CTE 3862 Exam 3

Price variability

(differential pricing) different prices are charged to different customers

statement of cash flows - three components

- Cash Flow from Operating Activities: includes cash received or disbursed from all of the activities involved in a retailer's operations. - Cash Flow from Investing Activities: cash received or disbursed from extending or collecting loans and acquiring or disposing of investments or long-term assets. - Cash Flow from Financing Activities: Cash received or disbursed from activities dealing with the retailer's own debt and capital instruments, for example, dividends paid to stockholders.

Pricing and the Customer

- Customers must be the center of pricing decisions - Retailers view price in terms of strategy - Consumers view price in terms of benefits and value - Because of differences in the customer base, retailers may charge different prices for their different market segments

markdowns - Reasons why retailers take

- Move older products - Clear inventory for a move to a new location or a remodel - Drive traffic

financial statements - three types

- income statement - balance sheet - statement of cash flows

Factors affecting elasticity

-Availability of substitute products -Time period under consideration -Price points -Permanent vs. temporary price changes -Proportion of consumer's budget to purchase item -Whether it is a necessity or luxury

Types of theft

-Shoplifting -Employee theft -Vendor Theft -Accounting and Tracking Errors

Assets

Anything of value that a retailer owns, broken into two categories: -Current assets: cash/inventory -Long-Term assets (Total assets = current assets + long-term assets)

balance sheet (basic concepts)

Assets = Liabilities + Net Worth Net Worth = Assets - Liabilities

Liabilities

Financial obligations owed by the retailer, two categories: -Current Liabilities -Long-term Liabilities (Long-term Liabilities + Current Liabilities = Total Liabilities)

Operations Management (OPS)

Involves the implementation of store policies, tactics, and procedures for things such as - human resources - purchasing, accounting, and inventory systems - supply chain management and logistics - various areas of marketing

Formula for calculating Planned Sales Increase when LY sales and planned % increase are known:

LY sales x planned increase % = sales (dollar) increase LY sales + sales (dollar) increase = TY planned sales

Formula - Markdown dollars

Markdown (in $) = Original retail selling price - New selling price

Formula - Markdown percentage

Markdown amount in dollars (MD$) ÷ the Original Retail (OR)

Markup Percentage formula

Markup % = Amount of markup ÷ Retail/Selling price (R)

Markup Pricing Formula

Markup (MU) = Retail Price (R) - Cost (C)

Library sources: when looking for public companies use...

Mergent Business

competitive pricing

One of the key components in establishing price is the competition - Must understand how your competitors' price and how your competitors react to changes in pricing - Price should help create desire - Helps to carry unique merchandise or offer a unique service (differentiation) - Retailers typically don't compete on price alone - Price competition drops profit margins

Forecasting

One of the most difficult aspects of merchandise planning

Library sources: when looking for private companies use...

PrivCo

Merchandising

Refers to activities involved in organizing the display of products or services

Cost Behaviors

Relates to the changes in total costs when sales volume increases or decreases - fixed or variable costs

Markup based on cost

Retail Price = Cost + Markup

Inventory Planning: the problem with too much or too little stock

Retailers must plan for various levels of inventory - Too much stock ties up capital - Too little cause stock outs and lost sales and customers

SG&A includes:

Sales commissions Salaries Payroll tax Fringe benefits Rent Insurance IMC Maintenance Utilities Advertising Depreciation

Formula for calculating percentage of sales DECREASE

TY planned sales - LY actual sales = sales decrease Sales decrease ÷ LY actual sales x 100 = % sales decrease

Formula for calculating percentage of sales INCREASE

TY planned sales - LY actual sales = sales increase Sales increase ÷ LY actual sales x 100 = % sales increase

Net worth

The retailer's assets minus the liabilities. Often referred to as owner's equity. Represents the net value of a retail business on a cost basis.

Categories of Potential Pricing Objectives

There are numerous categories that are used to develop effective pricing objectives: - Product quality - Skimming - Market penetration - Market share - Survival - Return on Investment - Profit - Status quo - Brand/Image

budget forecasting

To develop a budget a retailer must forecast planned sales -Forecast should include as many variables as possible - Larger companies use computer models to generate forecasts

balance sheet? and why is it important?

Used to itemize the retailer's assets, liabilities, and net worth as a specific point in time (Most often discussed financial instrument)

Initial markup

Variables that affect initial markup percentage - Influence of other channel members - Quantity discounts and shipping arrangements - Pricing for Internet activities vs. brick and mortar

What five main things contribute to the merchandise mix

Variety Assortment Private vs National Brands Quality Price Points

Relationship between Variety and Assortment

Variety refers to the number of different merchandise categories a retailer sells, Assortment is the number of different items or SKUs in a merchandise category.

merchandise forecasting

a comprehensive merchandise plan is needed to know the types and quantities of merchandise to purchase

Inventory Turnover

a measure of how many times a store sells its average investment in inventory during a year

cost of goods sold (COGS)

amount the retailer pays to vendors for merchandise they sell

income statement? and why is it important?

basic record for reporting a company's earnings. important. contains: - Net Sales - Cost of goods sold (COGS) - Gross Margin (profit) - Operating Expenses (SG&A)

operating expenses

costs associated with doing business, not including the costs of the merchandise (SG&A: Selling expenses, General expenses, Administrative expenses)

bottom-up approach to budgeting

each retail department manager supplies budget data; these budgets are passed on to the next level, until the budgets for all departments get aggregated to form the store's budget

What is a retailer's most effective tool against shoplifters?

employees

Manage growth

growth should not outpace the company's ability to obtain the cash necessary to maintain current operations

price inelasticity

if the retailer raises the price, people will still buy it regardless - Consumers are NOT sensitive to a change in price - Occurs when purchase urgency is high and no acceptable substitutes exist EX.) gas and medications are necessary purchases

open-to-buy (OTB)

is the amount the buyer has left to spend for a given time period, typically a month

Open-to-buy helps the retailer ____

keep track of how much money has been expended on inventory for any given period, plus the inventory on hand (tracks merchandise flow)

what is the buyer's goal?

make the best possible purchases for the retailer

gross margin (profit)

net sales minus the cost of goods sold (COGS) Important measure in retailing, this indicates how much profit the retailer is making on merchandise sold without considering the expenses in running a store

Price stability

one price policy; no need to run sales

Buyer

person responsible for buying merchandise for the company - Includes the physical purchase of products and services and how those products and services are brought to the retail outlet, handled, and finally placed ready for sale

Promotional pricing

pricing becomes integrated with IMC and tied to promotions

financial plan - three objectives

profitability, liquidity, manage growth

Statement of Cash Flows

provides information on the retailer's cash receipts and cash payments during a given period. Statements of cash flows is particularly important to the retailer.

asset management inventory? and why is it important?

refers to the extent that the retail managers are managing the retail operation's assets - it is important because inventory usually represents the retailer's biggest investment and it is important to use assets to full potential and implement controls

Price flexibility

the best range of prices that a retailer can set based on market demand - Max price: Competition and customer demand $ - Min price: retailers variable and fixed costs $

shrinkage

the loss of product or inventory that occurs from theft, fraud, or errors in receiving, accounting, or tracking

keystoning

the practice of marking up prices by 100 percent, or doubling the cost

Price strategy and policies - three things to know

they help create the overall strategy - price points are different levels set for the price - must be consistent with the other areas of the IRM plan

Profitability

to generate profits for the retailer

Liquidity

to manage cash (satisfy obligations)

cost behaviors: fixed costs

total costs that do not change with changes in sales volume (activity) EX) the total rental cost of the retail outlet space will probably not change based on sales

cost behaviors: variable costs

total costs that increase when sales volume increases and decrease when sales volume decreases EX) the total cost of merchandise sold increases (decreases) as the total sales volume increases (decreases)

net sales

total revenue received by a retailer that is related to selling merchandise during a given period of time minus the returns and discounts

top-down approach to budgeting

upper management personnel prepare a budget and pass it down to their various departments

determining pricing objectives - three things to know

• Objectives are necessary • Objectives should follow rules: Measurable/Realistic • Categories of Potential Pricing Objectives

merchandise mix

The product assortment that a retail store/online site has to offer

Merchandise

The products or services the retailer currently offers, or plans to offer

pricing decision flow chart - 4 steps

1) Determine pricing objectives 2) Determine price flexibility 3) Determine the pricing strategy and policies 4) Establish actual prices

Ways to prevent theft

1) Managers should observe and respond to - merchandise concealed for later pickup - Fitting room attendants not in their place - Unpaid-for merchandise under counters - Suspicious activities by customers 2) Get employees involved 3) Make shoplifters feel uneasy 4) Other Loss Prevention Strategies - Pre-employment integrity screening measures - Employee awareness programs - Asset control policies - Loss prevention systems - GREAT CUSTOMER SERVICE!

Merchandise plan

A dollar projection of the products needed for a retailer for a given period of time

Price Elasticity

A measure of the consumers sensitivity to price - Measures the responsiveness of quantity demanded to a change in price, with all other factors held constant - When the retailer raises the price, a relative decrease in total revenue occurs - When the retailer lowers the price, a relative increase in total revenue occurs

National brands - Advantages/Disadvantages

Advantages - Supported with national IMC - Higher consumer demand Disadvantages - Smaller profit margin

Private/store brands - Advantages/Disadvantages

Advantages: - Higher profit margin Disadvantages: - Higher IMC costs - Harder to establish brand loyalty

Vendor-managed inventory (VMI):

Allows vendors to track sales of their products through various retail outlets using scanner data. The responsibility for inventory management is shifted to the suppliers.

national brands

Brand name product produced by, widely distributed by, and carrying the name of a manufacturer. EX.) Heinz ketchup is a national brand and Great value ketchup is a private brand

private label brands

Brand name product that a wholesaler or retailer has commissioned from a manufacturer - store brands Ex. Walmart carrying GreatValue

Why is buying a complicated process?

Buying has become an analytical and sophisticated planning process - Involves quantitative and qualitative assessments - "rocket science retailing"

Vendor interactions - two types of technology involved in

EDI and VMI

Electronic data interchange (EDI):

Enables retailers to conduct business with vendors electronically

inventory turnover - Why is speed important?

The faster the merchandise turns over - the more money is generated, but it can also indicate a shortage or inadequate inventory levels