefits of genera access. As Richardson (1978) pointed out, the aggomeration of retaiers may be more attributabe to economics of concentration rather than economics of centraisation. The principe of minimum differentiation has been deveoped from the work of Hoteing (1929). The assumption behind the theory is that ony two firms wi be considered athough in reaity there wi normay be more than two. These two firms are ocated on a inear market ine and both are considered to have the utimate aim of seeking to maximize profits. It is aso assumed that transport costs are constant, based upon the distance traveed, and that demand is stabe. Potentia consumers are assumed to be eveny distributed over the inear market. Therefore, stabiity exists as no marketing or other infuences are brought to bear on the situation. The consumers are considered to be rationa and utiity maximizing, which means they are going to choose the nearest retaier in order to save on transport costs. The principe of minimum differentiation suggests that a retaier woud be abe to maximize profits by ocating or reocating coser to a competitor in order to gain a arger market area. However, after the reocation the competitor osing out on market share may then move or eapfrog in order to gain a arger market area share; see Fig which iustrates the dynamics of the repositioning. Figure 11.6 indicates the movement of the stas of two ice cream vendors on a beach. Starting initiay at opposite ends of the beach, vendor A reaizes that an advantage can be gained by moving nearer to vendor B as the buk of the market wi be captured by those waking to areas of the beach from X. However, vendor B can retaiate by eapfrogging vendor A to gain the main part of the market and eave A the smaer market share up to Y. Finay A responds by eapfrogging B and assuming a position where a staemate equiibrium occurs such that both vendors are competing in ocations adjacent to each other and with equa shares of the business from the beach.

302 Location site and types of deveopment Fig The dynamics of the principe of minimum differentiation Source: Hoteing (1929), in Brown (1992), p. 68 The ong-term outcome of the dynamics of the principe of minimum differentiation is that there is a tendency for some retaiers seing simiar categories of merchandise for exampe, motor car deaers to custer together in a pattern of aggomeration. The same phenomenon has been identified for compatibe but contrasting retaiers such as restaurants and cinemas or grocers and forists. The evidence of aggomeration patterns suggests that there is a reationship to the type of retaiing function. For exampe, it is much more ikey that high order retaiers (see the discussion on centra pace theory above) wi custer rather than ow order retaiers; whie boutiques, jeweery or antique shops are often found together in an area or street, ower order outets such as supermarkets or superstores attempt to be as far from each other as possibe. Additionay, there are compementary activity custers where theatres or cinemas wi be positioned near to restaurants, or an accessories outet near to a fashion retaier. LOCATION SITE AND TYPES OF RETAIL DEVELOPMENT The types of ocation are associated with different types of site seection. A number of different permutations exist but a retaier may decide to ocate in one of three types of site: a soitary site; an unpanned shopping area site; a panned shopping district/centre. Each of these site seections is associated with specific strengths and weaknesses. The foowing is ony indicative of what a site may provide; there is a range of compex and different factors which wi need to be assessed. 287

303 Retai ocation strategies and decisions 288 The soitary site may be a singe free-standing retai outet isoated from other retaiers and positioned on a road or street. Its strengths are the ack of competition, ow renta costs, ower operating costs which can be passed on to the customer, higher impact of presence given traffic visibiity is not a probem, and probabe ease of parking. For some arger companies a free-standing site offers the benefit of ower cost, provision of a arger dispay area and a store ayout to suit their own specification. It shoud be noted that free-standing stores, as part of their strategy of differentiation, emphasize ocation. This is because consumers tend to go to the nearest grocery store; this is in direct contrast to compementary retaiers, such as fashion retaiers, who aggomerate together to achieve a critica mass to create an attraction to consumers. The site s weaknesses wi be the difficuty in attracting initia/new customers, as a singe outet may not have a great dea of gravitationa pu. Promotiona costs may therefore be higher and there is no shared benefit of security, grounds maintenance or environment improvement. The soitary site is often operated by convenience stores, garages, fast-food restaurants or discount warehouses as other types of business find it hard to attract and retain a arge enough customer base. The unpanned shopping area site may be a retai ocation with two or more outets in cose proximity to each other. Unpanned retaiing, as the term impies, has evoved in a gradua or piecemea pattern. Buidings may have been converted to retai use and the ownership of unpanned retai centres is frequenty fragmented among a number of companies or owners. The majority of centra shopping areas in cities or towns and sma shopping areas are unpanned. Increasingy, though, they wi incude panned areas, especiay in edge-of-town or out-of-town deveopments. Normay a number of retaiers wi coexist, with perhaps an oversuppy of some business types and a shortage of others. No quotas wi exist as to number and types of retai businesses. The strengths wi be the variety of retai choice in a singe area, the abiity to compare price, higher eves of pedestrian traffic, probabe access to pubic transport, and convenience of saving time by utiizing different stores. The weaknesses wi be the probems of traffic congestion and parking, organizing deiveries, high rents and taxes, poor condition of some of the properties in oder city centres and, if trave is expensive to the centre and parking difficut, probems of recruiting and retaining staff. The panned shopping area site may be a retai ocation which has been architecturay panned to provide a unified theme for a number of outets. The panned retai area is a deiberatey deveoped site with compementary retai outets. Panned shopping sites are deveoped as an amagam of different retaiers to refect the market catchment area. The pan is often based upon having some arge, key brand stores and a number of smaer retaiers adding diversity and interest. Normay a centre wi be deveoped and operated as a singe unit, with adequate parking faciities and a baance between the types of stores represented in the centre. The retaiers wi be aowed to rent space on the basis of being abe to compement other centre retai businesses and on the grounds of the quaity and type of goods, or services, offered. The strengths wi be the baance and comprehensiveness of the retai offers, the freedom for individuas to shop in comfort and satisfy a their needs in the singe centre, the creation of a singe unified image and sense of pace, an abiity to funne consumers into a zoned ocation, the abiity to increase security and reduce theft this a fits in with the growing popuarity of mas and shopping centres which have no vehicuar traffic and are a-weather or temperaturecontroed environments. Generay, panned centres tend to be marketed and managed

304 Location site and types of deveopment hoisticay. The weaknesses wi be the infexibiity stipuated in the renta agreement such as opening hours; rents may be higher than in other ocations; there are often restrictions as to the type of goods which may be sod by the different stores; the smaer stores may not be as successfu as the more estabished ones; and some centres are ageing and are in need of upgrading. Types of panned shopping areas The retai park and shopping ma as panned shopping areas are discussed beow in more detai. The retai park A retai park is normay deveoped on the outskirts or at an out-of-town site and consists of a purpose-buit custer of free-standing stores with parking faciities. These are usuay a minimum of three warehouse-type stores based in a retai park of at east square feet and buit and et as a retai entity. Retai parks were initiay deveoped in the eary 1980s and ater were deveoped aongside eisure faciities such as bowing aeys or cinemas. The retai park is different from the shopping ma in that the ma is a singe buiding and marketed as an individua pace. The ma often contains sma retai outets but a retai park has retai units that are of at east square feet. MINICASE 11.1 The importance of the right anchor store for the deveopment of a shopping ma FT No matter which innovative saes ange deveopers dange in front of shoppers, a centre cannot attract a critica mass of shoppers without a significant purveyor of a critica mass of goods. And that means finding the right anchor the mass retaier with the singe argest foorspace in the centre to draw in the right mix of shoppers. So who, then, is the idea anchor? In the UK, there is growing consensus that food retaiing and shopping mas at east arger ones do not mix. Capita Shopping Centres, owner of some of the UK s eading centres, recenty announced pans to move Asda, the food retaier that is one of the anchors of its andmark MetroCentre in Gateshead in the north-east of Engand, to a new site and repace it with Debenhams, a department store. At the MetroCentre, we found that the footfa into the Red Quadrant (where Asda is ocated) from that entrance was not as high as from other entrances, says Dougas Lesie, chief executive of Capita Shopping Centres. Peope were entering through Asda but they were going right back out again. It is highy debatabe whether food shopping ever had any synergy with comparison shopping. David Robinoff, managing director at Eastdi Reaty Co. in New York, says: Peope who have stocked up on perishabe goods do not want to ock them in their cars for a few hours whie they take in the other sights at the ma. Moreover, food and cothing shopping trips are reay about different things. According to research by Heaey & Baker, it is typica to find supermarkets as anchors in many European countries, incuding Begium, Denmark, Germany and Portuga. France shows a preference for a so-caed hypermarket anchor. Yvonne Court, retaiing speciaist at Heaey & Baker, says restricted shopping hours in some European states may be part of the expanation. Aso, the degree to which 289

305 Retai ocation strategies and decisions supermarkets are desirabe anchors may depend on the degree of retaiing sophistication of the popuation generay, says Jonathan Tinker, of Cheverton Properties which speciaises in European retai and eisure parks. The richer economies anywhere wi have ess focus on basic goods reative to overa consumption, he notes. In Poand, where the average annua per capita income is $3,000, a higher percentage of expenditure goes on food than on anything ese. But in Germany, with income of $22,000, shopping patterns differ. Thus, understanding the nature of shopping depends on the socio-economic context in which it occurs. In deveoping economies, it is a necessary chore and in weathier ones, a eisure activity. And in the most we-off, it is an art form. Source: Norma Cohen, Financia Times, 9 January 1998 The shopping ma A shopping ma contains a high number of retai outets in a arge buiding of at east square feet in size. The ma normay forms a covered buiding with open pedestrian wakways which are ined with shops inking the main retaiers sites. If the ma is more than one foor high then the major anchor stores may extend to each of the foors. The ma deveopment may be free-standing or within an existing shopping area. This is because some mas have been buit as an infi, as part of an unpanned town centre, whereas others are ocated on greenfied sites. The property deveoper s aim is to create a modern themed entity with a baance of types of store. A shopping ma normay contains one or more major branded stores pus severa smaer enterprises. They are different from retai parks as the range of store offers is much wider and often incudes uxury and eisure items as we as cothing, footwear and other typica centra ocation merchandise. There are a number of exampes of shopping mas, ranging from sma district size centres to regiona mas such as the MetroCentre near Gateshead or Meadowha in Sheffied in the UK. Regiona mas are at east square feet in size and often incude eisure functions such as cinemas, food courts, ice rinks and restaurants. A shopping ma is strongy marketed as a unified shopping destination with one name and ogo. The success of a ma, however, is quite often dependent on the range and quaity of the shops it can attract. The ma is more ikey to want to attract nondiscount retaiers. Tabe 11.3 expains the differences which often exist between a discount operation and that of a department store. Two types of retaiing in ocation decisions Based upon the preceding theories, there are two basic types of retaiing which need to be expained: proximity and destination retaiing. The nature of any regiona deveopment wi affect the nature of the sites avaiabe for retaiers. Each area can be generaized to identify the type of retaiing which may be successfu. Therefore, two broad types of retaiing deveopment may be considered in the ocation decision: proximity retaiing and destination retaiing. Proximity retaiing is deveopment-ed by ocating where the consumer is to ensure high eves of convenience in the workpace, reated to the patterns of movement, near the home or at home. Specific exampes incude petro stations, chemists, sma convenience stores, newsagents, video outets, fast-food outets, mai order and teeshopping. A 290

306 Location site and types of deveopment Tabe 11.3 Retai strategy differences between a discount store and a traditiona department store Discount cothing store strategy 1 Low cost renta ocation which may refect in a ower eve of passing potentia consumer traffic or a ess prosperous area 2 Simpe fixtures and fittings, cheap foor covering, few dispays, singe fitting room 3 Promotiona strategy is based upon price eadership 4 Litte fexibiity in service (few, if any, of aterations, phone orders, gift wrapping, credit, etc.) 5 Reiance on sef-service, basic dispays, most merchandise being visibe and in crowded conditions 6 May stock imited ines and cheap discounted brands 7 Continua use of ow price offers 8 No changing rooms Department store strategy 1 More expensive renta ocation in an estabished shopping centre which has a high eve of pu on potentia consumer traffic 2 Eegant fixtures and fittings, carpeted fooring, individua fitting rooms, an abundance of window and interior dispays 3 Promotiona strategy is based upon deveoping brand image, offering quaity brands, achieving a positive image and providing superior service 4 Fexibiity in service (wi ater, arrange home deivery, have reationship marketing or oyaty schemes) 5 Thorough saes assistance, depth and breadth of stock, attractive dispay of merchandise 6 Fu seection of branded products and reuctance to have discounted items 7 Saes imited to specific end-of-season cearances or specia occasions 8 Changing rooms retai outet wishing to be successfu in this category has to identify sites with maximum passing traffic and visibiity, and ensure that the retai offer matches the needs and characteristics of peope working or iving in the immediate vicinity. Proximity retaiing is often associated with convenience or stape goods which are purchased on a frequent or routine basis. Destination retaiing is based on drawing consumers to trave to a store: brand eaders, the major mutipe grocers, arge outets for DIY, toys, cothing, as we as the arge discount retaiers are incuded in the category of retaiers using this type of ocation. Reativey mobie, car-owning consumers are more ikey to be attracted by this type of retaiing. Destination retaiing is often associated with speciaity goods which are characterized by unique attributes that wi attract specific segments. For these goods, purchase behaviour is often associated with higher invovement as part of the buying process and more pre-purchase panning than for other types of goods. A recent trend has been the movement of eectrica, carpet and furniture stores away from existing centres to fringe and out-of-town ocations, usuay grouped together in retai parks. The marketing strategy for this trend is often based upon the proposition of providing products which offer good vaue for money. 291

307 Retai ocation strategies and decisions 292 Fig Retai ocation and consumer behaviour consideration Other factors aso come into pay. From a consumer behaviour point of view it is important to understand the type of shopping occasion (see Fig. 11.7). A suitabe ocation strategy needs to be underpinned by the type of merchandise and how time dependent the purchase may be. Convenience goods by their very nature shoud be in cose proximity to the customer s home. However, there are aso comparison goods that are associated with more time taken to decide on the idea purchase. These may be in a centra high street ocation. If a retaier is offering buky goods, such as furniture or white goods, then quite often the ease of parking and a arge seection offered by a retai park is an idea ocation to pan for. Finay, a retaier distributing more portabe purchases can ocate in the high street where consumers can choose between competing outets. LOCATIONAL TECHNIQUES The use of different forms of anaysis is essentia to the seection of an appropriate retai ocation. The appropriateness is based upon the characteristics of the retaier s business and this means different types of anaysis wi need to be undertaken according to the type and range of products being sod, where the business woud ideay be based, and the idea catchment popuation. Factors in the ocation decision In order to determine possibe catchment areas, to forecast saes and to cacuate ikey demand and profitabiity, a substantia number of factors may need to be investigated. Chu and Lu (1998) have argued that within any discussion on spatia economics and ocation decisions it is assumed that the firm in question can choose ony one store site. This may be restrictive, as spatia decisions may be far more compicated based upon geographic distribution of competitors and competitive prices. The ist in Tabe 11.4 is not exhaustive but serves as an exampe. A sites need to be examined on a preiminary basis prior to the more detaied ocation anaysis. Road and traffic systems, parking

308 Locationa techniques Tabe 11.4 Sampe of ocation factors Customers potentia/actua Accessibiity Competition Costs Numbers by demographics Income/empoyment by occupation, industry, trends Site visibiity Pedestrian fows Amount and eve Type and numbers Buiding costs Rent costs Spending patterns Barriers such as raiway tracks, rivers Saturation index Rates payabe Popuation growth, density and trends Lifestyes Car ownership Type of ocation zone Road conditions and network Parking Pubic transport Proximity of key competitors, traders, brand eaders for exampe, Marks & Spencer Deivery costs Insurance costs Labour rates faciities, competitors and pedestrian fows may be easiy assessed; some of the other items isted in Tabe 11.4 need more detaied anaysis. Location assessment techniques Techniques for assessing a ocation for a retai outet range from the simpe to the sophisticated. An obvious method, which is the simpest way of assessing a site s viabiity, is to count the fow of peope during five-minute periods at the busiest times of the week. Based upon a crude rue of thumb, if it were a site where on average 100 peope passed within five minutes then that coud be equated to expenditure per person based upon a money weighting, of say 150 each, which woud represent a potentia of a week. Two hundred peope woud represent Obviousy there are certain variabes which aso need to be assessed to ensure the viabiity, such as being in a centra pace ocation among shops with a high customer utiization. Eppi (1998), in a study of consumer shopping behaviour, reveaed that the effects of ocation, comparison shopping, and department store image are a composite when estimating both shopping centre patronage and retai saes. The most ogica step woud be to use a checkist of factors simiar to those in Tabe Factors reevant to a potentia site coud be identified and then aocated a score on a scae of 1 to 10 (1 = poor, 10 = exceent). The fina score woud act as a management decision input when considering whether or not to proceed in one area as opposed to another. Whie a sma retaier without arge resources may adopt such an approach, the ocation of a superstore woud need a more sophisticated approach. This is because of the size of the investment invoved, the compexity of the operation and the profit required to secure a return on any investment. Destination retaiing, as previousy described, requires a much more detaied assessment as part of the ocation determination process. 293

309 Retai ocation strategies and decisions Tabe 11.5 Framework for catchment area anaysis (1) (2) (3) (4) (5) (6) Trave time Popuation Weeky Competition Square Forecast saes (minutes) potentia saes (tota square footage footage) per head 0 to under to under to under to under to CATCHMENT AREA ANALYSIS Catchment area anaysis together with the anaogue method (a comparison of simiar stores in the group) serves as a usefu basis for forecasting saes of a proposed superstore. A superstore wanting to ocate to a new site may turn to catchment area anaysis. The basic framework is shown in Tabe The coumns of Tabe 11.5 require some expanation. Coumn 1, athough expressed in time bands, coud equay be stated in terms of distance. However, distance does not take oca road conditions into consideration. Coumn 2 coud be broken down into socio-economic groups, age bands, car ownership, etc. It coud aso be based upon percentage of working popuation. Coumn 3 woud initiay be cacuated by mutipying per capita expenditure on merchandise ines/goods by the popuation figure. More detaied anaysis woud determine per capita expenditure in different consumer categories mutipied by the number of such consumers in the various time bands. The superstore, for exampe, may be ooking to attract the higher socio-economic groups or may be surrounded by specific househod types. Coumns 4 and 5 enabe an assessment to be carried out into the potentia market for a new store on the basis of existing provision. Coumn 6 by utiizing the data from a number of simiar stores in the group (anaogue method) a reaistic forecast can be made. The forecast wi indicate the eves of penetration in each of the trave bands, adjusted to take the effect of competition into account. Utimatey, the decision as to whether or not deveopment proceeds wi depend on the saes and profit requirements of both retaiers and property deveopers. Computerized databases as an aid to store ocation catchment area decisions In order to evauate the trade area for a store with some accuracy, a range of different computerized mapping techniques is avaiabe. Trade area mapping may be provided by software such as SYMAP, GIS (geographic information systems) or Pinpoint anaysis. These systems can assess the geographica and demographic attractiveness of a site with

310 Catchment area anaysis much more accuracy than other methods. Retaiers have often been sow to use spatia decision software in order to improve decisions regarding the retai ocation and operation. The arger mutipes, especiay food mutipes, use GIS because it can give competitive advantage as part of marketing panning over smaer retaiers. Gravitationa mode The use of modes is another way to assess the feasibiity of a ocation decision. With the gravitationa mode, the seection of a primary trading ocation is based upon the idea that consumers are attracted towards one ocation as opposed to another by its draw or pu effect. One of the origina exponents of the puing effect of a ocation was W.J. Reiy, who pubished his aw of retai gravitation in The aw set out to aow a point of indifference to be estabished between two cities or communities so that the catchment area coud be determined. The point of indifference is the geographic breaking point between two communities, that is, the point where consumers woud be indifferent to shopping at either ocation. This aids one of the crucia tasks in retai ocation, which is the necessity to deineate the catchment area or geographica area from which a retaier draws custom. According to Reiy, more consumers wi be attracted to the arger city or community to shop due to the greater amount of store faciities and choice which woud make any extra traveing time worthwhie. Reiy s aw may be expressed as: D AB = 1 + where D AB is the imit of city A s catchment area measured in mies aong the road to city B, d is the distance in mies aong a major roadway between A and B, P A is the popuation of city A and P B is the popuation of city B. Based on this formua, a city with a popuation of (A) woud draw peope from three times the distance that a city with a popuation of (B) coud manage. If the cities are 20 mies apart, the catchment area for city A extends to 15 mies and for city B, 5 mies (see Fig. 11.8). However, Reiy s aw rests on three major assumptions: d P P B A the two competing areas are equay accessibe from a major road; retaiers in either of the two areas offer no additiona competitive advantage and are equay effective; the areas are simiar and that no bias wi occur due to differences in ethnic, civic and genera architecture, faciities or parking restrictions. Consequenty, the aw has its imitations. Not ony is the focus on distance rather than trave times, but aso actua distance may not correspond with the consumer s perception of distance for exampe, a store that offers imited merchandise, few services and parking probems may be at a greater perceived distance from one with an attractive, peasant environment. Aternativey, consumers may be wiing to trave further due to ease of parking or to visit a particuar store, etc. 295

311 Retai ocation strategies and decisions Fig Reiy s point of indifference However, despite the above weaknesses, Reiy s aw sti represents an important contribution to our assessment of retai ocation as it formaizes the interreationships between competing retai trading areas. In particuar, it incudes some of the basics of ocation: spatia convenience the increase in trave time and distance to any destination to utiize a store or market centre wi restrict and imit the potentia size of the market; range this is the maximum distance that customers are wiing to trave to a shopping destination; threshod this refers to the smaest market size needed to support a certain type of store or shopping centre. REGRESSION ANALYSIS The arge stores may aso utiize regression anaysis in order to forecast saes. As seen previousy, existing stores simiar to the proposed new store are used to estimate an equation reating variations in saes to a set of variabes, for exampe popuation, competition store size, and so on. A hypothetica exampe wi iustrate the procedure: Y = a + b 1 x 1 b 2 x 2 where Y = retai saes x 1 = popuation (within 20 minutes drive time) x 2 = competition (foor space of a stores over ft 2 within 20 minutes drive time) b 1, b 2 = regression coefficients a = intercept vaue 296

312 Regression anaysis Twenty-five observations from anaogous stores give us the foowing regression equation: Y = x x 2 The overa expanatory power of the regression equation above is known as the coefficient of determination, R 2, which for this equation is (The figure of 0.83 is, in turn, the squared vaue of the correation coefficient, r, which in this exampe woud be Therefore = 0.83.) What does R 2 = 0.83 mean? An R 2 of 0.83 means that 83 per cent of the differences in saes among the 25 anaogous stores can be expained by variations in popuation and competition. Ony 17 per cent is eft unexpained (owing to some other factors, for exampe income eves, promotiona expenditure, product range). For the regression coefficients: b 1 is equa to 0.74, which means that for a 1 per cent increase in the popuation, saes wi increase by On the other hand, a b 2 of 1.35 means that with a 1 per cent increase in competitor s foorspace, saes wi decrease by 1.35 per cent. Using the area s popuation and competition figures, a proposed new superstore can use the above equation to estimate saes. Whereas superstores consider trave times and distance proximity, retaiers study geodemographic profies for an understanding of catchment areas. More specificay, proximity retaiers wish to know the types of peope in the immediate vicinity of the proposed site, as it is from here that the vast proportion of its business wi come. Geodemographic systems ike ACORN or MOSAIC (see Chapter 3 for further expanation), aong with Target Group Index (TGI) information on consumption, can provide detaied information on the catchment area: for exampe, type of housing, consumer characteristics, consumption patterns, suggestions on product ranges, etc. Statistica data and databases can show the infuence and distribution of, say, ACORN types within a city, town or viage. Further anaysis enabes an estimate of market size and saes potentia. Index of retai saturation The eve of competition between stores wi affect the retai opportunity in an area. Therefore, the competitive structure of a catchment area needs to be studied in order to assess a ocation accuratey. Put simpy, a catchment area can be under-stored, overstored, or saturated. An under-stored area has too few stores seing specific goods or services to satisfy the needs of its popuation. An over-stored area has a superfuous number of stores and some retaiers may not be abe to earn an adequate profit. A saturated area has just enough retai faciities to satisfy the needs of its popuation. To assess the above, a genera ratio mode has been deveoped to measure store saturation in a specific area based upon an index of retai saturation (IRS). The cacuation can be made as foows: where IRS i C i REi = RF IRS i = index of retai saturation for area i (where i = oca market area) C i = number of customers in area i for the product/service category RE i = retai expenditures per customer in area i for the product/service category RF i = tota retai square footage in area i aocated to the product/service category i 297

313 Retai ocation strategies and decisions Tabe 11.6 An exampe of the use of the index of retai saturation Catchment area Number of customers buying annuay Average annua purchases per customer Tota square footage (incuding the proposed store) Index of retai saturation (incuding the proposed store) Index of retai saturation (excuding the proposed store) Consider the foowing exampe of food store saturation in a catchment area. There are consumers in the area and they spend, on average, 20 per week in food stores. (Figures for different per capita expenditure on retai products are avaiabe from the Famiy Expenditure Survey.) There are three stores serving the market with a tota of square feet. Hence: IRS = = 10 The revenue of 10 per square foot of seing area measured against the revenue per square foot necessary to break even provides the measure of saturation. The use of the IRS can aso be iustrated by an anaysis of three catchment areas under consideration by a shoe retaier. The company has predetermined that its saes must be at east 160 per square foot of store space to be profitabe. The catchment area chosen wi be the one that yieds the best index of retai store saturation. In this case, the retaier seects catchment area 1 which has an index of saturation of 180 (see Tabe 11.6). When cacuating the index, the retaier has to remember to incude the proposed store. If the store is not incuded, the reative vaue of each cacuation may be distorted. If the proposed store is excuded in Tabe 11.6, for instance, area 3 has the best eve of saes per square foot ( 400). However, this area is not desirabe after the prospective store is added to the computation. It shoud be noted that saes per square foot decine most when new outets are added to a sma area. The retaier shoud aso examine the impact of its business and whether a new store wi expand the tota market or not. The information in Tabe 11.6 assumes that saes wi remain the same. In the food retaiing industry it has been caimed that there shoud be approximatey one square foot of retai space for each head of popuation iving in a catchment area. So peope shoud be matched by square feet of retai space. However, the compexity of any retai saes situation quite often means that such rues of thumb are too crude an approach. It shoud be noted that a market may be saturated in some sectors, for exampe grocery and superstores, and yet be very much underdeveoped in others such as footwear retaiing. Each retai organization must anayse the situation as it affects its business. In addition, the company has to have the resources to afford the deveopments. According to Edgeciffe-Johnson (2001) the probems of Gap ed the company to change its pans from its 30 per cent expansion of square footage to ony 10 per cent. 298

314 Retai property deveopment RETAIL PROPERTY DEVELOPMENT Retai property deveopment can be considered as the change of use of a piece of and in order to deveop it for retai use. This may be based upon the refurbishment of existing buidings from what used to be a warehouse or factory into retai units. The genera definition reating to transforming a pot of and from one state to another is based upon the premise that if there is a higher demand for retai sites in an area and a decrease in the need for industria sites then it wi be inevitabe that suitabe sites for retaiing wi be deveoped. The other type of deveopment is the panned deveopment of new centres in out-of-town ocations or the deveopment of retai parks. The atter type of retai property deveopment has been a more recent phenomenon but the overriding motivation for a deveopment is the financia return on any project and the commercia vaue of the new property. Retai property deveopment is aso reiant on: oca factors of suppy and demand; appropriateness of the avaiabe site(s) for different types of retaier; the experience and preferences of the deveoper and oca panning officers; the minimum amount of and required to provide different scaes of deveopment and change; the costs of the deveopment; the time factors in the competion of the deveopment; the eve of financia risk in undertaking the deveopment. MINICASE 11.2 Retai Location Probems: Market forces Like many sma market towns in Britain, Romsey has seen better days. New towns, garden suburbs, cars, ring roads, innovations in retaiing, refrigeration, e-commerce and even women working outside the home have a been bamed for the decining fortunes of Britain s 1,000 or so sma towns, with a popuation of under 20,000. The cosure of banks and raiway stations has added to their isoation. But most oca panners agree that one thing above a has damaged traditiona sma towns the growth of out-of-town superstores. In the past 40 years, the market share of arge mutipes, nationa brands and franchises that have homogenised Britain s high streets and shopping mas has amost doubed to 65% of retai turnover, according to a sma-business review by Barcays Bank. This has hurt independent shops, particuary sma grocers, whose numbers have decined from 275,000 in 1950 to fewer than 80,000 today. The atest threat to Romsey is West Quay, one of Britain s argest shopping centres, which is just opening in nearby Southampton. But after years of gente decine, a movement is under way to try to save Britain s sma towns, which are sti the homes of much of the country s most attractive architecture, as we as its sense of the past. Record numbers of deegates went to Ripon ast month to attend the fourth annua conference on market towns, advertised as the batte for surviva. Peas to Save our Countryside and Save our Cities are now competing with a new chorus of Save our Market Towns. Despite the growth of the superstores, sma retaiers own neary 250,000 shops across Britain and empoy more than 750,000 workers, a good proportion of them in sma towns. A quarter of the country s popuation continues to ive in or very near sma towns. Nichoas Fak of the Urban and Economic Deveopment Group, a consutancy, argues 299

315 Retai ocation strategies and decisions that the most important things sma towns can do are to improve their shops and to emphasise their distinctiveness. The superstores may offer convenience, keen prices and a range of products that sma-town shops cannot match. But they are homogeneous, and market towns can take advantage of the search for something a bit more picturesque and individua than the average out-of-town Tesco. Some market towns are going back to their roots, by rediscovering the puing power of the farmers markets which have done so much to keep sma towns going in France. Weington in Shropshire took on the superstores in nearby Teford by expanding its outdoor market under coourfu awnings. Other towns are putting on medieva craft fairs and seasona festivas in an attempt to attract visitors. Other towns are being urged to adopt an American formua, capitaising on bars, books and bread. Romsey is trying bits of severa of these strategies, with some effect. Its popuation of 17,000 is growing sighty after years of stagnation. Not so ong ago, 20% of the town s 85 shops were vacant. The remaining merchants banded together, sought hep from the borough counci and chamber of commerce, and aggressivey promoted the town. A co-ordinator heped organise civic and commercia improvements, emphasising attractive window dressings and courtesy to customers. This simpe strategy appears to be paying off. Just two shops remain vacant, and shopowners caim that trade has picked up. Source: The Economist, 7 October, 2000 THE LEASING OF A RETAIL OUTLET Once a specific site has been agreed upon a retaier needs to assess the contract or ease offered. There are different types of eases and a variety of terms which may be appied. On the whoe it is more usua for a retaier to ease a store site than enter into a oan or mortgage in order to purchase the property. This provides for a more fexibe response by the retaier and the abiity to free the capita for aternative projects. In addition, it wi be found that shopping mas and simiar purpose-deveoped ocations are ony avaiabe as part of a easing agreement. There are straight eases, percentage eases or net eases. With a straight ease a retaier wi pay an agreed fixed amount per month or quarter over the ife of the ease. With a straight ease, both the andord and the retaier know in advance what payments are expected over the ife of the ease. One modification of the straight ease is the graduated ease where the amount due increases by a fixed amount after specified periods of time. This may be based upon infationary causes using government figures as to how much the ease may increase each year or there may be some preagreed increase. The percentage ease is based upon an agreement made on the principe of the rent being inked to a percentage of saes. Given that eases can run from 5 to 20 years, there is some protection for the retaier if the rent can fuctuate on the basis of infation and saes resuts. In America, this is a very popuar form of easing, accepted as a fair way to set rent as the oca and nationa economy woud force rents down if there were a genera decine in saes demand or vice versa. This approach is often combined with an accepted minimum or maximum increase so as to incentivize the retaier and aso protect the andord. The scheme may aso be based upon a siding scae of change in rent whereby a retaier may pay 4 per cent on the first of saes and 3 per cent on the next , etc. This wi offer a further reward to those retaiers who can improve the achievement of their operation. 300

316 Concusion The above eases may be based upon maintenance recoupment, where a andord wi have the right to increase the rent if it can be shown that the property insurance, taxes or utiity bis have increased beyond a specified agreed eve. The above may aso be aied to a net ease. With a net ease the retaier is responsibe for a maintenance and utiity charges; the property owner, therefore, can base the rent on a more stabe set of circumstances. A ease is a forma contract and therefore agreement has to take pace regarding the conditions and terms by the essor (property owner) and essee (the party signing the ease). A ease may be negotiated to achieve the best conditions for each participant; the outcome, however, is often based upon the reative power of each party and their knowedge of what can be added to the agreement as specific causes. These causes may incude the foowing. A prohibited use cause is used in order to imit the andord from easing to tenants who may affect the image of the business or buiding(s) or restrict the demand for the retaier s goods, due to aternative business which may affect the use of parking space and not increase the retaier s saes. For exampe, certain types of eisure faciities such as a fitness cub or day centre may reduce the number of shoppers. There may aso be a wish for the ist of prohibited businesses to incude sex shops, bars, poo has or other estabishments which may affect the overa image of the area. An excusive use cause wi prohibit the andord from easing to retaiers who wi then become direct competitors. For exampe, if the retai outet is a video hire business the cause may imit the andord from renting to another simiar business unit; it may aso restrict other outets such as a convenience store from hiring out videos from their store. Aternativey, a retaier may wish to protect their business on the basis of the continued trading of strongy branded retaiers within the area. The excusive use cause may therefore ensure that the agreement is reiant on key, named retaiers remaining in the area. The ease may aso need to incude causes to restrict a andord from pacing any objects or kiosks in a position which may affect the sight ine to the store or its visibiity to passing potentia customers. With the deveopment of stand-aone automatic teer machines, pubic Internet machines and advances in technoogy there is the possibe threat of and being rented for the estabishment of an obstace which may affect the origina essee s business. CONCLUSION The decision regarding where to ocate a store is critica to the future performance of that outet and the retaier s prosperity. This is compounded by the fact that a ocation pans are important on the basis of the resources required to deveop a new store, and the time this takes. Any decision over a retai site requires an appraisa of the potentia site area based upon a number of anaytica techniques. The retaier s task is to identify the size and profie of the potentia market of consumers, assess the different potentia sites of an area and then utiize methods of screening the aternatives so that the chosen site offers the best ikeihood of maximizing the store s retai profitabiity. This process has to be one of matching the site to the type of business represented by that retaier. It aso has to be carried out in a timey manner to ensure there is the maximization of profits for the retaier. 301

317 Retai ocation strategies and decisions EXERCISES The exercises in this section reate to retai ocation strategies and decisions. It is advised that you work through them before moving on to Chapter What are the major consumer and business infuences which have produced the current ocation patterns of retai outets in deveoped economies? 2 Given the recent trends in retai shopping and customer behaviour, what changes may occur in the ocation of retai outets in arge city centres? 3 Do you beieve that some aspects of ocation anaysis techniques are better than others? If so, what are the techniques you woud empoy and which key aspects woud you want to assess prior to ocation decisions being made? What were the reasons for your choice? 4 In your opinion, what are the most important aspects of ocation decision-making? Use the foowing grid as a guide. Location anaysis factors proximity of competitors type of housing and ifestye of househods deveopment costs in-town, edge-of-town, out-of-town ocation others (ist) Comment on the importance of these from a marketing viewpoint: Now comment on how you think ocation anaysis wi change over the next 20 years to encourage increased purchases. REFERENCES AND FURTHER READING Bennison, D., Carke, I. and Pa, J.J. (1995) Location decision making in retaiing: an exporatory framework for anaysis, Internationa Review of Retai, Distribution and Consumer Research, 5 (1), Brown, S. (1992) Retai Location: A micro-scae perspective. Adershot: Avebury. Brown, S. (1993) Retai ocation theory: evoution and evauation, Internationa Review of Retai, Distribution and Consumer Research, 3 (2), Chu, C.Y.C. and Lu, H. (1998) The muti-store ocation and pricing decisions of a spatia monopoy, Regiona Science and Urban Economics, 28 (3), Cark, M. (1993) Mapping out retai direction, Internationa Journa of Retai and Distribution Management, 21 (2), Carke, I. and Bennison, D. (1997) Towards a contemporary perspective of retai ocation, Internationa Journa of Retai and Distribution Management, 25 (2/3), Carkson, R.M., Carke-Hi, C.M. and Robinson, T. (1996) UK supermarket ocation assessment, Internationa Journa of Retai and Distribution Management, 24 (6), Coates, D., Doherty, N., French, A. and Kirkup, M. (1995) Neura networks for store performance forecasting: an empirica comparison with regression techniques, Internationa Review of Retai, Distribution and Consumer Research, 5 (4), Cohen, N. (1998) Property market: an anchor in the centre, Financia Times, 9 January. Department of the Environment (1996) Town Centres and Retai Deveopments, Panning Poicy Guidance (Note 6). London: HMSO. 302

318 References and further reading Drezner, Z., Wesoowsky, G.O. and Drezner, T. (1998) On the ogit approach to competitive faciity ocation, Journa of Regiona Science, 38 (2), The Economist (2000) Market Forces, The Economist, 7 October. Edgeciffe-Johnson, A. (2001) Gap reins in pans to expand number of stores, FT.com site, 22 June. Eppi, M.J. (1998) Vaue aocation in regiona shopping centers, Appraisa Journa, 66 (2), Fernie, J. (1995) The coming of the Fourth wave: New forms of out of town retai deveopment. Internationa Journa of Retai and Distribution Management, 23 (1), Guy, C.M. (1984) The Urban Pattern of Retaiing within the UK, in Davies, R.L. and Rogers, D.S. (eds) Store Location and Store Assessment Research. Chichester: John Wiey. Guy, C.M. (1994) The Retai Deveopment Process: Location, property and panning. London: Routedge. Hasworth, A.G., Jones, K.G. and Muncaster, R. (1995) The panning impications of new retai format introductions in Canada and Britain, Services Industries Journa, 15 (4), Hoteing, H. (1929) Stabiity in competition, Economic Journa, 39, March, Jones, K. and Simmons, J. (1990) The Retai Environment. London: Routedge. McGodrick, P.J. (1994) Cases in Retai Management. London: Pitman. Reiy, W.J. (1929) Method for the study of retai reationships, Research Monograph No. 4, Austin, TX: University of Texas Buetin No Richardson, H.W. (1978) Urban Economics. Hinsdae: Dryden Press. Schier, R. (1994) Vitaity and viabiity: Chaenge to the town centre, Internationa Journa of Retai and Distribution Management, 22 (6), Scott, P. (1970) Geography and Retaiing. London: Hutchinson. Simkin, L.P. (1989) SLAM: Store Location Assessment Mode theory and practice, Internationa Journa of Management Science, 17 (1), Simkin, L.P. (1990) Evauating a store ocation, Internationa Journa of Retai and Distribution Management, 18 (4), Smith, C.A. and Webb, J.R. (1997) Using GIS to improve estimates of future retai space demand, Appraisa Journa, 65 (4),

319 12 The management of a retai brand This chapter shoud enabe you to understand and expain: what a brand is; the positioning and differentiation of a brand; the roe and purpose of branding; the deveopment and importance of own-brands; corporate branding; strategies of brand extension. In the modern competitive retai marketpace, growth markets are increasingy scarce and consumers are sovereign in dictating what shape the market wi be. The consumer is faced with an increasing array of essentia, as we as non-essentia retai products over which to exercise the power of choice and dictate trends. If a retaier is to be successfu, improvements and investment in stores or retaiing operations are not enough. Returns can be made ony if the customer decides to purchase, and purchase again, as part of a reationship with the store and the brand. Simpy put, retaiers and suppiers of products or services need to understand that consumption has symboic meaning which transcends mere utiitarian purchase in that peope seek out a ifestye when deciding upon a retai offer. One current marketing method of achieving positive symboic meaning is to embark upon a strategy of brand buiding. This can be adopted by a chain of retai outets, financia service providers or by a producer of branded merchandise. A successfu brand strategy wi both aid and convince consumers in the decision-making process to seect out certain companies and merchandise. To buid retai brand requires more than trading abiity; it requires that the company institutionaize marketing as the means to manage the ong-term deveopment of brand vaues. The benefit of deveoping a strong brand is that consumers are often prepared to pay a price premium for perceived added vaues reated to buying we-marketed brands. The price premium, aso known as brand equity, is the price customers are prepared to pay above the commodity vaue of a product or service. This being the case, werespected stores or brands if we positioned and managed can give a better return on foor space or investment. Brands with a strong personaity are attractive to companies who own them and predator companies wishing to buy into their potency. A successfu brand is a fag bearer as it provides visibe signas of positiona strength in the marketpace. In this way successfu brands provide their parent companies with a competitive advantage. 304

320 The management of a retai brand Fig Differentiation and positioning in reation to added vaue Figure 12.1 iustrates the benefit of creating a strong brand which is abe to add vaue to the retai offer. A differentiated position from that of the competition with a cear identity aows the brand to achieve higher prices and achieve higher eves of demand in periods of recession. In the UK, Boots the Chemist, the Eary Learning Centre and Dixons are exampes of strong brands which communicate a cear position for both merchandise and service. A secondary consideration is that strong domestic retai brands provide a good base on which to buid an internationa or goba presence. Therefore, brand management may become more important for those companies that want to escape the competitive domestic market and attempt internationa growth. There are few truy goba retai brands. The retai financia services market has American Express, VISA, MasterCard and Diners Cub. There are some arge banks that have foowed their domestic business, and private customers overseas, to business centres, tourist destinations or expatriate communities. However, the growth of non-branch banking coud ead to far faster goba competition due to the ow cost operations of direct services and the economies of scae to be found in internationa expansion. In addition, the activity of financia services utiizing the benefits of the Internet is an emerging trend whereby the brand has to be considered in both an offine and onine experience and how this affects perceptions of the consumer. Companies produce strategies based upon ong-term commitment to brand buiding as a way out of the heavy reiance on offering ow prices as the primary reason for consumer choice. More recenty, branding in the retai sector has taken on increased significance due to the importance of the own-brands (sometimes termed own-abe), which make up a significant percentage of retai saes. However, the ong-term success of a particuar brand, be it own-brand or not, is based not on the number of customers who purchase it once, but on the number who become repeat purchasers. They become brand oya or store oya. The concept of seing a product to as many peope as possibe at east once may have been reevant in a growth market, but when a market matures companies need to reaize that it is of paramount importance to maintain oya customers as we as search for new customers. For consumers, the famiiar associations and standard 305

321 The management of a retai brand 306 guarantees embodied in brand offers reduce the perceived purchase risks often associated with high invovement, intangibe retai products. Branding has become even more important nowadays due to the reentess evoution of the marketpace from an environment where satisfaction of basic needs has given way to the need to have brands that engender positive associations. We ive in a word where symboic meaning inked to brand use provides status and socia significance for the consumer of that brand. Historicay fashion brands have hed great significance in retaiing. These incude such brands as Yves Saint Laurent, Chane, Christian Dior and Jean Pau Gautier from France; Giorgio Armani, Gianni Versace and Emanue Ungaro from Itay; Issey Miyake and Kenzo from the Far East; and Raph Lauren, Cavin Kein and Donna Karan from the USA. These fashion brands are a names that have a strong internationa reputation. Branding is a powerfu phenomenon in that it is one of the most successfu ways of satisfying customer recognition needs. To understand the phenomenon we need to know specificay the intrinsic properties that constitute a brand. DEFINITION OF A BRAND Koter (1997) defines a brand as: a name, term, sign, symbo or design or a combination of them, intended to identify the goods or services of one seer or group of seers and to differentiate them from those of competitors. This describes a brand as a purey functiona means of distinguishing a retai offer and woud have been apt in the eary days of branding, but by the 1990s other aspects had been introduced and extensivey discussed. In tota abandonment of the focus on aspects of product, Kapferer (1992) produces the more esoteric statement: A brand is not a product. It is the product s essence, its meaning and its direction, and it defines its identity in time and space. An individua s awareness of the word is made up of experiences, earning, emotions and perceptions or, more accuratey, the cognitive evauation of such experiences, earning, emotions and perceptions. Such awareness may be described as knowedge producing a specific image of the word. This image wi obviousy affect an individua s preference and motivation towards products, as it wi provide a pu effect resuting in different demand schedues. The success of a brand is, therefore, not just what the company puts into the brand but is based upon what the customer associates with the brand the added vaue it provides for them. To examine branding from the viewpoint of consumer behaviour, the starting point is to comprehend the way a customer perceives and cassifies brands for exampe, Benetton and Body Shop are each both a brand and a retai product prior to specifying how companies can buid positive images to reinforce that perception. The process of brand management has to distinguish a brand from a commodity. The atter is typicay characterized by the ack of a perceived differentiation by customers between competing offerings. This being the case, the purchase decision for a commodity is usuay taken on the basis of price or avaiabiity and not on the brand. Store oya and brand oya customers choose on the basis that the shopping experience is more than the

322 The roe of the brand sum of its component parts. In other words, the successfu brand has added vaue over its commodity content. Aaker and Bie (1993) give the foowing definition: A brand is basicay a name that refers to the product of a particuar manufacturer in a particuar product category. A brand incudes tangibe or intrinsic quaities, such as appearance, performance data, package, and the guarantees or warranties that are attached to it. Perhaps more importanty, a brand invoves aspects that the consumer attributes to it, beyond its tangibe features. These aspects may incude attitudes towards the company that produces the product or towards the brand itsef, beiefs about the brand in reationship to sef and others, and so on. They further stress that their definition appies not ony to consumer products, but to peope (for exampe, poiticians, pop stars, and so on), paces, ships, companies and services. This at first seems to be comprehensive. However, brands have to be ceary positioned so as to give distinct signas and demarcations from their rivas. This requires a cear distinction encompassing the need to provide focus and personaity for the brand. The need to understand this argument introduces two further aspects positioning and personaity which wi be discussed beow. THE ROLE OF THE BRAND Before discussing what brand management invoves, we wi examine why it is considered a pertinent marketing too for retai companies in the current deveoped and highy competitive markets. As the marketpace becomes mature, there is a need to rise above the mass and confusion of competing offers. The brand, if managed propery, confers individuaity something different among the crowd. In a mature market, companies experience sow growth and decining returns. Each company wi, therefore, attempt to defend its market share, encourage consumers purchase oyaty and profitaby differentiate their outets and offer. We beieve a brand provides an icon or symbo which heps to identify the promise of a particuar retai offer or service and heps to distinguish it from competing offers. Successfu retai outet brand buiding enabes organizations to: 1 buid stabe, ong-term demand based upon increasing store brand name strength; 2 buid and hod better margins than stores that have weak or unsuccessfu brand names (e.g. even though Marks & Spencer have had probems their food products se at premium prices); 3 differentiate themseves through creating associations that can endure over ong periods of time and which may aow brand stretch (e.g. Starbucks from coffee to ice cream and CDs); 4 add vaues that entice customers to visit and buy, especiay in reation to own-brands; 5 act as a signa to the customer impying trust in the fufiment of service expectations; 6 promote customer oyaty and aunch reationship marketing schemes for their retai offers/services; 7 protect themseves against the growing competition of aternative intermediaries and to gain everage in the distribution channe; 307

323 The management of a retai brand 8 protect themseves against aggressive competitors by strengthening barriers to entry; 9 transform themseves into companies that are attractive to work for and to dea with; 10 negotiate with suppiers from a position of improved strength. The atter are the potentia resuts of successfu retai outet brand buiding, but a invove substantia initia, and ongoing, investments to ensure there are ong-term returns. Furthermore, brand buiding needs to be a comprehensive exercise which covers every aspect of the company and every point of contact with the consumer. This puts brand buiding under severe pressure in modern markets where short-term profits are more commony the measure of success. A company may introduce a brand and keep it excusivey for itsef, or it can either franchise a brand or manufacture a brand of another company under icence. Franchising is being used extensivey by companies in order to expand the brand as quicky as possibe in a domestic or goba marketpace. With franchising, the company owning the brand wi aow others to utiize the brand but with certain preconditions attached. These may be reated to an obigation to purchase goods excusivey from the franchiser or to pay a certain percentage of the turnover as part of a royaty payment. The consumer is offered the benefit of the consistency and recognized standards of quaity which have been buit up in conjunction with the brand. This has ed to a number of successfu retai operations such as Pizza Hut, Caffé Uno, McDonad s, KFC and Hiton Internationa. BRAND LOYALTY Some consumers use the same retai outet or purchase the same brand of product on most occasions or on a reguar basis. This buyer characteristic is known as store or brand oyaty. In particuar, store or brand oyaty wi mean that a person wi: fee positivey disposed to the brand, based upon brand attitude; utiize the store more than other stores or buy the brand more frequenty. This wi be based upon store or brand preference; continue to utiize the store or brand over time. This is the brand aegiance. The above description of store or brand oyaty can be based upon a number of consumer behaviour variabes which were mentioned in Chapter 3. There is the case of monopoy oyaty where there is often no aternative choice such as in rura areas; inertia oyaty where no aternatives are sought due to existing high eves of satisfaction; convenience oyaty due to the ocation of the retai outet; price oyaty where other aternatives are considered not to offer vaue for money; incentivized oyaty where a oyaty scheme ties in the customer to shop on a reguar basis; and emotiona oyaty which is buit up through the intangibes associated with the brand. Therefore, there is no simpe behaviour which indicates the reason for a specific form of oyaty and it may be the case that oyaty is expressed for one or more brands. If we assume that there are five brands, or five properties of brands, that the consumer can choose from A, B, C, D and E then we can further segment the demand, based upon brand oyaty, as foows. 308

324 Positioning of a brand 1 Hard core oyas. These consumers buy one brand a the time and demonstrate strong aegiance. They woud therefore on five occasions buy AAAAA, because they have undivided oyaty to the brand. 2 Soft core oyas. These consumers wi be oya to two or three brands. Thus a buying pattern of ABABA represents a consumer whose oyaties are divided between two competing brands. 3 Shifting oyas. This type of consumer shifts their oyaty from one brand to another. The buying pattern AACCC suggests a consumer whose oyaty has shifted from one brand A to brand C. 4 Switchers. These consumers show no oyaty to any one brand. The pattern ABCDE suggests a switcher who is prone to buy when there is a dea being given (price offers, saes, extra benefits). They may equay be a variety shopper who wants something different each time they purchase. Brand oyaty can be expained in a number of ways: habit; maximization of vaue over price; a cost may be invoved in switching brand; the avaiabiity of substitutes; perceived risk of aternatives is high; past satisfaction with the brand; the frequency of usage; infuence of the media; the awareness of the aternatives; and so on. For obvious reasons, the oya customer is of key importance to the retai industry, especiay those oya customers who are high spenders or provide ong-term patronage. Loyaty schemes are being introduced in an attempt to retain customers over onger periods of time (see Chapter 8 for a fu discussion of this). Such schemes are often based upon database programs that provide benefits for those with oyaty shopping cards whose expenditure and frequency of purchase can be assessed. The database can identify individuas birthdays, when a person is 21 for exampe, or it can identify apsed customers to whom a specia offer can be made. In addition, the information can be used to understand the patterns of preference and demand at different periods so as to convert soft core oyas and other customers into hard core oyas. POSITIONING OF A BRAND The positioning of a brand paces it in its competitive context. It may be determined on the basis of product usage: for instance, Müer yogurt may be positioned as a substitute for dairy cream or as a chid s pudding aongside ice cream. Aternativey, a brand s position may be determined on the basis of price: for instance, top designer branded cothes have a high upper market position which wi attract customers who want excusivity and a positioning which is associated with other uxury items. Benetton s bod and distinctive coours, Laura Ashey s Engish country patterns and The Gap s understated American casuawear a provide for brand differentiation. Registering a cear brand positioning is becoming increasingy difficut because competitors proiferate, media costs escaate, and shef space becomes more difficut to negotiate as retaiers exert more infuence over manufacturers brand strategies. Theorists maintain that focusing on brand positioning is essentia for a brand to survive. They express their ack of faith in the inteectua abiity of brand managers to assess fuy the competition and in the inteectua abiity of the consumers simiary to assess the range of brands avaiabe to them. The brand managers, who reguary take a sounding 309

325 The management of a retai brand 310 of consumer opinion, are the most ikey to maintain a brand s positioning successfuy. Once the target has been ceary identified, attention needs to be avished on panning the brand. Furthermore, a brand which is not differentiated from others in its sub-group of brands risks having no distinguishing characteristics and a weak brand position: Brand differentiation Brand segmentation = Brand position Branding paces a premium on achieving appropriate positioning. A brand may be made distinctive by its positioning reative to the competition, the main objective being to deveop sustainabe competitive advantage. As such, a key task for the strategist is to identify those bases which offer the most potentia for defensibe positioning. In marketing, choosing segments and positioning strategies are inseparabe. Whie segmentation identifies homogeneous groups of potentia customers, positioning needs to take into account how customers perceive the competing retai store brands, merchandise offers or services. Both segmentation and positioning research are, therefore, ways of focusing on how customers in a market can be identified and grouped, and then how those customers (segments) perceive the variety of retaiers or brands in the marketpace. The furniture maker MFI adopted the strategy of repositioning its retai offer in the ate 1980s by the acquisition and use of the Schreiber brand name so that it coud se its higher priced kitchen and bedroom furniture more easiy. This compemented its other brands, such as its sef-assemby Hygena brand, Pronto its ow price point products, and Greaves and Thomas and Ashton Dean for uphostery products. The brand segmentation benefits of Schreiber aowed MFI to attract oder ABC1 customers and to produce differentiation based upon stye and quaity. A new brand position can be created by deiberate strategic repositioning. Interbrand heped reposition Austin Reed stores to provide a more modern image so as to attract a younger market. The use of positioning in marketing shifts the emphasis away from the tangibe changes a retaier makes towards the menta perception of the prospective customer. It emphasizes the share of mind and judgement of mind based upon brand identity. This is what Ries and Trout (1981) referred to as the batte for your mind. Positioning is the cearest way to estabish a distinct pace in the minds of the consumer and counteract the procamations and cas for attention by the competitors. The market is the utimate judge of any organization s work and, athough customer perception can be irrationa and i-informed, the way a consumer perceives the brand and the image of the brand is a powerfu infuence on the way the retai marketpace reacts to different initiatives and changes. In the fuidity of retai market conditions, the more powerfu brands wi be successfu. The chaenge, therefore, for any organization is to position its offer in a way which wi be most appeaing to the target audience. Market position can aso be affected by pricing, distribution and, of course, the product itsef. This is why the grey market of seing goods not sourced directy from the manufacturer, and at ower prices than parae suppiers, has resuted in ega arguments. Tommy Hifiger, the trendy US fashion abe, brought what is beieved to be the first ega action of its kind in the UK (Hoinger, 1998). The US group issued a writ caiming damages and demanding that Tesco revea its sources for the 3.5m worth of Hifiger caps, T-shirts, jackets and other products it began seing at cut prices in Hifiger said it had examined the items and beieved certain products were not genuine. A firm can position a product to compete head-on with another brand. Like-for-ike positioning is reevant if the product s characteristics are at east equa to competitive

326 Positioning of a brand brands and if the product is priced ower; it may be appropriate, even when the price is higher, if the product s performance characteristics are superior. Conversey, a product may be positioned to avoid competition. This may be the best approach when the product s performance characteristics are not significanty different from those of competing brands, or when that brand has unique characteristics that are important to some buyers. For exampe, Adi ses many items which are sod at Tesco but at deepy discounted prices. Brand strategy is essentiay about two variabes: the exact composition of the offer made to the market and the part(s) of the market to which the offer is made (that is, brand differentiation and brand segmentation), either of which may provide a competitive advantage. Within this approach brand positioning provides the vehice to integrate the marketing mix and create overa consumer perception. The Argy Group decided in the eary 1990s to buid their business around the positioning of three store brands: Safeway, Presto and Lo-Cost. Safeway was the eading brand, bringing in about 85 per cent of Argy s profits, and therefore this brand was retained as the major fagship. This use of different brands was in direct opposition to the brand strategies of most of their competitors. The arger stores with the Presto brand were progressivey refurbished and rebranded as Safeway stores and this aowed the Presto brand to be reated to medium-sized units of around 5000 sq. ft. The Lo-Cost brand was positioned as a discount brand and was made up of the smaest units around 3000 sq. ft. The positioning of the brands aowed the Safeway brand to compete head-to-head with Sainsbury and, due to the brand rationaization, it provided a cear positioning statement for its customers. It can be seen that the positioning process is to make the offer into a ceary defined brand. Ideay the strategist shoud consider whether the position is: apparent to consumers and offers rea added vaue to them; buit upon rea brand strengths which refect performance potentia; ceary differentiated from competitor brand positions but not too narrow; capabe of being understood and communicated to a stakehoder groups; abe to be achieved, and then defended if attacked by competitors (British Home Stores were unabe to position their brand as the first choice for dressing the modern woman and famiy due to the strength of the Marks & Spencer brand). The risks of poor positioning A poory positioned brand with a fuzzy position, or not offering a cear proposition, is ikey to be ecipsed or weakened by a stronger competitor. Weak positioning can occur if a retaier consistenty cuts a brand s price. The Ratner stratagem of bringing in foreign stock which was cheaper but not hamarked was at first successfu. However, the overstretching of the business in takeovers to expand the brand and then a widey reported statement by Ratner himsef that his products were crap ed to the demise of the group. Ratner had to eave the company and the brand name was subsequenty changed to Signet. In effect, Ratner management had repositioned the brand without thinking beyond the price effect to the brand effect. This ed to the aienation of the company s target market. 311

327 The management of a retai brand There are other undesirabe consequences of not having the right positioning strategy for a product or service in the marketpace. Among the most common in the retai trade are: the retai organization (or its own-abe products) may find itsef in a position where it cannot escape from direct competition from stronger competitors; the retaier may find itsef in a position which is weak as demand may be faing and others have eft that position knowing there is itte customer demand there; the retaier s position, or that of its own-abe products, is so confusing that nobody knows what its distinctive competence or personaity reay is; the retaier has no apparent position in the marketpace because there is itte awareness of the brand or its personaity. PERSONALITY OF A BRAND As markets have become more competitive and products have ony margina differences in their physica formuation, it becomes more important to create distinction by adding reevant psychoogica vaues through advertising, packaging and other aspects of the marketing mix. It is interesting to examine the trend in advertising expenditure for retaiers (see Tabe 12.1). This shows a wiingness by major retaiers to reease arge promotiona budgets to support their brands. Some of this can be seen to have commenced ony in the ate 1990s, or to have doubed in the case of Boots the Chemist since 1992 to over 37 miion, representing a major share of a expenditure shown. Hankinson and Cowking (1993) define the brand personaity as being a unique mix of functiona attributes and symboic vaues. Functiona vaues are extrinsic, tangibe product properties such as hardwearing or easy to use ; whereas symboic vaues describe intrinsic, intangibe properties such as friendiness or fun. Utimatey, each company needs to find ways of encouraging consumers to buid a reationship with a brand for it to have any strength or staying power. This is why brand personaity is important and has consequenty deveoped as a term. We-positioned brands are more effective probem-sovers, due to marketing techniques which moud their image into a brand personaity that can be understood and accepted. A strong brand personaity is an effective added vaue at the augmented stage and is refected in the way consumers describe a brand. The extent to which peope perceive and identify brands in different ways is iustrated in the Saatchi and Saatchi Compton Wordwide 1984 Annua Report. This report stated that, When probed deepy, consumers described the products they ca brands in terms that we woud normay expect to be used to describe peope. They tak about a brand s persona, its image and its reputation, and it is this aura or ethos that characterises a brand. The personaity then stands for the essence of the corporate or product brand. This essence or personaity is the succinct cue that a consumer wi use to judge the brand. Some brands have a spokesperson or figurehead to represent them and this produces an instant personaity around which the brand can be deveoped. Famous fashion designers or individuas such as Richard Branson, Mary Quant and Anita Roddick have a created a human persona association for their company brand. 312

328 Personaity of a brand Tabe 12.1 Advertising expenditure of seected retaiers, ( 000s) Bookseers Books Etc Dions Waterstone s Chemists Boots the Chemist Superdrug Unichem Opticians 20/20 Vision Boots Opticians Doond & Aitchison Optica Express Specsavers Vision Express Sports shops Asports American Gof Discount Backs Leisure (First Sport) JD Sport JJB Sports Sports Division Toy shops Eary Learning Centre Toymaster Toys r Us Jeweery Asprey Godsmiths Group Signet Photographic stores Jessops Tecno Tota of above Source: ACNiesen-MEAL (1998), ACNiesen House, Oxford 313

329 The management of a retai brand MINICASE 12.1 The right to Grey Goods? Levi s court batte with Tesco, which has been seing jeans imported on the so-caed grey market at a discount, is raging on. The case, which seeks to carify whether EU retaiers can egay se grey, or parae, imports originay destined for a non-eu country, has given rise to passionate arguments on both sides. Retaiers argue that consumers demand ower prices and that brands are keeping EU prices artificiay high. But brand owners say their own investment in innovation and brand image, as we as quaity contro, wi be undermined shoud they ose contro of distribution. As we as damaging their own business, they argue that this is not in the ong-term interest of consumers. Athough it is Levi s, Cavin Kein and Davidoff that have taken this batte to the courts, the question is not restricted to uxury goods and designer names. Every brand from soap and razor bades to fim coud potentiay be affected by EU ruings on parae imports, according to John Nobe, director of the British Brands Group, which represents branded goods owners. Since grey-market goods first started to appear in the eary 90s, the ega penduum has swung one way and then the other, in favour of brand owners or retaiers. In 1998, a ruing on Sihouette sungasses said retaiers coud not import goods from outside Europe without the manufacturer s consent. But in 1999, UK courts rued that fragrance brand Davidoff had given impied consent to its perfumes being imported from the Far East by not expicity forbidding their resae in Europe. Since then, both parties have sought carification. At the Levi s interim ruing in Apri, the EU indicated that it woud refer the matter back to the nationa courts, and that parae traders rights shoud be recognised by the aw. Good news for retaiers. But it aso indicated that the nationa courts cannot appy a genera presumption that the manufacturer has waived its rights to contro imports in other words, a reversa of the 1999 case. Good news for brand manufacturers. The main reason Tesco was quick to shout victory in Apri is that UK courts are ikey to ook favouraby on parae importers. The government certainy does: Stephen Byers, former trade and industry secretary, aggressivey backed a campaign ed by Sweden to overturn the EU s current bock on parae imports for trademark goods. Byers has aso repeatedy caed for ower prices on branded goods in Britain, and eary indications are that his successor at the DTI, Patricia Hewitt, wi do ikewise. But in yet another twist, the European Commission itsef is against a change in the regime. It has said that parae imports inhibit investment in new brands and may make trademark-hoders withdraw products from the market. Ony one thing is certain: the issue is not going to go away. Retaiers such as Tesco and Asda are confident about their justification for seing branded goods sourced on the grey market. We do it because it s what our customers ask for. It s about the price the customer pays, not the price the retaier pays, says David Mies, head of speciaist businesses at Asda, which ses a range of grey-market brands, from Ray-Ban sungasses to Armani fragrances. Brands argue that they have created an attitude and an ambience for their products but we don t beieve this is consistent with the ocation of purchase, he adds. How can perfume brands say that environment devaues the brand when consumers can buy these products off a troey in the gangway of an aircraft? The retaiers argument is endorsed by a growing anger among consumers about rip-off Britain. Consumers see that prices are higher in the UK than the US or the rest of Europe and beieve greedy brands are to bame. But British Brands Group s Nobe argues that rip-off Britain has nothing to do with brand manufacturers. He agrees that the UK is expensive, but says there are many reasons, such as ack of avaiabe retai space and fue costs. This means brands such as Gap are more expensive, but actuay ess profitabe, in the UK. Aan Christie, 314

330 Personaity of a brand vice-president of pubic affairs at Levi s, echoes this caim. He says retaiers such as Tesco are we aware there are price differences due to different economic regimes around the word but are happy to perpetuate the myth that the retai price in the UK is set by the manufacturer. The brand manufacturers case has been furthered by research reveaing that the outcome for consumers of aowing parae imports is on the whoe negigibe. Products are, in the end, ony about 2% cheaper. You have to ook at whether retaiers are seing these brands as promotiona items to get peope into stores or seing them at a consistent price, says Nobe. But the same study showed that shoud parae imports become fair game, there wi be a major shift in profit from manufacturers to retaiers. A study commissioned by the EU into the consequences of this change shows that the effect on reducing prices is sma between 0% and 2% whereas the transfer of profits from manufacturers to traders is high up to 35%. This is because retaiers purchase the goods at ow prices and can se them at a reasonabe mark-up, whie sti making the products cheaper than an approved outet. Despite the sight discount, consumers are sti far more wiing to buy discounted goods. Indeed, when questioned, by Tayor Neson Sofres, an overwheming majority 88% of UK aduts said they woud rather buy discounted Levi s from a supermarket than fu-price at a Levi s store. Ony 8% said they were prepared to pay the extra. Companies such as Levi s, Cavin Kein and Microsoft have invested miions in their advertising and marketing to create their brand image. They argue that not ony are brands devaued by becoming just another supermarket item, but the retaiers are profiting without making any investment themseves. Christie points out that whie Asda and Sainsbury s created their own designer cothing ranges, Tesco took the cheaper option in seing someone ese s. Tesco knows exacty what it is doing; it is trying to grow its non-food business. Brand owners aso beieve supermarkets do not give the consumer the same quaity of service and advice they woud get in an approved outet. A brand is a combination of things, incuding the quaity of product and the retai experience, says Christie. If you attack any of these things, you change the consumer s perception of that brand. However, the brand owners maintain that there is sti an issue of quaity contro. Nobe says that even more worrying than the Levi s court case is the ongoing Davidoff saga, which hinges on whether remova of batch codes on products amounts to them being damaged. If it doesn t, parae importers can go ahead and se them. Nobe says that this has many impications. In the event of a heath scare, for exampe, manufacturers might have to withdraw products gobay as they woud not be abe to trace the fauty batch. It aso means customer guarantees on quaity and safety, which are arguaby part of the brand promise, effectivey disappear. So what can brands do to protect themseves? By fighting pubic battes, they do their reputation no favours. Levi s Christie admits that Tesco has scored a PR coup by positioning itsef as the consumer champion in the court batte, but adds that Levi s had no choice but to try to contro its brands distribution. One way of protecting a reputation is to invest in brand security technoogy. Companies such as DeLaRue offer soutions that aow brand owners, retaiers and even consumers to track and trace products, so that the origin can aways be guaranteed. Chris Cark, business deveopment director of DeLaRue, says: At the moment there is too much fire-fighting going on, such as raids of warehouses when a probem occurs. It s a very we investing in above-the-ine advertising, but brand owners aso need to ensure their product is going where it shoud be. Another soution is for companies to tighten up on their brands distribution. It might see a short-term saes fa, but the strategy provides ong-term benefits. In June, Gucci announced a rescue pan for its strugging Yves Saint Laurent brand, which invoves cutting icensed manufacturers from neary 200 to just 12. Yves Saint Laurent had 315

331 The management of a retai brand expanded so widey in the 80s that it now appears on a range of products from socks and baseba caps to pastic shoes arguaby osing its excusivity in the process. Burberry has carried out a simiar exercise and has successfuy repositioned itsef as an excusive, must-have abe. This strategy doesn t ony appy to uxury goods. Giette has announced a new pan to contro its suppy chain more stricty and match production to consumption in an effort to protect its brand. And Christie says Levi s is taking a hard ook at its distribution. Phiip Evans, principa poicy adviser, Consumers Association, beieves consumers are much more cynica about prices than they used to be, and brand owners are out of touch with the way shoppers and retai are changing. It s what is known as the Forida and Caais effect. Peope used to go on hoiday to Spain and Greece and they woud understand that prices were cheaper because the standard of iving seemed ower than ours. But now they go to Forida and Caais and they can t beieve that it s so much cheaper peope coming back from hoiday abroad are much more questioning. Brand owners think they contro their brands image, but it s simpy not true, particuary when you can buy stuff they ve over-ordered or ast year s goods with their bessing in designer outets or discount stores such as Mataan or TK Maxx. Do they think peope don t go to these paces? The average punter doesn t know or care that it s ast year s stock, uness they are a rea brand obsessive. John Nobe, director, British Brands Group, beieves consumers interests are not served by aowing grey market imports. They woud ose out in the ong-run, he says, because of a ack of quaity contro and the fact that brands very existence woud be threatened. Source: Aexandra Jardine, Marketing, 9 Juy 2001 CONSUMERS CONCEPT OF SELF-IMAGE When consumers choose between brands they rationay consider practica issues about a brand s functiona capabiities. At the same time they evauate different brands personaities, forming a view which fits the image with which they wish to be associated. In fact, image can be seen to be the sum of impressions about the brand as that which it is perceived to be and, at the same time, what it is perceived to signify about the purchaser/user. When two competing brands are perceived as being equa in terms of their physica capabiities, the brand that comes cosest to enhancing the consumer s sef-concept wi be chosen. Consumers ook to brands not ony for what they can do, but aso to hep say something about themseves to their peer groups. Roex watches are not worn simpy for their functiona exceence, but aso to say something about who the owner is. According to de Chernatony and McDonad (1998), the symboic nature of brands increases the attraction for consumers as they: hep set socia scenes and enabe peope to mix with each other more easiy; enabe consumers to convey messages about themseves; provide a basis for a better understanding of the way peope act; hep consumers to say something to themseves. In effect, consumers are transmitting subte messages to others by purchasing and dispaying the use of particuar brands in the hope that their reference groups decode the messages in a positive and acceptabe way. This can be reated to the sportswear market in the UK where shoppers identify with the eisure associations of different brands. According to Neey (1997), brand oyaty for sportswear is high in the UK, especiay for 316

332 Brand proposition the upmarket brands which confer a certain cachet. Consumers hod a view of themseves what is caed their sef-image and buy brands which conform to that image. Consumers may be said to admit brands and their personaities into their socia circe, in much the same way as consumers enjoy having ike-minded peope around them. When friends or coeagues admire someone s newy bought brand, that person fees peased that the brand reinforces his or her sef-image and wi continue to use the brand. The situation in which consumers find themseves wi dictate, to some extent, the type of image that they wish to project. Through anticipating and subsequenty evauating the peope that they wi meet at a particuar event, consumers then seek brands to refect the situationa sef-image that they wish to dispay. BRAND PROPOSITION The term proposition is used for a set of statements which summarizes the combination of positioning and personaity. The proposition aows the brand to emerge from the fuzziness of the competition. However, the secret of success is to have a simpe proposition which consumers understand; brand propositions which are compicated or inconsistent wi simpy confuse consumers. As part of this concept, two non-functiona aspects of brands have been highighted and are discussed beow: brand image and brand identity. Brand image Image is the outcome of the consumer s interpretation of the brand. In a postmodern word this is a about the constructed meanings which offer symboic identity as to what individuas want to be and are convinced they can be through marketing communication and persona experience processes. Brands are compex and their identity is often regarded by consumers as incorporating human-ike characteristics. Such characteristics are projected on them by consumers who experience the brands not ony as functiona products or services, but aso as bundes of associations. Consumers see, hear, sme, taste and get gut feeings about different brands. This profie or essence is caed brand image. It represents the consumer counterpart perception of brand personaity which, as has been discussed, has to be endowed by the brand marketer. It is important to understand that when a brand image is deveoped, through communication and experience, consumers do not judge the image in reation ony to other stores they aso adopt best-in-cass processes. This means that if other service providers outside of retai such as British Airways or Marriott Hotes provide word cass standards these can be benchmarked as the best-in-cass expectation for the way retaiers shoud dea with their customers. Brand identity Brand identity is the centra concept in promoting a brand. Identity comprises durabiity, coherence and reaism, embodying the personaity of the brand. It sends out signas which the consumer decodes and interprets in terms of image. Identity is the soid enduring concept of the brand and is not subject to the ideaism, fickeness or opportunism of brand image. A graphic description used is that of the brand fingerprint, the unique 317

333 The management of a retai brand Fig Identity and image Source: Kapferer, identity of the company s offering. The power and recognition of brands has become so powerfu for some brands that in certain circumstances the brand ogo even without the name wi suffice to provide a cear brand identity. Nike, for exampe, can rey on its swoosh ogo to promote its products. In the UK at east 80 per cent of consumers associate the swoosh symbo with Nike which is higher than for the recognition of the goden arches as standing for McDonad s (Snowden, 1997). Figure 12.2 shows the reationship between identity and image. BRAND NAME A brand name is that component of the brand which consists of words or etters to provide a means by which the company can be recognized and distinguished from other companies in the marketpace. It is the part of the brand which can be vocaized, unike the trade mark which is a symbo or design. A name cannot make or break a retaier or company. What matters is how we a retaier s stores, merchandise or services meet its customers needs. However, a brand name is imbued with associations which conjure up an overa brand image. The choice of a name is ony one part of the overa company strategy that has to be backed up by a sophisticated and cohesive branding programme. Consumers normay seek to process ony a few rich pieces of information as quicky as possibe. Labeing presents shorthand pieces of this information which can highight key points and faciitate brand choice. A good brand name can communicate a brand s promise and potentia. Brand names thus faciitate the consumer purchase decision by acting as a usefu and convenient shorthand device. There are instances where there are a number of sub-brands, which aso act in this shorthand way to confer association with the brand. For exampe, BigMac is a coded way of inking a sub-brand to the McDonad s master brand name or Miss Sefridge to that of Sefridges. Consumers have restrictive cognitive capacities which are protected from information overoad by perceptua seectivity. This channes consumers attention on those attributes considered to be important. To process the minimum of information, consumers deveop ways of coping with the extensive even excessive information avaiabe. It is widey accepted that consumers have a preference for using a brand name above a other informationa cues in order to make a decision. There is a schoo of thought which views the consumer as an efficient information searcher and processor, reying on a brand name as an informationa memory device. Through the use of the

334 Brand awareness brand name, the consumer is abe to reca numerous attributes, for exampe quaity, avaiabiity, guarantee, advertising support, and so on. This emphasizes how vita it is for marketing managers to communicate associations for the brand and affect the emotiona memory in the consumer s mind in order to form the brand entity successfuy. The retaier s name aone, no matter how apt, is not going to ensure a company s success uness there is a we-co-ordinated marketing and communications programme in order to buid the brand around the name. BRAND AWARENESS Peope wi often buy a famiiar brand because they are comfortabe with things famiiar. There may be an assumption that the brand that is famiiar is probaby reiabe, in business to stay, and of reasonabe quaity. A recognised brand wi thus often be seected in preference to an unknown brand. The awareness factor is particuary important in contexts in which the brand must first enter the evoked set it must be one of the brands that are evauated. An unknown brand usuay has itte chance (Aaker, 1991). Creating awareness of a brand is one of the biggest chaenges for marketers; to put their product in a customer s evoked set of brand options. In Fig a customer s evoked set is shown by top of the mind reca; this is the optima awareness of a brand. This pyramid is ony representative as there are no estabished scaes or measurements connected with it, but it does serve as a conceptua framework. Marketing strategy shoud take the evoked set into consideration because the actua choices of individua consumers depend cruciay upon which brands are considered and evauated by consumers and which are not. According to research it is found that consumers generay carry ony a imited number of brands in their evoked set often no more than three to five brands. Consumers do not necessariy seect brands ony from their evoked set nor is their seection process ogica, but if buyers reca a company s brand first the ikeihood of them purchasing it increases. This concept accounts for the enormous amounts of money companies spend in buying out a we-branded competitor, to erase the visibiity and reinforcement of aternative brands in the marketpace. Advertising is often aimed at faciitating the growth of brand awareness. Furthermore, it can deveop an image and manipuate consumers perception, which is Fig The awareness pyramid Source: Aaker, 1991, p. 62. Adapted with the permission of the Free Press, a Division of Simon & Schuster, Inc. from Managing Brand Equity: Capitaizing on the Vaue of a Brand Name by David A. Aaker, Copyright 1991 by David A. Aaker 319

335 The management of a retai brand 320 fundamenta to buiding vaues over and above the price vaue reationship. Brand advertising communicates the consumer-oriented benefits of owning, dispaying or consuming a brand, which increases confidence in the seection process. The process is enhanced by the shopper being provided with bags which communicate the store ogo. However, the probem facing the marketer is that consumers are seective in their search for brand information and may distort some of the information to ensure it matches their existing beiefs. A brand promotiona activity must, therefore, be reguary scrutinized, to gauge the extent to which consumers correcty interpret the desired message. Good brand advertising ensures that the perceived brand image is not product-based but overrides it in its infuence on the target market s menta processes. Brand advertising can aso aid repeat purchase and brand oyaty. Advertising s major roe is to reinforce and protect brands which, in turn, reinforces and hods market share. The promotion branding roe is very much about reinforcing core vaues and keeping the brand uppermost in the choice process. MANAGING BRANDS OVER THEIR LIFE CYCLES Life-cyce theorists beieve that a brand is aunched, wins market share, enjoys a period of maturity and then decines. These theorists are wrong insofar as they predict an inevitabe decine of a brand. The product ife cyce refers to the product not the brand. There is no reason why a brand cannot adapt to new technoogies and move from mature into reaunch or new growth markets. Therefore, a brand that has been managed propery can extend the timeframe associated with the product ife cyce. We may find that we-managed brands are evidence that some brands have ongevity. The eading brands are constanty fine-tuned to keep them updated, making it possibe for them to survive more than one generation. Compared with the iterature on how to manage a product or service over its ife cyce, there is reativey itte written about how to manage a brand s image over time. Brands which successfuy stand the test of time buid up a considerabe amount of goodwi with their consumers, so much so that when saes start to fa it shoud not be automaticay assumed that they are in a termina state and investment must be cut. It is ess expensive to revitaize an estabished brand than it is to deveop and aunch a new brand consumers are ess famiiar with. Some brand owners become compacent about their brands, amost preferring to ignore the threat of competitors unti it becomes too ate. Having ost contact with their consumers, they respond to competitive threats in a ess effective manner, for exampe through pricing. If a brand is to survive, within the notion of product ife cyce, it must first be recognized as symboizing asting vaues. An exampe is Giette. Its core vaue in its 90 years of existence had been performance in shaving it had become a symbo of manhood. In the 1980s disposabe razors entered the market, offering convenience and cheapness. Giette responded according to cassica product marketing and introduced its own disposabe razor. As a resut, the Giette brand name became subsidiary to the product name and the traditiona vaues attached to the brand were being ost. In order to restore its position, Giette stopped advertising disposabes and emphasized systems. Its successfu sogan The best a man can get was an expression of what the Giette brand had aways stood for. To manage a brand propery there is a need to ensure the marketing effort does not endanger the brand s deveopment.

336 Successfu brands Saes promotion tactics that may endanger brand buiding 1 Whie brand-buiding activities such as advertisements are very much individua creations, saes promotions are easiy repicated by competing firms. 2 Strategic activities can be thought of as buiding up brand oyaty. Saes promotions may be viewed as the reverse: heping to break down competitors brand oyaty. 3 Saes promotions often cause a catch-22 situation, in which competitors must retaiate or suffer osses. When a promotions/price-cutting cyce begins it is most difficut to stop; both the customer and the trade become used to it and begin panning their purchases around the promotion cyce they perceive it as part of the standard product, price or terms of trade. Koter suggests that probaby there is risk in putting a weknown brand on promotion more than 30% of the time (Koter, 1997). That is why Marks & Spencer amost never have a sae and Harrods ony has one a year. They are protecting the brand name and its position. 4 An emphasis on price as a retai strategy can put pressure on organizations to reduce the quaity, features and services offered. In extreme situations, a retaier or the merchandise may revert to the status of a commodity as brand added vaues decine in importance. One danger is that saes promotions can seem even more attractive for their short-term impact, though consumers can quicky become bored with one particuar promotion. 5 Sustained saes promotions aso cause serious erosion of profitabiity, which highights the need to imit them. They can aso engender a degree of boredom and acceptabiity which undermines the impact of the saes promotion effort. 6 Poory presented saes promotion campaigns may create negative images for the brand. Though saes promotions are not the ony brand debiitating device, they remain one of the most visibe and often used. Decisions over branding are strategic issues. The most astute tactica decisions wi ony buid rea brand strength if a strategic view underies a activity. A brand needs to evove sowy and yet there is the responsibiity to consider every response to unco-ordinated short-term stimui. A tactica brand strategy has to be associated with the outcome and impact on the brand. Companies which empoy brand managers to cover an individua product ine very often have a high turnover in personne. This may be dangerous as too many changes in advertising strategy or programmes, or in decisions on brand extension, promotion or discounts, confuses distributors as we as consumers. It is significant that brands which have maintained a continuous, consistent message are those beonging to businesses with cear strategies and sustained consistency of brand management. Decisions by these brand managers shoud have ed to successfu brands. SUCCESSFUL BRANDS De Chernatony and McDonad (1998) describe the necessary attributes of a successfu brand: A successfu brand is an identifiabe product, service, person or pace augmented in such a way that the buyer, or user, perceives reevant, unique added vaues which match their needs most cosey. Its success resuts from being abe to sustain these added vaues against competitors. 321

337 The management of a retai brand Fig The pyramida mode of a brand Source: Kapferer, Successfu brands therefore are required to have unique added vaues. Exampes of added vaue are: rituas (Moët et Chandon champagne at ceebrations); symbos (Perrier as a statement about a sophisticated consumer); heritage of good (Keogg s as a refection of time-honoured famiy vaues); aoofness (Carsberg s time spent brewing and storing); beonging (Caring Back Labe as one of the crowd); egend (Sandeman, Johny Waker back abe); quaity and trust (M&S food); excusivity (Gucci, Harrods). To succeed, brand marketers have to ensure that their current added vaues are appropriate to the preferences of their intended consumers. Kapferer (1992) introduces the pyramida mode of a brand as a means of successfuy managing a brand through time (see Fig. 12.4). At the top of the pyramid is the brand s core vaue, its essence or kerne ; in the midde are the styes and codes a brand s specific means of conveying a message in words and images; the ower eve represents the brand s communication themes its current advertising position. The art of managing a brand over time depends on brand managers being totay aware of what their brand s kerne is and reaizing that this must not be changed. At the same time, they must beware of two extremes: an excess of democracy reying too

338 Brand updating much on the consumer to dictate how the brand shoud evove; and an excess of code fear of changing the brand. Kentucky Fried Chicken faced increased competition during the 1990s from newy aunched, chicken fast-food outets as we as from McDonad s and Burger King who introduced chicken products foowing the BSE scare. It aso had to contend with the growing probem of fried food being perceived as ess heathy. Evoving the brand to KFC, in order to be abe to stand out from the new competition, and introducing gried, baked and rotisserie-cooked chicken soved the diemma. BRAND UPDATING Kapferer (1992) maintains that a brand is updated not, as many think, by communication but through its products and meaningfu actions. For instance, technica progress aerts the pubic to a brand s reviva and intentions. Branded products with ong histories, for exampe Keogg s various cereas, have been forced subty to adjust their offerings to keep them reevant to the changing market conditions. For some companies this has been itte more than adjusting packaging to update the product; for others it has meant putting the brand s core vaues in a different context. For exampe, Lucozade used to promote their drink as providing energy for the sick. When socia trends indicated a shift towards a more active popuation in the eary 1980s, Lucozade adapted successfuy by presenting the brand as a source of energy for highy active peope. However, updating can have its dangers. It must be undertaken in ine with customer expectations. Coca-Coa s move into the caffeine-free Coca-Coa Light was one which achieved consumers acceptance because the product was essentiay unchanged, but the creation of New Coca-Coa, an attempt to introduce a totay new taste, was at odds with the origina brand s identity and it had to be dropped. Some of the argest brand owners have been compacent about their brands in the past, appearing to ignore the changing surrounding environment and the threat of their competitors unti it was amost too ate. The notion of brand reviva was then introduced. Babycham, for exampe, suffered from its ack of acknowedgement of different socia situations and changing consumers. In 1993 the brand was forced to grow up as it entered the decine stage in the product ife cyce. Gaymers aunched the Babycham reviva. The name has remained the same but the product has been reformuated; the packaging has been changed and the we-known fawn ogo revised. Brand ine extensions have aso been introduced to suit different consumer tastes Xtra Dry Babycham, for exampe. Ideay a product shoud not be aowed to get so cose to termina decine and it must be recognized that initia market research for a brand, however thorough, has imitations in that it ony investigates attitudes, beiefs and socia norms at that one specific point in time. However successfu a brand is, its managers have to be constanty vigiant about potentia rivas and their tactics, and need to adapt strategy accordingy. Pricing and brands In 1993 Phiip Morris cut the price of the company s fagship brand of cigarettes, Marboro, by as much as 25 per cent to stem the oss of saes and market share to ower priced rivas. City anaysts criticized the move as kiing the brand. Athough the brand 323

339 The management of a retai brand MINICASE 12.2 Monsoon How shoud Monsoon go about expansion? Monsoon has carved a distinctive niche on the high street with an ethnic, Liberty-meets-Goa-hippie stye, described by the company as deuxe boho chic. This positioning has been conveyed through much instore panache. The itte above-the-ine activity it has carried out has mainy been created in-house. Chairman Peter Simon started importing brighty cooured ethnic cothes from the Far East and India in 1972, naming his store Monsoon because he was born in Sri Lanka during such a storm. The company soon branched into houseware and accessories, and opened the first Accessorize store in But whie Monsoon, which foated in 1998, has been argey successfu, and its atest resuts, announced on Monday, show ike-for-ike saes up by 15% for the year to May 26, it faces strong competition in the high street from Jigsaw, Karen Mien and a rejuvenated Laura Ashey. With a its product sourced in the Far East, it is aso suffering from the strong pound. It is thought that Monsoon needs to widen the appea of its brand and communicate its strengths to a younger generation of women in order to expand. So how can it create a storm? We asked Juiet Warkentin, former Arcadia marketing chief and editor of Marie Caire Brands such as Monsoon that are not owned by big retai groups sometimes fa off the marketing and advertising word s radar. Retaiers with store portfoios of 100 to 150 stores usuay focus on getting their core skis right. Service, card marketing, positioning are a critica in converting a browser into a sae. With a that retai foor space and a those windows, cothing retaiers are often azy marketers. If the sun is shining and the coection is good, who needs marketing? But with an aggressive growth strategy panned both in the UK and overseas, Monsoon now stretches beyond its signature foaty, high street/ethnic dresses into homeware and kids cothing and an extremey successfu sister brand in Accessorize. It has to start thinking carefuy about the carity of its brand position. The company s decision to focus on marketing is absoutey right it signas a move from thinking just about the product to thinking about the customer as we. Lindsey Roberts [said] his guess is that Monsoon is currenty doing better than most retaiers. The keys to its success incude being genuiney differentiated on the high street, remaining true to its core vaues and being content to dominate a niche. In fact, it dominates not just one niche, but two creating a new market with Accessorize was a masterstroke. Go bindfoded into most fashion retaiers and you d strugge to know where you are when you take it off. Not so with Monsoon. This is a rea brand that has perenniay succeeded in connecting its brand name with its product, by taking the best of the ethnic infuence in fabrics and transforming it into wearabe, gamorous and contemporary fashion. Right now, the stores are teeming with jewe coours and spanging brocades just going in gives you a ift. Source: Aexandra Jardine, Marketing, 2 August 2001 dropped in vaue by 2.4 biion, the rea issue in this case was not what it cost, but what it woud have cost the company if they had done nothing. Higher price is associated with higher quaity and some brands are positioned to be expensive. During the 1980s, price was considered a purey tactica marketing too. Since 1981, premium ager brand Stea Artois has used the promotiona ine reassuringy expensive in its advertising. The phrase expains to the consumer that the reason for the brand s high price is the quaity of the ingredients. A more common approach to using price to defend the brand is iustrated in the batte that has been raging between different UK newspapers. Both The Times and the Daiy Teegraph have used price as a short-term weapon to defend market share. However, once a company has decided to embark on the road of using price as a tactica weapon, the process of increasing price is made a the more difficut. In most cases, taking the price war option signifies that the company has faied to buid a sustainabe competitive edge and price disparities ony serve to devaue the brand. 324

340 Own-brands Deciding whether or not to choose price as a marketing too wi depend on the roe of the brand within the company s portfoio. For exampe, it woud not be an option for Coca-Coa to introduce price as a weapon against riva coas. The one big advantage they have is that of image, and their pricing points refect part of that perception. To destroy that position coud ead to commercia and strategic suicide. Richard Branson s Virgin Group attacked the giant coa manufacturers in The Virgin Coa Brand was aunched in November 1994 mainy through Tesco, Iceand and the Thresher chain, with an estimated market share of about 10 per cent (Fagan, 1995). This indicates the strength of the existing Virgin brand in the aunch of a new product. COUNTERFEIT OR COPYCAT BRANDS Counterfeit trade marks are especiay dangerous to brands which rey upon a high price to give them a superior image to the consumer. Cheap imitations ead to proiferation and hence diute the brand image. Manufacturers are quick to use egisative action wherever possibe so as to ki off such imitations. A more generaized threat has been copycat brands which, unti recenty, have been difficut to fight on ega grounds. These are brands which so cosey copy the packaging of an estabished brand that the consumer is seduced into choosing them, either because they think they are the origina brand or because the copy s price is ower and it is assumed represents better vaue than the origina. However, the Trade Marks Act 1994 gives some protection to the initia brand. Any sign can be registered as a trade mark if it can be represented graphicay, and an important new faciity is the registration of the shape of goods or their packaging, for exampe the distinctive prismatic shape of Toberone or the cassic Coca-Coa botte. The recent Act greaty strengthens a trade mark owner s rights. Previousy, if a very simiar trade mark were used it had to be proved that the pubic woud be confused between the two marks. This is no onger the case. Secondy, a trade mark can be infringed verbay, not just in printed or other physica form. Thirdy, where a trade mark is registered for particuar goods or services, and has acquired a strong reputation, the owner of the trade mark can, in some circumstances, prevent it from being used with other goods or services. Finay, action can be taken against a person who appies a trade mark to abeing, packaging or business documents when they ought to know that the use of the trade mark is unauthorized. However, trade mark owners must proceed cautiousy before making an aegation since any person who is threatened by court proceedings for registered trade mark infringement without justification is abe to seek compensation from the trade mark owner. OWN-BRANDS On an internationa basis own-brand retai power is most deveoped in the UK where Boots, M&S and the supermarkets have ed the way. Own-brands are the names given to consumer products produced by, or on behaf of, distributors and sod under the distributor s own name or trade mark through the distributor s own outet. The deveopment of own-brands has reinforced the position of arge-scae concentrated retaiers due to the extra contro they gain over the vaue chain. Own-brands, sometimes referred to as own-abe brands (but this has restricted meaning reated simpy to groceries), evoved 325

341 The management of a retai brand 326 initiay as a cheap and inferior aternative to manufacturers brands. There are four main types of own-brands and their characteristics that we can recognize: Generic simpe ow-cost pain packaging with no branding but may have the retaier s name. Typicay unadvertised and offered as a ower grade aternative purchase. Wi be more popuar in poorer areas and in times of recession. Price-ed retaier brand the name of the retaier is shown and the packaging is designed overty to communicate the impression of vaue and of ower price. The strategy is based upon providing better vaue than the manufacturer brands and to reduce their power by setting a ower price. Tend to be based upon products which offer arge voume product purchases. Quaity-ed own-brand the packaging is designed to refect product quaity and to compete directy with estabished manufacturer brands. The strategy is to attack any product positioned as a cose competitor, buid brand image of retaier, expand product assortment and increase margins. Excusive own-brand this is manufacturer based and produced to be sod through one agreed retaier. This is a seected niche strategy often based upon differentiation in order to achieve higher margins. The Co-operative movement in the 1870s initiated the first own-brand products. As time passed own-brands grew to repace generic brands, which were commodity foods or househod ines which were sod in basic packaging. In the 1970s generic brands were perceived to be simiar to own-brands and this aided their initia aunch. By the ate 1980s, own-brands had repaced the generic brands which had taken up shef space and brought in ower margins. With the expansion in the number of supermarkets, ownbrands became more proific. This occurred at a time when there was itte differentiation in the marketpace and there were a number of simiar products. In addition, the economic conditions in the ate 1980s made consumers more price conscious, whie at the same time own-brands were improved in reation to their quaity and packaging to such an extent that they became brands in their own right. By the 1990s, own-brands in Tesco and Sainsbury accounted for over 50 per cent of a saes. The own-brand concept is thus a broader concept than that of manufacturer brands as it embraces both the store proposition and that of individua product ines. It shoud be remembered that Marks & Spencer s St Michae s cothing, as a brand, had for decades been 100 per cent of a saes. If a retaier such as Marks & Spencer can inspire confidence in a brand as an ownabe brand then the company has a distinct advantage in aso being abe to raise prices. The company is considered to be Britain s argest own-brand retaier but has no manufacturing capacity within its direct span of contro. This type of own-abe strategy is not easy to achieve and has required Marks & Spencer to have compete domination over its suppiers. The St Michae abe was backed by stringent buying and manufacturing specifications. More recenty Northern Foods became the suppier for St Michae foods, operating what is termed a mixed brand poicy in producing own abes and a number of we-known brands. The deveopment of own-brands may have certain advantages, some of which are isted beow. 1 The excusivity of a good quaity own-brand, at the right price, can boost store patronage. There is, therefore, the benefit of improved store oyaty due to consumers

342 Own-brands seeking out a popuar own-brand. Aso, when the retaier brand is on the packaging this acts as a constant reminder when the product is in the cupboard or in the home and this can reinforce brand oyaty. 2 Goods carrying an own abe cannot be directy compared on price or attributes in other retai outets. The resut is that own-abe offers greater price fexibiity and does not need to be repriced as often as some other ines. 3 If the own-brand is we received, the store image is enhanced. In fact, the two reinforce each other as there is a circuar reinforcement effect of one on the other. 4 A range of own-brand products which offers advantages over the competition wi attract higher eves of custom and ead to purchase from a wider range of the store s products. This wi consequenty ead to higher profits through increased saes and the abiity to achieve high margins. 5 Own-abe products are free from the restrictions which reate to methods of dispay, promotion or pricing which often appy to manufacturers brands. 6 Supermarket own-brands can become powerfu enough for the company to pace pressure on some of the major branded manufacturers to make concessions to avoid their brands being deisted. 7 Own-brands can be used as a co-ordinated range or positioned to fi gaps eft by the competition. There is aso the opportunity to create an own-brand which is positioned to appea to the specific tastes of a store s customers. 8 Launch and distribution costs for new products are far ower than those of conventiona manufacturers. The shorter, cheaper route aows for ess risk and opens up the market to innovation. One way that retaiers have tried to achieve the advantage of the image of we-known brands is by use of copycat packaging, but the recent Trade Marks Act (as discussed above) wi seriousy inhibit this and we may see a decine in proiferation of own-brands which are hardy distinguishabe in packaging and design from their nationa brand counterparts. Products which are argey image based, such as Coca-Coa, are protected from the threat of price-cutting rivas by the consumers desire to support the status brand. The retaier danger is that consumers wi buy rivas products unknowingy, if they are ookaikes, and that the in brand wi shift from being theirs to that of a newer younger riva, for exampe Virgin. On the other hand, manufacturers such as Mars are being forced into own-abe ventures due to the probems which may face their business if they decide not to co-operate with the arger retaiers. However, the own-abe phenomenon is probaby a serious threat not ony to the surviva of a particuar brand, but aso to the very concept of branding. Manufacturers invest heaviy in research and deveopment before aunching a brand, and the price has to refect this. If own-abes can step in and capitaize on this investment, it is impossibe for the initia brand to survive uness the manufacturer can convince the consumer that the price premium is worth paying. This is becoming increasingy difficut as the pubic acquire a more sophisticated approach to purchasing. The more functiona the product, the more threatened it is. For exampe, BP tried to counteract the price cutting of the new entrant rivas the mutipes by caiming that BP s petro contained engine ceaning detergents, but consumers did not acknowedge this product differentiation as important. Within a product category a brands may be 327

343 The management of a retai brand perceived as simiar and, in this case, a petro is apparenty regarded as essentiay the same. MINICASE 12.3 Back to cheap and cheerfu Own-Labe FT Private-abe products aso known as ownabe or store-brand products are rapidy steaing market share from estabished brands. In part, this is because own-brand products are usuay priced we beow their branded equivaents. But private abe is no onger competing on price aone. Excusive deas with big retaiers and heavy investment in product innovation have made private-abe brands more attractive for the cost-conscious shopper. Private-abe goods are not new. It is more than 20 years since Sam Waton, the founder of Wa-Mart, introduced a pet food caed O Roy, named after his favourite hunting dog. The product now outses the big nationa brands. But the US sowdown has encouraged US retaiers to devote fresh attention to a part of their business that offers higherthan-average profit margins and a chance to differentiate themseves from their rivas. A recent JP Morgan anaysis of the grocery industry found this month that store brands are gaining market share in 55 of the 61 categories it monitored. The businesses suffering most from the incursion of private abe are often those where the market eader has stumbed and faied to keep an od product up to date, such as Campbe s Soup. In part, this is because private abe has shed its cheap and cheerfu image and arge stores such as Wa-Mart have invested heaviy to ensure that their ownbranded produce keeps up with innovations in their categories. On rare occasions, privateabe suppiers have even beaten their branded rivas to the punch. Co-operative Group, the UK retaier, rushed out iquid detergent capsues before Procter & Gambe and Uniever, the two giants of the aundry industry, coud bring their own new products to market. Dan Barry of Merri Lynch says retaiers are focusing on investing in such innovations more than ever: The quaity of private-abe [goods] is dramaticay better than it was 10 years ago. But private-abe goods serve another purpose for retaiers: They are using it at the opening price eve, where the branded guys don t have what they need. In short, as companies such as Procter & Gambe and Uniever have sought to increase returns by focusing on high-margin, top-ofthe-range goods, they have negected the cheaper end of the market. A.G. Lafey, chief executive of P&G, says he sees private abe as a reativey sma probem in most of the group s categories, which range from nappies to toothpaste. We don t want to be in the commodity end of the market. We want to be in the differentiated end of the market, he says. He admits, however, that competition from private abe has been a factor in considering which businesses it no onger wants to be in. Peope ask why we re getting out of Crisco [cooking oi], he says. In cooking ois you have a coupe of brands and a ot of private abe, because it is essentiay a commodity. Mr Lafey says that P&G decided it no onger wanted to compete in such a business as more consumers switch to oive oi. Consumer-branded companies are aso responding by seeking private-abe status for some of their own products. Retaiers such as Target and manufacturers such as P&G have signed agreements ensuring that certain products wi appear ony in certain stores. Whie store brands are gaining significant ground in the US, they have never been as arge a force in North America as they have in much of Europe. Ahod says private abe contributes one-third of its revenues in the Netherands and Scandinavia, compared with just one-fifth in the US. In the UK, ownabe goods often account for more than haf of a supermarket s saes. Edited source: Andrew Edgeciffe-Johnson, Financia Times, 19 June

344 Corporate branding CORPORATE BRANDING There is a schoo of thought that beieves that brand buiding wi increasingy mean deveoping the whoe company as the brand. The service industries, which incude retai, are ideay paced to produce this change because it is difficut for them to sustain a differentiated, competitive product advantage over their competitors. Thus, it wi become increasingy important to position organizations as brands in the minds of actua and potentia consumers. According to King (1991), increasingy the company brand wi become the main discriminator. That is, consumers choice of what they buy wi depend rather ess on an evauation of the functiona benefits to them of a product or service and rather more on their assessment of the peope in the company behind it, their skis, attitudes, behaviour, design, stye, anguage, greenism, atruism, modes of communication, speed of response, and so on the whoe company cuture coud be said to refect this. The communication of a company brand is necessariy targeted at a wider variety of audiences rather than simpy consumers. Reevant audiences incude sharehoders, suppiers, government agencies, banks, empoyees and potentia empoyees, as we as immediate customers. In short, a the company s stockhoders. For Hankinson and Cowking (1993) these audiences shoud understand: what the company is; what the company does; how the company does it. From a company s point of view, de Chernatony and McDonad (1998) state: a characteristic of successfu brands is the way that their position has been precisey defined and communicated internay. Everyone working on a particuar brand is reguary reminded of the brand s positioning and an integrated, committed approach is adopted, ensuring that the correct baance of resources is consistenty appied. In essence, brand buiding invoves designing and controing a aspects of a company which may require new initiatives and activities outside of the traditiona skis of the marketing department and the agencies that it engages. This is an a-pervasive approach requiring constant and convincing communication with severa audiences offering positive images of product or company vaues, styes and behaviour. This is becoming more, rather than ess compex. As it is becomes increasingy necessary for companies to grow, through extension, brand acquisition or brand aiance, we increasingy ive in an age whereby arge corporations need to use corporate brand management to buid brand portfoios. According to Fisher (2001) Uniever, the Ango-Dutch consumer products group with brands incuding Birds Eye foods, Ben & Jerry s ice cream and Lipton tea is restructuring with a brand strategy that invoves greater focus on its top 400 brands, taking into account the suppy chain and innovation areas. It has aready reduced its brands to around 900 from Corporate brand buiding aso needs to be highy controed, especiay where there are retai franchises invoved. Cosey managed franchises, such as McDonad s, are an exampe of where the corporate brand is not owned by the retaier. In order to contro the standards and service deivery there is very strong contro of a aspects of the retai experience and service deivery to protect the brand equity. This wi be egay binding 329

345 The management of a retai brand and enforceabe through a franchise agreement. It wi be found that protection of the brand can aso appy in a non-franchise environment, such as a Bang & Oufsen outet where an excusive retaier not owned by the manufacturer utiizes the manufacturer s brand. If a company wants to support a corporate brand it can decide upon one of three options: a centra hub system; an endorsed brand system; a hybrid approach. A centra hub system wi pace the brand at the heart of the business and a products, services and communications are managed with the same brand name, corporate famiy identity and corporate brand vaues. For exampe, Richard Branson has utiized the Virgin brand name across the whoe of his business empire. The benefits are obvious in that there is the benefit of goodwi, economies of scae in brand buiding and instant credibiity when the company aunches its new products. Therefore, the benefits accrue to the centre and are transmitted out aong the spokes. The difficuty with the centra structure is that each business has to adapt easiy to the whoe breadth of the business to ensure fit with the core brand vaues. More importanty, if there is any negative communication from one part of the spoke system it may ead to a diution of corporate brand equity for the whoe group. An endorsed brand system is where the corporate brand s vaues (trust, security, competence, etc.) are used to endorse product brands within the portfoio. For exampe, 3M with Post-it and Scotch Tape which is endorsed by having the 3M corporate association. A hybrid approach by its very nature is a mixture of different approaches whereby competitive advantage of the corporate name is subsumed within other eading brands. For exampe, Nesté, the argest food group in the word, have grouped their portfoio into ten goba banner brands such as Perrier, Carnation, etc. TYPES OF BRAND EXTENSION A brand can be stretched in the process of product deveopment, by introducing minor product variations (ine extension), as in the extension of the Coca-Coa ine to incude Diet Coke. This approach has been used by Gap, which was founded in America in 1969 and in 1986 stretched its brand to aunch GapKids, having identified the growing importance of the chidren s market. More recenty in 1990 they expanded to BabyGap and diversified into aftershave, perfumes and deodorants. A report of eading consumer product companies in 1993 found that 75 per cent of new product introductions were ine extensions. Another exampe of the way extension is used is exhibited by the introduction of fanker brands to monopoize shef space in retai outets, for exampe Cherry Coke, Cadbury s Twir and Procter & Gambe s different washing powder brands. Competey new products can be introduced. A brand may aso be stretched in the process of market deveopment, when the origina brand (and product) is aunched into segments of the existing market and then into new markets (brand everage) as in the extension of Yamaha from motorbikes to musica instruments. The Tesco supermarket 330

346 12 Types of brand extension Fig Leverage aternatives for brand extensions Source: Tauber, 1988 chain extended its brand to petro retaiing and gained very good pubicity for the brand due to ow pricing poicies and a campaign supporting uneaded petro. In many cases, the stretching is a combination of both factors for exampe, Dunhi, where the origina brand product (cigarettes) was simutaneousy extended into a new segment (pipes), a reated product category (ighters), and over time into totay new product sectors (cothing, accessories and cosmetics). After studying a sampe of 276 brand extensions over a ong period, Tauber (1988) concuded that there are seven types of everage, which he iustrated graphicay (see Fig. 12.5). Advantages of brand extension When market entry barriers are high or rising, brand extension is a means by which a company can achieve growth by capitaizing on its existing brand assets. It gives ready-made and ower-cost access to an existing distribution and retai operation. For exampe, traditiona menswear brands such as Diese, Pau Smith and Ted Baker have a incorporated womenswear into their ranges. There may be economies in promotion and advertising, since there is no need to buid pubic awareness of the name. The use of an existing brand name gives own products or new businesses an instant position and reputation. The customer has an immediate awareness of the brand, and thus has existing confidence transferred to the new product on offer. The perceived quaity of the existing retai offer is transferred by the customer to the new product. A recognizabe brand name reassures a prospective purchaser that the retai offer is we supported and hence encourages initia purchases, for exampe, Genera Motors or Ford car deaers. 331

347 The management of a retai brand Disadvantages of brand extension Brand extension may discourage innovation and may ead to companies producing too many ookaike products. The brand extension may weaken the core brand by diuting its appea, for exampe, Pierre Cardin s extension into too many other product areas. The company may waste resources producing products which are very simiar to the origina, and which may gain their saes at the expense of the origina (cannibaization). There is a temptation for the company to rey on the power of the core brand name and hence not give sufficient financia support to the extension. Any bad pubicity for the origina product wi affect any other products with the same brand name (spiover). For exampe, the faiure of the Sincair C5 eectric vehice added to the demise of the company s Spectrum computer range. An inappropriate extension in the eyes of the consumer can ead to negative associations, for exampe, Levi s extension into suits, or if a cigarette company extended into heath products. Research shows that extensions which are successfuy aunched are sedom as successfu as the origina brand. Risks of brand extension Risk associated with brand extension has two dimensions: 1 the abiity of the brand to trave across products; 2 the capabiity of management to market a new product whie not negecting the core business and overestimating the new brand. Some markets seem ogica and therefore harbour itte risk. For exampe, Paxo s move from suppying dried stuffing mix to other dehydrated food products or Mars s move into ice cream. However, as markets become more competitive there is pressure for companies to create diverse product portfoios. We have witnessed amazing eaps, such as Swatch extending from manufacturing watches to designing cars, and Virgin diversifying into controversia markets such as airine and train transport systems where faiure or distrust coud have a knock-on effect on other services or products under the Virgin brand name. Levi Strauss in the 1980s extended its brand from jeans into other cothing and shoes. However, the consumer did not accept this and Levi had to return to its core business and recaim its former position through a reaunch focusing on the 501 jeans product. Extending successfuy Four brand extension options were identified by Peter Doye (1989) and are iustrated in the brand positioning grid (see Fig. 12.6). The foowing is an expanation of the four quadrants of Fig. 12.6: 1 If the brands appea to the same target segment and have the same differentia advantage, then they can safey share the same company name or range. Here, there is consistency in the positioning strategies. 332

348 Types of brand extension Fig Brand positioning grid Source: Doye, If the differentia advantage is the same but the target market differs, then the company name can be extended because the benefit is simiar. However, it is important to identify the group. 3 If a company has differentia advantages, then it shoud use separate brand names. 4 If both the target customers and the differentia advantages are different, then using unique brand names is the most appropriate strategy. Studies have shown that groups of reated products reinforce the brand, particuary where technica expertise is important and perceived to be so. Consumers categorize goods or services in their purchase decision and transfer attitudes associated with a core brand to its extensions. An extension into a separate category has ess risk of a resuting negative feedback on the core brand than when the extension is very simiar to the core brand. Keer and Aaker (1992) report that high quaity brands stretch further than those of average quaity. The stronger the brand, the easier it is to extend it into diverse product areas. The question to ponder is how toerant the customer is if the product differs from the core brand. Toyota did not beieve that new product positioning can be achieved by stressing the attributes of the extension; in trying to capture the more uxurious sector of the car market, Toyota beieved that a brand extension into a quaity position woud not be successfu. The company, therefore, aunched the Lexus brand in order to enter the quaity marketpace. Recent research has shown that a brand name which has a strong association with functiona benefits can be extended more readiy into product areas which are themseves bought for functiona benefits. Simiary, if the origina brand is more inked to prestige then it may be extended into a product fied aso bought for its prestige. For exampe, a Timex watch which has functiona associations woud extend readiy into stop watches, whereas a Roex brand might be extended to uxury cocks. Probems may appear when attempting to move a brand down the income scae rather than up it. However, attempting to move a brand to a higher income group is possiby the most risky form of brand stretching because it invoves stretching consumers perceptions. In such cases the management strategies have to be carefuy panned for such a move. 333

349 The management of a retai brand CONCLUSION In order to maintain a brand successfuy, it is essentia that its managers thoroughy understand its intrinsic properties its core vaues, added vaue, its positioning, proposition, personaity, image, and identity and constanty update themseves on consumer concepts of their brand in reation to others. Any modification of the store brand or offer must be in ine with customer expectations of the origina positioning. Branding is a necessary feature of the marketpace because without brand management there woud be no strategies to understand the essence and position of the retai operation. The utimate aim of management must be that of brand strength and immortaity. Such an aim requires adaptation of the brand to the new and evoving demands of customers, competitive moves and the changing marketpace. New egisation has strengthened the hand of manufacturers in defending their brands against counterfeits and copycat products. However, own-abe entrants are one of the most exciting changes taking pace. If an own-abe brand is very simiar in packaging to an existing brand, it does seem unfair to benefit from the reputation of the origina brand without having had the expense of deveopment and aunching. Another key trend is brand extension. This enabes companies to introduce new products and product modifications to new and existing customers. However, their success cannot be guaranteed, and it is important that there is a perceived quaity and fit with the core brand. The range of products currenty offered may aso infuence the success of the extension very simiar extensions succeed in narrow ranges, whereas wide ranges can sustain more variety in the extensions. Even the strongest brands have boundaries and the art of brand extension is fuy to expoit a brand s possibiities without overstepping the boundary imits. 334 EXERCISES The exercises in this section reate to the management of a retai brand. It is advised that you work through them before moving on to Chapter Write down a ist of brands or stores you beieve you wi aways patronize. Now refer to the theory you have read to compie a ist of reasons for the strength of the brands you have isted. 2 Do you beieve that own-brand products wi be even more successfu in the future, and if so why? What reactions do you think manufacturers wi have to these changes in terms of defensive strategies? 3 Read Minicase 12.1 and then write a briefing document to your marketing director (of a eading high fashion jeans manufacturer) as to the damage to different aspects of the brand which may occur if a discount retaier sources your product and ses it at discount prices. You need to cover the different aspects of branding as described in this chapter and in any other reading you may carry out. 4 What brands have aunched (extension strategy) new products or retai concepts which do not fit easiy with the core brand? Were they successfu? If not, why not? 5 How does Chane perfume keep its brand strength? Can marketing ensure there is more to a brand than simpy a name? Use the foowing grid as a guide.

350 References and further reading Consideration of Chane attributes: Identify the marketing approach: distribution promotion pricing range and position of products others (ist) Now discuss what you have earnt about the success, or otherwise, of Chane which coud be appied to a high street fashion retaier. REFERENCES AND FURTHER READING Aaker, D.A. (1991) Managing Brand Equity: Capitaising on the vaue of a brand name. New York: The Free Press. Aaker, D.A. and Bie, A.L. (1993) Brand Equity and Advertising. Lawrence Erbaum Associates. Davies, G. (1992) The two ways in which retaiers can be brands, Internationa Journa of Retai and Distribution Management, 20 (2), Davies, G. (1998) Retai brands and the theft of identity, Internationa Journa of Retai and Distribution Management, 26 (4), Debing, F. (2000) On brand banking: An examination of the factors contributing to effective branding and brand deveopment through direct marketing in the consumer financia services sector, Journa of Financia Services Marketing, 5 (2), Doye, P. (1989) Buiding successfu brands: the strategic options, Journa of Marketing Management, 5 (1), de Chernatony, L. (2001) Succeeding with brands on the Internet, Journa of Brand Management, 8 (3), de Chernatony, L. and Danies, K. (1994) Deveoping a more effective brand positioning, Journa of Brand Management, 1 (6), de Chernatony, L. and McDonad, M.H.B. (1998) Creating Powerfu Brands. 2nd edn. Oxford: Butterworth-Heinemann. de Chernatony, L. and McWiiam, G. (1989) The varying nature of brands as assets, Internationa Journa of Advertising, 8 (4), Edgeciffe-Johnson, A. (2001) Back to cheap and cheerfu Own-Labe, Financia Times, 19 June. Fagan, M. (1995) Virgin steps up coa campaign, Independent, 3 January, 26. Fisher, A. (2001) Uniever sharpens its focus on its top 400 brands, Financia Times, 8 August. Hankinson, G. and Cowking, P. (1993) Branding in Action: Cases and strategies for profitabe brand management. London: McGraw-Hi. Hidebrandt, L. and Kapper, D. (2001) The anaysis of price competition between corporate brands, Internationa Journa of Research in Marketing, 18 (1 2), Hoinger, P. (1998) Hifiger sues Tesco over counterfeit goods caim, Financia Times, 29 May. Institute of Grocery Distribution (1996) Brands: Their future on the supermarket shef. A survey of retaiers and manufacturers attitudes to brands. Watford: IGD Business Pubications. Interbrand. Web site: Jardine, A. (2001) The right to Grey Goods? Marketing, 19 Juy. Jardine, A. (2001) Monsoon How shoud Monsoon go about expansion? Marketing, 2 August. Jary, M. and Wieman, A. (1997) Retai brands. Is this the rea thing? Retai Week, 11 Juy, Kapferer, J.N. (1992) Strategic Brand Management: New approaches to creating and evauating brand equity. London: Kogan Page. Keer, K.L. and Aaker, D.A. (1992) The effects of sequentia introduction of brand extensions, Journa of Marketing Research, 29 (1),

351 The management of a retai brand Key Note (1993) Own-brands: A market sector overview. 5th edn. Hampton: Key Note Pubications. King, S. (1991) Brand buiding in the 1990s, Journa of Marketing Management, 7 (1), Koter, P. (1997) Marketing Management: Anaysis, panning, impementation and contro. 9th edn. London: Prentice-Ha. Meyers, H.M. (1994) The roe of packaging in brand ine extensions, Journa of Brand Management, 1 (6), Monk, H. (1997) Gentemen prefer brands, Retai Week, 17 January, 5. Neey, J. (1997) UK Fashion Report. London: EMAP Fashion. Reid, M. (1995) Survey of retaiing (4): Make it your own Own abe is good for profits, good for the image and good for consumers. No wonder it is spreading, The Economist, 4 March. Ries, A. and Trout, J. (1981) Positioning: The batte for your mind. London: McGraw-Hi. Rubenstein, H. (1996) Brand first management, Journa of Marketing Management, 12, Snowdon, R. (1997) No name just images, The Times, 30 September, 29. Tauber, E.M. (1988) Brand everage: strategy for growth in a cost-controed word, Journa of Advertising Research, September, Vishwanath, V. and Mark, J. (1997) Your brands best strategy, Harvard Business Review, May/June, Webster, F.E. (2000) Understanding the reationships among brands and reseers, Journa of the Academy of Marketing Science, 28 (1),

352 13 The appications of IT to retai marketing This chapter shoud enabe you to understand and expain: how retaiers add vaue to their business through the use of IT; the use of IT to improve marketing and merchandising performance; the roe of customer databases in deveoping effective retai marketing; the contribution of business e-commerce to improved retai performance; the deveopment and significance of consumer e-commerce, the Internet, mutimedia and future IT trends ikey to have an impact on retai businesses. THE GROWING ROLE OF INFORMATION TECHNOLOGY IN RETAILING A visit to any arge store wi show that information technoogy (IT) has become a vita part of retaiing. The aser-scanners used in most of the arge stores to read product bar codes, check the detais on their product fie, and provide the correct price in fractions of a second are among the most distinctive exampes of modern computer technoogy. In addition, the deveopment of the Internet has enabed consumers to order books, CDs, cothing or groceries at any time of day or night and have them deivered to their homes. These are merey the visibe components of the investment of substantia resources by retaiers throughout the word in extensive computer and high speed communications networks which coect and exchange data between stores, distribution centres, suppiers, head offices and consumers. Such systems are not the soe preserve of arge companies. The reative costs of IT systems have faen consideraby in recent years, enabing retaiers of any size to purchase IT. As Management Horizons (1995) predicted, technoogy is becoming a virtua prerequisite to successfu competition. Retai-suppier partnerships utiize technoogy where information is a key to reduce costs whie improving productivity. The current success of many retai companies is reated to the way they have improved the operation of their businesses through investment in technoogy. The significant contributions to efficiency can be directy reated to the appication of scanning and stock contro systems, data interchange and management support systems. For a arge retaiers and for many smaer ones, ever-growing investment in IT is not simpy one option among many, but a necessary condition of remaining a serious competitor in the marketpace. Modern technoogy is transforming the retai environment and has heped many retaiers to expand their operations. In this chapter we sha examine the roe of IT systems in enabing retaiers to increase efficiency, productivity and marketing needs as we 337

353 The appication of IT to retai marketing as the roe of eectronic commerce (e-commerce) in providing new ways in which retaiers can serve the pubic and compete with one another. 338 INFORMATION TECHNOLOGY SOME EXPLANATIONS AND DEFINITIONS IT or information technoogy refers to the technoogy of the production, storage and communication of information using computers and micro-eectronics. IT incudes both the equipment used to produce, store and communicate information and the business uses or appications to which IT is put. It requires hardware (the term used for the equipment which handes data, using computer equipment), software (the instructions that contro the way hardware accepts data input, and then processes, stores, and communicates that data), and communications. Communications deas with the equipment (incuding any cabing) and software used to transmit data between computers within a store or across a wide distance. Companies use a range of different computers incuding mainframes, minicomputers and PCs. Mainframes are the argest computers used to run major systems with speciaized software often produced by the mainframe suppier or by cosey associated companies. Minicomputers, as the name suggests, are smaer computers with much of the power of mainframes but which can use commerciay avaiabe packages, representing considerabe savings in cost and deveopment time. PCs or persona computers vary in computing power from those which are simpy advanced word processing devices to those which are sma minicomputers capabe of running an eectronic point of sae (EPOS) system or store administration system. Each system wi normay have termina equipment (often known simpy as terminas), which is the equipment at each end of a computer system, used to input data (via a keyboard or from reading a bar code) or to dispay data output on a screen, store it or print it out as text or graphs (known as hard copy). Athough the phrase information technoogy may seem to focus mosty on computer hardware, in this book we foow current usage to cover both computer equipment and the business appications of IT. The context of IT is primariy about how it can be used to hep sove retai business probems. A simpe case iustrates the advantages of IT to a retaier of modest size. The bigger the retaier, the more necessary the appication of IT. Exampe: Grantham Fashions Ltd, Reading Grantham Fashions Ltd is a chain of ony five cothing shops. Each store is equipped with a PC which hods information about the stock in the store by item and by range, size and coour. A hand-hed device reads when an item is sod to a customer and the bar code on the abe deducts the item from the shop s stock. Overnight, the saes information on each store s computer is downoaded automaticay over a BT teephone ine to the company PC in the main store. Every morning the owner of Grantham Fashions is abe to review the previous day s saes performance of every one of her stores. When deciding how much to order, she has avaiabe the weeky and monthy saes figures for each type of artice ast year and this year. She is abe to spot product ines that are seing very we in the first few days and quicky pace top-up orders with her suppiers. She can aso reaocate stock between different branches to ensure that every store has a range of sizes or coours of each range.

354 IT for competitive advantage The computer is aso used to maintain the company accounts, cacuate the saaries and bonuses of every empoyee, and hod customer information used to keep in touch with the best customers. When the owner had ony two stores she was abe to act as manager for both of them as we as doing a the buying and her own marketing. With five stores she has found that the ony way she can keep tight contro on a her stores as we as buying is through her computer system, athough she sti visits every store at east twice every week. She uses the Internet to access her bank account, pay her suppiers, and check the progress of orders and often e-mais her reguar customers to te them about new merchandise that may interest them. IT FOR COMPETITIVE ADVANTAGE Grantham Fashions Ltd, ike major retaiers Tesco, Dehaize Le Lion and Carrefour, uses IT to carry out basic functions incuding seing items, capturing the saes data by item, stock contro, buying, management reports, customer information, and managing the finances of the business. The main uses of IT in retaiing are shown in Fig However, the most advanced retaiers attempt to use IT to give them competitive advantages over their rivas. For IT to provide competitive advantage it needs to cut costs, differentiate the retaier s service offer, or provide innovation in ways that are prized by the customer. Tayor (1998) argued that in the increasingy competitive retaiing sector, advances in IT systems such as data mining, mutimedia kiosks and Web-based commerce are heping businesses differentiate their services and are enabing them to deveop coser reationships with their customers. Lowe and Wrigey (1996) suggest that since the 1970s there have been three main ways in which retaiers have used IT, positioning themseves Fig.13.1 A retai IT system 339

355 The appication of IT to retai marketing at the cutting edge of technoogica deveopment, compared with manufacturers. These are: 1 investment in IT aong with organizationa changes, improved retai ogistics, reducing deivery ead times, resuting in a progressive reduction in retaier inventory hodings; 2 better information about consumer demand supported retai poicies in own-brand, product deveopment, and the refocusing and redefinition of many of the most successfu firms. 3 cutting abour costs by effective staff scheduing and by using more part-time and casua staff. Retaiers were abe to use IT to measure staff performance, enabing costs to be further reduced with the hep of better information about transactions and performance eves. IT is having a major impact on the modern retai business. Artice bar-coding, combined with the advent of business-to-business eectronic commerce, creates phenomena efficiencies for the retaier, as isted beow. Cost and productivity benefits efficiency of time/transaction speed increases; reduced queuing times; operating cost reductions, e.g. ess ticketing; increased accuracy of a aspects of the saes transaction; improved administration/invoices; no new keying required; shorter ead times; reduction in stockouts and stockhoding; pricing can be changed easiy and accuratey. Marketing benefits improved data effectiveness of promotions, forecasts of saes, stock records, etc.; faster distribution cyce system; improved trading partner reationship; abiity to incorporate faster responses to changing market conditions; consumer benefits from operationa efficiencies, e.g. shorter queues; can ead to the buiding of oyaty schemes and databases; additiona seing space owing to reduced stockhoding. Automating processes Automating a process may cut costs, increase accuracy, reduce processing times, enabe decisions to be made more quicky, and speed up customer service. For exampe, the appication of eectronic point of sae, or EPOS, which uses scanning systems to ensure the charge is based upon accurate prices, enabes checkout staff to work faster, and, in a 340

356 IT for competitive advantage food environment, to eiminate the need to appy price abes to goods. A these factors cut abour costs. In addition, accurate shopping basket data can be coected and stored for anaysis. Coecting data about the customer Data about what individua shoppers buy is coected and anaysed. The purchasing patterns of different types of shopper can be anaysed, assisting decisions about ranging, product extension, or promotions. (Note: Data protection egisation in every EU country contros what persona information can be hed on an individua and bans the export of persona data to other countries which do not have equivaent data protection.) MINICASE 13.1 Opinion: Onine shopping the next five years FT We expect shopping onine in the UK to be worth GBP12.53bn ($17.9bn) by 2005, or 5 per cent of tota retai saes. Shopping on the Internet is acceerating and women are fast catching up with men as a spending force. Our atest research shows that the number of UK Internet shoppers has reached 3.2m peope, whie the number of women shoppers has doubed to 1.1m. Some GBP581m was spent onine in About a third of this was in the fourth quarter of the year. This may sound high but in fact it is ony 0.3 per cent of a retai saes. However, our work shows that spending eves have continued to increase as the year has unfoded. Our forecast for 2005 is party expained by deveopments in the grocery market, which wi drive saes forward over the next few years. Onine food business wi grow to GBP4.9bn, or 4.9 per cent of sector saes. More payers have entered the market and the eaders such as Tesco, Sainsbury, Asda and Iceand are a pushing ahead faster. We aso predict that the deveopment of Internet shopping via the TV wi be particuary beneficia to the cothing sector where saes wi rise to GBP1.8bn, or 4.0 per cent of sector saes, by Cothing saes wi be driven by technoogica innovations such as body scanning, enabing measurements to be stored eectronicay. As we as interactive digita TV services, growth drivers wi incude mobie phones. However, this growth wi not be in addition to existing retai saes. By far the argest part wi be cannibaised from existing saes through stores and mai order cataogues. We forecast that about 6 per cent of Internet saes wi be new growth and that 94 per cent wi be transferred from existing channes. Despite recent bips there is no escape from the inevitabiity that retai must become muti-channe to cater for consumer needs. Just as physica retaiers are moving onine, it wi not be too ong before pure payers open a physica presence, making their brands better known and reaching more customers. There wi be consoidation. Many businesses wi fai as there is a fight to quaity. Mergers and acquisitions wi be rife incuding between dotcoms and estabished retaiers. Despite the rapid growth of onine shopping via PC over the past two years, it is sti a very sma part of consumers ives. There are two main barriers to stronger Internet retai growth security and deivery. Some 41 per cent of Internet users 48 per cent six months ago are sti worried about giving their financia detais over the Internet. The increase of trust in secure servers, new ways to pay, incuding onine currency, and the rise of the waed gardens of digita TV where providers imit Internet access to the bunde of services they are offering wi a hep. As for deivery, 25 per cent of shoppers have a probem with the fact that many companies cannot deiver when it is convenient. Retaiers are on a steep earning curve in understanding what motivates the Internet 341

357 The appication of IT to retai marketing shopper. Behaviour patterns and expectations are very different onine than they are physicay. There is a significant time ag between going onine and buying a product. Shoppers are aso much more demanding about seeing and experiencing constant newness, and getting the best dea. Whie price discounting has typified retai Internet activity, we beieve that upping added-vaue eements of the offer and everaging brand vaues wi be essentia for retaiers, as it wi ead to greater profitabiity. Creating communities around the brand and targeting peope by ifestye, interests and aspirations, rather than by age and cass is key, with new eves of communication required. Retai brands which can diversify as Amazon has done wi be the strongest, as consumers trust the core brand whether it ses cothes, toys or pensions. The retaiing andscape wi change significanty over the next five years, but onine shopping and physica shopping wi co-exist. Onine and offine retaiers can earn much from each other. Customers sti favour going into shops rather than going onine for many important products. They trust those retaiers more, fee they get better hep and advice and prefer the ease of transaction. Shoppers view Internet shopping as more convenient, better for sourcing unusua products and more costeffective. Source: Richard Hyman, Chairman, Verdict Research Limited, FT.com site, 26 October 2000 A oyaty card database wi hod the customer demographic information and the addresses of card hoders. These entries can be inked to transactions data provided by EPOS to show what individua customers buy and this data can be used to profie the customer base. This then aows specific offers to be made to certain types of customer. Boots the Chemist aunched its first mai order cataogue, Mother and Baby, by sending copies to a oyaty card hoders who had bought baby products from Boots in the previous year. In addition, many Internet e-commerce sites attempt to use previous transaction information to personaize their sites for each shopper by offering them items that have been reated to their ast few transactions and by automaticay greeting them by name when they enter the site. Feedback on marketing decisions EPOS data can be anaysed to show quicky the effects of promotions, prices, new products, and packaging changes. The impact of changing the ayout or merchandising of stores can be rapidy assessed in terms of category saes, competitor brands, gross profit and saes esewhere in the store. New ideas and concepts can be carefuy tested against marketpace reaities. For exampe, the DIY company B&Q has a rigorous poicy of using its EPOS data to evauate its promotions, enabing it to cacuate customer price responsiveness for core and seasona products at different times of the year. This enabes the company to pan its promotions more scientificay and predict the outcomes with greater accuracy. Communications Stores can communicate with suppiers to send documents such as purchase orders, stock and saes information over third-party communications networks. This is known as e-commerce (eectronic commerce). This is cheaper and faster than paper-based 342

358 IT for competitive advantage Tabe 13.1 Remote grocery shopping operation options Ordering method Picking and packing Deivery charge Payment method Avaiabiity Internet, intranet, phone, fax. Sometimes incentives are offered to join scheme Minimum worth of order required or free at any eve. Sometimes restricted range ony Minimum worth of order required, free to home or work or coection (can be drive though) from store ony Debit / credit card, cheque on deivery. E-cash payment is undergoing trias Mainy arge city, or within 5 mies of named store systems, so that many stores ony need to pace their orders hours in advance compared with seven days earier with traditiona ordering methods. Store computers aso transmit daiy EPOS data and other information to head office so that senior managers are more in touch with the performance of every store and product group, and can respond appropriatey. For exampe, in the Tesco Stores Group stock repenishment occurs automaticay, made possibe by a computer system which receives daiy EPOS data from each store and generates the next day s stock requirement using a computer mode of predicted saes. The system automaticay sends the requirement eectronicay overnight to the distribution centre for picking and deivery the next day. This creates efficiency as the ead time (time between sending an order and receiving the merchandise) has been sashed. This system has aowed Tesco over a period of five years to have the amount of stock it carries and to improve the freshness of its product on offer to the consumer. A number of options are possibe as to the way a remote shopping operation is set up to service customers. Tabe 13.1 indicates the current methods empoyed for grocery shopping services from the arger companies. Toos to pan the business Sophisticated computer software packages may hep retaiers to pan, budget and forecast, to choose the most successfu ocations, and to contro their business. Expert systems can mode decision-making, statistica packages can forecast saes, data-mining toos can extract and anayse information in a database, and neura networks can see changing patterns in compex data. Retaiers use geographic information systems (GIS), which draw on socio-demographic data by postcode, aong with company transaction data, and inteigent anaytica toos to forecast the ikey turnover of stores in different ocations. Adding vaue to the retai transaction IT-assisted transactions can be preferred by at east some customers to traditiona retaiing in shops, because they provide transactiona speed, accuracy, and convenience. The use by bank customers of automated teer machines ( hoe-in-the wa cash machines) at any time of day or night demonstrates that customers wecome ower eves of invovement if they receive cear additiona benefits which they vaue. 343

359 The appication of IT to retai marketing Exampe: Sef-scanning Safeway in the UK and Abert Heijn in The Netherands are the European pioneers of sef-scanning for customers. On entering the store, the customer coects a sma hand scanner, which is used to read the item bar code before putting the goods into the troey. Customers can go at their own pace, they can check the accuracy of the prices they are being charged, they can change their minds and repace merchandise back on the sheves, and there are virtuay no queues. When they reach the end of the store a quick check on the items purchased may be made, the customer pays the member of staff and eaves the store. It took Safeway five years to deveop the system, which is now being taken up by other food retaiers such as Sainsbury s and Waitrose. Technoogicay enabed shopping Seing goods over the Internet is ikey to become increasingy important, athough its progress has been much sower than was predicted in the 1990s. The trend is fuy discussed in the ast two sections of this chapter. Eectronic means of seing incude the foowing: Products: range of grocery, cothing and footwear, music, books, videos, DIY, eectronic goods such as washing machines and hi-fi, garden products, motor vehices and motor bikes, sports goods, cameras and photographic goods, computer hardware and software, pharmacy goods, etc. Services: home betting, retai banking, persona insurance, financia service, estate agents, stocks and shares, trave and hoidays, fower deivery, entertainment tickets, virtua education, information services. Exampe: Amazon.com Amazon.com, founded in 1995, had by 2000 taken 7 per cent share of a book saes in the US as an Internet retai bookseer seing miions of different tites. As a virtua bookseer it does not invest in stores but has concentrated on buiding brand and dominating the Word Wide Web. More recenty it has expanded into seing other products and aso carrying out fufiment services for other companies. It has therefore merged the roe of the whoesaer/distributor and the retaier. The business strength is that cost is taken out of the operation as a they need is a massive warehouse and no shops as a their business is Web based. The marketing benefit is the ow price and convenience they can pass on to the customer because of their shorter and more cost-effective suppy chain. They have succeeded, based upon Porter (1980), due to a generic strategy of industry-wide differentiation and having smaer overheads than their rivas. The company have questioned existing accepted ways of doing business and are speciaizing in a commodity item market. However, the costs of operating at the eading edge of retaiing are huge and Amazon.com has not yet earned a profit in any year of its operation. Further reinforcement of the powerfu roe of IT in business has been deveoped by Porter and Miar (1985). They fet that new technoogy was transforming the nature of products, processes, companies, industries and even competition itsef. Companies coud not stand aside from the massive changes that were going on and survive indefinitey. Porter and Miar s transformationa view of IT is widey accepted today. 344

360 IT for competitive advantage Limits to using IT for competitive advantage IT was originay used by retaiers to automate centra services such as finance, payro, and management accounts. The first EPOS systems appeared in the 1970s, usuay in department stores that were arge enough to be abe to justify a computer instaation. The use of EPOS across most retai markets did not occur unti the mid-1980s, and even the argest and most IT-committed retaiers did not compete the instaation of EPOS in a their stores unti the eary 1990s. Retaiing is a highy dispersed business and the cost for retaiers of providing eaborate IT equipment in a their stores has been high. Compex systems are required to hande the arge number of product ines and the wide range of purposes the systems are to serve. Ony the very argest retaiers can afford to empoy computer speciaists so systems have to be designed which require itte maintenance and can be used in stores where staff may have imited knowedge about computers. Thus the costs, both of routine investment in automating processes (such as EPOS) and the transformationa IT investment, may simpy be too high for many retaiers. Moreover, the more adventurous and radica the IT investment, the onger it may take to garner the rewards. Many IT projects fai and the risk of a nove appication faiing may simpy be too great for many companies. Professor John Dawson (1994) fet that there was itte evidence that European retaiers made sufficient use of IT to transform their businesses. He argued that arge European retaiers devoted proportionatey smaer amounts of their budgets to IT than manufacturers, many retaiers were untouched by significant invovement in IT, they concentrated on operationa improvements rather than transformationa ones, and that the expected pay-offs from IT had not been fuy reaized. Porter s (2001: 66) anaysis ooked at the Internet and found that the Internet per se wi rarey be a competitive advantage on its own, that Internet technoogy provides better opportunities for companies to estabish distinctive strategy positionings and gaining such a competitive advantage wi not require a radicay new approach to business. Foowing this argument, it is suggested that companies shoud utiize Internet technoogies aongside their traditiona competitive strategies to maximize their profitabiity and competitive advantage. Effective use of IT IT is not a singe event or product and this wi aso imit the abiity of many retaiers to gain the maximum competitive advantage from IT. Computerization is usuay dependent upon many other changes in reated IT and processes. Getting the fu benefits of IT may take a ong time whie the retaier attempts to earn how best to expoit the new systems. Athough many UK grocers invested in EPOS in the 1980s, they were abe to make itte effective use of information about patterns of individua customer shopping behaviour (caed shopping basket data in grocery) unti the ate-1990s when costeffective ways of creating and anaysing masses of data became avaiabe. It has taken Tesco seven years of heavy investment and earning from experience to create one of the most advanced IT-based stock repenishment systems, using EPOS saes data, expert forecasting systems, and eectronic data communications (Seth and Randa, 1999). Dawson (2001) describes the way changes in markets and increased technoogicay enabed productivity were heping to create a new ow-cost commerce (the new commerce) in Europe. Powe and Dent-Micaef (1997) investigated the inkages between 345

361 The appication of IT to retai marketing IT and the performance of firms. The research examined the IT iterature and incuded a retai study; they found that IT aone had not produced sustainabe performance advantage in the retai industry, but that some firms have gained advantages such as fexibe cuture, strategic panning-it integration, and improved suppier reationships. This underines the point that the rea advantage ies in peope and systems rather than systems aone. Obtaining the fu competitive advantages from IT requires ong-term investment for an IT strategy which supports the retaier s strategic direction. It is ikey to invove not simpy heavy investment in one or two appications but continuous investment and improvement in most functiona areas where IT can add vaue. CAPTURING AND TRANSMITTING DATA AT THE POINT OF SALE To be abe to pan effectivey there is a need to coect and transmit timey data on retai transactions, which may be fufied in a number of ways. Retai data capture (or data coection) of every saes transaction at the point of sae is one of the most important eements of retai IT, whether data capture occurs through an EPOS (eectronic point-of-sae) device or is directy entered into a computer using a keyboard. It provides accurate information about customer purchases, the saes of individua merchandise ines and other data the retaier wishes to capture, covering, for exampe, how the customer has paid for the item, a oyaty card reference, the time and date of transaction, the saes assistant and amount spent. This means that, for marketing purposes, the ikey performance of new product ines can be assessed quicky by using a number of we-ocated tria stores. The impact of new ines upon the saes of other products can aso be measured by comparing how saes of different ines have changed in the tria stores and in contro stores. Many retaiers offer an EPOS-based service to manufacturers, which aows them to market test the impact of new products in their stores. The effect of new promotion can be anaysed in the same way. There are many retaiers with pronounced seasona saes for whom rapid feedback about new product ines is not merey important, it is vita. To know exacty how we or bady the new season s coours or designs are seing in the first week enabes merchandisers and buyers to turn provisiona orders into firm orders and to make purchases in the Far East, for exampe, with confidence. Mistakes can sti be made, but EPOS data can provide buyers with accurate and timey information. Extensive, timey and accurate saes data generated by EPOS systems has become a critica source of marketing information for retaiers and suppier marketing departments. Data capture invoves three eements on a practica eve: a coding system; a code symboogy; the means used to capture the data in a form that can be fed to the computer. Coding systems The retaier must decide how merchandise wi be coded. In practice, this usuay invoves the retaier deciding whether to use the dominant European Artice Numbering 346

362 Capturing and transmitting data (EAN) system using 13 digits (EAN13), which has become the internationa standard, or to deveop a different one. The code structure adopted must uniquey identify every product ine to prevent confusion (and pricing errors). To provide continued improvement, in 2005 a new 14-digit system known as GTIN wi repace current systems. Code symboogy How wi this code be represented in a machine-readabe form? Retaiers who use EAN wi naturay expect manufacturers to deiver merchandise to them aready bar-coded. The EAN13 code is omni-directiona which means that it can be presented to the scanner in any direction and be successfuy read in any orientation. Where retaiers have adopted their own coding system, they usuay adopt a version of EAN13. There are aso new symboogies that are just starting to be introduced which can represent consideraby more data within a comparativey sma space. Such new systems incude snowba, a two-dimensiona symboogy that is read verticay as we as horizontay. For most retaiers, however, the use of the internationa standard, EAN, wi provide considerabe benefits. Data capture There are severa options avaiabe to the retaier in capturing saes data. Athough the price of aser scanners has faen, it is sti a considerabe investment for retaiers to adopt a poicy of high-speed automatic data entry. Fat-bed scanning systems provide the best pay-off in supermarkets or mass merchandising environments, which require fast transaction speeds for high densities of reativey ow-cost products. Data can aso be captured automaticay by using a hand scanner or some other portabe scanning device. Aternativey, the item code can be captured manuay by keying in the product identification numbers to the cash ti or computer keyboard. On each occasion a sae is registered, the retaier wi have captured on a transactions database the brand name, size, coour and price and perhaps detais of the individua if a oyaty card is used or where expensive items are invoved. This information can be combined with other forms of market research to hep the retaier improve both marketing and retai panning decisions. At the point of transaction, credit or debit cards need to be read. Computerization of credit card transactions has created a more efficient and secure way for retaiers to accept payment. In addition, retaiers reaize the advantage of increased saes due to accepting credit cards as the higher the cost of the merchandise the more ikey it is that a credit card wi be used. Credit and debit card information (and most oyaty card information) is coded on the reverse of the card using magnetic strip technoogy, which can ony be read (or decoded) by speciaist devices caed card-swipes. Tamper-proof smart cards incorporating eectronic chips have been introduced throughout Europe to combat fraud. Smart cards are abe to hod much more data than a magnetic strip and coud themseves hod persona information, payment imits, and act as oyaty cards for severa retaiers. Most standard bar codes do not incude prices, they simpy identify the merchandise. If the merchandise price is kept on fie within the EPOS termina or the centra store computer, then the correct price is automaticay entered every time the bar code is read. 347

363 The appication of IT to retai marketing This system of price ook up (PLU) saves the need to price-mark goods and is much faster than entering prices automaticay. PLU systems make it easier for the retaier to amend prices as ony the shef edge abe needs to be changed. Some non-food retaiers have taken advantage of this faciity to create extra excitement in-store by reducing prices for 30 minutes or an hour. Newer EPOS systems aow mutipe purchase promotions to operate automaticay, with the EPOS system recacuating the correct price for a muti-save, or buy-one-get-one-free, or inked transactions thus enabing the retai marketer to be more adventurous with pricing mechanisms. 348 Communicating store data Stores and depots transmit EPOS saes data fies, financia transactions data, the amount banked, aong with a range of other data such as staff hours worked, despatch information, and stock eves, eectronicay to head office computers for processing and anaysis. This is caed retai data transaction fie exchange. Much of this information is transmitted automaticay. The store may be poed at night by one of a number of centra computers and the required data downoaded to head office. In arger stores the store computers automaticay exchange data with a centra computer severa times every day, enabing the merchandise director to view the progress of that day s trading in every store by 11 a.m. The same systems are used by retaiers to update the price fies hed by stores. The new prices are downoaded from head office to the store computer, often on a Thursday night to take effect the foowing Monday morning. Depending on exacty how the system is configured, the new price fies may finay be passed to every EPOS termina by the store computer. DATABASE MARKETING, DATA MINING AND BUSINESS INTELLIGENCE A database is a computer system used to store and anayse arge voumes of data. Data reating to item saes, customer information, and the range of goods bought by customers can be hed on a database and used for marketing purposes. A department store can deveop a speciaized cataogue aimed at affuent customers with teenage daughters. Postcodes uniquey identify a sma ocation and the demographic information avaiabe commerciay for each postcode area (for exampe from CACI) wi aow the department store to target affuent areas with a degree of precision. Customers of bookshops who mainy buy management books can receive maiings of the retaier s management offerings aong with something more frivoous such as a seection of thriers or humour to purchase. In practice, retaiers have found it difficut and expensive to target customers with precision. Wa-Mart, USA, found, from anaysis of its shopping basket EPOS data, that saes of beer and nappies were inked and that joint saes were highest on Friday evenings. The company s reasoning was that maes were buying nappies on their way home and were stocking up on beer at the same time. When beer and nappies were merchandised next to each other the saes of both increased. This use of a database to trigger off a arge number of maishots or teephone saes is probaby the most typica use at present. However, most arge retaiers are investing in data warehouses (see Fig. 13.2). These are arge systems coecting interna information from inside the company (such as eectronic point of sae, oyaty cards, and customer services) and externa information from other organizations (such as third party

364 Database marketing, data mining and business inteigence Fig Data warehouse suppiers, customer profiing toos, competitor information and market research). These data are usuay stored in a separate computer system so that the data warehouse does not interfere with norma day-to-day operations. The data then need to be anaysed by easy-to-use toos, often in conjunction with other externa data. If the anaytica toos can mimic norma patterns of thought they wi be much easier to use. The retaier hopes that trawing through masses of data can derive key marketing patterns or reationships about types of customer that can be expoited to increase saes or profitabiity. Data mining invoves extracting and anaysing different types of data to detect patterns that are not immediatey obvious and might never be discovered using norma reporting systems. Data mining and anaysis wi permit data to be organized to assist customer segmentation. Virtuay a retaiers need to be abe to answer these questions: Who are our best customers and what do they buy? Where are they price sensitive and where are there possibiities for price advances? What products do they tend to buy or order at the same time, during a singe visit to a store? How much do they spend per visit? What can we do to hod on to these customers and to attract others ike them? However, many data warehouses have been poory designed making it difficut to access and anayse the data except by speciaists. The probem is that there has often been a tendency to store everything, which is not a cost-effective approach. Severa North American retaiers, such as JC Penney, have suffered expensive faiures with data warehouses, which were bady deayed and faied to provide the business with new insights. However, expectations of the new systems may have been too high. A more focused approach invoves creating what is known as a data mart, a smaer data warehouse used for one functiona area such as marketing consisting of saes, stores promotions and 349

365 The appication of IT to retai marketing 350 consumer profie data. These data can be quicky anaysed with a set of speciaized anaytica toos that can spot trends (and probems) and support merchandising much more easiy than by attempting to extract data from an unwiedy data warehouse. The growing interest in data marts and data warehouses is a part of a trend towards deveoping methods of assessing the massive voumes of data which retaiers typicay coect every day. Data warehousing is one, arge-scae approach towards doing this, but there are many other systems caed variousy: executive information systems (EIS), business inteigence, or decision support systems (DSS). Enterprise-wide business data, often stored in different paces and databases, is modified and simpified and stored in what is known as an onine anaytica processing engine (OLAP). This mouded or transformed data can be ooked at by end users in severa different ways, for exampe at saes by store, by product and product group, and by suppier. The manager utiizing a desktop computer can interrogate some versions of business inteigence, athough these have difficuty in handing arge quantities of data. Once data is in the right form, decisionmakers can ook at severa aspects of the business simutaneousy. Many retaiers have ony a few years experience of data warehousing, data mining and business inteigence systems and are earning how to configure them to the best advantage. Whie there wi continue to be faiures, these systems are ikey to be a fundamenta method of enabing managers to understand and make decisions about their own company within the retai market. For exampe, Aders Internationa, the UK department store group, uses data mining to anayse the performance of its 82 stores to identify poory performing ines and to estabish the reasons for probem stores. They have used the system to take out ower margin ines, even though they were seing we, substituting them or adjusting their ocation within stores. BUSINESS E-COMMERCE AND DATA COMMUNICATIONS Rapid data communications have been an essentia eement in the appication of new IT systems to retaiing. Computer fies with the data arranged in a specified way are switched between individua retai stores, depots, head offices and suppiers using a range of networks incuding ordinary pubic teephone ines, dedicated networks and secure pubic data ines or by sateite ink. Business eectronic commerce with other businesses (increasingy described as businessto-business e-commerce or B2B) has grown rapidy since the eary 1990s. This automates such critica business functions as pacing orders for merchandise, checking deivery, and exchanging order or payment documentation. Business eectronic commerce needs to be carefuy distinguished from customer eectronic commerce (otherwise known as business-to-customer or B2C) by which retaiers se goods to the fina consumer. Creating even further jargon, the whoe area of data communication for trading purposes, both as business-to-business and as business-to-customer (B2B and B2C), is aso known as e-commerce or e-business. What types of data are exchanged in business e-commerce or B2B? The most significant invove computerized ordering and messages providing saes or promotiona information, which hep suppiers to know how and where to keep retaiers effectivey stocked with merchandise. Stockhoding (or inventory) is one of the retai sector s argest costs. Tight contro over inventory exacty what is in stock, what is on order, what new items are out of stock, what potentia probems exist is a necessary requirement for modern

366 E-commerce and data communications retaiers. From a marketing approach it is necessary to improve service and product avaiabiity, and simutaneousy reduce the stock eves in order to improve profitabiity. To be abe to cut inventory to the minimum at the same time as ensuring that product is never out of stock represents a trading idea. Computerized ordering speeds up the stock ordering process, thereby cutting costs incuding the costs of safety stock and providing more information. The use of eectronic data interchange (EDI) provides an eectronic administrative management system of repenishment through controing product despatch and returns. The technoogy aows the retaier to: be more efficient due to enhanced merchandise avaiabiity; have higher stockturn rates; incur ower spoiage and shrinkage costs; achieve improved merchandise tracking; have ess need for discount ines; ower administration costs; provide fresher products for customers and timey offers in store, particuary vauabe for food retaiers. There are four main types of systems for business communications and exchanging data: e-commerce and EDI; trading exchanges and e-tendering; extranet; intranet. E-commerce and EDI Sending orders to suppiers and to depots eectronicay saves time and avoids the need to re-key order information. In principe, an e-commerce order can be received by a manufacturer, accepted, and immediatey passed into the distribution system for order picking in the warehouse and deivery. After processing the order, the suppier or depot can then eectronicay transmit despatch information to the store (i.e. what goods are going to be received) and send an invoice. EDI (eectronic data interchange) is a highy structured variant of e-commerce used mainy for order messages between arge retaiers and their suppiers. EDI messages between companies conform to a common standard, the wordwide standard being UN/EDIFACT. This defines the core information being exchanged; and where and how that information must appear. There are many different EDI messaging systems which retaiers, manufacturers and shippers use. In the UK the dominant system is one caed Tradcoms, deveoped by the e-centre UK, which resuted from an initiative ed by UK grocers. One of the odest EDI systems is Bookshop Teeordering, which suppies books from different sources of book suppy in the UK to bookshops of a sizes. Other exampes incude Interfora (independent forists transmit customer orders to the most convenient member store) 351

367 The appication of IT to retai marketing and Odette (car distributors search for the right mode and coour of motor car for their cient). Trading exchanges and e-tendering Whie EDI provides a highy structured means for a retaier to send orders or instructions to a suppier, ess forma approaches, incuding trading exchanges and extranets, are gaining ground. An eectronic trading exchange provides a reativey simpe method for retaiers to put contracts out to suppiers without the costs and deays of preparing documents, advertising and waiting for the tenders to arrive. More than 30 per cent of retaiers in the UK and the USA are aready members of one or more trading exchanges. A tender can be circuated to the suppier members of a trading exchange with the tenders returned within hours or a few days, enabing the retaier to make a decision about suppiers quicky. Sainsbury s has used trading exchanges to pace three-month contracts for goods as diverse as cheese, frozen amb, jeans, and VCRs. Trading exchanges can aso be used by suppiers to auction off existing stocks quicky, thus providing continuity in saes. A number of trading exchanges are provided by third parties, such as BarcaysB2B, a partnership between Barcays and Accenture. Large retaiers have estabished two separate internationa pubic trading exchanges, GobaNetXchange and Word Wide Retai Exchange. GobaNetXchange incudes Carrefour (France), Sears (US), Kroger (US), Sainsbury s (UK), and Metro AG (Germany). Word Wide Retai Exchange has Abertsons (US), Boots Group (UK), Tesco (UK), Coop Itaia (Itay), Dairy Farm (Singapore/Austraasia). Very high numbers of retaiers are concerned that confidentia information sent to their suppiers via pubic trading exchanges may eak to other users of the scheme and this has assisted the deveopment of private exchanges (aso known as extranets) which bring together a sma number of participants. 352 Extranet Aso termed Web EDI this is ikey to be the way that many businesses wi use Internet technoogy for B2B (business-to-business) communication. Norma EDI transactions can be very costy to manage and many companies have said that EDI is not costeffective for data exchange with a but the top 100 or 200 suppiers. Smaer suppiers are increasingy using dedicated (i.e. cosed and secure) Internet services to receive orders from retaiers, which aso have the advantage of being intuitive and very easy to use. Wooworths (UK) uses an extranet to contro new product introduction by sending EPOS saes data to suppiers. Both DHL, the internationa parces courier, and De Computers, the Internet computer company, permit customers to track the progress of their orders by accessing the information over a dedicated extranet. Sainsbury s, the UK food retaier, has set up an extranet with its suppiers to hep with promotions and other events. One-third of its suppiers are part of the scheme. The EQOS extranet faciities have improved joint panning with suppiers, thus smoothing out spikes in suppy. Information about regiona pubicity is shared with suppiers and any differences in perception about start dates and deadines are resoved. Further deveopments incude the exchange of current EPOS saes data with seected suppiers to ensure that their stock repenishment pans are aways accurate.

368 E-commerce and data communications Exampe: The Retai Extranet Optimizer So much retai EPOS information is now sent to suppiers that 17 of the UK s main consumer goods suppiers have estabished an e-business porta, which coects daiy saes and other data automaticay from retaiers and passes these back to the suppier. Heinz, Eida Fabergé and Cussons among other suppiers need to track hundreds of different products across mutipe store sites on a daiy basis for many different retaiers. This porta system does it automaticay. A porta is a Web presence which passes information between users. Intranet An intranet is a forma system to permit the eectronic exchange of business data within an organization, mosty between managers and senior staff. Managers may have access to a range of software to create or amend text, spreadsheets and graphs. They shoud be abe to send the documents eectronicay to coeagues. Staff in the fied (i.e. visiting stores) can downoad required information about the store s performance and other documents over a teephone ine or even down their mobie phone. This means that staff are abe to have access to current data, whether marketing or ogistics, in order to make decisions or provide advice. Data communications and merchandise reordering systems Two transformationa reordering systems are: automatic stock repenishment systems; efficient consumer response (ECR). Automatic stock repenishment systems use daiy or weeky EPOS saes data to generate a fresh order for rapid deivery overnight or within the next 48 hours. Saes data are sent eectronicay to the depot or to the manufacturer by EDI. The order from the store can be automaticay converted into a picking ist, a despatch note and an invoice without the need to key in the data. The amount sod one day is the amount repenished the foowing day. Efficient consumer response (ECR) makes EPOS saes data avaiabe to suppiers so that they can programme their production and distribution systems to ensure that the retaier never runs out of stock. The retaier creates a suppier partnership with key suppiers using a confidentia EDI ink to the retaier s weeky or daiy saes of reevant merchandise so that suppiers can be responsibe for maintaining the target inventory eves of the retai business. ECR is increasingy common in cothing and fast-moving food and non-food merchandise. We can expect the use of e-commerce and other eectronic ordering and remerchandising systems to grow rapidy. The ony question mark invoves the extent to which the forma EDI systems might be sideined by informa and intuitive systems such as trading exchanges and extranets. Athough the Tradcoms standard has come to dominate many retai appications, ony 8 per cent of Western hemisphere trade is carried out using EDI. However, both forma and informa e-commerce systems wi have to find their roe in serving the business community. Some retaiers are aready compaining that the ack of 353

369 The appication of IT to retai marketing data format standards in extranets and trading exchanges is creating difficuties in deaing with different companies, so it is possibe that further deveopment of trading exchanges and extranets wi be dependent upon greater discipine than has been seen so far. ELECTRONIC RETAILING Eectronic retaiing to consumers (or B2C) was first deveoped on a arge scae in the 1980s. The area is advancing at a rapid rate with retai organizations reaizing the growing importance of the sae of products through these new distribution channes. Eectronic deivery systems do not necessariy require direct human interaction and, as such, they offer specific advantages. In principe, quaity can be assured, the costs are ower, there is consumer convenience of access, and distribution can be wider than norma retai channes. The key underying reasons behind eectronic retaiing are: consumer time poverty, consumers wanting to have more contro over time and pace of transaction, the technoogy convergence aowing change to take pace and growing experience of the benefits of the medium. The different categories of this major growth area fa into two distinct systems: passive or interactive: 1 Passive systems. These are non-interactive one-way media, where the retaier can decide upon the content and timing of messages. They incude a forms of one-way communication media such as shopping pages, or cubs on teevision, or one-way cabe systems. The success of the Quaity Vaue Convenience Network (QVC), using such an approach, is discussed beow. This form of seing incudes video cataogues or eectronic media which demonstrate the product in use or provide further information. 2 Interactive systems. This type of eectronic retaiing aows for two-way interaction and incudes the Internet or promotiona touch-screen booths and kiosks for items such as airine or hoiday bookings. Some systems can demonstrate the product in use and, in the case of touch-screens, give printouts or aow further enquiries from the database. A feature of both systems is that a credit card can be used in order to secure the sae. The retaiers that undertake eectronic commerce can be cassified in three main ways. 1 Virtua retaiers: these have no shops or stores or physica presence in the high street, mas or out-of-town ocations. They trade excusivey on the Internet or on teevision and have to find new ways of attracting custom and serving consumer needs. Exampes of these are Amazon.com and astminute.com. 2 Two-channe retaiers: these are estabished retaiers with stores that have deveoped an eectronic retaiing capabiity as a major or minor aspect of their business. Tesco can be regarded as a two-channe retaier. 3 Muti-channe retaiers: these are estabished retaiers which service customer needs in a number of ways, incuding shops, teephone ordering, the Internet, cataogues, and TV. Exampes woud incude Littewoods and Boots UK and Ireand. As we as 1400 UK stores, Boots has mother-and-baby cataogues, the Webeing digita TV channe athough its introduction has been postponed and transactiona and information websites, handbag.com as we as webeing.com. 354

370 Eectronic retaiing Athough many observers originay fet that eectronic retaiing woud be dominated by new virtua retaiers, it now seems ikey that the e-commerce market wi be made up of a three categories of retaier. Passive systems and home shopping Home shopping through direct mai, agency cataogues, and direct response advertising aready accounts for a significant proportion of spending by European consumers. New technoogy wi add greater variety to the routes that aready exist. However, many innovative IT home shopping systems have faied because they were not based on what customers needed but on what the technoogy coud provide. This is surprising as most surveys of customers show that athough they disike routine shopping for commodities this does not mean they wecome technoogicay enabed retaiing. In practice, service eves are poor, with considerabe amounts of time spent staring at unchanging computer screens; ead times are much onger than popping into a shop on the way home; and there are abiding concerns about security. One cear trend that is successfu is the growth of the home shopping networks, especiay in the USA. These are based upon the use of studio demonstrations of products whie a teephone saesforce stands by to receive orders. As the number of cas diminishes, the network operator is abe to demonstrate a new product. The system is therefore characterized by instant feedback on what items are popuar and shoud remain on screen for onger periods or those that shoud be repaced. In addition, the overheads are ow as there is ony the need for warehouse storage, a teephone saesforce and the rent of studio time. In the USA, a number of retaiers offer teevised home shopping. They incude JC Penney Shopping Network, Home Shopping Network, QVC Network, Cabe Vaue Network and Sky Merchant. The USA teevision retaiing marketpace is segmented by product, brand and price. The cabe and home shopping networks are targeting the ower end of the market whereas QVC offers we-known nationa brands. The different networks are abe to offer easy payment pans because they own company credit faciities and use promotiona techniques such as direct mai coupons. The means of response is by teephone. TV-based retaiing (for exampe, home shopping programmes such as QVC in Britain and Germany, and the extended TV advertising caed infomercias) has proved extremey successfu compared to the comparativey sow growth of retai saes on the Internet. The British retaiers Boots (pharmacy) and Sainsbury s (food) have set up home shopping channes on pay-tv designed to provide information about heath/webeing and good food respectivey, athough the Sainsbury s channe was cosed down in Many commentators beieve that the introduction of digita TV in severa European countries wi enabe shoppers to use their TV to buy goods on the Internet rather than by using a PC. The teephone/cabe company NTL has customers in Britain abe to og on to any Internet website whie watching digita/interactive TV. However, in 2001 ony 15.9 per cent of digita TV viewers used their teevision sets to go onine, whie those that did so were rather more interested in entertainment, eisure, computer games and eectronic gambing than in shopping onine, athough this may change. Retaiing via digita teevision may be sow to buid a critica mass, but it is eventuay ikey to become a formidabe sector in its own right. 355

371 The appication of IT to retai marketing MINICASE 13.2 How the fittest survived the dotcom metdown: Onine Retaiing FT In the back room of a Tesco store outside London, a woman ooks over bags of items for an onine order to be deivered ater that afternoon. We need a box of peaches, she tes a young man she is training. He fetches some from the shop foor. The operation is conspicuousy ow-key: it has no fancy conveyor bets, no big warehouses, no cutting-edge computer systems. Yet Tesco s Internet deivery service has achieved what so many others have not: it is profitabe. Other onine grocers have shut down, incuding Homeruns, Streamine and the fabuousy wefunded Webvan. Given the sector s disma record, Tesco surprised many with its announcement ast month that it was expanding its onine service to the US by a joint venture with Safeway. In spite of the demise of thousands of dotcoms, Internet retaiing is not dead. In May, US consumers aone spent $3.9bn ( 2.7bn) onine, according to Forrester Research. That compares with $3.4bn in the same month ast year. Even more remarkabe, severa onine operations are now turning a profit. Their success proves that businesses can thrive onine. And the key to profitabiity is something so mundane that it was dismissed as overy imiting two years ago: cost contro. Profitabe Internet operations tend to have modest ambitions. At the peak of the dotcom hype, the creation of the Internet was often compared with the industria revoution. As it turns out, the web may have more in common with the invention of mai-order cataogues. The Internet is another channe that companies can tap, says Mr Kurtzman. It s that simpe but that doesn t mean the web is not important. The most successfu sites concentrate on ease of use. To make the channe accessibe and fast, companies have abandoned pans for compicated video streaming and inks. You don t need to be a software engineer to use our site, says Brad Newcomb, director of marketing automation at Southwest Airines. Conventiona wisdom had it that bricks-and-mortar chains woud fade away as the pure pays took over the word. But bricks-and-mortar groups have emerged as eaders in onine saes. Two years ago, pure pays ooked ike the sure winners, said Tom Stemberg, chief executive of Stapes. And if the dotcoms coud have spent with no regard to cost for 10 more years, they might have been. As head of a bricks-and-mortar company, of course, I m gad it turned out this way. In retrospect, I woudn t have set up a separate tracking stock for Stapes.com but that s the ony thing I woud have done differenty. Traditiona retaiers, it turns out, had something pure dotcoms didn t: existing infrastructure. That infrastructure has proved to be important in aowing companies to create new saes opportunities at the owest possibe extra cost. Victoria s Secret, for exampe, uses the same photographs onine as in its cataogues. You have to sweat your existing assets, says David Reid, deputy chairman of Tesco. That s the key to profit on the Internet, or in any area. Webvan, the defunct dotcom grocer, panned to set up warehouses a over the US within a few years. Tesco, the UK food chain, perceived that it coud use its existing stores. Tesco invested ony $56m to buid its onine business. Webvan had spent $1.2bn by the time it foded. The dotcoms desire to do everything quicky added to their expenses. Pets.com (USA) tried to buid a consumer brand amost overnight and wasted a sma fortune on expensive teevision commercias during ast year s Superbow. Traditiona companies, by contrast, have been abe to rey on existing brands. There were frivoous moments. Victoria s Secret s onine fashion show for St Vaentine s Day in 1999 attracted a stampede of viewers that caused the company s website to crash. But for the most part these companies imited their marketing efforts to ow-cost outets direct mai to existing customers, or simpy printing their net address on retai bags. Pure pays were wiing to pay amost any price to win customers because they were judged on how many peope visited their site. Successfu Internet companies study numbers carefuy. Deivery costs are of particuar concern and managers strugge to come to terms with what can be provided and at what price. Stapes, for instance, has cacuated the average onine order is about $150. With an average gross margin of $45, the company decided it coud afford to provide next-day deivery free. If our average order were $75 and we had $25 to work with, it woud be a different story, says Mr Stemberg. Tesco operates with ower average order sizes and thinner 356

372 Eectronic retaiing margins. To make a profit on its onine service, the group charges 5 an order. Many of the faied US grocery sites, by contrast, offered the service free. The key, say managers, is to be reaistic. The customer comes first but not to the point of putting peope out of business, says Sharen Jester Turney, chief executive of Victoria s Secret Direct. Our customers won t get same-day or next-day deivery; that s just the way it is. Victoria s Secret tapped a new demographic group by its Internet operation, abeit inadvertenty. A big surprise of the company s dotcom experience has been the many orders it receives from men. At Christmas, one-third of onine purchases are by mae customers. Some men are too embarrassed to go to the stores, says Jester Turney. And they weren t on our maiing ists, so they didn t do cataogue orders. Internet retai is in its infancy but the eariest evidence of successfu onine strategy is just becoming cear: keep it simpe, with stringent cost contro. Source: Victoria Griffith, Financia Times, 27 August 2001 Interactive systems the Internet The Internet is an open wordwide computer network, inking together by fast data communication countess thousands of computers owned by government, education, commercia and other organizations. No one actuay owns it. The Internet is a set of protocos governing how data is presented by individuas and organizations wishing to provide information to others. Within the Internet, the Word Wide Web (WWW) is a coection of inked documents or pages that span the Internet. They are accessed from the user s own PC or computer termina by what are caed Web browsers, which are software products enabing the user to oad and view a document reativey quicky or switch to other reated documents. Most arge retaiers of any size and many sma retaiers now have their own website, incuding Tesco, Iceand, Virgin, the Boots Group, Comet, Arcadia, HMV, and Gratton. Once estabished, the website aows a retaier to conduct a targeted business 24 hours a day, 365 days in the year, with a potentia wordwide audience. The Web is avaiabe and open to anyone with an Internet connection, irrespective of geography, time zone, or computer system. This makes the offer of retai products more accessibe to the new goba marketpace. A sma retaier with a new business idea can, in principe, use the Internet to access miions of customers in the same way as an internationa retaier. The technoogy aso aows sophisticated digita images, video and sound. Eectronic brochures coud incude three-dimensiona aspects of the product that the potentia customer coud expore continuousy. Exampe: Sma retaiers Some smaer retaiers are abe to use the Internet to give themseves a nationa or internationa market. Mike Maoney, butcher and sausage maker in the sma town of Mansfied, Nottinghamshire, now derives 35 per cent of his turnover from nationa saes over the Internet of his award-winning sausages. Ron Higgins in Sapton, Devon, has set up the successfu Sapton Viage website to promote tourism and book accommodation, thereby encouraging additiona turnover for his convenience store (the ony shop remaining in the viage). Mike Maoney Ron Higgins

373 The appication of IT to retai marketing Initiay, most retaiers websites were passive and static: they provided simpe information and photographs about a imited range of goods. To buy anything customers needed to teephone or to visit a store. Setting up this form of website is reativey cheap, but an interactive site for a arge retaier, which aows customers to interrogate the site to find product detais and to purchase items onine, can cost more than 15 miion per year. When the grocery retaier Somerfied cosed down its grocery Internet shopping site it had to write off more than 30 miion in debt. However, by 2001, arge retaiers across the word had tended to repace their previous static websites by making them transactiona and many of the better websites were aso fuy interactive. From a marketing perspective, the major benefit of the Internet is the much greater degree of interactivity than other communications media. The most vauabe Web appications are those that aow companies to transcend communication barriers and estabish diaogue directy with customers. For exampe, websites can contain eectronic forms for customer competion and retaiers can repy directy via eectronic mai (e-mai). This kind of connection wi improve customer reations and contribute towards the buiding of customer oyaty. The Web can give access to a greater store of information than other traditiona communications media, and provide visitors with the means to seect and retrieve ony that which appeas to them. A number of sites such as and differentiate themseves from retaier cataogue websites by providing in-depth objective advice, but provide inks to appropriate products. Information for customer-specified trave guides are avaiabe from booktaier.com, customized CDs, newspapers, and videos wi foow. Customized promotiona materia coud be produced at the touch of a key. For the modern retaier, it provides a usefu too in the adoption of micro-marketing in this age of the individua and reationship marketing. However, it must be remembered that the true determinant is the wiingness of customers to use the Web to make purchases. The progress of an Internet e-retai business can be monitored by measuring the foowing: number and types of visits to the site; ength of time on the site; number of orders paced, broken down by timing of order; average basket or transaction vaue for each order; number and profie of different customers; number of repeat customers; vaue of transaction by individua customer; average time and cicks prior to making an onine order; deivery accuracy and timing; customer satisfaction eves. Exampe: Tesco.com Tesco, Britain s argest grocery retaier, is now the argest onine grocery retaier in the word, fufiing orders per week with Internet 2001 saes of more than 300 miion. It started deivering groceries to the home in Because of poor Internet response times, Tesco provided its users with a CD-ROM containing its product fie. Customers coud teephone or fax orders for home deivery or order on the Internet. Unike many other retaiers, it assembes the orders in stores and 358

374 Eectronic retaiing wi achieve coverage of 80 per cent of UK shoppers in 2002: in 1998 it operated this service from ony 10 stores. This approach avoided the need to estabish separate (and costy) preparation and distribution depots for home shopping before customer demand was sufficient to justify this. Tesco.com is now regarded as a brand in its own right. A joint venture with Safeway Inc., USA, intends to make the Tesco approach to grocery home shopping avaiabe to US customers. Note that the Tesco.com operation ost 9 miion in 2000, but was expected to break even in Tabe 13.2 provides some basic statistics about Internet use in 2001 in some major countries, with the USA sti dwarfing a other users of the Internet for e-commerce combined. In the UK, 39 per cent of aduts had access to the Internet, compared to 52 per cent in the USA and 21 per cent in Spain. The patterns vary between countries, but in these deveoped countries one-fifth or more of the popuation have access to the Internet and there is a reativey high use of Internet shopping sites. However, B2C Internet saes to consumers over the Internet was reativey ow as was consumer m-commerce revenue using mobie phones. What sorts of customer wish to use the Internet to buy goods? An attitudina survey of Internet users carried out by the market research agency BMRB segmented ikey Internet users as shown in Tabe It wi be seen that the attitudes of consumers are mixed, with ony a sma proportion of shoppers showing unaoyed enthusiasm. This is ikey to change somewhat as customers start to use the Internet simpy as one of the many shopping options that are open to them and retaiers become more expert at understanding and meeting customer needs over the Internet. There are a growing number of ways in which peope can access retai sites via the Internet. Thirty-nine per cent of UK aduts have access to the Internet through a PC at home or work (and, increasingy, both); there is digita TV; and, increasingy, customers wi be abe to shop through their mobie phones or sma hand-hed computer devices such as Pam Piots (Minicase 13.3). Athough, according to IMRG, retai saes over the Internet in both the UK and the USA accounted for ony 1 per cent of tota retai saes in 2001, it seems ikey that Internet retai transactions wi continue to grow rapidy. Tabe 13.2 Use of e-commerce in seected countries Percentage of E-commerce B2C revenue Consumer Visitors to Percentage of popuation revenue for for year to m-commerce shopping sites Internet users with Internet year to June June 2001 revenue for year to in month of who visit access 2001 ($ bn) ($ bn) June 2001 ($ bn) June 2001 (m) shopping sites France Germany Spain Sweden UK USA Source: Derived from Net Figures ( figures correct to end June

375 The appication of IT to retai marketing Tabe 13.3 Attitudina survey of Web users Name of segment Reaistic enthusiasts Confident brand shoppers Carefree spenders Cautious shoppers Bargain hunters Unfufied Percentage of users Description Prize the Internet s convenience more than ow prices, but often want to view before they buy. Wi buy goods/services costing more than 500 at a time. Confident in using Internet, tendency to buy we-known brands and beieve that Internet prices are ower than standard stores. They are prepared to spend more than 500 over the Internet on goods/services. Confident Internet users, they do not restrict themseves to we-known brands and do not need to see before they buy. Refuse to buy goods through Internet auctions, are concerned about the quaity of goods they buy on the Internet and need to try before they buy. These are driven by ow prices not by convenience, wi buy from any website however itte known, but wi not spend more than 50 over the Internet. These users find purchasing items on the Internet to be extremey difficut, they are suspicious of itte-known websites, concerned about ow quaity and beieve that it takes too ong before items are deivered. Source: Derived from BMRB (August 2001), The Internet Monitor, London MINICASE 13.3 Mobie phone and m-commerce futures? The increased popuarity and extensive use of mobie (ceuar) teephones and the introduction of the WAP (Wireess Appication Protoco) was heraded as the start of wider access of the Internet in order to purchase goods and services from any ocation (sometimes caed m-commerce). There has been an exceptiona increase in text messaging but no corresponding deveopments in reation to mobie phone use in purchasing from the Internet. However, it is reported that business use of m-commerce has been significant. A probem that needs to be overcome is that GSM (Goba System for Mobie Communications) runs at one-sixth of the speed of a PC s modem and the screen size of a mobie phone is restricted to comparativey few characters. This may not ast as in the next few years new deveopments such as Genera Packet Radio System (GPRS), and Universa Mobie Teephone Systems (UMTS, aternativey known as G3) are to provide many times the capacity of the existing phone network and shoud be ower cost. In addition, new wireess technoogies such as Buetooth permit data to be exchanged at high speed whereby information about specia offers or ast minute discounts in nearby stores can be picked up on a shopper s mobie phone, Pam Piot or eectronic diary. The forthcoming technoogy is more suited to sending short messages and therefore this is the way it wi be harnessed and the potentia is enormous. Source: various reports 360

376 Eectronic retaiing Onine auctions A popuar way of buying goods on the Internet is through onine (eectronic) auctions 1.5 miion auction transactions take pace every day on the Internet. Such sites as ebay.com and QXL.com bring together individuas and companies to buy and se items both new and second-hand, ranging from works of art to CDs and computer software. However, the anonymity of the Internet has aowed fraudsters to operate pretty freey: 64 per cent of the compaints made to the US Internet Fraud Compaint Center concerned onine auctions. In many countries Internet auctions are so recent that they are not covered by reevant aws to protect buyers. Auction technoogy can aso be used by retaiers to se batches of merchandise quicky at a higher average price than if they were advertised at a fixed price. For exampe, the eectrica goods retaier Comet is seing its surpus stock for higher prices in Internet auctions than it woud achieve in its cearance outets. US retaiers such as Wa-Mart and JC Penney use the same tactics, but aso target consumers whose bids have been rejected with offers of other stock at a fixed price. The use of dynamic pricing (fuctuating prices refecting customer demand) and the creation of an eectronic market sta atmosphere for these eading websites manages to convert 25 per cent of faied bidders into purchasers. The dotcom revoution At one stage, many commentators (for exampe, Cope, 1996 and Gonyea, 1996) beieved that eectronic retaiing woud grow at a very rapid pace and woud account for more than 20 per cent of the retai markets of advanced economies by They thought that most of the new B2C e-commerce sector woud be dominated by new virtua retaiers at the expense of traditiona retaiers with shops. It was this widey hed beief that ed to the dotcom revoution in the period that brought into existence thousands of untested business formats for new virtua retaiers, many of which were heaviy funded by private sharehoders, merchant banks and venture capita. Eighty per cent of these utimatey coapsed, and by June 2001 US Internet stocks had faen 83 per cent from their peak and UK Internet stocks had faen 98 per cent (Loyds TSB Economic Buetin, 2001). The reasons for their faiure were primariy: the e-commerce market was not big enough at that time, the set-up costs were huge and unikey to be recovered uness rapid growth was achieved, they experienced heavy operating osses as they advertised heaviy in order to attract custom, and they were frequenty bady managed by inexperienced young persons. A these businesses had predicted a massive growth in saes in order to garner the economies of scae which woud make them profitabe. When this did not happen, they vanished. Frequenty, aso, Internet technoogy was insufficient to provide customers with a rapid interactive service, eading to disappointment among many users. The Word Wide Web became popuary known as the word wide wait, exciting specia effects woud not oad, or the customer order woud not get through. According to Forrester Research, 65 per cent of Internet shopping baskets were abandoned by customers and did not ead to an actua sae (Tayor, 2001). 361

377 The appication of IT to retai marketing Exampe: Boo.com Boo.com was a sports and eisurewear virtua retaier which panned for saes of $1 biion by 2003 in 20 countries. The centrepiece of the site was Miss Boo, an animated shopping adviser who woud be abe to show the effects of different coour schemes and options. Lifeike rotating modes woud demonstrate cothing for the customer. The founders had previousy set up an onine book retaier in Sweden. Boo.com received $120 miion from investors. However, the aunch in November 1999 was 7 months ate, the stock was dated, the technoogy never worked propery, saes were ow, there were heavy operating costs and high advertising spending to win customers. When the business coapsed in 2000, 300 jobs were ost, there were debts of $50 miion and a investors money had been spent. 362 E-commerce futures Internet retaiing has gone through severa stages of deveopment. Initiay it was fet that users woud prefer to access WWW retaiers through virtua shopping mas, with a range of different retai businesses, simiar to actua retai shopping centres. In fact, these eectronic mas have been generay unsuccessfu and some important ones, ike IBM s Word Avenue, have disappeared from the Internet. The most successfu Internet retai marketpaces have been those in which the quaity is known and customers are searching for ow prices, avaiabiity, or convenient deivery. Jupiter (2000) estimated that the argest singe sector traded in B2C commerce was eectronics (30 per cent of a onine purchases), foowed by computer hardware and software (27 per cent), books and music (18 per cent), and then other retai sectors. NOP Research (2001) found a 42 per cent increase in the number of Internet e-commerce users compared to the previous year and found that athough computers, music and books were the argest retai e-commerce sectors, much of the new growth had come from toys, eectrica goods and cothing. Whie new Internet users came from across the spectrum, the majority of new users were femae and the argest singe age group was that over 50 years, the so-caed grey market. Netvaue (2001) estimated that the percentage of Internet users aged over 50 was 24.4 per cent in the USA, 19.3 per cent in the UK, 17.2 per cent in Germany, and 15.7 per cent in France. Retaiers, whether virtua or rea, found e-commerce a tough marketpace to be in. By 2001, many major retaiers had dropped their Internet operations incuding Somerfied, Superdrug, Kingfisher, Boots Bootsphoto.com, and Disney s Go.com, whie virtua retaiers incuding boo.com, Letsbuyit.com, and the heath and beauty site Cickmango.com cosed. Figure 13.3 indicates the way Porter has anaysed the current infuences of the Internet on industry structure. The Consumers Association report covering the Internet (Which?, 2001) found that 36 per cent of peope surf the net but ess than one-haf had ever bought anything there. Ony 15 per cent said that they visited shopping sites frequenty; and a mere 10 per cent found that Web-based retaiers provided a better service than stores. A Minte report found that ony 8 per cent of its respondents had ever bought groceries onine, whie 61 per cent had never visited a grocery retai site. Both reports commented on the probems many shoppers experienced in using the websites, found that the main reasons for using Internet shopping were convenience and time savings rather than ow prices, and expected the growth of Internet shopping to continue.

378 Eectronic retaiing Fig An appication of Porter s 5 forces mode indicating the infuences on industry structure (Porter, 2001). One of the major issues facing Internet retaiers is what is now caed fufiment, or the abiity of the business to deiver the customer orders accuratey and quicky. According to Accenture, two-thirds of deiveries by Internet companies contain at east one error and 12 per cent of goods ordered for Christmas 2000 were deivered ate (Revoution, 2001). Rather than commit resources to a dedicated fufiment operation, most Internet companies outsource fufiment to parce couriers or Roya Mai and it is fet that companies that send out sma easiy deiverabe packages ike DVDs, software or books have a fufiment advantage. Among other options being considered incude deivery direct to a customer s home by a mik roundsman, customer coection from a oca extendedtrading-hours convenience store, or deivery to a service box fixed to the house or garage. The need to deiver a buky assortment of goods within a specific timesot to a house when the customer is not present is a major constraint for grocery Internet saes. Companies in the US and the UK are experimenting with storage boxes that can be rented from a third-party suppier such as M-boxes, Homeport, Home Deivery Access, or PoD Systems. At their crudest these may simpy be ockabe boxes securey fastened to a buiding, but they may additionay provide proof of deivery and incorporate a refrigerator for chied and frozen grocery items. Once these externa storage boxes have been instaed, then obviousy any Internet deivery company can use them, thus faciitating growth in the use of Internet ordering. 363

379 The appication of IT to retai marketing Most surveys show that a major barrier to the use of the Internet for transactions is security. There are now severa systems for making payment and credit card detais secure, usuay invoving data encryption. Authorities around the word are currenty working on a compex payments security project caed secure eectronic transaction (SET), which wi aow cardhoder and merchant to authenticate each other during an Internet transaction. The ideas expressed by writers such as Cope (1996) that a arge percentage of conventiona shopping woud be transferred to the Internet by 2006, forcing the cosure of many shops and superstores, now ook outdated. Existing retaiers with shops are themseves paying a major part in the Internet revoution, whie the competitive threat from the virtua retaiers faied to materiaize. However, even though e-commerce saes are comparativey sma, the Internet is having an effect aready on high street retaiing, but it seems ikey that a two- or muti-channe approach wi be the most favoured, whie existing retaiers earn how to make the most effective use of eectronic commerce. The research company Zygon found in 2001 that three-quarters of the 100 argest UK retaiers expected to adopt a muti-channe strategy (Retai Week, 2001). The e- commerce options for existing retaiers are discussed in pubications from the UK Government Foresight Programme such as Cicks and Mortar: The New Store Fronts (Retai e-commerce Task Force, 2000) and The (R)etai (R)evoution: From a Nation of Shopkeepers to a Word of Opportunities (Retai and Consumer Services Pane, 2000) (both are found at Limitations of the Web There are potentia probems and imitations that the retai industry must address. The Buter Group suggests that effective Web appications are those that demonstrate an understanding of network imitations, demographics, and cuture (URL: June 1996). Network imitations The visua impact of the website is important, but raises conficts. Graphics and mutimedia attributes require that the customer (cient) end has access to a high specification PC. Aso, the experience of sow data transfer can resut in customer frustration and even the premature termination of the access. Demographics Successfu Web appications shoud demonstrate cear reevance to the customer base. Websites can be structured so that pages are targeted to specific onine customer groups. These pages must be dynamic enough to keep pace with the ever-changing interests of such groups. The chaenge here is to monitor the interests and to be fexibe in responding to them. Cuture It is important that customers are comfortabe with eectronic shopping if they are going to purchase via the Internet. Consumers have been reuctant to suppy credit card detais

380 Future trends over the Internet as they judge it to be risky and have a fear of breach of security. Both popuar Web browsers, Netscape and Microsoft Exporer, have now incorporated secure payment encryption agorithms. Eectronic cash (e-cash) projects, which secure payment without having to transmit card detais over the Internet, have generay been unsuccessfu (note the faiure of Digicash), athough it seems ikey that they wi finay be successfu when they receive the whoehearted backing of the banking system. It woud appear that users, as potentia customers, are not aware that it is often easier for hackers to obtain credit card detais passed over a cordess or mobie teephone, or by crimina activity to take a copy of a credit card as payment in a restaurant or aternative retai outet. E-waet or e-purse projects wi enabe sma amounts to be debited automaticay from a user s e-purse credits making it easier for WebPages providers to charge for access to parts of their sites. The commercia success of Internet technoogy depends not ony upon connectivity but aso on the fundamenta question of socia acceptance. Eectronic commerce wi fourish if users of technoogy are motivated to become customers and to change their patterns of buying. Shopping by cataogue, TV and phone marketing, and phone banking are increasingy accepted as part of the way society works. Whie the home PC market is growing at speed, the home Internet market is aso set on an upward trend. This means that society is becoming more famiiar with information technoogy and in particuar with PCs and the Internet. Therefore, the retai industry has an opportunity to depoy the Web as an effective marketing too, providing it is abe to respond to the demands of Internet commerce by being responsive, agie and innovative. Many commentators on the WWW beieve that, in addition to the competition conventiona stores face from Internet retaiers, manufacturers of heaviy branded goods may aso start to use their websites to bypass retaiers and suppy WWW customers direct. CDs, jeans, videos, cosmetics, perfumes, cameras and so on coud a be sod over the WWW by manufacturers who have invested heaviy in their brands, such as EMI, Levi, Warner Bros, Estee Lauder, J-P. Gautier and Kodak. The success of Napster, a website which made avaiabe software to exchange music over the Internet (thus avoiding both the retai mark-up and record company icence fees), indicated that there seemed to be a arge market for Internet music downoads, athough the ow cost of the operation refected the fact that it was iega. The US record industry is now to make popuar music avaiabe for downoading via MusicNet and Press Pay, reducing production, distribution and retai costs, and this wi operate in parae to CD saes of music in conventiona shops and over the Internet. FUTURE TRENDS IT has aready had a tremendous effect on the retai sector. A number of new IT innovations ie in store for shops. There are many different possibiities. The main difficuty is to assess how quicky these new IT products wi be used in stores. The Internet has generated a tremendous eve of excitement and sensationa predictions have been made with regard to the future of eectronic commerce. However, it is argued by Burke (1997) that the Internet is ony one of many toos avaiabe to manufacturers and retaiers for advertising, seing, and distributing their products to customers. He indicates that marketers are most ikey to use the Internet in cases where its unique characteristics make it a viabe and attractive substitute for the functions of traditiona channe intermediaries. 365

381 The appication of IT to retai marketing He suggests that, because of its abiity to transform information quicky and inexpensivey, the Internet wi have the greatest impact on marketing communications, a moderate effect on saes transactions, and a minima impact on ogistics. The Foresight Programme pubished Retaiing 2010, presenting a number of case studies for discussion based upon possibe futuristic scenarios for retaiing at the end of the decade (Retai and Consumer Services Pane 2001). However, it is possibe to argue that these scenarios may be more typica of 2025 than Some of the trends predicted for the future of IT innovations in retaiing are discussed beow. Smart cards Smart cards equipped with a siicon chip wi have repaced magnetic strip credit and debit cards (and possiby oyaty cards) by 2003 in the UK and Europe. However, they wi aso carry a magnetic strip to aow them to be used abroad. Smart cards are more secure than conventiona cards and can carry additiona information. Smart oyaty cards coud incude the customer s name and address, preferences, points awarded and be capabe of being used across a number of retai companies and services. By the mid-2000s, it is thought that smaer versions of smart cards wi be appied to many artices in the form of smart tags, to provide fu information about their manufacture (essentia for food or pharmaceutica products), monitor their progress down the suppy chain, provide stock contro in the stores, and may be a partia repacement for EAN codes at the checkout. These smart tags wi provide proof of ownership and may hep to combat theft instore as we as heping househoders to protect their goods. Retaiers may be abe to charge a premium for goods that are protected by smart tags. A tagged domestic TV or video payback equipment can be protected from unauthorized use in the home (for exampe, by chidren when the parents are away). Simiary, without knowedge of the code or the activation device, such products woud be unappeaing to burgars because the goods coud be used ony by the ega owners; the ega owners of goods can be identified; stoen goods can thus be returned to their owners. The price of siicon chips, which are the key ingredient of smart cards and smart tags, is faing rapidy, suggesting that the next few years wi see a considerabe growth in the use of these products. E-cash E-cash or eectronic purses consist of smart card systems which can be used in the same way as cash or debit cards with retaiers whose stores are equipped with specia card readers. Users of the scheme deposit funds into the cards, which are then debited every time they are used unti further deposits are made. The piots carried out in Britain and other European countries show that the technoogy works but that there is not yet a widespread consumer acceptance of the scheme. Deveopment is, therefore, ikey to be sow. Some form of e-cash is proposed to enabe young peope to buy goods over the 366

382 Future trends Internet as they do not usuay have credit cards or bank accounts. A sum woud be credited to an account which woud be avaiabe for Internet transactions either via an onine account (one eary mode was caed Beenz) or a form of Internet debit card with a ow credit imit such as 20. An aternative approach woud invove an account inked to a mobie phone, which coud be debited in order to buy goods, or where a teephone payment card can be topped up with a credit which can then be used to buy goods over the Internet: iabiity woud therefore be stricty imited. Progress is ikey to be sow, but it woud permit peope who do not own credit/debit cards to buy goods over the Internet and aso hep to overcome customer security fears. Mutimedia kiosks Mutimedia kiosks paced in stores, shopping mas, ibraries and raiway stations are ikey to become increasingy important over the next few years. For the retaier, they wi add vaue in a number of ways. The kiosk can be used by oyaty cardhoders when entering the store to receive detais of specia offers, check the number of points they have, receive updates about new products, and spend their points as shown by Boots UK and Ireand. In DIY or gardening, heavy or cumbersome items coud be ordered eectronicay and be assembed ready for coection in 15 minutes. The retaier coud use mutimedia to cross-se reated products, for exampe, a session with a beautician may be booked in a heathcare store; customers booking hoidays coud arrange insurance, purchase tickets for the cinema, or check and book concessionary train fares. Exampe: Service Merchandise Inc. Service Merchandise Inc. is the USA s argest cataogue retaier with over 400 showrooms across the southern states. It has a customer database of 27 miion peope and segments them by ifestye. Over the ast five years it has spent miions of doars in deveoping customer-friendy kiosks which peope woud use to buy their goods without the need to invove staff. Current versions use touchscreen technoogy, show pictures and video cips of the product, and aow customers to compare different items through a comparison screen. Customers can pace their orders and pay by credit card for home deivery. These have been so successfu that Service Merchandise is now starting to ocate singe kiosks in shopping mas and airports. Customer-specific offers Customer-specific offers are another possibiity in the grocery store of the future. The customer s oyaty card (oaded with customer preference information) inserted into a card reader on a shopping troey woud trigger individuaized offers at different parts of the store. Some offers woud attempt to induce the customer to buy different ranges of product; others might reward a highy oya customer; yet others might attempt to retain the custom of a consumer who has become ess oya than before. Eectronic body scanners Eectronic body scanners are devices that can provide an exact set of measurements for the perfecty fitting pair of jeans, underwear or suit. This aows customers to be scanned 367

383 The appication of IT to retai marketing in the round when they pace their order. The goods can then be ready for them about 30 minutes ater. Marks & Spencer customer advisers are currenty abe to use a sma eectronic device to check bra size and fit. Other ideas being discussed or deveoped incude the virtua reaity store (to mimic shopping, but used by home deivery companies) which may aso be used to hep with space panning and the positioning of checkouts and new gondoa designs in retai outets; 100 per cent customer sef-scanning stores with no staff; and the integration of smart tags into products to provide information about product integrity, prices, and to act as an anti-theft device. Aso avaiabe are eectronic shef edge abes (ESELs) which are iquid crysta modues that repace paper abes on the shef front. These ESELs may be automaticay inked to the head office EPOS system and so enabe the changing of a prices on outet sheves to coincide with scanned prices at the checkout. CONCLUSION We have seen how IT has transformed the operation of retai marketing by providing accurate saes data and a mass of high quaity information about customers. Fast data communications have enabed retaiers to make their merchandise reordering systems more responsive to customers at the same time as cutting the costs of inventory. Data communications are aso at the heart of the deveopment of the Internet, which wi have a considerabe effect on retaiers of a kinds even if the hopes of its greatest supporters prove over-optimistic. A major task facing retaiers is to discover new opportunities in the customer and product data now being hed in databases and data warehouses. Retaiers are attempting to be more customer-focused and hope to use customer information and oyaty systems to increase the average amount spent, and to understand consumer sensitivities about pricing and ranges. The costs of investing in the new IT systems and getting the most from them, and the penaties of not investing, wi continue to make retaiing a high risk area. EXERCISES The exercises in this section are reated to the appications of IT to retai marketing. It is advised that you work through them before moving on to Chapter Taking the short-, medium- and ong-term trends, how is eectronic retaiing going to dispace the current patterns of retai purchasing? Reate this to different segments such as business-tobusiness as we as consumer sub-groups. In addition, comment on the impication for eectronic advances in retaiing and the changes which may occur in the socia aspects of shopping. 2 What is the supportive roe of IT systems for retai (such as EDI) and how can any of the systems you have identified be used by retaiers to improve further the management and costeffectiveness of their operations? 3 Look up the websites isted in the grid beow and record your impressions of them. 368

384 13 References and further reading Company website: Boots Co-op Group Iceand Sainsbury Tesco Top Shop Note others you ooked up: Note your impressions of the Web pages: Note your impressions of the Web pages: (interest, ease of purchase, further inks, etc.) Then expore the Internet for the retai methods of seing different types of merchandise such as cars, trave and CDs, or visit foreign sites such as Report which websites you visited and again note your impressions, particuary recording any differences you find. 4 Discuss, with reasons, what you beieve to be the most important future appications of IT to retai marketing and retai operations in the next 20 years. REFERENCES AND FURTHER READING Aba, J., Lynch, J., Weitz, B. and Janiszewski, C. (1998) Interactive home shopping: consumer, retaier, and manufacturer incentives to participate in eectronic marketpaces, Journa of Marketing, 61 (3), Barnatt, C. (1994) The Computers in Business Bueprint. London: Backwe Business. BMRB (2001) Internet Monitor, August. Branigan, L. (1998) The Internet: the emerging premier direct marketing channe, Direct Marketing, 61 (1), Burke, R.R. (1997) Do you see what I see? The future of virtua shopping, Journa of the Academy of Marketing Science, 25 (4), Comer, J.M., Mehta, R. and Homes, T.L. (1998) Information technoogy: retai users versus nonusers, Journa of Interactive Marketing, 12 (2), Cope, N. (1996) Retai in the Digita Age. London: Bowerdean Pubishing. Curtis, G. (1995) Business Information Systems: Anaysis, design and practice. 2nd edn. Wokingham: Addison-Wesey. Davies, G. (1995) Bringing stores to shoppers not shoppers to stores, Internationa Journa of Retai and Distribution Management, 23 (1), Dawson, J. (1994) Appications of European management in European retaiing, Internationa Review of Retai, Distribution and Consumer Research, 4 (2), Dawson, J. (2001) Is there a new commerce in Europe?, Internationa Review of Retai, Distribution and Consumer Research, 11 (3), European Consumer Research (2001) Maintaining the Web s best customers: Profiting from segmentation, London: Jupiter Research. Fider, C. and Rogerson, S. (1996) Strategic Management Support Systems. London: Pitman. Gonyea, J.C. (1996) Seing on the Internet: How to open an eectronic storefront and have miions of customers. Maidenhead: McGraw-Hi. 369

385 The appication of IT to retai marketing 370 Griffith, V. (2001) How the fittest survived the dotcom metdown: Onine Retaiing, Financia Times, 27 August. Haecke, S.H. (1998) About the nature and future of interactive marketing, Journa of Interactive Marketing, 12 (1), Haigh, M. (2001) The E-Marketing Handbook: An indispensabe guide to marketing your products and services on the Internet. London: Kogan Page. Hogarth-Scott, S. and Parkinson, S. (1994) Barriers and stimui to the use of Information Technoogy in retaiing, Internationa Review of Retai, Distribution and Consumer Research, 4 (3), Hyman, R. (2000) Opinion: Onine shopping the next five years, FT.com site, 26 October. Institute of Grocery Distribution (1998) Grocery Market Buetin. Watford: IGD Business Pubications. KPMG (1997) Home Shopping Across Europe: Experience and opportunities. KPMG Pubication Lindstrom, M. (2001) Cicks, Bricks and Brands: the marriage of Retaier and E-taier, London: Kogan Page. Loyds TSB Economic Buetin (2001) The tech market crash: the end of the new economy? (39), June, London: Loyds TSB Bank. Lowe, M. and Wrigey, N. (1996) Retaiing, Consumption and Capita: Towards the new retai geography. Harow: Longman. Mahadevan, B. (2000) Business modes for Internet based e-commerce: an anatomy, Caifornia Management Review, 42 (4), Mamster, E. (2001) Boohoo.com, London: Random House. Management Horizons (1995) Retaiing New York: Management Horizons. Margois, B. (1996) Digita commerce: the future of retaiing, Direct Marketing, January, Muhern, F.J. (1997) Retai marketing: from distribution to integration, Internationa Journa of Research in Marketing, 14 (2), NOP Research (2001) Internet User Profie Survey, June London: Nationa Opinion Pos. Packaged Facts Inc. (1994) The Eectronic Retaiing Market. New York: Wiey. Porter, M.E. (1980) Competitive Strategy: Techniques for anayzing industry competitiveness. New York: The Free Press. Porter, M. (2001) Strategy and the Internet, Harvard Business Review, March, Porter, M.E. and Miar, V.E. (1985) How information gives you competitive advantage, Harvard Business Review, 63 (4), Powe, T.C. and Dent-Micaef, A. (1997) Information technoogy as competitive advantage: the roe of human, business, and technoogy resources, Strategic Management Journa, 18 (5), Retai and Consumer Services Pane (2000) The (R) etai (R)evoution: From a Nation of Shopkeepers to a Word of Opportunities. London: The Foresight Programme, Department of Trade and Industry. Retai and Consumer Services Pane (2001) Retaiing London: The Foresight Programme, Department of Trade and Industry. Retai e-commerce Task Force (2000) Cicks and Mortar: The New Store Fronts. London: Department of Trade and Industry. Retai Week (2001) Retaiers expore the potentia of muti-channe, Retai Week, 5 October. Revoution (2001) Revoution Guide to E-commerce, Revoution, 1, March. Reynods, J. (2000) E-commerce: a critica review, Internationa Journa of Retai and Distribution Management, 28 (10), Rhodes, E. and Carter, R. (1998) Eectronic commerce technoogies and changing product distribution, Internationa Journa of Technoogy Management, 15 (1, 2), Rogers, D. (1998) Barcays offers on-screen inks, Marketing, 21 May, 2. Rowey, J. (1996) Retaiing and shopping on the Internet, Internationa Journa of Retai and Distribution Management, 24 (3), Seth, A. and Randa, G. (1999) The Grocers: The Rise and Rise of the Supermarket Chains. London: Kogan Page. Tayor, P. (1998) The eectronic revoution: making cose inks with shoppers, Financia Times, 17 March. Tayor, R. (2001) Brand and Deiver, Retai Week, 28 September, 19.

386 References and further reading Further information The e-centre (Artice Number Association (UK) Ltd), 11 Kingsway, London WC2B 6AR. The Foresight Programme (UK Department of Trade and Industry): Cicks and Mortar and other e-commerce reports can be downoaded from the Retai e-commerce Task Force sector of the Foresight site. Word Wide Retai Exchange: E-commerce Times is a vauabe centra source of press artices about IT and e-commerce. IMRG is an internationa research and consutancy body deaing mainy with the deveopment of e- commerce: Jupiter: jsp is a French research company speciaizing in the Internet

387 14 Consumerism and ethics in retaiing This chapter shoud enabe you to understand and expain: the different pressures for companies to become more sociay responsibe; what woud be deemed a constraint of trade or unfair methods of competition; the criticisms eveed at different aspects of marketing; the societa marketing approach. It is not uncommon for reports to reach us of unacceptabe service, poor quaity, shoddy goods, marketing mapractice and the beief that a company has no interest apart from the profit motive. In the 1990s Sears, as part of its portfoio, managed the argest independent auto-repair concern in the USA. It ost the trust of its customers after the company had to provide a refund of $50 each to around one miion customers for auto-work that had been unnecessary. The case damaged the image of Sears and its ong-hed reputation for reiabiity. Such situations are now ess ikey as retaiers manage image far better. This is because there is the growing awareness that ong-term customer satisfaction and the buiding of a positive image is a prerequisite for success. In ight of this understanding companies are discovering the need to identify and react to the new wave of consumerism and its associated vaues. As indicated, the probem of negative attitudes to the modern business word is associated with faceess, arge companies attempting to increase their profits. We shoud, however, be aware that companies are made up of peope simiar to us and the probems may not be divorced from what we a do. Some studies have highighted that up to onethird of midde managers have submitted deceptive reports to their supervisors and that even more woud bend the rues to gain persona advancement. We know of companies that can be viewed as bad barres because they have bad appes working for them. To be successfu, retai companies need to discover approaches to the marketpace that wi buid a sociay responsibe and ethica company cuture. There is a need to understand the foowing three basic issues: Consumerism. This is organized group pressure, by a consumers, to protect and benefit consumer groups and the environment. This means it is not soey those consumers buying from a company, it is a broad movement to bring about improved exchange reationships. Corporate socia responsibiity. This is the decision of a firm to conduct its business in the interest of society as a whoe as we as its own interests. 372

388 The pressures for socia responsibiity Ethics. This invoves persona decisions on the mora principes of what woud be the right or wrong activity for individua empoyees. These decisions wi be inked to the vaues and cuture of the organization. Ethica vaues are the core beiefs and standards such as honesty and fairness that wi dictate the stance a company takes in reation to retai marketing. THE DIFFERENT PRESSURES FOR A COMPANY TO BE SOCIALLY RESPONSIBLE The concept on which to base the ensuring of ong-term satisfaction is not a straightforward one. Consumer satisfaction is inked to aspirations and these may change in reation to poitica systems, and the products and services other consumers enjoy. For exampe, the basis of satisfaction of consumers in Eastern European countries prior to and since 1989 wi be totay different. Simiary, the USA wi not have the same cutura vaues as ess industriaized countries. Satisfaction is based upon persona concepts of acceptabiity of the type of products avaiabe, the potentia to purchase them, and how companies act in the transaction process of creating and suppying products or services. This points to the premise that we often use reative standards when judging the circumstances of a specific action. But we need to understand this in more detai as the study and description of ethics is quite compex. There is a need to understand the subte differences between the meaning of corporate socia responsibiity and business ethics. Corporate socia responsibiity reates to the socia aspects of the responsibiity a company may adopt for its own business operation within the society it serves. To be corporatey responsibe, a company woud deveop and operate economic, stakehoder, or phianthropic poicies which were beyond its required ega duties. On the other hand, business ethics is the code by which an organization shoud behave based upon carefuy deveoped rues of mora phiosophy. The two are different as a service company coud act in a sociay responsibe manner of providing oca sponsorship money to a worthy activity whie teing consumers they required service on their appiances that was not actuay needed. Even this is not a straightforward description as the judgement of ethica standards can be cuturay determined by a reative approach based upon: utiitarianism which judges not the actions but the consequences of those actions. If the resut is that there is a net increase in the happiness or wefare of society then the action can be beieved to be moray right; intuitionism the premise that a decision is right if the individua s intuition or conscience informs him or her that it is right. If a person beieves his or her motives are good and honest and no other person is harmed by a decision then that decision can be made. However, there are arguments that stress that there are absoute standards that can be appied: Absoute standards are based upon rigid rues which provide cear guidance as to the judgement of whether any action is right or wrong. As such there is no ambiguity as to what constitutes ethica behaviour and no account is taken of the circumstances 373

389 Consumerism and ethics in retaiing which may surround the situation. These standards are based upon reigious teachings such as thou sha not ie or thou sha not stea. One major change in the acceptabiity of the behaviour of companies can be traced to the widespread reaization that the word needs to have its environment protected. Green issues are creating more awareness of the environment in Western societies. Poution due to acid rain, the motor car and eaded petro, nucear waste, chemicas in farming and untreated sewage is of topica concern. This has ed to the emergence of the green consumer who wi seek out and buy environmentay friendy products. The same consumer wi expect a retai company to adopt responsibe attitudes in terms of the way it carries out its business. This coud be reated to the organization of waste recycing, energy conservation and some contro of the products it stocks or ses. There is the further concern that financia services institutions shoud work with acceptabe poitica regimes and provide oans ony for ethica business ventures. In the ate 1990s, various retaiers were accused of expoiting workers in deveoping countries. The recognition of the power of the consumer, based upon emerging vaues which deem unethica processes unacceptabe, has ed companies to adopt more sociay responsibe poicies. The recognition by different companies of the need to be more aware of the persona vaues of those in society is primariy due to consumerism. 374 Consumerism This is organized group pressure which has become a set of vaues hed not ony by the consumers of a company s products but aso within the wider society. Hence consumerism has the objective of protecting a consumers from organizations with which there may be an exchange reationship. As a movement, it attempts to infuence the poicies and behaviour of organizations and groups to minimize the ikeihood of detriments being inficted on individuas, society or the environment. The vaues of the movement are based upon scepticism of the motives of businesses. There is a beief that businesses are more ikey to maximize their profits than think about issues of pubic interest. This eads to a arge number of individuas beieving that retaiers combine with producers to ensure that they, the consumers, are ripped off. In recent years the consumer has not been passive. Consumers have reaized their economic power and have used this to bring about change. Consumerism has been used for poitica ends with purchasing power being appied to infuence the poicies of different governments. The boycott of goods from South Africa prior to the change of government is one exampe of this. Simiary, there has been concern over the sae of fur products, geneticay modified foods, or the use of cheap chid abour in deveoping countries. In 1996 a boycott took pace reated to retaiers sourcing in Burma, a country where the miitary regime abused human rights. A campaign was targeted on the fashion retaier, Bhs. In this instance Bhs promised to sever their connections with the country by the foowing year. However, other companies such as Levi withdrew more quicky. Raph Nader is an infuentia individua in the history of the modern consumer movement. His book on the US automobie industry, Unsafe at any Speed, focused consumers minds on the need for arge companies to be more responsibe to the users and to society in genera for the products they make. Whereas each individua is reativey poweress against arge companies, the consumer movement champions the needs of individuas

390 The pressures for socia responsibiity through a coective voice. President Kennedy, foowing the tradition of Thomas Jefferson with his inaienabe rights in the Decaration of Independence, signaed the need for organizations to recognize the rights of the consumer when he incorporated the foowing four areas into his Consumer Bi of Rights : 1 the right to safety that there are no hidden dangers; 2 the right to be informed that there shoud be honest communications; 3 the right to choose that there shoud be rea competition among seers; 4 the right to be heard that there shoud be channes or bodies for compaints. The protection of the consumer and suppier is often represented by pressure groups. Consumerism as a movement is often based upon the activities of a number of pressure groups who infuence government, the media and affect the vaues within society groups such as ASH (Action on Smoking and Heath) who have organized and promoted nationa non-smoking days and sensitized the pubic to the probems of smoking; CAMRA (Campaign for Rea Ae) who have forced significant changes on the brewers of beer; and RoSPA (Roya Society for the Prevention of Accidents) which has improved safety reguations in various industries. The sef-financing Consumers Association has been in operation since 1957 and has done much to improve standards through its pubication of Which? Magazine, which provides comparative information on different products. The idea of a free marketpace seems, at face vaue, to be good for the consumer. However, compete freedom in the marketpace is not in the interests of consumers or suppiers. Compete freedom can ead to monopoy situations, may restrict competition and aow price fixing. Consumers are most concerned when a monopoy situation exists. Where effective competition cannot be provided as was the case with the privatization of many of the UK pubic utiities in the 1980s other means of contro are needed. The resut has been the creation of a number of reguatory bodies that can determine the eve and structure of charges made by these utiities. Ofte, Ofwat and Ofgas contro the utiities of teecommunications, water and gas respectivey. In the case of British Gas, Ofgas reguations aow the company to raise gas suppy prices in ine with energy prices but the price for anciary services, such as standing charges and repairs, can ony rise in reation to the rate of infation. However, some groups argue that the reguatory bodies are not as powerfu as they shoud be as they cannot insist, by statutory requirement, that the utiity companies shoud meet their recommendations. The Monopoies and Mergers Commission, the Office of Fair Trading, trading standards officers and different government departments are consistenty ensuring that the consumer has some protection from unfair methods of competition and seing. There is aso an EU minister responsibe for competition. In recent years that minister has rued on anti-competitive practices ranging from financia services to airines, and forced companies to ater trading practices. The Monopoies and Mergers Commission in the UK is an independent body whose members are drawn from a variety of backgrounds incuding awyers, economists, industriaists and trade unionists. This commission has the power to take action to remedy or prevent harm to the marketpace. Their power can be appied if the marketpace changes where at east a quarter of the suppy is controed from a singe source and eads to a distortion of competition. Historicay, much of the reguation of retaiing has been designed to encourage and maintain competition and 375

391 Consumerism and ethics in retaiing 376 to imit or end deceptive or unfair business practices. What is required is contro of restraint of trade and unfair methods of competition. Restraint of trade The foowing indicates measures which can be introduced to provide an improvement in business practice. 1 Retaiers shoud not be abe to pace pressure on manufacturers to prevent them from seing products to their competitors. 2 Retaiers shoud not acquire their competitors with the intention of substantiay essening competition or creating a monopoy. 3 Retaiers shoud not conspire to fix prices at eves that are unfair. 4 Retaiers shoud not price their products ower in some areas with the objective of driving some retaiers out of business so that they can then raise average prices. 5 Retaiers shoud be aowed to se foreign imported products if they compete fairy with domestic suppies. Unfair methods of competition 1 Retaiers shoud not use deceptive abeing, advertising, pricing or saes techniques. Consumers beieve that the most miseading forms of seing are those by teephone, foowed cosey by direct mai techniques. 2 Prices of certain products such as drinks, ice creams, etc. shoud be dispayed so that customers can check on what they have been charged. Prices have been removed from the items in many food retaiers, with the prices being marked on the aises and sheves ony, because of the use of computerized checkouts which scan pre-marked bar codes. Some groups beieve this process to be deceptive as it makes it harder for consumers to judge if the fina tota is correct or not. 3 Advertised specia offers shoud be avaiabe so that the initia customer request is fufied. 4 Credit practices shoud be fair and unambiguous. 5 Warranties shoud be ceary written with an affirmation of a guarantee to the performance of the product and freedom from defects. 6 If a customer enters into a contract it shoud have cear wording about canceation and iabiities. The contract shoud be written in easiy understood terms. 7 When a product is ordered there shoud be no ong-term deay in its deivery. 8 Dereguation of services shoud occur if it is in the interest of the consumer to have wider choice. For exampe, buiding societies moving into banking is a change with positive repercussions for the consumer due to increased competition. Rights When considering the above points, it shoud be reaized that both the retaier and consumer have certain rights. Seers have the right to:

392 The pressures for socia responsibiity se any product determined by the retaier as ong as it is not injurious to heath and safety and has a description or abe as to the correct use and contents; price products at any eve provided that there is no discrimination among simiar casses of buyers; caim any points about the product in their promotions as ong as they are not dishonest and miseading; utiize whatever eve of promotiona expenditure they wish, based upon incentive schemes or other means of increasing saes, as ong as these schemes are cassed as fair competition. Buyers can aso be considered to have demonstrabe rights: the right not to frequent a store or purchase the products offered them. The sient vote of consumers demonstrates consumer sovereignty by staying away from stores which create consumer probems. This is a very powerfu sanction; the right to expect that a suppier wi have ensured that the product is safe. With the increasing amounts of artificia additives in foods and the aarmist coverage of the press, this is a major concern. The whoe food chain is under suspicion from worries of carcinogenic effects of food substitutes or additives to the worry over diseases which can be transmitted through fresh meat and other products. To ensure their fast food did not suffer from heath hazard scares, McDonad s reformuated the cooking process of its french fries in order to make them more heathy and Dunkin Donuts spent two years in an attempt to remove egg yoks and reduce eves of choestero in its doughnuts. The question is whether these are ony minima heath improvements. These issues are discussed further in the section on product misuse and safety issues; the right to expect that the product wi be essentiay the same as the seer has represented it. This means that a fuy informed buyer shoud be abe to make a rationa decision. Criticism of the expoitation of workers Western retaiers are accused of attempting to make maximum profits through the expoitation and manipuation of suppiers in Third Word countries. Whether it be a fruit farm worker in South Africa, a toy worker in China or a factory worker in Bangadesh, Sri Lanka or Pakistan, many are on subsistence wages; some are forced to work unpaid overtime, may be fired or even beaten if they cannot keep up with the production schedues. An Oxfam eafet (1996) shows how a banana from the Caribbean costing 10p provides 4p to the retaier, 2p to the importer/whoesaer, 3p for shipping and handing charges and ony 1p for the picking and growing. The criticism is not confined soey to overseas abour; the Nationa Group on Home Workers estimates there are currenty a miion home workers in the UK on extremey ow wages. Whatever any retaier beieves about the current situation, a number of pressure groups are now quite vociferous regarding the terms and conditions of different workers who are considered to be expoited and acking in bargaining power. It is not just the sma companies who are hed up as exampes of bad practice; Marks & Spencer were at the centre of a Word in Action TV programme in January 1996 regarding the ethics of retaiers and Toys R Us have simiary featured in the Wa Street Journa. 377

393 Consumerism and ethics in retaiing CRITICISM OF MARKETING ACTIVITY As we move further into the twenty-first century there is a growing concern for ethica practice which eads to business poicies that aim to sustain the earth s resources. The new vaues emerging are pacing pressure on the underying concepts of marketing. This is creating a great dea of debate around the ethica standpoint of marketing. In examining criticisms of marketing it is important to distinguish between micro (the individua firm) and macro (how the whoe system works) eves of marketing. Some compaints are ony directed to one eve, say the advertisements of Benetton. Other types of criticism, however, may be eveed at the industry as a whoe for exampe, that society is overmateriaistic owing to the actions of the advertising industry in its proific use of promotiona techniques. Some of the most significant criticisms are discussed in the foowing subsections. 378 The disregard of the effects of promotion The marketing concept can ead to a tunne-vision focus on potentia retai consumers without consideration being taken of the wider society. Promotion targeted on a specific segment may be criticized by other groups who may find it annoying, insuting, miseading or sociay unacceptabe. Promotiona campaigns are often judged adversey to affect others due to the insensitive nature of marketing poicies. Many women are offended by the use of the femae body to se products. It is argued that this indirecty creates symbos and meanings which bear no reationship to the pace of women in modern society. Whie advertising is recognized as a powerfu medium, it is criticized because it is not used in a sociay responsibe way. The critics often fee that individuas are manipuated by promotion to buy products that they do not need and often products that shoud not exist. It is difficut to know whether the critics or consumers shoud ead on this. For exampe, some critics woud ban many recreationa products such as private boats and panes as we as motorcyces and some pets. On the other hand it is argued that marketing can ony inform peope and stimuate interest, it cannot manipuate peope. In addition, poution and damage as a by-product of retai activities is treated as an environmenta and socia cost carried by the whoe of society and not simpy the company s consumers. Marketing poution is the over-abundance of promotion which makes an area ess attractive. There are roadside poster sites, advertisements on taxicabs and buses, messages painted on buidings, and eafets given away which are then discarded a of which create invasive poution. There is aso a trend to produce advertisements which aim to shock, such as those of Benetton, and there are others which offend, such as the amount of promotion for sex-tak teephone numbers. The overa effect of these trends is to ead the genera pubic to mistrust marketing generay and to suspect the motives of advertisers. In 1990 Benetton accepted the earier emphasis of Oiviero Toscani to create a unified corporate trade-mark approach of refecting the different nationaities of its customers throughout the word. This cuminated in the aunch of the United Coours of Benetton campaign, where the company s communications were repaced by a series of advertisements reated to socia concern. Critics condemned the programme because of its utimate goa to se more products rather than to dea propery with the issues it raised. The management of Benetton responded by pointing out that other retaiers simpy provided

394 Criticism of marketing activity a perfect word stye of advertising which was based upon an association that buying products eads to happiness. Toscani took the stance that if consumers were concerned about the word situation, they woud be better to shop at Benetton. The use of arge biboards to pubicize the company and to bring about change was not fuy accepted by major sections of the pubic but this did nothing to stop the Benetton communication campaign. Such images as a priest and nun kissing on the ips; a boody newborn baby with uncut umbiica cord; David Kirby dying of AIDS surrounded by his famiy; human body parts, marked ike a side of beef with an HIV Positive stamp; these are just a few exampes of images taken from the campaign. This type of controversia advertising is not new. Cavin Kein has been accused of projecting images of chid pornography based upon images of young peope in seductive and vunerabe poses. MINICASE 14.1 Changing vaues reated to retai consumer issues FT The UK government has produced a code of practice to crack down on miseading green caims on consumer products. The new rues, which wi ban terms such as environment-friendy, set standards for retaiers and manufacturers. Caims wi have to be accurate, capabe of being substantiated by hard evidence, reevant to the product in question and used in an appropriate context. So boasting that a deodorant does not contain CFCs woud not be aowed because CFCs are aready banned by aw. Nor coud greeting cards be advertised as biodegradabe, because a paper is over the onger term. Such caims have heped generate cynicism among consumers. But the government has ignored cas from consumer groups to make the code egay binding. The Nationa Consumer Counci, which demands statutory rues, wi monitor products to see whether the code has any impact. The environment, regions and transport department, which is pubishing the code after a year of consutation, hopes retaiers wi take it up vountariy. The code s effectiveness wi depend on how enthusiasticay it is taken up by retaiers, the NCC said. B&Q, the DIY chain, said the company is to make the code mandatory for its suppiers. It has aso changed the abeing of some of its products to make them compy with the rues. As a resut, abes on insuation materias had aready been changed to read: This product heps conserve energy. Source: Leya Bouton, Financia Times, 17 February 1998 An overemphasis on profitabe products The marketing concept dictates that products shoud ony be offered to the marketpace when they are profitabe. This has cuminated in the axing of bus and train transport routes and the disregard of ow-spending individuas. The oss of the supporting services of transport may affect poorer individuas disproportionatey and, in turn, wi have an impact on their choice and seection of retai outet. Where a want exists and the marketing opportunity cannot deiver the required profit return, then a retai offer is sedom deveoped. The market-based system is guided by sef-interest and profit motivation; therefore consumer preferences are ony accounted for if an abiity to pay is demonstrated. These vaues are represented by a ack of concern for those who cannot afford to purchase certain items, trave to cheaper priced stores or obtain credit. In addition, it is widey questioned whether retaiers want to cater for those who are disadvantaged or disabed. Faciities for bind and disabed peope are of ow priority in most business panning. 379

395 Consumerism and ethics in retaiing Marketing is sometimes bamed for the drive to the deveopment of monopoistic competition. It is often fet that marketing is the catayst in the constant attempts to create monopoistic competition. Retai price contro by manufacturers has ed to the domination of markets and is taken to be a key marketing strategy in order to create premium prices, obtain greater contro and make higher profits. The question remains, however, as to the choice or aternatives different consumers have. Accordingy, it can be asked whether some are disadvantaged by the way business is organized. The Economist in 1997 highighted that the Monopoies and Mergers Commission had concuded that the appiance manufacturers had used recommended retai prices to fix many of the prices at which eectrica goods were sod. More recenty the report by the EU Commission discussed in Minicase 14.2 highights the ongoing probem of whether retai prices are fair or not. There is greater profitabiity to be gained by deveoping in new site areas. Therefore, there is growing concern over the demise of the high street with the reocation of arge retaiers to out-of-town sites. The arge retai companies have continued to deveop new out-of-town areas, forcing out smaer aternative retaiers, and creating change without due regard to the cost of environmenta or socia impacts on the area and oca popuation. The concern over the poution and waste of resources due to the increased use of the motor car may heighten the pressure on the deveopment of future out-of-town sites or may ead to the introduction of parking fees which coud subsidize other forms of transport. MINICASE 14.2 Brusses drops compact disc price-fixing probe FT The European Commission has dropped an investigation into possibe price-fixing for compact discs by the word s biggest music companies. The inquiry was aunched after a simiar investigation in the US, where CD prices are generay much ower than in Europe. Some officias thought that they had uncovered signs of cousion of prices whie scrutinising a panned joint venture between EMI and Time Warner, which was eventuay abandoned. But on Friday the Commission said that it had cosed the five separate investigations into Bertesmann Music Group, EMI, Sony Music, Universa Music and Warner Music. As the possibe infringements were confined to the territory of singe member states the Commission is informing the reevant nationa competition authorities of the resuts, it said. It woud continue to keep the industry under cose scrutiny and might re-open the inquiry if additiona information came to hand. Companies found guity of pricefixing in the EU can face big fines. The big record companies agreed ast year to drop a poicy of requiring retaiers to dispay a minimum price for CDs in their advertisements. In May, the five companies setted with the US Federa Trade Commission after it accused them of over-charging for CDs in the US for five years. The FTC said the companies practice of setting minimum prices with retaiers had cost consumers $480m since They argue that CDs are not overpriced. The retai price shoud not be directy compared with the cost of manufacturing the CD, which is ow, but aso incude the cost of finding or acquiring taent and deveoping successfu acts, they say. Separatey, music companies are being investigated by UK competition authorities over aegations of cousion to bock cheaper imports from continenta Europe. Sony, EMI, Warner, Virgin, Universa, BMG and Pinnace are being questioned under the inquiry aunched in February. If found guity of contravening competition aws, they coud each be fined up to 10 per cent of their UK turnover for every year of the infringement, up to a maximum of three years. The European Commission is aso continuing an investigation into whether the market for DVDs is being artificiay fragmented in the EU. Source: Ashing O Connor and Danie Dombey, FT.com site, 18 August

396 Criticism of marketing activity The invasion of privacy The power of modern computers aows companies to capture a compete range of persona information for use in targeting direct mai campaigns. As retai companies such as Tesco begin to spend more on oyaty programmes there is a growing database of information that can be utiized by retaiers for different purposes. Aso, there is a greater use of teephone and high street interviews to coect information. If this is for a reputabe survey, there are no probems, but a number of companies use the disguise of research to coect information on individuas who are then targeted with specific insurance or financia offers or for fund-raising activities. There is aso a distrust of Internet sites with over 50 per cent of onine consumers citing privacy and security as a major concern. The fear is that private information wi be shared between site providers and that the ikeihood of fraud, poor service and abuse of credit card detais is higher through Web transactions. This paces the emphasis on companies to ensure that they have a trustworthy image by a demonstration of socia responsibiity in a business deaings. A persona computer is not that persona when e-mais can be sent which are unsoicited. It is estimated that about 30 miion e-mais are sent each day. Of these around 30 per cent are unsoicited and form what is known as spam. Spam e-mais are those which are not wecome and therefore shoud not have been sent. As a resut, companies shoud be considering permission marketing as a means to decide whether a recipient is happy to receive information and messages. Good permission marketing is where the individua opts in to receive the messages rather than has to tick an opt out box in order not to get the maiings. The concern to companies and individuas is that spam is a cost to the company. This is based upon: the cost of time taken up in deeting or deaing with the maiings; the waste of resources due to the cost of the e-mai being carried through third party systems; and the annoyance factor of having to check unwanted mai and finding it irreevant. Another area of concern for intrusion is that of CCTV cameras in retai outets. The benefits of CCTV are we recognized as a crime deterrent for customers as we as staff in retai environments. However, as a genera surveiance too they can be used for anything from monitoring the fow of store traffic, to maintaining safety of environment as we as monitoring staff. The modern CCTV is a covert miniature video camera hidden inside an everyday appiance such as a cock, a smoke aarm or a PIR (passive infra red) detector. As such, a covert instaation is virtuay impossibe to detect and is not used in the same way as overt cameras to act as a deterrent to move a prospective thief on to another ocation. Being abe to detect crime is a key benefit to retaiers using covert cameras. According to Home Office figures, tota UK retai osses through theft are estimated at 1500 miion per year. Interestingy, staff stea more than 40 per cent of this figure and over 50 per cent of staff apprehended are management. It is aso estimated that 300 miion per year is ost to frauduent void and refund entries. In the case of ti fraud a covert camera can be used as evidence to compare the video footage to the ti data to estabish a possibe theft. The question is whether these unseen cameras are an intrusion or not. If it is known that covert cameras are in use perhaps this wi deter possibe thieves but it may pace a greater eve of stress on the retai staff as they may fee a big brother is watching them. 381

397 Consumerism and ethics in retaiing The waste of resources on retai marketing Marketing is seen as a waste of money because of the arge amounts spent on promoting products. The money given over to retai promotion is often associated with convincing consumers to buy merchandise which they do not want. It is beieved that the most disadvantaged of consumers are the ones most ikey to be infuenced by high expenditure on retai marketing promotiona campaigns. Promotion is often criticized as a wastefu cost. In addition, competitive advertising is argued to be responsibe for higher costs and subsequenty higher prices. It is therefore argued that if advertising were reduced, or did not exist, there woud be more competition based upon price and service. The consumerist standpoint is that it woud be better to spend the money on informative advertising rather than competitive advertising. It is interesting to note, in this context, that when the US government banned cigarette advertising the saes did not fa significanty and the reative market share of the cigarette manufacturers remained very simiar. The eves of marketing expenditure are often bamed for changing consumer attitudes and bringing about a materiaistic society where status is derived from the number and type of products we own or consume, the number of shopping trips we undertake, or what areas we shop in, rather than how good we are as a caring member of society. There is itte doubt that marketing panders to materiaistic vaues. However, the question is, does marketing create these vaues or simpy appea to the vaues aready within society? It is found that the most simpistic of societies have members who want to accumuate possessions. In many triba societies status comes from the number of animas or possessions an individua owns. On the other hand, marketing may we enhance or reinforce the appea of materiaism. Need for more protection of chidren Chidren are often beieved to require protection from different products (Aacker and Day, 1974). Whie there is an age ban on certain products which are thought to be harmfu to the young acoho, tobacco and gambing it is often beieved that retaiers profit motives ead to saes to those who are under age. Aso, it is thought that the way scratch cards and the ottery product is offered aongside sweets and other peasure purchases wi ead to the young having a weakened set of vaues reated to gambing. Some retaiers are carefu to ensure that products such as toys or games are not sod to inappropriate age groups. The retaiers take the responsibe action of insisting on age abeing to ensure the safety of younger chidren. They aso hep individuas to purchase presents which wi provide higher satisfaction for the recipient. The targeting of chidren with advertisements can be seen to be unfair rather than miseading. This is because chidren often find it difficut to understand the advertising messages. The important questions in respect of chidren that need to be asked are: Can chidren te the difference between commercias and the programmes they are watching? Do chidren understand that advertisements are attempting to infuence them to buy? Can commercias make chidren want products that are of no benefit to them? 382

398 Criticism of marketing activity MINICASE 14.3 Misspent youth The aunch of Schoos Pus, a scheme which aims to pour miions of pounds into the rapidy emptying coffers of schoos across the UK (MW ast week), has brought the subject of marketing to pupis back into the spotight and once more questions the ethics of marketing to chidren. Since Tesco aunched its Computers for Schoos scheme in 1990, Wakers Crisps tied up with News Internationa to market its Free Books for Schoos on-pack promotion in 1998 and the Mirror and United Biscuits aunched a free maths equipment dea two years ago, major education marketing exercises have been thin on the ground. Now Schoos Pus aims to become the mother of a corporate funding schemes in primary and secondary schoos across the country. The company is on the verge of signing up goba giants such as Coca-Coa and Burger King to an initiative which, it caims, coud raise miions of pounds for impoverished schoos. Brands which join the scheme wi be incuded in a book containing vouchers worth up to 250, which can be refunded against participating sponsors products. The books wi be sod to parents for 10, of which 7 wi go into schoo funds, with the remaining 3 going to Schoos Pus to cover costs. This raises the question of whether the parents are being encouraged to pay for their chidren s education themseves, in exchange for discounts on brands. There is aso the added worry for parents that if they don t buy the vouchers their chidren wi not receive a proper education. The company says the initiative differs from other schoo incentive schemes, such as Wakers and Tesco s offers, because it aows more than one brand to participate in an unobtrusive way and incudes brands chidren buy as a matter of course. Schoos Pus was set up at the beginning of ast year by a group of senior marketing figures who have a been invoved in education, either as schoo governors or through the running and creation of schoo promotions. Two teaching unions, the Nationa Association of Head Teachers and the Secondary Headteachers Association, are backing the scheme and must be rubbing their hands with gee at the prospect of securing funding from these goba giants. But despite Schoos Pus s ostensiby atruistic approach, opponents of the scheme are worried that brands are fostering reationships which wi give them more contro over chidren their own future consumers. Rumours in educationa circes that McDonad s is panning to insta outets in schoo canteens in the UK, simiar to those it aready operates in coeges in countries such as Austraia, have so far proved unfounded. But Naomi Kein s poemica anticorporate book No Logo outines two starting exampes of corporate cassroom interference. One US schoo, sponsored by Coca- Coa, hed a Coca-Coa day and suspended a rebeious pupi for wearing a Pepsi T-shirt. Kein aso highights another schoo, which was sponsored by US TV station Channe One on the understanding that pupis watch ten minutes of the broadcaster s programming every day in the cassroom, incuding three minutes of ads. Some observers find this approach outrageous and are intent on having a types of marketing and advertising to chidren outawed. The UK s Nationa Consumer Counci (NCC) drew up a ist of guideines in 1989 and reaunched in 1996, which it hoped brands woud adhere to when approaching schoos with sponsorship or branding possibiities. The NCC guideines covered branded information packs and other educationa resources, but did not dea specificay with marketing. But the organisation has been criticised for faiing to widey pubicise the code or produce any foow-up research on marketing to schoos. Many parents sti beieve reguations exist to prevent advertising from invading cassrooms. The NCC has now passed on responsibiity for the reguations to the Consumers Association (CA), which is set to reease a 383

399 Consumerism and ethics in retaiing code of practice this summer, in conjunction with the Incorporated Society of British Advertisers (ISBA) and the Department for Education and Empoyment (DfEE). The previous code did not have DfEE backing and the new guideines have no ega status as yet, and are not expected to gain it. The new code embraces emergent forms of marketing, incuding voucher schemes ike Schoos Pus. The CA is taking a controversia stance on the issue. A spokesman says: The CA has no objection in principe to advertising to chidren. They (the chidren) need to become informed consumers and if the CA opposed that it woud undermine the empowerment process. A good proportion of commercia activity is of high quaity, can add vaue to the curricuum and can provide additiona resources that woud otherwise be unavaiabe. However, the CA s admission is that chidren are a particuary vunerabe group of consumers. Source: Marketing Week, 31 May 2001 PRODUCT MISUSE AND SAFETY ISSUES The most dangerous aspect of any purchase concerns the way the customer uses the product. In fact, the most dangerous aspect of any purchase often reates to the type of consumer utiizing it. Most of us reaize that eectrica appiances in the bathroom can be extremey dangerous or that eectrica garden toos have to be used with care; such dangers have prompted pubic poicy makers to urge or insist on safe designs and testing. However, there is a imit to the precautionary notes which can be presented on a abe and a manua or eafet may often be discarded without due notice to safety hints. Consumerism woud ike greater safety but individuas may easiy misuse products simpy because of the type of user they are. 1 Enthusiastic users may focus more on using the product as eary as possibe than on studying the directions for use. There is aso a probem in the sef-assemby of products whereby care in construction and checks are not carried out in the rush to use the product. 2 Desensitized users are often unaware of the consequences of their action, or they may carry out the activity routiney and thus become ess vigiant and aert. In addition, when the consumer takes risks which do not ead to probems they get away with it they may be more prone to risky behaviour. 3 Hedonistic users focus on the fantasy and fun of using products and are ess ikey to assess the risks of their actions. The use of acoho, or even gue, may aso ead to misuse and abuse. Critics of the safety of products beieve that thousands of accidents coud be avoided if companies made better use of improved design and safety standards. The Consumer Product Safety Commission (CPSC) is the federa US agency with major responsibiity for product safety in about product categories. The CPSC can exercise its powers to: require products to be marked with cear warnings and instructions; issue mandatory standards that may force firms to redesign products; require manufacturers and reseers to notify if they find a product has a defect that woud create a substantia risk of injury; 384

400 Green issues require manufacturers to conduct reasonabe testing programmes to make sure the products conform to estabished safety standards. When the CPSC finds a product that may be a potentia danger, it can issue an order for the firm to bring the product into conformity with the appicabe safety rue, repair the defect or exchange it for one that meets existing safety standards. They can aso insist that the origina price is refunded. Firms found breaking the safety rues can be fined, and executives are hed personay iabe and can be fined or jaied for up to a year. The CPSC may aso instigate product reca so that the product can be modified or discontinued. Consumers in the US have the right to sue the maker or seer of an injurious product, in addition to the powers hed by the CPSC. These are so-caed cass-action suits and there are over in the USA each year. GREEN ISSUES As society deveops there is an emphasis on the need for a more hoistic approach to the reationship existing between the economy, society and the environment. The emphasis of this is on the marketing activities of companies and whether they are affecting oca and goba sustainabiity of different resources. This presents itsef in a green consumerism movement which expresses a preference for ess environmentay harmfu goods and services. Of course, environmentay friendy is a non-specific term and, in reaity, no mass-produced good can be entirey environmentay friendy. Such miseading terminoogy has aowed considerabe freedom for retaiers to decare their operation or processes as being green. At the same time, there has been a rise in the awareness and concern of green issues due to pressure group activity, increased media coverage of the issues, and the adoption of new egisation. The trend is strong throughout Europe, with Germany eading the way with organizations adopting a forma environmenta poicy. The Germans are aso keen to introduce schemes whereby scientific testing takes pace to assess the caims of various products that they are environmentay friendy. The German consumer is seen as being more environmentay conscious than other European consumers. Sriram and Forman (1993) found that 82 per cent of German supermarket consumers make decisions on environmenta considerations. This can be compared to 67 per cent in the Netherands, 55 per cent in the UK and 50 per cent in France. However, the key question is whether the consumer wi be wiing to pay higher prices for green products. There is a segment of about one-quarter of the popuation which is wiing to pay higher prices but this is affected by times of recession, competitive pricing and the media. The retai industry may aso be affected by the use of more friendy chemicas in products. If the new ingredients are perceived to be inferior in terms of achieving the resuts required by the consumer, the impication is that the consumer woud sooner buy the more harmfu product if it is thought to be superior. There is another segment that beieves that the retaier wi caim the products are green on the basis of wanting to charge higher prices. The cynica view hed by many is that greenness is a way to expoit the consumer through: making ony margina or cost-free shifts in the responsibiity of the company towards the environment; 385

401 Consumerism and ethics in retaiing saving on costs by using cheaper packing or other measures; using so-caed greenness simpy as a pubic reations exercise; disguising the prime objective of achieving higher profits behind a mask of socia responsibiity. Retaiers need to identify and quantify the processes and activities of their operations in reation to the use of materias and energy. There is a need to consider any waste or emission produced and opportunities for environmenta improvement. Some retaiers have carried out this process and adopted change. B&Q has taken a hoistic approach to green retaiing practices with its ogistics panning such as: the contro and reduction of vehice emissions, improved distribution ogistics to reduce vehice movements, working with suppiers to reduce the use of packing such as corrugated board, recycing poicies and systems at store eve, and the promotion of awareness in its staff. Some companies, such as The Body Shop, who foow EU Eco-Management guideines, and Boots the Chemist, are being proactive in the area of environmenta responsibiity. Others merey jump on the bandwagon and offer recyced or disposabe packaging without examination of their own environmenta practices and poicies within the organization or giving any consideration to wider ethica concerns. Sainsbury have taken bod initiatives in the writing of an environmenta poicy and undertaking a constant review of poicies. Their initiatives incuded the eary remova of CFCs from own-abe products and refrigeration equipment, a pastics and waste recycing faciity for the company and customers, new energy management systems pus a wide range of environmenta and organic products. 386 Finding merchandise which is environmentay acceptabe The chemica compounds chorofuorocarbons (CFCs) are/were used in the production of aerosos, packaging materias, refrigeration and air-conditioning pants. It is widey recognized that there are ong-term dangers to the ozone ayer from CFCs, which coud cuminate in a greater number of skin cancers and other wide-ranging probems. Many companies have taken a responsibe attitude and vountariy found aternative chemicas to CFCs. This has ed to far greater pressure on those companies who did not change quicky to new compounds. Most aerosos have now adopted more benign chemicas which given the diversity of range of spray appications, from hair sprays to furniture poishes has provided strong evidence of the speed at which companies can adopt the above guideines. One of society s main probems is based upon the ack of space to dispose of refuse. This makes the disposa of non-biodegradabe materias such as pastics and styrofoam packaging a major probem. It aso makes the sae of products such as disposabe nappies a ong-term environmenta probem. In the USA, a number of states have banned the use of a pastic packaging in stores and restaurants. This trend has caused probems for McDonad s and other fast-food restaurants which have had to find aternative forms of packaging. McDonad s has changed to wax-paper packing rather than attempting to dispose of poystyrene from the estimated 22 miion customers it serves each day. Some firms are recycing pastic to make the most of the reativey recent concerns about environmenta issues. Procter & Gambe market ceaning products in recyced pastic bottes. The important question to be posed by retaiers, however, remains whether the customer

402 A societa marketing approach wi be wiing to pay higher prices for products that are ess harmfu to the environment. There is aso a suppementary question: wi the consumer be satisfied with ower quaity recyced packaging? There is no cear answer to this as some consumers wi accept these changes but others wi not. The young and the affuent are more ikey to accept proenvironment changes irrespective of whether they ead to higher costs and changes. THE ACCEPTABILITY OF A SOCIETAL MARKETING APPROACH It has been argued that the pressures affecting the image of marketing need to be taken into account. This has cuminated in the movement towards a societa concept of marketing which stresses the enhancement of the needs of society as we as those of the consumer. The importance of any changes a company makes to improve society has to be baanced with how much ese coud be achieved. Some companies, such as brewers and distiers, are creating campaigns to warn peope of the excesses of drinking but it is questionabe whether they are as worried about the customer as they are about the egisation which coud affect their operations. Whie some companies may pay ip service to a societa concept for PR purposes, in a competitive situation many of the probems reated to retai, and its marketing, wi continue. It is aso important to recognize that consumers are now better educated and informed, and are competent enough to seect products which are not creating undue probems for society. If companies or their products do create probems, there are articuate pressure groups and government egisation avaiabe for consumer and environmenta protection. A truy societa marketing approach is probematic because of the need to resove mutifaceted decisions over profit, poution, and environmenta concerns such as energy and and use. However, some companies perform their marketing activities better than others and are judged in positive terms by the pubic. The disposition of the pubic to buying and promoting the brands of retaiers is an important aspect of contemporary marketing. The image of retaiers, based upon the expectations of the pubic and the behaviour of the company, may ead to different patterns of negative or positive demand. It is therefore important for companies to adopt a more societa stance by showing that they are ethica and considerate in their marketing and panning. This is important for both retaiers and marketers who shoud accept responsibiity for any consequences of their activities and actions. Good business managers are being urged to put themseves in the consumer s position with regard to how they or their famiy fee they shoud be treated by others. The foowing points are reevant in this context: 1 Good business managers shoud be sociay responsibe to a stakehoders (customers, empoyees, suppiers, sharehoders, society, etc.) reated to the company or retai offer so as to minimize socia costs. They shoud aso have regard for aws or reguations, and be ethica in management decisions. For exampe, not seing certain products such as acoho and tobacco to chidren or pacing sweets at the checkout counter. 2 Managers shoud be honest in caims and promotions, not be deceptive or agree to miseading advertising. They shoud show fairness to third parties. In addition, there shoud not be any hidden costs identify extra costs which may be appicabe. 3 The retai products offered shoud not cause harm when in use or on disposa and managers shoud communicate any risks which are known to be associated with any product. 387

403 Consumerism and ethics in retaiing 4 Marketers shoud undertake not to adopt saes techniques or fund-raising under the guise of research. Aso, it is unfair and unethica to use promotions as research when adequate stock is unavaiabe because the research is being used as a method of deciding on the stock requirements. Some retai companies such as The Body Shop have attempted to become benefactors of the oca environment in which the stores are ocated, so as to bring about improvements to inner-city neighbourhoods and communities. This is a proactive approach to socia responsibiity. Community reations programmes may incude: ensuring that no retai outets imit or hinder access for disabed peope (miions of consumers find it difficut to carry out shopping as they may have arthritis, visua or hearing impairments and difficuties in waking, reading signs, reaching or stretching or manoeuvring in confined spaces this means any steps or obstaces, heavy doors and product positioning may make it difficut for them to shop in comfort); demonstrating an ecoogica approach by cearing up packaging and the oca environment as we as recycing waste (a sogan of The Body Shop is refi, reuse and recyce); supporting oca charities, and young and od peope s centres; setting up inks with oca coeges and schoos; training and empoying oca residents; giving specia promotiona offers to senior citizens or disadvantaged groups. Cause-reated marketing The use of saes promotion techniques is not aways we accepted when such techniques are used under the guise of heping the community. There is a proiferation of schemes aimed at schoochidren encouraging their famiies to patronize certain retai chain outets so that the chidren s schoo wi receive some benefit. Tesco have used computers for schoos, WH Smith have offered books for schoos and Boots, sports equipment. Teachers have shown some concern that the underying purpose of the retaiers ventures is to benefit themseves in the ong run in terms of improved profits and improved image. However, there is aso some pubic concern as to the true purpose of such schemes. The strength of good cause reated marketing is that the majority of parents as we as chidren are more interested in buying a company s products if they are associated with a charity. Minte found in 2000 that the majority of those questioned about causereated marketing woud be ikey to purchase a product which supported a good cause. The pubic, especiay femaes, were even wiing to pay higher prices for products which were inked to charitabe causes. Cameot, Virgin and The Body Shop were the companies most frequenty associated with charitabe causes. Apart from these, there were few other companies mentioned. Therefore, the use of cause-reated marketing can pay an important roe in the marketing of a retai company to enhance its corporate image and increase saes. 388

404 Corporate socia responsibiity MINICASE 14.4 Iceand sociay responsibe or utiising marketing promotion? FT Iceand, the frozen food retaier, chaenged the food industry yesterday to foow its ead in refusing to accept geneticay modified ingredients in own abe products. The group pedged that a own abe products woud be manufactured without soya, or any of its derivatives, which have been geneticay modified to resist weedkier. It aso reveaed it was exporing the possibiity of eiminating a processes invoving geneticay modified products in the manufacture of its own abe ranges and wi seek to use meat from animas fed ony on non-modified products. Macom Waker, chairman, said the introduction of geneticay modified soya into the food chain represented unquantifiabe risks to consumers. It was even potentiay more devastating...to heath and the environment than BSE. Genetic engineering is an issue which shoud concern us now. We urge a other food retaiers, manufacturers and farmers to campaign for crop segregation and tighter safety egisation, he said. However, the big food retaiers said it woud be impossibe for them to foow Iceand s exampe. You cannot equate a niche frozen food retaier with a supermarket as the quantities required are so different, said Safeway. Four supermarket groups Asda, J. Sainsbury, Tesco, and Safeway have vounteered to abe products containing geneticay modified ingredients. Athough EU and US authorities have decared modified soya safe, some scientists are concerned that the ong-term effects are unknown. Source: Peggy Hoinger, Financia Times, 19 March 1998 Update: It was reported in the Financia Times on 4 Juy 2001 that Iceand had very poor resuts in 2001 and admitted they were suffering from a disastrous switch to organic produce and therefore the company s trading remained weak. CORPORATE SOCIAL RESPONSIBILITY The issues of corporate socia responsibiity cover a company s approach not ony to its markets but to its empoyees, the oca community, its suppiers and the way it treats the environment. This paces a duty on the organization to seek socia approva for its poicies because of the potentiay detrimenta effect on the quaity of ife of others. Many companies are attempting to provide a green, caring image for their organizations and project the message that they have a socia conscience. Sponsorship for the arts, the environment or worthy causes is taking a growing share of marketing budgets. B&Q ensures that amost the whoe range of its wooden products has been independenty certified as coming from we-managed forests. The Body Shop is entering into a ong-term pan to have partnership agreements with staff and managers in neary haf its 40 stores; Thomas Cook is funding oca hospita construction; Butins is offering day visits for underprivieged chidren; and ICI is transforming redundant sites into nature reserves. Kentucky Fried Chicken is co-operating with the Tidy Britain Group to remove itter and educate peope on how to improve the environment. The cynics of a this argue that it is impossibe for companies to provide for society without an accompanying high environmenta cost such as goba warming, damage to the ozone ayer or a waste of scarce and non-renewabe resources. Some companies are offering to give donations to good causes in order to improve their image. The Leeds VISA card has made it into the Guinness Book of Records twice for its charitabe money-raising efforts. By March 1995, it had donated 6. miion to 389

405 Consumerism and ethics in retaiing three charities the British Heart Foundation, Mencap and Imperia Cancer Research. Some 20p is donated for every 100 spent using the card. In addition, those spending more than 500 a year on their card have their 12 annua fee refunded or 7 refunded and 5 given to charity. Many retai companies are eading the fied in environmenta concern by their participation in recycing initiatives. Boots, ASDA and Tesco have a set up recycing units. Reusing newspapers, auminium cans, bottes and packaging is a saving on resources and does not add to the ever-increasing need for andfi sites. Coection banks for different types of refuse and return poicies on carrier bags for reuse are to be seen in most advanced countries. The different company initiatives expained above are part of a wider need for companies to have a posture which gives them comparative marketing advantage over their competitors. Companies now need to be doing things better than their competitors if they are going to survive and prosper. To be sociay responsibe, it is not enough to have a hidden agenda of saving on costs athough improved quaity management wi often reduce wastage and management time. Today s consumers are abe to judge the actions of retaiers. There is often a need to undertake a strategy which may have cost impications but which shoud ead to onger-term increases in profitabiity. The actions of companies have to ink their performance into medium- and ong-term benefits. The best strategies being adopted are often proactive and honest and are not knee-jerk reactions to pressure groups. They incude: integrated management poicies aimed at protection of the consumer and environment; a poicy for the continuous process of improvement in reations with a stakehoders as shown in Fig. 14.1; a continuous education programme for a staff in order to train and motivate them into conducting a company activities in an ethicay agreed way; a system to check that a retai products and services are safe, fairy priced and promoted with fu information, and where possibe to assess the possibiity of the products and packaging being recyced, reused or having directions reated to safe disposa; advising and, where reevant, ensuring that there is provision of information to customers, suppiers and the pubic in the safe use, transit, storage and disposa of retai products. The retaier as a condition to the suppier may stipuate this; running the operation in an energy efficient way and to minimize the probems of waste disposa and impacts on the environment; supporting and conducting research which identifies the ways and means of improving the retai product and services in reation to preventing adverse impacts and improving quaity; promoting partnership reationships with suppiers so that they aso adopt a consistent approach to sociay responsibe poicies; having contingency pans and emergency preparedness in case a hazard or heath risk is associated with any of the company s products. Figure 14.1 iustrates the reationship factors with retai stakehoders (empoyees, banks, government, oca community, andords, service providers, sharehoders, pressure 390

406 Corporate socia responsibiity Fig The reationship factors of stakehoder socia responsibiity groups, media) which need to be considered when contempating the benefits of adopting a sociay responsibe approach to the marketpace. It is increasingy important for retaiers to reaize that they cannot simpy foow the soe pursuit of profit without due consideration to the diversity of stakehoder interest. Corporate socia responsibiity has to be treated as a strategic process which deivers a more effective means of achieving core mission objectives. The way some retaiers approach strategic panning to achieve the advantages of socia responsibiity are discussed in the foowing sections. Strategies for corporate socia responsibiity There are different components of corporate strategy which are critica to the success or otherwise of deivering a truy sociay responsibe service or product. 1 The first is to ensure that the mission and objectives of the company refect the posture and stance of the organization towards socia issues and are centra to its functioning. There has to be a cose fit between the company s mission and its socia responsibiity programme. 2 The second is to ensure that whatever responsibe poicy is carried out there is some competitive advantage gained that is specific and measurabe as a benefit to the company. This may be visibiity of actions or change of attitude by the different stakehoders. 3 The third is based upon ethica eadership or degrees of compiance to adoption of corporate socia responsibiity. Vountarism is far more beneficia than externay imposed compiance requirements. The different approaches to the adoption process are discussed in the next section. 391

407 Consumerism and ethics in retaiing Sef-reguation The setting up of vountary codes of practice is vauabe for the consumer and creates benefit for those companies who join such an initiative. Once a code has been agreed companies are more ikey to abide by the code because they wi be in danger of being judged to be a deviant if they contravene the procedures agreed by every other company. Vountary codes do not protect the consumer from companies that are determined to stay outside of such schemes. The Office of Fair Trading is a usefu arbitrator in consumer or trade disputes as one duty of the Office is to approve, monitor and revise codes. The advertising industry set up the British Code of Advertising Practice in Any compaint is brought before the British Advertising Standards Authority whose job it is to ensure advertisements are ega, decent, honest and truthfu and that any advertisement is produced with a sense of responsibiity to the consumer. The US Direct Marketing Association has a code of ethics. The main directives are: a offers shoud be cear, honest and compete; offers suitabe for aduts ony shoud not be made to chidren; sweepstake prizes shoud be advertised in a cear, honest and compete way so that the consumer may know the exact nature of the offer; merchandise shoud not be shipped without first having received the customer s permission; teemarketers shoud remove the name of any customer from their teephone ists when requested by the individua. Sef-reguatory programmes have certain advantages over government aws and reguatory agencies. They are usuay ess expensive to estabish and impement, and the guideines that make up the code are normay more reaistic and easier to appy. In addition, sef-reguatory programmes reduce the need to expand government bureaucracy and costs. However, with some trade associations, the worst offenders are not members and therefore are not required to abide by the code. When an association attempts to revise its members actions it may find it has itte authority to enforce guideines. Therefore, sef-reguation is often ess strict and has ess sanctions than woud be the case if the reguation were appied by a government office. The Body Shop was one of the first retaiers to adopt a company poicy against the testing of products on animas. The company has raised pubic awareness on the issue of anima testing over many years, having worked cosey with the British Union for the Aboition of Vivisection. Whie such poicies are now commonpace, amost 3 miion experiments on ive animas took pace in Britain in 1994 and as such this wi remain a contentious issue. A eafet from The Body Shop states: The Body Shop never has, and never wi, test ingredients or fina products on animas or authorise such tests on its behaf. We adhere to the BUAV s five year rue every six months, our suppiers and manufacturers must sign a decaration stating that they are not testing our ingredients on animas and have not done so within the ast five years. This dynamic poicy is proving successfu in changing the practices of suppiers and manufacturers who used to test on animas. The strategic options for any company poicy are as foows: 392

408 Concusion Non-compiance Companies with poor ong-term strategic panning and tunne vision may choose noncompiance with the new trends and reguations sweeping the word. Aternativey, other companies wi decide that because of cost constraints they are not abe to change their poicies or products. Compiance Companies that pick up pressures from their operating environment are going to be more reactive to the demand by egisators and consumers for changes in the methods and organization of business practices. Compiance as a posture wi not achieve competitive advantage, as the company is more ikey to be a foower than a eader in socia and environmenta concerns. Proactive compiance Companies that are we aware of their operating environment, due to the systems they appy to understanding the environment, wi be ahead of the need for egisation or change and wi be more proactive. These companies wi be the first to introduce poicies and change, and this may enhance their image and reputation. Socia and ethica eadership These companies wi strive for best practice in a their standards of business. They wi be the eaders in their sectors, with environmenta management and socia responsibiity being a pivota basis for their business. The Co-operative movement and The Body Shop are exampes of this type of organization. CONCLUSION Consumerism is a growing, powerfu force which has to be treated seriousy. Ceary the retaier s reaction to consumerism must refect the changing attitudes of the customer. The benefit of iving in a puraist society is that pressures are brought to bear on organizations to encourage them to be more sociay responsibe. Retaiers need to be increasingy sensitive to the needs of society and to practise improved community reations. The demands made by the consumer are often reaistic and shoud be an indicator of what needs to change. The diemma from the retaier s perspective is how to bring about change whie sti being abe to compete with other stores. It has been argued here that there are advantages in being responsive to consumer pressures. In fact, retaiers shoud activey encourage and seek feedback on consumer issues to ensure that they are abreast of the trends. The change in different individua and pressure group vaues towards the acceptabiity of business actions creates the preconditions for a change in strategic panning within retai companies. This change needs to address the ethica concerns of different stakehoder groups and provide for assessment of poicies reated to society and the environment. We cannot expect any dramatic vountary short-term change by companies; we can, however, expect a gradua and continuous adjustment to the need to satisfy not ony existing consumers but members of the wider society. 393

409 Consumerism and ethics in retaiing EXERCISES The exercises in this section reate to consumerism and ethics in retaiing. It is advised that you work through them before moving on to Chapter Having read this chapter, what ethica guideines, if any, woud you now recommend to a chain of chidren s cothes shops? 2 With regard to ethics, think about the future issues for retaiing and write down what you beieve are the most important aspects of concern for an improvement in the way UK retaiing or business wi operate in the next 20 years. Use the grid beow as a guide. Business operations/interfaces: Issues to be faced in next 20 years: retai marketing purchasing from stores and eectronicay sourcing and buying oca community EU and government egisation pressure groups others (ist) Issues identified as of most concern: How you beieve these wi be resoved: 3 Expain a the different pressures there are for a retaier to become more ethica. Can you expain why a retaier or the retai industry is so resistant to pressures for change from consumer groups? 4 It can be said that consumerism provides the idea business opportunity for retaiers. What is meant by this statement and do you beieve it is vaid? 5 What can be done to improve the safety of retai products? What are the cost and other impications of your argument? REFERENCES AND FURTHER READING Aaker, D. and Day, G. (1974) Consumerism: search for the consumer interest. New York: Free Press. Bansa, P. and Kibourne, W.E. (2001) The ecoogicay sustainabe retaier, Journa of Retaiing and Consumer Services, 8 (3), Body Shop (1996) Measuring Up: A summary of The Body Shop vaues report The Body Shop Consumer Literature. Bouton, L. (1998) Ministers to pubish guideines for green abeing, Financia Times, 17 February. Chryssides, G. and Kaer, J. (1993) An Introduction to Business Ethics. New York: Chapman & Ha. DeGeorge, R. (1986) Business Ethics. New York: Macmian. 394

410 References and further reading Eadie, A. (1995) Money: if you want a new Vauxha, get a GM card, Independent, 24 June. The Economist (1997) Upheava on the high street: The Monopoies and Mergers Commission is about to demand an end to the use of recommended retai prices by eectrica-appiance makers. A wave of discounting coud foow, The Economist, 31 May. Hoinger, P. (1998) Iceand chaenges rivas on genetic soya, Financia Times, 19 March. Hoinger, P. (1998) Probe into profitabiity set to fire a warning shot at the big four food retaiers: inquiry by Office of Fair Trading may signa that any further concentration of power among supermarket groups wi ony be acceptabe if customers see benefits, Financia Times, 31 Juy. Marketing Week (2001) Misspent Youth, Marketing Week, 31 May, Minte (2000) Cause Reated Marketing Report, Juy, Minte Internationa Group, London. Nader, R. (1966) Unsafe at any Speed. New York: Pocket Books. O Connor, A. and Dombey, D. (2001) Brusses drops compact disc price-fixing probe, FT.com site, 17 August. Packard, V. (1960) The Wastemakers. Harmondsworth: Penguin. Simms, C. (1992) Green issues and strategic management in the grocery retai sector, Internationa Journa of Retai and Distribution Management, 20 (1), Sriram, V. and Forman, A.M. (1993) The reative importance of products environmenta attributes: a cross cutura comparison, Internationa Marketing Review, 10 (3), Suchard, H.T. and Suchard, J.C. (1994) Corporate environmenta marketing: an environmenta action mode, Business Strategy and the Environment, 1 (1), Whysa, P. (2000) Addressing ethica issues in retaiing: a stakehoder perspective, Internationa Journa of Retai Distribution and Consumer Research, 10 (3),

411 15 Internationa retaiing This chapter shoud enabe you to understand and expain: internationa retaiing; differences between nationa retai structures; motives underying retai internationaization; the direction of expansion; different market entry methods; typoogies of internationa retaiing. THE MOVE TO INTERNATIONAL RETAILING Retaiers have ong operated on an internationa basis, yet it is ony since the ast decade or so of the twentieth century that they have done so on any significant scae. In the past, companies trading outside their home market were rare by comparison with the number of retaiers operating soey within the domestic market. Aso, internationa operations usuay accounted for a much smaer part of the business than domestic trade. However, the arger retai companies that have successfuy deveoped their marketing strategy and human resource base in the domestic market are we suited to extend deveopment into internationa markets. Other smaer payers that have a powerfu brand and a strong retai concept aso have the abiity to internationaize successfuy through using a ower cost and risk strategy such as that of a franchise. Luxury goods retaiers are among some of the eariest internationaists, seeking to serve a simiar consumer niche in a number of cosmopoitan cities around the word. This is exempified by Harrods, which operated a store in Argentina in the eary twentieth century in order to meet the needs of coonia expatriates. However, internationa expansion was not just imited to uxury goods retaiers. Around the same time, in 1909, Wooworths (then FW Wooworth) expanded its variety store operation from the US to Europe. Internationa retaiers are often perceived as companies serving consumer niches, such as The Body Shop or Benetton; however, mass merchandise retaiers are aso moving across nationa borders, as exempified by Tesco s move into Eastern Europe and WH Smith s and Sainsbury s entrance into the US market. This is not to say that we have witnessed significant internationa expansion by many retaiers. Even today, it is noteworthy that many retaiers remain essentiay domestic operations. In addition, many of those retaiers we might perceive to be deveoped internationaists, or indeed goba operators, receive ony a minority of their turnover and 396

412 Deveopment of internationa retaiing Tabe 15.1 Overseas turnover: exampes of European retaiers Percentage of turnover from Retaier Origin European ranking (1999) non-domestic operation(s) Carrefour France 1 48 Tesco UK 3 12 Ahod Netherands H&M Hennes Sweden & Mauritz IKEA Sweden Source: Retai Inteigence, 2001b profit from their operations outside the home market (Tabe 15.1). Thus, it might be suggested that whie the process of retai internationaization has increased at a substantia rate, particuary since the ate 1980s, internationa retaiing is sti at a reativey eary stage in its deveopment. Why do retaiers choose to enter new geographica markets? The motivations underying the strategy to internationaize incude saturation, namey that retaiers in deveoped markets such as the UK are forced to move into new markets because of imited opportunities for growth at home. Whie this is certainy a factor, it is ony part of the reason. Increasingy the forces driving the process of internationaization are seen as a compex interpay of push and pu factors. The growing importance of retai internationaization is iustrated by the fact that not ony are more retaiers operating internationay but, increasingy, they are moving into markets that are distant both geographicay and cuturay. As part of this change retaiers must aso assess which market entry method is most appropriate. Their seection wi be the outcome of the interpay of a number of different factors such as the nature of the host market, the sector of retai activity, and the nature of the organization. THE DEVELOPMENT OF INTERNATIONAL RETAILING This chapter examines the concept of retai internationaization by uncovering some of the variations within Western European retaiing. The motives underying retai internationaization are then expored. Whie in the past much prominence has been paced on a reactive interpretation of internationaization, namey that retaiers ony move outside the domestic market when opportunities for growth at home are severey imited, more recenty a more proactive stance has been taken. Prominence has been paced upon the notion that retaiers activey seek opportunities outside the home market, regardess of the potentia for growth within it. Both the direction of expansion (choice of host market) and the method of entering a market are considered (the pros and cons of acquisition, joint venture, franchise and so on). Emphasis is paced upon the different requirements of retaiers operating in different sectors and with various retai offers. Prior to examining the nature of the contemporary internationa retai arena, we wi discuss the factors that constrained retaiers from operating on an internationa basis in 397

413 Internationa retaiing the past, and how those infuences have changed to promote the modern internationa retai environment. Manufacturers and retaiers are at opposite ends of the distribution channe (see discussion in Chapter 1). They may aso be viewed as dichotomous in other ways. Unti recenty, manufacturers have dominated retaiers within the channe of distribution. For exampe, Coca-Coa, as a suppier, has had the advantage of utiizing the expertise of overseas distributors famiiar with oca consumer attitudes and preferences. However, retaiers faired ess we. US payers such as Sears had major probems in Begium and Spain, and JC Penney were not successfu in Itay and Begium. Many of the probems of these US companies have been reated to their ack of awareness of the European consumer. In fact, the probems have been mutifaceted. There was a ack of awareness of the consumer market and the retai infrastructure. Conditions constraining the internationa deveopment of retaiers 1 Retaiers have traditionay been perceived as operating in a ocaized manner and hoding imited market power, whereas many manufacturers have ong since had an internationa presence. 2 Whie manufacturers have been characterized as arge companies with sophisticated organizationa structures, retaiers have been perceived as sma scae and unsophisticated in comparison. 3 Manufacturers have estabished brands, whie it is ony recenty that retaiers have created strong brand images capabe of internationa transfer. 4 There has been a ack of understanding of the consumers in foreign markets. Before discussing the motivations eading to internationaization, it is important to have an understanding of the structura changes that have occurred in the retai industry in the ast few decades. Athough these trends have not in themseves caused internationaization, they may be considered as prerequisites to significant eves of retai internationaization. As was discussed more fuy in Chapter 1, there have been major changes in the retai environment since the Second Word War. Whie to some extent these structura shifts have occurred throughout Western Europe, they are most apparent in the advanced retai markets of the UK and Germany, and particuary within the food sector. Structura changes in post-war retaiing 1 Retaiers have grown in strength reative to manufacturers and in some cases are now characterized as dominating the distribution channe. 2 Traditiona independent retaiers and co-operative societies have ost market share to mutipe retai organizations. 3 Larger but fewer stores and retai companies. 4 Increasing consoidation of the retai sector measured by increasing rates of market concentration and caims of saturation. 5 Higher profitabiity of major EU and US retaiers and subsequent abiity to embark on expansionist strategies into foreign markets in order to achieve growth. 398

414 Deveopment of internationa retaiing Each of these structura shifts have aowed, or indeed promoted, the process of retai internationaization. The fact that retaiers have grown in size and strength has given them the capabiity to operate on an internationa basis. Intrinsicay inked to this is the dominance of the mutipe organizations. Their sheer size has given them the necessary financia resources and backing required to move internationay and as they have grown in size so they have deveoped in terms of organizationa structure. The mutipes, therefore, have the management expertise and sophistication, as we as being more ikey to have access to sufficient capita, to operate internationay whie smaer, more traditiona, firms have not. The first three structura changes isted in the box are prerequisites for internationa retaiing on a mass scae, but the fourth provides the prompt. If retaiers are to continue to grow in a concentrated market then they must ook to diversify from their core activities. Whie some may foow a strategy of diversifying their activities within the home market for exampe, one of the argest retaiers in Germany, Rewe, operates a number of types of food store, from hypermarkets to convenience stores, as we as DIY stores, Kee garden centres, Idea and Sconti drugstores, Frick carpet outets and Kressner cothing stores others ook to transfer their offer to a new market for exampe, US cothing retaier The Gap s entry into Canada, Japan, France, Germany and the UK. The type of decisions made, whether to internationaize or not, wi be based upon the foowing strategic concerns, discussed in further detai ater in the chapter: The strength of the push factors saturation of the home market or strong competition; nationa economic recession or imited growth in consumer spending; a decining or ageing popuation which wi affect the market size; strict panning poicies on store deveopment which wi constrain growth; operating costs which are considered too high (abour, rents, taxation); sharehoder pressure to maintain profit growth and so be seen to be doing something ; inabiity to find any further competitive advantages in the home market. The strength of the pu factors internationa opportunity due to the underdeveopment of some markets or weak competition within them; strong economic growth or rising standards of iving; popuation growth in reation to the target market of the retaier; a reaxed reguatory framework of empoyment and retai site deveopment; favourabe operating costs (abour, rents, taxation, etc.); a geographica spread of trading risks; the opportunity to innovate, in new market conditions. 399

415 Internationa retaiing INTERNATIONAL RETAILING: A DEFINITION Before discussing retai internationaization, we need to define the actua process. Within the body of the academic iterature, no singe comprehensive definition is used. There are numerous attempts to describe the process and, athough they have obvious simiarities, distinct differences between them exist which can make discussion of the topic confusing. The term retai internationaization may seem cear enough, yet a number of compexities underie it. For exampe, does internationaization encompass ony the operation of stores outside the domestic market or does internationa sourcing count as internationa activity? Shoud a company with one store in a neighbouring market be differentiated from retaiers with a goba strategy operating in many diverse markets? Is a company with a portfoio of different brands/fascias going through the same process as a retaier which operates a singe brand around the word? Aexander (1997) has highighted the varying conditions that internationa payers operate in, suggesting that retai internationaization is: the management of retai operations in markets which are different from each other in their reguation, economic deveopment, socia conditions, cutura environment, and retai structures. Perhaps the most obvious definition of retai internationaization is the transfer of retai operations outside the home market; indeed, much of the research into retai internationaization is concentrated precisey on this. However, it is more sensibe to consider it as a wider and more compex process than merey the transfer of stores. It may invove the internationa transfer of retai concepts, management skis, technoogy and even the buying function. Based on this we woud suggest a usabe definition for retai internationaization is: the process of a retaier transferring its retai operations, concept, management expertise, technoogy, and/or buying function across nationa borders. These factors are discussed in the foowing subsections. 400 Operations A itera interpretation of retai internationaization is the expansion of a retaier s operation into a foreign market. The type of store may or may not be simiar to that in the home market. Even if it is an a but identica operation, it may we trade under a different brand/fascia than that operated in the domestic market. This decision is dependent upon (among other things) the sector of activity and the method of market entry. If a foreign retai operation is acquired, very often the new owner may chose to retain the origina fascia, particuary if it is an accepted and respected brand. For exampe, when in Juy 1999 US giant Wa-Mart bought UK grocery chain ASDA it retained the vauabe ASDA brand. It was not unti a year ater that it estabished its first ASDA/Wa-Mart Supercentre fascia, and even now pans are to ro out this joint fascia to ony a few of the very argest stores in order to differentiate them from the standard ASDA hypermarkets. If a retaier chooses to enter a new market by organic growth, or perhaps by franchise, it may transfer an estabished domestic fascia. For exampe, the Arcadia Group operates

416 Internationa retaiing: a definition numerous cothing brands in the UK incuding Top Shop, Miss Sefridge and Dorothy Perkins and has transferred these, and other, fascias into numerous countries around the word. In 2001 Arcadia operated 284 non-uk outets across many of its different store brands. In contrast, athough US cothing retaier The Gap operates two other chains at home (Od Navy and Banana Repubic), it is ony its core fascia that has been expanded internationay. A new fascia is particuary attractive and gets attention in sectors such as cothing where a new foreign brand is perceived as more gamorous or fashionabe than its competitors, exempified by the success of Swedish brand H&M Hennes & Mauritz and Spanish fashion payers Zara and Mango on entering the UK. Concepts Retai concepts incude innovations in the industry, such as the sef-service concept which first emerged in Caifornia in 1912, with the ater estabishment of the first supermarket in New York in This concept was transferred to a number of internationa markets within the next two decades; for exampe, to Sweden and Germany in 1938, and France in Simiary, the convenience store format, which originated in the USA in the ate 1920s, was subsequenty the focus of internationaization with its transfer to Europe in the 1970s (Sternquist and Kacker, 1994). The process of internationaization may introduce new retai formats into markets. For exampe, the hypermarket was initiay deveoped by Carrefour in France in Carrefour subsequenty transferred it into foreign markets sometimes extremey successfuy, as in the case of Spain and Brazi, and other times with ess success such as the UK and USA (Dupuis and Prime, 1996). Retai concepts aso encompass particuar retai offers focused on niche consumer segments. The internationaization of The Body Shop brought with it the idea of environmentay sensitive products and a sociay responsibe organization. The success of such concepts has meant that they have been adopted by competitors in the markets The Body Shop has entered, both in terms of the deveopment and growth in natura toietries and cosmetics, and the spawning of simiar retai offers, such as Nectar based in Northern Ireand and O. Boticario, a Braziian company now aso operating in Europe. The retaier who originay deveoped the concept may carry out the transfer of retai concepts into a new market or they may be copied. One scenario is when a retaier sees a successfu concept in a foreign market for exampe, a stye of retaiing, a particuar format or a niche retai approach and then transfers the concept into its own home market. Athough it may not have experience of operating that particuar concept, it woud have knowedge of the domestic market and the prevaiing conditions. An exampe of this incudes Sainsbury s (among others) importation of the supermarket format from the USA to the UK in the ate 1940s. Conversey, a retaier who is operating a particuar retai concept and perceives that a simiar format woud be successfu in a foreign market may carry out concept internationaization. Exampes of such actions incude Swedish based furniture retaier IKEA, which fet its concept was strong enough to transfer into other markets. IKEA perceived its offer was not reiant on particuar market conditions, and hence coud be successfu in a variety of non-domestic markets. IKEA seek to target a specific part of the market, mainy those setting up home for the first time, an audience that is found around the word, and aims to be the destination store for this consumer group. 401

417 Internationa retaiing Exampe: Adi deveops new outets across Europe The majority of UK grocery retaiers have reentessy moved into midde to upmarket positionings with their retai offers. They have concentrated on deveoping own-brand offers, improving quaity and service eves, and designing arge outets with car parking and other faciities. The budget sector position has been eft to a few imited ine, no fris service providers which concentrate on manufacturer brands. However, Adi, the German heavy discounter which is one of the argest grocery retaiers in Europe, has entered the UK market. Adi is a no fris retaier with itte spent on store fittings and atmospherics. The way Adi and other internationa payers gain advantage from being internationa is: system transfers panning, budgeting and distribution systems which have been tested in different markets can be impemented easiy; peope transfers skied peope can be assigned across nationa borders, thus drawing upon an internationa experienced workforce; economies of centraization rather than dupicating the main company systems functions across different countries, they can be centraized, thereby deveoping greater competence and reducing costs; goba perspectives internationa retaiers are we positioned to understand the different opportunities and retai changes which may benefit the whoe of the business given the right strategies. Management expertise The transfer of concepts is reated to the internationaization of management expertise. This incudes the internationaization of skis and techniques used in the management and running of the company; aso incuded is the transfer of characteristics of the company cuture. An important means of transferring management functions is through the formation of aiances. Retai aiances were once seen primariy as a means of achieving economies of scae in buying; modern internationa aiances go much further than this. Retaiers motives for joining aiances incude: operationa synergies, buying economies of scae, increased retaier power over manufacturers, the deveopment of retaier ownabes, and joint defence buiding against the market entry of foreign competitors. Internationa retai aiances are an outcome of the growing trend of gobaization. Successfu aiance management requires cose co-operation, communication, synergistic performance measures and an agreement to common objectives. The focus of aiances has atered somewhat in the ast coupe of decades. The 1980s saw the deveopment of strong aiances, particuary in the food sector, in order to gain a scae advantage in reationships with manufacturers. For exampe, Associated Marketing Services (AMS) was set up in 1988 members incude Ahod of the Netherands, Casino of France and Safeway of the UK. With the boom in retai internationaization in the 1990s, aiances geared themseves towards providing scae for retaiers to compete with the retai giants, such as Wa-Mart which has a massive turnover of a207 biion and Carrefour which operates in 27 countries. Advances in technoogy have spawned a new type of aiance in the form of businessto-business (B2B) onine exchanges, for exampe, the WordWide Retai Exchange and the GobaNetExchange whose members incude Carrefour, J. Sainsbury, Metro of 402

418 Internationa retaiing: a definition Germany and US grocer Kroger. The aim here is to increase efficiencies throughout the suppy chain rather than soey trying to give retaiers a better bargaining position. Technoogy The scae and sophistication of retaiers, especiay those operating internationay, means that they require the use of technoogica advances to remain competitive. The introduction of IT has aso aowed the deveopment of new techniques and systems used in the centra management of retai operations to improve decision-making in functiona areas such as finance, personne and ogistics. These areas are increasingy compex functions for internationa payers. Technoogy is aso impemented at the operationa eve, for exampe EPOS systems in stores. Internationaization may not aways invove the introduction of state-of-the-art technoogy, but generay wi invove empoying technoogy that is reativey advanced. Retaiers may justifiaby fee that it is preferabe to move into a market where they have a technoogica advantage. In such a situation the technoogica advantage woud confer a competitive advantage over indigenous retaiers. So, athough technoogy may be empoyed for the purposes of efficiency and cost savings, it may aso be used as a form of competitive advantage in itsef. The impementation of technoogy in many aspects of the retai industry internationay has numerous impications. Notaby, a changed working environment is imposed upon the recipient country. The process of internationaization can resut in changes in the retai environment of the host country. This is particuary the case when a retaier originating from a deveoped market moves into a country with a ess-deveoped retai structure. It is not just the introduction of specific formats or new technoogica toos that impacts on the host; the use of sophisticated management structures may aso have a significant effect on the host country. For exampe, a study of non-indigenous retaiers in the Greek market suggested that the major impact is not the introduction of new forms of retaiing, but the diffusion of modern management thought and practices (Boutsouki et a., 1995). Buying Finay, as in retai operations management expertise and technoogica know-how are being increasingy transferred across nationa borders, so is the function of buying indeed it is sourcing that has had the greatest impact in terms of internationaization. In the post-war era many manufacturers have grown in size and have become transnationa corporations. In many cases this has resuted in retaiers, even those whose retai operation is based soey in the domestic market, deaing with manufacturers and whoesaers in foreign markets. One of the major motives for retaiers to join an aiance is sti the efficiencies and everage they can attain in sourcing. When deaing with transnationa manufacturers, the benefits of joining together to increase size are evident: to use their coective infuence with suppiers to reduce prices and improve quaity. For exampe, the European aiance EMD expicity stated its aim of exerting the combined purchasing power of its members: In unity there is strength. In internationa unity even more strength (Retai Inteigence, 1991, p. 18). 403

419 Internationa retaiing 404 It is suggested that internationaization of one function of a retai company often foows the internationaization of another aspect. For exampe, if a retai company internationaizes its product sourcing, this may ead to the internationa transfer of certain technoogies and management functions. This in turn deveops the experience and confidence of the retaier in operating in the internationa environment, which may act as a catayst to them foowing a growth strategy of internationaizing their operations. It is therefore possibe to consider the process of retai internationaization as foowing a earning curve. INTERNATIONAL RETAIL STRUCTURES As indicated by Davies and Finny (1998), unti the mid-1970s the eve of internationa retaiing was imited and characterized by many faiures. The eary companies were mosty American: Wooworths in 1909 athough now not American owned; British Home Stores (now Bhs) was incorporated in 1928 by two Americans, and Safeway in 1963 prior to being acquired by Argy (now Safeway pc). European retaiers were far ess ambitious, with the exception of eary moves by C&A, Boots and Marks & Spencer. Whie we may tak of a goba retai environment there remain fundamenta differences between nationa retai markets. Despite the existence of truy goba retai brands, which are found throughout the word, retai structures remain traditiona in many parts of the word. Informa retaiing, such as open trading markets, characterize deveoping regions. Even though modern forms of retaiing are emerging in such markets, traditiona retai styes remain an inherent part of the market structure and are inescapaby bound to the oca cuture and ifestye. For exampe, even in Singapore with its sophisticated shopping mas and whoe array of internationa retaiers, shopping for produce at markets remains a daiy way of ife for many peope. Measuring retai structures So what do we actuay mean by the term retai structure, and how do we measure it in order to compare markets? The structure of the retai environment generay refers to the nature and characteristics of the market: for exampe, the type of retai operations, the variety of retai offers, store ocation and nature of ownership. In terms of measuring the retai environment, eves of market concentration are often used. Higher eves of concentration are associated with more deveoped markets. For exampe, the top three retaiers of each country account for 58 per cent of a saes through food retaiers in Germany and 47 per cent in the UK and in France, indicating that these are highy deveoped retai environments. Compare this with concentration eves of just 22 per cent for Itay and 8 per cent for Poand, iustrating their ess deveoped retai industries (Retai Inteigence, 2001b). This is expained by the fact that, as retai industries deveop, so mutipe organizations begin to take market share from traditiona independent and co-operative retaiers; thus, a smaer number of arger organizations are taking a greater proportion of the market. The eve of retai structure deveopment can be measured not just by the number of retai organizations, but aso by the number of stores (Davies and Whitehead, 1995). As iustrated in Fig. 15.1, as a demand-ed retai market begins to deveop, so the number of stores, and aso the number of retai companies, increases. As the market becomes

420 Internationa retai structures Fig Measures of retai deveopment Source: Adapted from Davies and Whitehead, 1995 more structured, the number of retai organizations begins to drop off due to the dominance of fewer but arger mutipe organizations. The number of stores begins to decrease because the size of individua shops has increased in order to gain scae economies and efficiencies, and so one store can serve a arger group of the popuation. In the deveoped retai market of the UK there are some 185 inhabitants per retai outet, this compares to just 66 peope in Greece, impying that stores in Greece are much smaer (Retai Inteigence, 2000a). The number of empoyees per retai business or per store aso increases since traditiona retai businesses are characterized as sma scae, and empoy few peope per outet and per company. As the retaier deveops, the size of the store tends to increase, as does the number of outets per business. Hence, more deveoped retai industries have more empoyees per business and more empoyees per store. A more genera measure of prosperity and deveopment in a market is the proportion of consumer expenditure that goes on retai. As the popuation becomes more weathy a greater proportion of income is spent on non-essentias, thus a smaer percentage of tota spend goes on food and cothing (athough the actua amount may increase) and a higher share of spending power is directed towards non-essentias such as hoidays and eisure activities. This is exempified by the fact that in Germany some 28 per cent of consumer expenditure went through retaiers, whie in Portuga a much higher proportion, some 60 per cent, was accounted for by retai (Retai Inteigence, 2000b). Tordjman (1995) has divided the markets of Western Europe into a four-stage matrix of structura deveopment. The advanced markets of the UK and Germany are characterized by having the highest eves of concentration and a ceary segmented market. Next are the structured markets of France and the Netherands, foowed by the intermediary markets of Spain and Itay and, finay, the traditiona retai structures of Portuga and Greece. Rather than regarding these as unchanging distinct phases, it is perhaps more usefu to consider these markets as being at different points aong a continuum of retai deveopment (see Fig. 15.2). 405

421 Internationa retaiing 406 Fig A continuum of European retai structures Source: Adapted from Tordjman, 1995, p. 25 The retai environments of former centray panned economies (CPEs) may appear simiar to other deveoping markets whereas there are fundamenta differences. For exampe, the Russian retai industry is based on a egacy of a suppy-ed, not a demanded economy. Retaiing has traditionay been perceived as an unproductive ink in the channe of distribution. The outcome of this is that concepts such as marketing, product advertising or the roe of the saesperson were previousy unknown or at east absent. Whie many foreign operations are moving into former CPE markets as a resut of consumer demand and imited indigenous competition, the former state-owned operations are finding it difficut to transform themseves. It is important to note that the above description does not fuy expain the structure of CPEs and former CPEs. With a retai industry based on suppy rather than demand, the pattern of growth in terms of size and number of retai businesses does not foow the same rues. The nature of the economy dictates that increased consumer demand is not met by more stores or the deveopment of mutipe organizations, thus former CPEs need to be anaysed separatey. The foowing section refers to markets by their nationa borders, which suggests that there are various differences between nationa retai markets. Whie fuy supporting this assertion, it is aso necessary to point out that there may be simiarities between markets retai characteristics do not necessariy change abrupty at nationa borders. For exampe, it may be difficut to distinguish differences between retaiing in western Germany and conditions across the Dutch border. It is aso true to say that conditions may vary consideraby within nationa markets; indeed, this was a point made by Hoander (1970) in a semina study of internationa retaiing. He suggested that differences between retaiing on the East Coast of the USA and on the West Coast far outweighed variations between the retai environments of north-east USA and Canada, despite the nationa border separating them. This concept, that variations may be greater within a market than between them, has aso been supported in a European context (Dawson, 1994; Myers, 1996). MOTIVES AND REASONS FOR INTERNATIONALIZATION A question fundamenta to the discussion of retai internationaization asks why retaiers foow such a strategy. Invariaby operating in a new market is a high cost and high risk method of growth. Indeed, it has been suggested, Goba retaiing demands huge investment and gives no guarantee of return (quoted in Lamey, 1997). Whie there are certainy successfu internationa retaiers, there are many exampes of faiure. Faiure is, undoubtedy, the resut of a series of compex and interreated factors. For exampe, athough a successfu domestic retaier, Boots the Chemist has had a number of internationa ventures that it has subsequenty pued out of. It has retreated

422 Motives and reasons for internationaization from Canada, New Zeaand, France and the Netherands and most recenty its Japanese operation. It sti has stores in Taiwan and concessions in Thaiand. Just because a retaier successfuy internationaizes into one market does not mean it can necessariy repeat this success esewhere. For exampe, Tesco entered Ireand in 1978 ony to pu out in 1986 after incurring substantia osses. Tesco re-entered the Irish market in the ate 1990s and aso operates stores in Eastern Europe and Asia. Growth strategies If it is assumed that retaiers want to grow their company, then they have three options (Peegrini, 1994; Treadgod, 1991): 1 From operating their core offer in the home market they may choose to foow a strategy of sectora expansion, whereby they move into new formats, retai sectors or even outside the retai industry. 2 The second growth strategy open to retaiers is to remain with the core offer and to transfer this into new markets. The advantage of this is that they are experienced in the operation; however, they may need to earn about and adapt to new market conditions. 3 The third method of growth is to use a combined strategy, whereby a company may move away from its core offer and aso internationaize. Athough this may baance the risks somewhat it may mean the board ose focus. If this strategy is taken to its extreme, the company then becomes an internationa portfoio or hoding company. Exampes: Growth strategies Sectora expansion The John LewIs Partnership runs a chain of some 25 department stores. In addition it aso operates 120+ Waitrose supermarkets. There may seem itte connection between the two but both are pitched at the mid to upper market and so have a simiar target market and compementary retai offers. The company aso has its own manufacturing operations and own-brand is important for both chains. The advantage of being a muti-sector retaier concentrating on the home market is that it is famiiar with the domestic consumer market and its brand image is strong enough to transfer from one sector to another. Internationa expansion An exampe of such a retaier is the German hard discounter Adi. The company was founded in the immediate post-war years with an orientation on heaviy discounted imited ines of generic products. Since the 1960s Adi has moved into numerous European markets and aso the US, using a method of organic growth. Athough a number of aternative fascias are used, a stores are practicay identica. This generates vast economies and efficiencies of scae. Despite moving into a variety of markets, Adi has made the very minimum of adaptations to its retai offer. Combined sectora and internationa expansion Kingfisher operates in a number of chains in sectors incuding DIY (e.g. B&Q, Castorama) and eectrica (e.g. Comet, Darty) but is divesting in genera merchandise (e.g. Wooworths). It has stores in numerous European countries as we as the Far East, Canada and Brazi. The company has aso ventured into e-commerce. The advantage of this strategy is the array of opportunities it offers; however, it aso increases the probems associated with working in unfamiiar markets and in unfamiiar sectors. A danger is that the company may ose direction. It is a strategy perhaps more appropriate for experienced internationa companies. 407

423 Internationa retaiing Reasons for internationaization The motivations underying the decision to internationaize have been addressed in a number of ways. One of the first studies, by Hoander in 1970, proposed five reasons for retai internationaization: 1 inadvertent internationaization; 2 non-commercia motives; 3 commercia objectives; 4 government reguation; 5 capitaizing on existing or potentia saes opportunities. By inadvertent internationaization Hoander was referring to poitica instabiity. Changes in the demarcation of nationa borders may mean a retai company is operating in a different market athough its stores have not physicay moved. This is exempified by changes in Eastern Europe. The US retaier K Mart entered Czechosovakia and within a year found itsef operating in two distinct markets, the Czech and Sovak repubics (Aexander, 1995; Loker et a., 1994). Miton Friedman (1970) controversiay suggested that the ony responsibiity that businesses have is to increase their profits. However, Hoander (1970) perceived that some retaiers may move into new markets not to make money but for non-commercia reasons of poitica, persona, ethica or socia responsibiity. For exampe, retaiers may move into markets for reasons of socia and environmenta responsibiity, notaby The Body Shop s Trade not Aid sourcing poicy, or to hep deveop infrastructures in order to stabiize economies, such as in Eastern Europe. Commercia objectives incude entering a market in order to estabish a presence before a competitor, to gain important market knowedge before moving in on a arger scae, or to earn about innovations to transfer esewhere. The impact of government reguations is perhaps more ikey to infuence the choice of market rather than be a prerequisite to internationaization. Retaiers are obviousy more ikey to enter markets with fewer restrictions on their growth. If reguations at home are severey restricting growth pans it may be the catayst that pushes them into the internationa arena. A prime exampe of such a situation is the Loi Royer in France, which severey restricted the deveopment of arge out-of-town stores. The outcome was that French hypermarkets turned to ess restrictive markets, such as those in Spain, to continue their expansion. Hoander s fifth suggestion is probaby the most obvious. Retaiers are businesses seeking the best growth potentia possibe, therefore if they perceive significant opportunities in overseas markets they are ikey to capitaize on them despite the risks invoved. 408 The proactive reactive debate The strategic focus of retaiers is shaped by a set of underying forces. If a retaier expands by moving into foreign markets, it is due to the infuence of a set of specific conditions in both the externa environment and the interna factors within the company. Traditionay, internationaization has been viewed as the outcome of forces pushing the retaier from the domestic market. It is proposed that if market conditions make it

424 Motives and reasons for internationaization Fig The proactive reactive continuum increasingy difficut for retaiers to continue to expand, then they wi be forced to seek opportunities for further growth in a new market. This has been termed the reactive schoo of thought. The other perspective suggests that retaiers internationaize not because of imitations at home but rather because they seek opportunities in other markets. This has been defined as the proactive response. The debate about these two ideas continues and it is now suggested that there is a need to use an integrated approach when studying retai internationaization (Aexander and Myers, 2000). In many cases, it is true to say that retaiers internationaize as a resut of a combination of both push and pu factors. If this is indeed the case, it is perhaps more appropriate to view motivations for internationaization not as dichotomous forces, but rather as two ends of a continuum (see Fig. 15.3). Forces acting to push retaiers from continuing to expand within the home market incude: structura conditions that inhibit the deveopment of further growth for exampe, competitive pressure from increasing rates of market competition, retai format maturity, retai sector concentration and the proximity of saturation eves; egisative factors, for exampe, the impact of panning restrictions controing the deveopment of arge-scae out-of-town food stores or regiona shopping mas such as Buewater; poitica issues, such as the unstabe environment of Eastern Europe; socia and demographic factors, such as the effect on consumer demand of an ageing and decining popuation; economic issues, an exampe being the impact of a recession on consumer spending power. Pu factors are the opposite. In some respects they may be considered to be the reverse side of the coin. For exampe, a market that has comparativey unrestrictive egisative measures concerning such issues as store opening hours may serve to highight the potentia for growth. A retaier faced with a restrictive environment in its home market may therefore seek to move into one with ess reguation. A market with a growing popuation may appear attractive to retaiers from countries with ageing demographic structures. Simiary, a market with a high amount of consumer expenditure is ikey to be more attractive than one where consumers have imited spending power (see Tabe 15.2). The traditiona interpretation of internationaization is the reactive schoo of thought. Primariy based on observing the actions of retaiers in the 1960s, 1970s and eary 1980s, it suggested that the underying motives for increasing numbers of retaiers moving into foreign markets were push factors, namey the ack of opportunities at home (Kacker, 1985; Samon and Tordjman, 1989; Treadgod, 1988). It was considered that retaiers woud not undertake a high risk and high investment strategy of 409

425 Internationa retaiing Tabe 15.2 Push and pu factors Factors Structura Legisative Poitica Socia/demographic Economic Push exampes Maturity of superstore in UK Panning restrictions for arge out-of-town stores in France Instabiity in Eastern Europe Decining popuation in deveoped Western markets Economic recession in Japan Pu exampes Competitive advantage of importing hypermarkets to Indonesia Laissez-faire reguations in Greece Stabe poitica environment in Germany Increasing and unfufied consumer demand in deveoping parts of Europe Increasing consumer expenditure in Latin America internationaization uness prospects for continued growth within the domestic market were severey curtaied and they had few options or opportunities for domestic growth. In contrast, it has been suggested that pu factors motivate retaiers activey to seek and identify opportunities in foreign markets. Proactive internationaization occurs when perceived opportunities in foreign markets outweigh the associated risks and high investment necessary for internationaization, regardess of the opportunity for continued growth in the domestic market. It is a more aggressive strategy, and potentiay more successfu as it may be impemented more sowy and with ess initia investment. There is aso ess risk, as there is sti growth within the home market. Even within the reactive schoo of thought, the infuence of pu factors is not ignored. Instead, it is suggested that rather than being a reason for retaiers seeking to internationaize, pu factors are an important infuence in the choice of one market over another. In contrast to research based on observing retaiers actions suggesting a reactive view, empirica work conducted in the eary and mid-1990s proposed a proactive interpretation (Aexander, 1990a, 1990b; Wiiams, 1992a, 1992b; Myers and Aexander 1996, Myers, 1996). Aexander (1995) suggests that the degree to which a retaier is wiing to expoit opportunities in the internationa arena the extent to which they are proactive internationaists is party dependent on the operation s format and merchandise as we as saturation eves within the domestic market. Whie the reactive schoo of thought proposes that retaiers internationaize when there is a high eve of market saturation, despite the fact that they operate formats with ow eves of goba reevance, the reactive interpretation suggests that retaiers internationaize when operating a format with a high degree of goba reevance, despite there being ow eves of saturation within the home market. The importance of the proactive debate in the atter research does not necessariy contradict the reactive schoo of thought, but simpy provides an anaysis of the perceived motives for internationaization in the 1990s. It may be viewed as a continuum aong which the motives underying internationa expansion can be paced. It woud appear that at different times and to different extents for individua retaiers, factors of both a reactive and a proactive nature work in conjunction as underying motives in the decision to internationaize. 410

426 Motives and reasons for internationaization Driving forces In addition to anaysing environmenta infuences such as economic growth and egisative conditions, interna factors, for exampe the opinion of senior directors and management phiosophy, are aso considered part of the compex array of factors underying the motives for retai internationaization. McGodrick and Davies (1995) have constructed a mode of the driving forces of internationaization. This is a deveopment of the dichotomous push pu theory. In addition to anaysing the effects of environmenta factors, consideration is aso given to the impact of various infuences within the organizationa sphere. Defining and understanding the factors of infuence within the organizationa sphere is particuary usefu as they are more easiy controed, unike the environmenta factors which are often beyond the contro of retaiers. MINICASE 15.1 Creating a warm, fuzzy feeing: Factory outet centres are set to do we in Europe ony if they are abe to master the art of US-stye customer service FT Anyone who has ever savoured the smug feeing that comes from buying upmarket goods at downmarket prices wi understand factory outet centres. They offer the opportunity to get the feeing in wedesigned, comfortabe surroundings with access to food, eisure and ampe, free parking. Factory outets are itte more than shopping centres where the distributors are the manufacturers rather than retaiers. They are a necessary adjunct to any producer of consumer goods that has to cear unsod inventory to make way for the atest ine. Typicay, the products sod at factory outet centres are not damaged seconds but prime merchandise in ast year s styes and coours that are unikey to se at fu price. For consumers who may not care whether the Versace suit they buy is the atest ook, factory outet centres are a boon. Given their inherent attractiveness, the question is why factory outet centres, a ong-time stape of the US shopping scene, have taken so ong to come to Europe. Do Europeans not want the warm, fuzzy feeing that comes from buying that Prada handbag at a 50 per cent discount? Research says that of course they do. According to the European Factory Outet Center Report by the Institut für Gewerbezentren, based in Starnberg, Germany, the number of factory outets in Europe has soared over the past two years. From 40 in 1998, the number wi have grown to 77 by the end of this year and is expected to reach 93 by the end of Tota retai area for this format is expected to exceed 1m sq metres by the end of next year in an industry that was represented by just three European centres in What is interesting, the report notes, is that whie the number of factory outets in Europe is surging, the data suggest that in the US where the concept first took off the sector is showing signs of decine. The number of centres opened in the US has been decining steadiy each year since 1993, according to data from Vaue Retai News, the Forida-based newsetter of the Internationa Counci of Shopping Centers. Currenty, there are 278 centres in the US, down from 329 in Momme Fak, project director for the European Factory Outet Center Report, says the decine in the number of centres does not mean they have aready passed their zenith. On the contrary, he says, oder, smaer centres are cosing whie much arger centres are opening. Indeed, the VRN data show that the average size of a factory outet centre has neary doubed to 207,469 square feet from 122,000 in But the big chaenge for factory outet centres in the US, according to Linda Humphers, editor-inchief of VRN, is saturation. The probem for Europe wi be that, eventuay, you cannot buid any more of them, she says. Outet centres, she says, sprung up originay in areas that were desperate for some retai offering we away from urban centres. Manufacturers aren t going to go into their own distributors back yards, she says. 411

427 Internationa retaiing Whie the dominant ocation in the US is one equidistant between two conurbations, more than haf a European factory outets are ocated in edgeof-town ocations. The second most popuar ocation is in the midde of nowhere, where 24 per cent of the centres are to be found. Mr Fak says that the chaenge of saturation that has affected US factory outet centres is far more ikey to arise in Europe because panning is so much more restrictive. In countries such as Germany, he says, there is aso fierce opposition from oca retaiers and manufacturers, making approva of new sites very difficut. German consumers, he says, are very price-conscious and woud probaby ike more discount shopping outets. But are peope going to take to the streets to protest against this? he asks. I don t think so. Sti, a ook at the evoution of the US market suggests some chaenges for factory outet centres in Europe. For one thing, even the casua observer of the US retai scene cannot hep but notice the strong gains in market share by cut-price retaiers such as Wa-Mart and Target at the expense of fu-price department stores and fashion retaiers. But with discount goods avaiabe on every street corner, who needs factory outet centres? Ms Humphers says that shoppers in outet centres are typicay seeking more than just ow prices. Who shops at outet centres isn t just the bargain hunter, she says. It s the brand shopper, the aspirant shopper. Simiary, Mr Fak makes the same distinction in ooking at the customer base for outet centres in Europe, separating bargain hunters from vaue hunters. Vaue hunters, he says, are as motivated by the opportunity to buy quaity as to buy cheap goods. They want to shop in comfort and to take advantage of a high standard of customer service. The centres in Europe most ikey to thrive, even in a saturated environment, are those catering to the most sophisticated shopper, he says. Ironicay, it is probaby in the area of customer service an absoute essentia to US upmarket consumers that European factory outet centres fare worst, Ms Humphers says. I beieve that in Europe, the outet industry is run by the deveopers. In the US, it s a retai-run business, she says. Even at a 50 per cent discount, a Prada handbag needs to be sod with tender oving care in order to induce that warm, fuzzy feeing that is the essence of factory outet shopping. Source: Norma Cohen, Financia Times, 31 August 2001 Environmenta factors incude those that: promote internationa activity, such as the avaiabiity of suitabe targets for acquisition and ower poitica and economic barriers; push retaiers from their home market, eements such as domestic trading restrictions and market saturation. In addition to environmenta infuences, the framework gives prominence to infuences within the organizationa sphere that: inhibit the impementation of a strategy of internationa expansion, such as start-up costs and fear of sharehoder reaction; faciitate, for exampe, the effect of internationa aiances and the bandwagon effect. As iustrated in Fig. 15.4, findings from an empirica study of the internationa activity of the argest European food retaiers supported McGodrick s mode in Chapter 1 of McGodrick and Davies (Myers, 1996). Whie structura factors in the home market such as the maturity of domestic food retai formats push retaiers to internationaize, demographic conditions in potentia host markets may pu retaiers into the market. Environmenta factors such as the estabishment of the Singe European Market promoted the opportunities avaiabe in other markets, whie obstaces such as anguage and 412

428 Motives and reasons for internationaization Fig Driving forces: European food retaiing Source: Myers, 1996; adapted from McGodrick and Davies,

429 Internationa retaiing cuture barriers had a negative effect. In terms of interna factors, though ack of experience may have hed retaiers back from making an internationa move, the image of wanting to be perceived as internationa was an important factor promoting internationa activity. MINICASE 15.2 Kingfisher s chief executive wants a run of good fortune FT Sir Geoffrey Mucahy wi next week trave to China for the opening of the biggest B&Q store in the word on what shoud be an auspicious day. The Kingfisher chief executive wi be in Shanghai on Wednesday, the eighth day of the eighth month of the year with the number eight signifying uck in moneymaking in China. The fotation of Wooworths (by Kingfisher) foows the sae of the Superdrug heath and beauty chain and marks the end of Kingfisher s invovement in genera merchandise retaiing. Sir Geoff wi ead a group focused on the more highy rated DIY and eectrica sectors and with a strong exposure to a series of internationa markets. Internationaisation may be a buzz word in the retai sector more often discussed than achieved, but Kingfisher now operates in 16 countries. A ot of peope tak about their internationa operations and their internationa businesses but there aren t many who make a whoe ot of money out of them, says Sir Geoff. He says the main priority is making sure that the group is getting the most out of a its businesses particuary given their geographic spread around the word. Next he wants to fix any underperforming businesses most notaby the ProMarkt eectrica chain in Germany, which has never found the right formua. Ony after that wi he turn his attention to acquisitions. If, after we have tacked those main priorities, there are other opportunities that come up we wi then actuay be in a position to tacke them, he says. His caution is we founded. The internationaisation of Kingfisher has not a been pain saiing. The expansion in Europe has been achieved mainy via France, where the group bought the Darty eectricas chain in 1993 and engineered a merger with Castorama, the DIY business, in He has sti to buy out the minority interests in Castorama, a dea which under current circumstances woud be highy diutive as the French business is more highy rated than Kingfisher. Taking heart from the US market, where eectricas and DIY are each dominated by two big companies, he says Europe wi move the same way. In particuar, he says changes to the German capita gains tax regime due to come into force at the start of next year shoud make some of the big retai groups there, many of which are famiy-owned, reconsider their positions. Europe is going to rapidy consoidate now, he says. It is quite cear to me that the train is out of the station and moving down the ine. But it is difficut to predict exacty what wi happen. Source: Susanna Voye, Financia Times, 2 August 2001 DIRECTION OF EXPANSION The direction of internationa expansion taken by retaiers has received a good dea of attention in recent years. Much of the recent research on internationaization describes either the deveopment of new markets or the invasion of home markets by foreign competitors. Burt (1993) suggested that the initia direction of internationa retai expansion is primariy determined by three factors: 1 cutura proximity; 2 geographica proximity; 3 the stage of deveopment of the retai market. 414

430 Direction of expansion Retaiers, at east in eary stages of internationa activity, tend to choose markets that are spatiay cose. Border hopping has obvious advantages in terms of ogistics and distribution. A retaier may be abe to service internationa stores from a domestic distribution warehouse, which is a more efficient and ess costy and risky option than setting up an entirey new distribution chain. This type of activity provides retaiers with the option of moving into a market on an incrementa scae, perhaps buiding their stores at a sow pace as they earn about the market. When first operating internationay, retaiers wi often try to move into markets they consider cuturay simiar. Knowedge of both the consumer and business cuture is important to success. Indeed it has been suggested that the degree of psychic distance is a key determinant of success (Evans, Treadgod and Mavando, 2000). Defining cutura simiarity may not be as easy as assessing eves of geographica and structura deveopment, not east because cuture is not necessariy dependent on nationa boundaries. However, cuture might we be one of the most saient factors; this being the case, the difficuties of defining and anaysing its impact shoud not resut in cuture simpy being ignored. The information box indicates the significant cutura considerations in internationaization. It has aso been assessed that retaiers usuay prefer to enter a market that is ess structuray deveoped than their home market in order to have competitive advantage over indigenous payers. Whie there are many exampes of such strategies, such as Carrefour moving into Brazi or Makro moving into South East Asia, it is not aways so straightforward. For exampe, the UK is characterized as one of the most competitive food sectors in the word, yet US giant Wa-Mart entered the UK despite knowing that they were moving into a market equay competitive to their home market. However, it is assessed that this was outweighed by the expected positive attitude of the UK consumer to the Wa-Mart concept (Arnod and Fernie, 2000). The socia and cutura environment Buying processes vary between different cutures. For exampe, the roe of women may differ on an internationa basis. Different famiy structures may pace more emphasis on the famiy producing some of the retai goods that woud otherwise be purchased in deveoped societies. Services that are taken for granted in one country may be rejected in another; for exampe, interest charges evied on a store credit card scheme wi not be acceptabe in some Musim cutures. Attitudes between cutures differ when promotions are utiized. Symbos, coours and product caims can be perceived in different ways. In most of the Arab word a woman s ceavage shoud never be utiized in promotions and bare arms are not acceptabe in Thaiand and Maaysia. In addition, merchandise that is bright in coour may not be acceptabe in a number of countries, incuding Japan. The knowedge of the importance of face and the need for the deveopment of socia connections in business transactions in orienta countries is a key to success. 415

431 Internationa retaiing Exampe: Entry into the UK food retai sector The UK is one of the most concentrated markets, the top three food retaiers taking about haf of sector saes. The primary format in the food sector is edge-of-town superstores. They are characterized as providing ease of access and car parks, high eves of service, a arge proportion of quaity own-brand ines, a strong retai image, an increasingy wide range of goods and services and the abiity to command high profit margins. Faiure The French company Carrefour transferred its hypermarket format to the UK ony to subsequenty withdraw. The venture faied for a number of reasons, not east its unacceptabiity to British consumers. For exampe, shoppers were not used to buying high priced non-food items from food stores and thus profit eves were hit. Superstores were aready beginning to offer the advantages of a hypermarket, namey ease of access and parking and onger opening hours, and shoppers preferred higher eves of service and the famiiarity of the trusted UK retai brands. Success Continenta hard discount operation Adi entered the UK in Again, the format was heaviy price oriented and with a imited service. Typicay it offered generic brands at prices one-third cheaper, made possibe by imited ines typicay 550 and high saes voumes. The company now operates over 225 stores in the UK. Its success is based on its strategy of not competing head-on with the big superstore chains, but rather offering a non-directy competing and indeed compementary format. Retaiers can be successfu not ony by entering markets that are ess deveoped than their home market, but aso by fiing a gap in the market. In terms of the whee of retaiing (McNair, 1958; Brown, 1987), the UK food sector had traded up from its price orientation to service and quaity. Consequenty a gap had been eft at the bottom of the market which was fied by the hard discounters. Whie the factors of geography, cuture and market structure are fundamenta to an understanding of the direction of expansion and are observabe within the commercia environment, it is dangerous to assume that attitudes towards the direction of expansion remain static. Consequenty a fourth factor, which aters perceptions of internationa opportunities, shoud be considered; it is time. This fourth factor has been recognized by Treadgod (1991) who suggests that retaiers, whie initiay reuctant to foow the high risk and cost strategy of internationaization, over time become ess cautious, more ambitious, and are incined to seek expansion outside the confines of the markets impied by those factors. Stages of internationa retai deveopment 1 Reuctant 2 Cautious 3 Ambitious 416 The underying ogic of Treadgod s (1991) mode (see Fig. 15.5) is that retaiers are initiay reuctant to internationaize due to the high investment and high risk invoved.

432 Market-entry methods Fig Stages of internationa deveopment Source: Adapted from Treadgod, 1991, pp At the time Treadgod assessed Tesco to be in the category of reuctant internationaist. The argument suggests that once they moved into the internationa arena, most ikey as a resut of push factors from the domestic market, their experience in operating on an internationa basis grew and they became cautious internationaists. J. Sainsbury was cited as an exampe of a retaier in the second stage of internationaization. Over time, they are ikey to move into markets of increasing geographica distance from home. The third stage in Treadgod s mode is when retaiers have significant experience in the internationa arena and have a wide geographica presence. Carrefour and Adi are quoted as ambitious internationaists. Retaiers do not necessariy deveop aong this ine of expansion and, once they have reached a certain stage, it is possibe for them to retreat rather than progress. A decade after Treadgod s work was carried out it is interesting to evauate whether the positions of these companies have changed. Tesco is now certainy an accompished internationa company with operations in Ireand, France, Eastern Europe, Thaiand and South Korea. Currenty Tesco might be assessed as being in the ambitious stage. And what of Sainsbury? They sti operate ony in the US. Perhaps we coud now categorize them as cautious going towards reuctant internationaists. Carrefour has operations throughout southern Europe and Latin America and is concentrating its efforts on South East Asia. The company is ambitious and its substantia operations in more than 25 countries make it one of the most goba retaiers in the word. Adi continue to ro out their stores in the more deveoped markets of Europe and the US, perhaps with a more cautious yet singe-minded strategy. MARKET-ENTRY METHODS Retaiers may enter new markets in a number of ways. Athough various terms are used, the basic choices are between acquisition, joint venture, organic growth, sharehoding and franchise. 417