Chapter 14 Buying Merchandise

Merchandise Management Planning Merchandise Assortments Retail Communication Mix Buying Merchandise Buying Systems Pricing

Merchandise Branding Strategies Manufacturer (National) Brands Designed, produced, and marketed by a vendor and sold by many retailers Private-Label (Store) Brands Developed by retailer and only sold in retailer’s outlets Licensed Brand Developed by licensee and right sold to either manufacturer or retailer The McGraw-Hill Companies, Inc./Jill Braaten, photographer

Spectrum of National vs. Private Label National Brands % Store Brands Wal-Mart Home Depot The Gap Limited Marks & Spencer IKEA Macy’s Target

Value of Retail Brands

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

Private Labels Advantages Unique merchandise not available at competitive outlets Difficult for customers to compare price with competitors Higher margins Disadvantages Need to develop expertise in developing and promoting brand Unable to sell excess merchandise Typically less desirable for customers

Manufacturer (National) Labels Advantages More desired by customers Resell excessive merchandise Don’t need skills and people to develop and promote merchandise Disadvantages Lower margins Vulnerable to competitive pressures Limit retailer’s flexibility

Buying from Vendors of National Brands Helps retailers build their image Helps build traffic flow Reduces selling and promotional expenses The McGraw-Hill Companies, Inc./Lars Niki, photographer

Most Recognized Apparel and Accessory Manufacturer Brands

Most Recognized Apparel and Accessory Private Label Brands

Examples of Private-Label Brands

Examples of Private-Label Brands

Examples of Private-Label Brands

Examples of Private-Label Brands

Going to Market for National Brands Wholesale Market Centers National Markets (new York), Regional Markets (Atlanta, Miami) Trade Shows Frankfurt Book Fair, Las Vegas Consumer Electronics, Atlanta Sporting Goods Internet Exchanges Worldwide Retail Exchange Meeting Vendors at Your Company Diverters, Closeout Specialists, Liquidators, Other Retailers (Gray Markets, Diversion)

What do Buyers do at Market? Meet with vendors Discuss performance of vendor’s merchandise during the previous season Review the vendor’s offering for the coming season May place orders for the coming season Sometimes they do not buy at market, but review merchandise, return to their offices to discuss with the buying team before negotiating with vendors

Negotiating with Vendors Two-way communication designed to reach an agreement when two parties have both shared and conflicting interests. Royalty-Free/CORBIS

Planning Negotiations Consider prior history Assess current situation General market conditions Vendor’s position Power of vendor Set goals Be aware of vendor’s goal’s Number of people involved Select an advantageous place Be aware of deadlines

Issues to Negotiation Price and gross margin Additional markup opportunities Purchase terms Delivery times and exclusivity Advertising allowances Transportation Steve Cole/Getty Images

Types of Negotiations Types of Negotiations Vendor Win Lose Win Buyer

Win - Lose Negotiation Can be good in the short run and bad in the long-run Short-term solution-- person you are negotiating with can’t lose all the time Might degenerate into LOSE - LOSE

Lose - Lose Negotiation Wastes time and energy No relationships established Objectives not met

Win - Win Negotiation Collaboration Cooperation Long-term relationship Doesn’t mean “giving-in” Enhances vendor trust Royalty-Free/CORBIS

Guidelines for Negotiations Separate people from problem Insist on objective criteria to evaluate performance Invent options for mutual gain Let the other party do the talking Know how far to go

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

Negotiating Tips Don’t over negotiate Don’t assume Visualize the negotiation Timing is everything Always leave the door open Maintain self-esteem

Negotiation SUMMARY Planning is critical Knowledge is power A person will only do what is right for him/her (c) Brand X Pictures/PunchStock

Functions Provided by Internet Exchanges Product Directories Use of Reverse Auctions Collaboration in Planning – CPRF Software General Information about Trends

Online Reverse Auctions Why reverse? Vendors bid for buyer’s business Price falls One buyer, multiple vendors

Reverse Auctions B S B Reverse Auction B S Traditional Auction B S S

Reverse Auction Process Develop specification Select potential sources and invite them to auction Bidding for several hours Select supplier

Price Path on Open-Bid Auction

Strategic (Partnering) Relationships Retailer and vendor committed to maintaining relationships over the long-term and investing in mutually beneficial opportunities PhotoLink/Getty Images

Strategic Relationships Win – Win --Concerned about expanding the pie, not how to divide the pie Retailer vs. Vendor

Building Partnering Relationship Discrete One Purchase at a Time Short-Term Focuses on Price Win-Lose Negotiations Governed by Contracts Partnering Anticipate Future Long-Term Considers all Elements Win-Win Collaboration Governed by Trust

Building Blocks for Strategic Partnerships Mutual Trust Open Communications Common Goals Credible Commitments Stockbyte/Punchstock Images

Developing Trust: Capability or Competence Salespeople demonstrate competence when they can show that they know what they are talking about. Requires knowledge of: The customer The product The industry The competition (c) Digital Vision/PunchStock

Stages in Building Strategic Relationships Awareness Exploration Expansion Commitment

Vendor Managed Inventory Manufacturer access to POS information Replenishment automatically triggered Enables demand-based view of replenishment & production planning – reduce bull whip effect

VMI—What it Lacked Focused on replenishment activity only Static-model based (assumed fixed reorder points to trigger replenishment) Often only moved inventory ownership rather than removing it Incomplete information for decision making Vendor and retailers use different systems and data bases

Collaborative Partnering Relationship - CPFR Common goals A single demand forecast developed collaboratively Collaborative Promotional planning & execution A single, shared data source Improved inventory management across entire Supply Chain Optimized replenishment strategies with joint ownership Process simplicity creates optimal framework for success

Legal and Ethical Issues Contractual Disputes Resale Price Maintenance Chargebacks Commercial Bribery Slotting Allowances Buybacks Counterfeit Merchandise Gray Markets and Diverted Merchandise Exclusive Territories Exclusive Dealing

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

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

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

Slotting Allowances Harvard School of Economics Give big suppliers competitive advantage over small suppliers Drive small suppliers out of business, then raise prices Anti-competitive – adverse effect of social welfare Chicago School of Economics – Free Market Improves market efficiency Resolve information asymmetry

Buybacks Used to get products into retail stores. Two scenarios: Retailer allows a vendor to create space for its goods by “buying back” a competitors inventory and removing it from a retailer’s system. Retailer forces a vendor to buyback slow-moving merchandise.

Counterfeit Merchandise Goods made and sold without the permission of the owner of a trademark, a copyright, or a patented invention that is legally protected in the country where it is marketed. Major problem is counterfeiting intellectual property.

What to do About Counterfeiters Trademark,copyright, and/or patent products in the countries in which they’re sold. US government is engaged in bilateral and multicultural negotiations and education to limit counterfeiting. (WTO) Take steps to protect yourself.

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

Gray-market and Diverted Merchandise: Taking Sides Discount stores argue customers benefit because it lowers prices. Traditional retailers claim important service after sale will be unavailable May hurt the trademark’s image.

Avoiding the Gray-Market Problem Require customers to sign a contract stipulating that they will not engage in gray marketing. Produce different versions of products for different markets. Steve Cole/Getty Images

Exclusive Territories Granted to retailers so no other retailer in the territory can sell a particular brand. Benefits vendors by assuring them that “quality” retailers represent their products. Assure retailers adequate supply. Grants retailers a monopoly. Illegal when they restrict competition.

Exclusive Dealing Agreements Occur when a manufacturer or wholesaler restricts a retailer into carrying only its products and nothing from competing vendors. Illegal when they restrict competition.

Tying Contracts An agreement that requires the retailer to take a product it doesn’t necessarily desire to ensure that it can buy a product it does desire. Illegal when they lessen competition. Ok to protect goodwill and quality reputation of vendor.

Refusals to Deal Suppliers and retailers have the right to deal or refuse to deal with anyone they choose. Except when it lessens competition. Kent Knudson/PhotoLink/Getty Images

Ethical Issues Should a retailer sell merchandise that it suspect was made using child labor? Should a retailer advertise its prices are the lowest available in the market even though some items are not? Should a retail buyer accept an expensive gift from a vendor? Should retail salespeople to use a high-pressure sales approach when they know the product is the best for the customer’s needs? Should a retailer give preference to minorities when making promotion decisions? Should a retailer treat some customers better than other customers?

Guidelines 1. Would I be embarrassed if a customer found out about this behavior? 2. Would my supervisor disapprove of this behavior? 3. Would most co-workers feel that this behavior is unusual? 4. Am I about to do this because I think I can get away with it? 5. Would I be upset if a company did this to me? 6. Would my family or friends think less of me if I told them about engaging in this activity? 7. Am I concerned about the possible consequences of this behavior? 8. Would I be upset if this behavior or activity were publicized in a newspaper article? 9. Would society be worse off if everyone engaged in this behavior or activity?