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