Introduction to the World of Retailing CHAPTER 1 7

develop strategies to guide these decisions and provide a good return to its stock-
holders while facing intense competition.1
Working in this highly competitive, rapidly changing retail environment is
both challenging and exciting, and it offers significant financial rewards. This
book describes the world of retailing and offers key principles for effectively man-
aging retail businesses. Knowledge of retailing principles and practices will help
you develop management skills for many business contexts. For example, retailers
are the customers for most business-to-consumer (B-to-C) companies such as
Procter & Gamble and Hewlett-Packard. Thus, brand managers in B-to-C com-
panies need to have a thorough understanding of how retailers operate and make
money so that they can encourage retailers to offer and promote their products.
Financial and health care institutions use retail principles to develop their offer-
ings; improve customer service; and provide convenient, easy access to their cus-
tomers. Thus, any student interested in professional B-to-C selling, marketing
management, or finance should find this book useful.

WHAT IS RETAILING?
Retailing is the set of business activities that adds value to products and services LO1
sold to consumers for their personal or family use. Often, people think of retailing Identify retailing activities.
only as the sale of products in stores, but retailing also involves the sale of services
such as overnight lodging in a motel, a doctor’s exam, a haircut, or a home-
delivered pizza. Not all retailing is done in stores. Examples of nonstore retailing REFACT
The word retail is derived
include ordering a T-shirt on your mobile phone app, buying cosmetics from an
from the French word
Avon salesperson, ordering hiking boots from an L.L. Bean catalog, and renting a
retailer, meaning to cut a
Blu-Ray from a Redbox kiosk. piece off or break bulk.2

The Retailer’s Role in a Supply Chain

A retailer is a business that sells products and/or services to consumers for their
personal or family use. Retailers are a key component in a supply chain that links
manufacturers to consumers. A supply chain is a set of firms that make and deliver
goods and services to consumers. Exhibit 1–2 shows the retailer’s position within
a supply chain.
Retailers typically buy products from wholesalers and/or manufacturers and
resell them to consumers. Why are retailers needed? Wouldn’t it be easier and
cheaper for consumers to cut out the middlemen, the wholesalers and retailers,
and buy directly from manufacturers? The answer, generally, is no, because retail-
ers add value and are more efficient at adding this value than manufacturers or
wholesalers.

Retailers Create Value

The value-creating activities undertaken by retailers include (1) providing an
assortment of products and services, (2) breaking bulk, (3) holding inventory, and
(4) providing services.

Manufacturing Wholesaler Retailer Consumer

EXHIBIT 1–2
Example of a Supply
Chain
QWK SUE'S
DISCOUNT STORE
8 SECTION I The World of Retailing

Providing Assortments Conventional super-

markets typically carry about 30,000 different items
made by more than 500 companies. Offering an as-
sortment enables their customers to choose from a
wide selection of products, brands, sizes, and prices
at one location. Manufacturers specialize in produc-
ing specific types of products. For example, Frito-
Lay makes snacks, Yoplait makes yogurt, Skippy
makes peanut butter, and Heinz makes ketchup. If
each of these manufacturers had its own stores that
sold only its own products, consumers would have to
go to many different stores to buy the groceries
needed to prepare a single meal.

Breaking Bulk To reduce transportation costs,

manufacturers and wholesalers typically ship cases
of frozen dinners or cartons of blouses to retailers.
Retailers then offer the products in smaller quantities
tailored to individual consumers’ and households’
consumption patterns—an activity called breaking
bulk. Breaking bulk is important to both manufac-
turers and consumers. It allows manufacturers to
efficiently make and ship merchandise in larger
quantities at one time and enables consumers to
purchase merchandise in smaller, more useful
quantities.

Holding Inventory A major value-providing ac-

tivity performed by retailers is holding inventory so
that products will be available when consumers want
them. Thus, consumers can keep a smaller inventory
of products at home because they know local retail-
ers will have the products available when they need
more. This activity is particularly important to con-
sumers with limited storage space, such as families
living in small apartments.
Retailers add value by
providing an assortment of Providing Services Retailers provide services that make it easier for customers
products that customers can to buy and use products. For example, retailers offer credit so that consumers can
buy at one location when
they want them.
have a product now and pay for it later. They display products so that consumers
can see and test them before buying. Some retailers employ salespeople in stores
or maintain Web sites to answer questions and provide additional information
about the products they sell.

Costs of Channel Activities

While the value-creating activities undertaken by channel members provide ben-
efits to customers, they also increase the cost of products and services. Exhibit 1–3
illustrates the supply chain costs of getting a T-shirt from the manufacturer to the
consumer. In this example, it costs the T-shirt manufacturer $10.00 to make and
market the T-shirt. These costs include the design, raw materials, labor, produc-
tion equipment, transportation to the wholesaler, and so on. The manufacturer
sells the T-shirt to the wholesaler for $11.00 and makes $1.00 profit. The whole-
saler incurs $2.00 to handle and store the T-shirt and transport it to the retailers.
The wholesaler sells the T-shirt to the retailers for $14.00, making a $1.00 profit.
 Introduction to the World of Retailing CHAPTER 1 9

Profit as a EXHIBIT 1–3

Channel Member Percentage of Sales Costs Incurred to
Undertake Value-
Manufacturer Cost $10.00 Added Activities in the
Profit $1.00 9.10%
Selling price to wholesaler $11.00
Distribution Channel
for a T-Shirt
Wholesaler Price paid to manufacturer $11.00
Cost to add value $2.00
Profit $1.00 8.00%
Selling price to retailer $14.00
Retailer Price paid to distributor $14.00
Cost to add value $4.00
Profit $1.95
Selling price to customer $19.95 9.77%

The retailer then incurs costs to fold the shirt, put price tags on it, store it, employ
sales associates, light and air condition the store, and so on. The retailer sells the
shirt to a customer for $19.95, making a profit of $1.95.
Note that the costs in the supply chain, $8.95 ($19.95 2 $11.00), are almost as
much as the cost to make the product. These costs are justified by the considerable
value added by the wholesaler and retailers to the product. By providing assort-
ments, breaking bulk, holding inventory, and providing services, retailers increase
the benefits that consumers receive from their products and services.
Consider a T-shirt in a shipping crate in an Iowa manufacturer’s warehouse.
The T-shirt will not satisfy the needs of a student who wants to have something to
wear at the basketball game tonight. The student finds the T-shirt more valuable
and will pay more for it if it is available from a nearby department store that also
sells pants, belts, and other items complementing the T-shirt and provides sales
associates who can help the student find what he likes. If retailers did not provide
these benefits, wholesalers or manufacturers would have to provide them, and they
would typically not be as efficient as retailers in providing these benefits.

Retailers Perform Wholesaling and Production Activities

Wholesalers buy and store merchandise in large quantities from manufacturers and
then resell the merchandise (usually in smaller quantities) to retailers. When manu-
facturers like Apple and Nike sell directly to consumers, they are performing the
production, wholesaling, and retail business activities. Some large retailers, like
Costco and Home Depot, function as both retailers and wholesalers: They perform
retailing activities when they sell to consumers, but they engage in wholesaling activi-
ties when they sell to other businesses, such as restaurants or building contractors.
In some supply chains, the manufacturing, wholesaling, and retailing activities are
performed by independent firms, but most supply chains feature some vertical inte-
gration. Vertical integration means that a firm performs more than one set of
activities in the channel, as occurs when a retailer engages in wholesaling activities
by operating its own distribution centers to supply its stores. Backward integration
arises when a retailer performs some wholesaling and manufacturing activities, such
as operating warehouses or designing private-label merchandise. Forward integration
occurs when a manufacturer undertakes retailing and wholesaling activities, such as
Apple operating its own retail stores.
Most large retailers such as Safeway, Walmart, and Lowe’s manage their own
distribution centers and perform activities undertaken by wholesalers. They buy
directly from manufacturers, have merchandise shipped to their warehouses, and
then distribute the merchandise to their stores. Other retailers, such as J. Crew and
Victoria’s Secret, are even more vertically integrated. They design the merchandise
they sell and then contract with manufacturers to produce it exclusively for them.
10 SECTION I The World of Retailing

Apple is a vertically
integrated company
because it performs the
manufacturing, distribution,
and retailing activities in its
supply chain.

Differences in Distribution Channels around the World

Some critical differences among the retailing and distribution systems in the
United States, European Union, China, and India are summarized in Exhibit 1–4.
As this exhibit suggests, the U.S. retail industry has the greatest retail density
(retail stores per person) and concentration of large retail firms. Real estate in the
United States is relatively inexpensive, and most consumers own automobiles.
Thus, retailers often operate large stores in lightly populated areas. Many U.S.
retailers have stores with more than 20,000 square feet. Due to their size, they
have the scale economies to operate their own warehouses, eliminating the need
for wholesalers. This combination of large stores and large firms in the United
States results in a very efficient distribution system.
In contrast, the Indian distribution system is characterized by small stores oper-
ated by relatively small firms and a large independent wholesale industry. To make
the daily deliveries to these small retailers efficiently, the merchandise often passes
through several different wholesalers. In addition, the infrastructure to support
modern retailing, especially the transportation and communication systems, is not
as well developed in India as it is in more developed economies. These efficiency

EXHIBIT 1–4 Comparison of Retailing and Distribution across the World

United States Northern Europe India China

Concentration (percent of Highest High Lowest Low

sales made by large retailers)
Retail density (square feet of Highest Modest Lowest Low
retail space per person)
Average store size Highest Modest Lowest Modest
Role of wholesalers Minimal Modest Extensive Extensive
Infrastructure supporting Best Good Weakest Weak
efficient supply chain
Restrictions on retail locations, Minimal Extensive Extensive Modest
store size, and ownership
 Introduction to the World of Retailing CHAPTER 1 11
The retail industry in India is
dominated by small, local
retailers with few modern
national chains.

differences mean that a much larger percentage of the Indian labor force is em-
ployed in distribution and retailing than is the case in the United States, and the
supply chain costs in India are higher.3
China’s retail industry is highly fragmented like the retail industry in India. It is
composed of many small and medium-sized firms. The number of national and
even regional chains is limited. However, China’s retail distribution system is go-
ing through a period of rapid development. This development is spurred by the
government’s shifting interest from focusing on exports and satisfying basic con-
sumer needs that provide a higher quality of life. In China, the government removed
most restrictions on direct foreign investments, and global retailers flocked to this
huge and growing market. Now, Walmart operates 370 stores in China, and
Carrefour, the second largest retailer in the world, operates 204. However, there is
great disparity between the distribution system in the first-tier, eastern coastal
cities—Beijing, Shanghai, and Guangdong—and the smaller western cities. The
retail offering in the first-tier cities is very similar to the urban retail environment
in U.S. cities such as New York and Chicago. In contrast, retailing in the smaller
western cities is more similar to retailing in India.4
The European distribution system falls between the American and Indian sys-
tems on this continuum of efficiency and scale. In northern Europe, retailing is
similar to that in the United States, with high concentration levels in some na-
tional markets. For example, 80 percent or more of sales in sectors such as food
and home improvements are made by five or fewer firms. Southern European re-
tailing is more fragmented across all sectors. For example, traditional farmers’
market retailing remains important in some sectors, operating alongside large
“big-box” formats.5
Social and political objectives have created some of these differences in distri-
bution systems in countries. An important priority of the Indian and European
economic policies is to reduce unemployment by protecting small businesses such
as independent neighborhood retailers.6 Some countries have passed laws prohib-
iting large stores, as well as strict zoning laws to preserve green spaces, protect
town centers, and inhibit the development of large-scale retailing in the suburbs.
12 SECTION I The World of Retailing

Finally, retail productivity is reduced when countries restrict the hours that stores
can operate. For example, in France, many stores close at 7 p.m. on weeknights.
Labor unions in France and elsewhere in Europe are opposed to U.S.-style 24/7
shopping because of the strains it could put on store employees.7

SOCIAL AND ECONOMIC SIGNIFICANCE OF RETAILING

Role in Developed Economies
LO2 Retail sales (excluding automobile and automotive parts sales) in 2011 were
Realize the importance of $4.3 trillion. More than 8 percent of the total U.S. gross domestic product comes
retailing in the U.S. and from retailing, almost as much as the contribution of the entire U.S. manufacturing
world economies. industry sector.8 But this sales level underestimates the impact of retailing on the
U.S. economy because it does not include the sales and employment of many firms
providing consumer services such as entertainment, home repairs, and health care.
Consumer spending plays a critical role in the economies of the United States
and other developed countries. When consumers spend more money buying
goods and services from retailers, a country’s economy flourishes. Merchandise
flies off the shelves, and retailers place orders for replacement merchandise.
Manufacturers hire more employees, place orders for raw materials, and make
more products. However, if consumers feel uncertain about their financial future
and decide to refrain from buying new refrigerators or blue jeans, the economy
slows down.
The retail sector plays a key role in developed economies, not only because
consumer demand is an indication of a vibrant financial system, but also because
retailers are large employers. More than 14 million people were employed in
retailing in 2012—approximately 11 percent of the U.S. workforce—and an
additional 15 percent work for companies that either provide services to and/or
sell products through retailers.9

Corporate Social Responsibility

In addition to providing the benefit to their customers outlined in the previous
section and a fair return for their stockholders, most retailers engage in socially
responsible activities. Corporate social responsibility (CSR) involves an organi-
zation voluntarily engaging in business practices that meet or exceed the ethical
and legal expectations of its stakeholders—its employees, customers, community,
and society in general.
Many retailers now go the extra mile to support their communities, environ-
ment, and social causes. Examples include reducing their use of energy, supporting
local schools, and working with national organizations such as the American Red
REFACT Cross and Habitat for Humanity. These corporate social responsibility activities
Shoppers in promote a positive image to customers, build employee morale, and save money—
the United
a win–win scenario for both the companies and their stakeholders.10
Kingdom are
For example, community philanthropy is the cornerstone of Target’s CSR ac-
more likely to buy goods
on the basis of environ-
tivities. Store managers have a budget for donations they can make to local events.
mental, animal welfare, or Since 1946, Target has given 5 percent of its income to support local activities in
fair trade claims than their the communities in which it has stores, such as company-sponsored youth leagues
counterparts in continen- or a special exhibit at the local zoo. Target has been innovative in using social
tal Europe. About 41 per- media to support its CSR program. Target’s “Bullseye Gives” program asked its
cent of British consumers million Facebook fans to vote on how the company should allocate $3 million
have bought ethically pro- among 10 nonprofits.11
duced products, compared Many retailers are building LEED-certified stores. The Leadership in Energy
with 34 percent in Germany, and Environmental Design (LEED) certification is based on an assessment of the
31 percent in France, and
store’s impact on human and environmental health, sustainable site development,
12 percent in Spain.12
water savings, energy efficiency, materials selection, and indoor environmental
 Introduction to the World of Retailing CHAPTER 1 13

Home Depot employees’

involvement with Habitat
for Humanity helps the local
community and builds
company morale.

quality. Some features in a prototype LEED-certified McDonald’s restaurant are

its permeable pavement that cleans rainwater; a cistern buried behind the restau-
rant that collects rainwater, which is used to water the landscaping; a roof garden
that insulates the restaurant; the use of less-toxic cleaners and of paints and resins
that do not emit chemical odors; and the installation of low-flow toilets and uri-
nals that use less water than standard low-flow toilets. Walmart’s new stores have
fuel cells that supply half of the electricity. Holes are punched in the roof for
skylights that provide 70 percent of the store’s lighting needs during the day. To
help keep the scorching sun at bay and cool the building naturally, roofs are
painted white.13
The production of apparel has adverse effects on the environment because it
involves the use of dyes, solvents, and huge amounts of water and petroleum for
transportation. An industry group called the Sustainable Apparel Coalition has
developed an index to rate the relative sustainability of apparel. Some members of
the coalition are Walmart, Target, Kohl’s, Nordstrom, and Patagonia. Environmen-
talists anticipate that the index will be used by consumers when selecting products
and by retail buyers when they select the assortments of products to offer. The
index considers the entire life of a product—from raw
materials to disposal. Brands can get higher scores by
asking consumers to wash items in cold, rather than
hot, water. Some buyers are rewarded for the design of
products with high index levels. A new Nike “Flyknit”
running shoe worn by U.S., Kenyan, and other mara-
thoners at the London Olympics was designed based
on the index. The shoe is knit from polyester, eliminat-
ing the waste of shoes sewn from cut textiles.14
Companies typically go through several stages be-
fore they fully integrate CSR into their strategy.
Companies in the first stage engage only in CSR
activities required by law. In this stage, companies are
not actually convinced of the importance of CSR
actions. In the second stage, companies go beyond The Nike Flyknit receives a high Sustainable Apparel
Coalition index because its construction reduces waste by
activities required by law to engage in CSR activities an average of 80 percent when compared to typical Nike
that also provide a short-term financial benefit to the running footwear.
14 SECTION I The World of Retailing

company. For example, a retailer might reduce the energy consumption of its
stores just because doing so reduces its costs. In the third stage, companies oper-
ate responsibly because they believe this is the “right thing” to do. Companies in
the fourth and final stage engage in socially and environmentally responsible
actions because they believe these activities must be done for the “well-being”
of everyone. These companies have truly incorporated the concept of CSR into
their business strategy.15

Role in Developing Economies—

The Bottom of the Pyramid
Retailers need to also focus on opportunities available by serving the needs of
the 4 billion people (25 percent of the world’s population) at the lowest end of
the income distribution. Serving these customers also provides an important
social benefit: reducing worldwide poverty.16 Consumers in this low income
consumer segment, referred to as the base of the pyramid or bottom of the
pyramid (BoP), have a potential spending power of more than $5 trillion. The
sheer size and growth of the BoP markets, especially in the countries with
emerging economies such as China, India, and Brazil, and maturation of con-
sumer goods and retail markets in developed economies is motivating firms to
enter the BoP market.
Undertaking retailing activities to the BoP market is challenging. It is diffi-
cult to communicate and complete transactions with people in the BoP market
because they are more likely to lack access to mass media, the Internet, mobile
phones, or credit cards than more affluent markets. Most people in BoP markets
live in rural areas—remote villages that are not connected to the outside world
through adequate roads. Limited local demand combined with the high cost of
transporting goods to and from remote villages results in higher costs and
prices for consumer goods. Thus, engagement at the BoP markets requires
innovative approaches for doing business. Retrofitting business models used in
the more developed markets will not work.17 Retailing View 1.1 describes how
Grupo Elektra has improved the lifestyle of Latin America’s working poor.

THE GROWING IMPORTANCE OF

RETAILING AND RETAILERS
Evolution of the Retail Industry
LO3 From a consumer’s perspective, retailers are local businesses. Even though many
Analyze the changing consumers collect information and make purchases using the Internet or a mobile
retail industry. device, more than 90 percent of all retail sales are made in stores—usually stores
that are less than a 15-minute drive from the consumer’s home or workplace. Thus,
retail stores predominately compete against other stores that are located nearby.
There has been a dramatic change in the structure of the retail industry over
REFACT the past 50 years. Fifty years ago, Sears and JCPenney were the only retail firms that
James Cash Penney had chains of stores across the United States. The retail industry consisted of
opened the first JCPenney
the small, independent, local retailers competing against other small, independent
store, called Golden Rule,
retailers in the same community. Walmart, Home Depot, Staples, and Best Buy
in Kemmerer, Wyoming,
in 1902.18
did not exist or were small companies with a few stores. Now, the retail industry
is dominated by large, national, and even international retail firms. While there
are more than 1 million retailers in the United States, over 40 percent of U.S.
retail sales are made by companies with more than 10,000 employees. Home
improvement centers are the most concentrated sector in the retail industry, with
the four largest firms accounting for 92.7 percent of U.S. annual sales in the
sector. The top four department store chains account for 73.2 percent of annual
U.S. sales in that sector, and the top four drug store chains account for 63.0 percent
 Introduction to the World of Retailing CHAPTER 1 15
in that sector. On the other hand, the least concentrated sectors are food service
and drinking, where only 5.8 percent of sales are represented by the top four
firms in the sector, and furniture stores where only 13.9 percent of sales are rep-
resented by the top four firms in the sector.19
The largest retailers in the world are shown in Exhibit 1–5. Nine of the top
20 retailers are headquartered in the United States; while Germany has five. Of
these top 20 retailers, the U.S. retailers have fewer global operations than the non-
U.S. based retailers. The average number of countries that these U.S.-based retail-
ers operate in is five, compared to the non-U.S.-headquartered retailers, who
operate in an average of 16 countries. Five of the largest U.S.-based retailers oper-
ate in only one or two countries. Only four of the 11 non-U.S-based retailers REFACT
operate stores in the United States, the largest retail market in the world. Walmart’s annual sales are
The development of information systems is one the forces facilitating the five times greater than the
growth of large retail firms—the shift from an industry dominated by small, sales of Procter & Gamble,
the largest consumer
local retailers to large multinational chains. Prior to the development of these
product producer.20
systems, it was difficult for someone other than the local store manager to track

R E TA I LI NG VI EW Grupo Elektra Improves the Lifestyle of 1.1

Latin America’s Working Poor
Grupo Elektra, with headquarters in Mexico City, owns
and operates more than 2,600 specialty stores in Mexico,
Brazil, Argentina, Guatemala, El Salvador, Honduras,
Panama, and Peru. Its stores sell consumer electronics and
appliances to Latin America’s working poor. It is quite a
challenge to sell consumer durable goods to families
earning less than $400 per month and spend 90 percent
of their income on basic necessities, such as food and
housing. In addition, these BoP consumers often do not
have formal jobs or bank accounts. But Grupo Elektra,
and its banking affiliate, Banco Azteca, have been in-
creasing sales and profits during one of the worst eco-
nomic recessions in decades by servicing these low-income
consumers. For the past five years, revenues and operat-
ing profits have grown at a double-digit rate.
Rather than wait for low-income consumers to open
their own bank accounts so they can afford to buy its Grupo Elektra has developed a successful strategy for
products, Elektra launched its own banks inside its net- selling products and providing micro-loans to its customers
work of specialty retail shops. These banks make small at the base of the pyramid.
“micro-loans” to Elektra’s customers so they can afford to
buy its appliances. It determines how much money its new America—put their money in a cookie jar or below their
customers can really afford to borrow—and then pay mattresses. Now, they can establish a bank account for a
back. Within 24 hours, the bank approves or denies a cli- minimum of only US $5 and have access to a debit card.
ent’s loan application using the information gathered by
the credit officer at the branch. The officer visits the cus- Sources: Erin Carlyle, “Billionaire Ricardo Salinas: Mexico’s Credit Card,”
tomers’ houses to determine their income and expenses. Forbes, May 7, 2012, p.100; Erin Carlyle, “Mexican Billionaire Buys Advance
The bank then establishes weekly installment payments America, Largest Payday Lender In U.S.,” Forbes, April 23, 2012, p. 102; and
“Grupo Elektra: Will Selling in Brazil Prove to Be the Retailer’s Next ‘Growth
that match the borrowing capacity of each customer. Moment?” Knowledge @ Wharton, April 07, 2010.
More than 5,000 loan officers travel by motorcycles to the
applicants’ homes to assess their creditworthiness and,
when necessary, to collect payments from customers. Usu-
ally, however, cash payments are made once a week at an DISCUSSION QUESTION
Electra store.
The typical interest rate charged by Grupo Elektra is
This approach has enabled thousands of low-income
50 percent, a rate that would be illegal in most U.S.
consumers to acquire durables that have long been inac-
states. Is Elektra providing a benefit to its customers or
cessible to them because they lacked the opportunity to
taking advantage of its customers’ lack of knowledge
use credit. Traditionally, these low-income people—the
about these financial contracts?
taxi drivers, mango vendors, and cleaning ladies of Latin
16 SECTION I The World of Retailing

EXHIBIT 1–5 The 20 Largest Retailers in the World

Headquarters Number of
Rank Name Location Countries Stores in U.S. Sales ($ millions) Primary Format

1 Walmart U.S. 16 Yes 418,993 Supercenter

2 Carrefour France 33 No 119,652 Supercenter
3 Tesco UK 13 Yes 92,171 Supercenter
4 Metro Germany 33 No 86,931 Warehouse club
5 Kroger U.S. 1 Yes 82,189 Supermarket
6 Schwarz Germany 26 No 79,119 Discount store
Untematmens
Trauhard
7 Costco U.S. 9 Yes 76,225 Warehouse club
8 Home Depot U.S. 5 Yes 67,997 Home improvement
9 Walgreens U.S. 2 Yes 67,420 Drug store
10 Aldi Einkauf Germany 18 Yes 67,112 Discount store
11 Target U.S. 1 Yes 65,786 Discount store
12 Rewe Germany 13 No 61,134 Supermarket
13 CVS U.S. 2 Yes 57,345 Drug store
14 Seven & Holding Japan 18 Yes 57,055 Convenience store
15 Groupe Auchan France 13 No 55,212 Supercenter
16 Edeka Zentrale Germany 1 No 54,074 Supermarket
17 Aeon Japan 8 No 53,458 Supercenter
18 Woolworth Australia 2 No 51,171 Supermarket
19 Best Buy U.S. 15 Yes 50,272 Electronics category
specialist
20 Lowe’s U.S. 3 Yes 48,815 Home improvement

Source: “2011 Global 250 Retailers,” Stores Magazine, January 2012.

how the merchandise in the store was selling—whether it was selling above
plan and needed to be reordered or was selling below plan and needed to have
its price reduced. It was also difficult to collect and consolidate the plans from
a number of different stores so that a buyer could place large orders with ven-
dors to get price discounts. Thus, before the availability of modern information
systems, it was difficult for retailers to lower costs through scale economies,
and larger retailers had limited advantages over small local or regional
retailers.
REFACT Most consumers shopping in their local stores don’t realize the sophisticated
Walmart processes more
information systems used by retailers today to manage these large, complex supply
than 100 million transac-
tions per hour through its
chain systems. To illustrate the complexity of these systems, consider the following
POS terminals in stores example. You go to Best Buy and find a tablet you are going to buy. When you
around the world.21 decide to buy a tablet in a store, the point-of-sale (POS) terminal transmits data
about the transaction to the retailer’s distribution center and then on to the manu-
facturer. Data about your purchase are incorporated into a sophisticated inventory
REFACT management system. When the in-store inventory level drops below a prespeci-
Walmart has a data ware- fied level, an electronic notice is automatically transmitted, authorizing the ship-
house with more than ment of more units to the retailer’s distribution center and then to the store. The
2.5 petabytes (2,500 terra- retail buyer or a computer program analyzes the sales data to determine how many
bytes) of information—the and which tablet models will be stocked in the retailer’s stores and what price will
equivalent of 167 times be charged.
more than all of the books
To add even another layer of complexity, most large retailers contract with fac-
in America’s Library of
tories around the world to have merchandise made for them. Thus, for example,
Congress.22
nearly 1,500 employees, working in both quality-control and full-service buying
 Introduction to the World of Retailing CHAPTER 1 17
centers, help Target ensure that any
factory worldwide that produces
products with the Target name meet
Target’s own standards for product
quality, without violating ethical labor
standards.23

Role of Information
Systems
Now, retailers are inundated with data
about the thousands of transactions
that take place each day. The challenge
for retailers is to convert this raw data
into information that managers can
use to make better decisions. Many
retailers now use the data they have on
their customers to identify their best
customers and target customized pro-
motions to them, place products close
to each other when they find that
many customers are buying the same
products at the same time, and tailor
the assortment of products in each
store to better match the needs of the
store’s local market.
In addition to playing an important
role in society in general, retailing pro-
vides personal opportunities to work
for a company in an exciting, challeng-
ing environment or to start an entre-
preneurial venture. These opportunities Sophisticated supply chains have facilitated the economies of scale that large
are discussed in the next section. retailers have been able to achieve.

MANAGEMENT AND ENTREPRENEURIAL OPPORTUNITIES

Management Opportunities
To exploit these new technologies and systems and gain advantage in a highly LO4
competitive and challenging environment, retailers need to hire and promote the Recognize the
best and brightest. Sherry Hollack, a former vice president of talent develop- opportunities in retailing
ment at Macy’s, emphasized this point: “One of the biggest challenges facing for you.
Macy’s, and most other retail chains, is hiring and retaining managers to lead our
company in the coming years. The changing demographics are working against us.
Over the next ten years, a lot of our senior managers, members of the Baby Boomer
generation, will be retiring. So we are going to be competing with other retailers
and firms in other industries for a smaller pool of available managers in the gen-
erations behind the Boomers. In addition, retailing is becoming a much more so-
phisticated business. Our managers need to be comfortable with new technologies,
information and supply chain management systems, and international business as
well as managing a diverse workforce and buying merchandise.”24
Students often view retailing as part of marketing because managing distribu-
tion (place) is one of the 4 Ps of marketing. But retailers are businesses and, like
manufacturers, undertake all the traditional business activities. Retailers raise cap-
ital from financial institutions; purchase goods and services; use accounting and
 18 SECTION I The World of Retailing

management information systems to control their operations; manage warehouses

and distribution systems; design and develop new products; and undertake
marketing activities such as advertising, promotion, sales force management, and
market research. Thus, retailers employ people with expertise and interests in
finance, accounting, human resource management, supply chain management, and
computer systems, as well as management and marketing.
Retail managers are often given considerable responsibility early in their careers.
Retail management is also financially rewarding. Starting salaries are typically be-
tween $35,000 and $65,000 for college graduates entering management trainee
positions. After completing a management training program, retail managers can

1.2 R E TA I LI NG VI EW Sam Walton, Founder of

Walmart (1918–1992)
Like Henry Ford with his Model T, Sam Walton revolution-
ized the retail industry. After graduating from the Univer-
sity of Missouri in 1940, Walton began working at a
JCPenney store in Des Moines, Iowa. He served in the
army during World War II and then purchased a Ben
Franklin variety store franchise in Newport, Arkansas. He
boosted sales by finding suppliers
REFACT that would sell him merchandise at
With 2.2 million lower prices than his cost to buy
employees, Walmart is from Ben Franklin.
Walton lost his store, however, in
the largest company in
1950 when the landlord refused to
the world in terms of
renew his lease. He then moved to
number of employees.25
Bentonville, Arkansas, where he and
a younger brother franchised an-
other Ben Franklin store. Walton employed a new self-
service system that he had discovered at two Ben Franklin
stores in Minnesota. He placed the checkout registers and
clerks at the front of the store rather than scattering Sam Walton believed in “management by walking around.”
them throughout. By 1960, Walton had 15 stores in stay on top of. Communicate, communicate, communi-
Arkansas and Missouri that laid the foundation for Walmart. cate: What good is figuring out a better way to sell beach
By the early 1960s, some retailers in large, urban, east- towels if you aren’t going to tell everybody in your com-
ern cities had developed the discount store concept, in- pany about it? Keep your ear to the ground: A computer
corporating self-service, shallow but broad assortments, is not—and will never be—a substitute for getting out in
low overhead costs, and large parking lots. In 1962, Walton your stores and learning what’s going on.”
brought this format to small southern towns, opening his In 1991, due to the success of his concept and manage-
first Walmart Discount City in Rogers, Arkansas. ment practices, Walton became America’s wealthiest
Walton often visited his stores, dropping in unan- person; however, he maintained his simple, unassuming
nounced to check the merchandise presentation or finan- lifestyle. Whenever he traveled on business, he rented the
cial performance and talk to his “associates.” He prided same compact economy cars and stayed in the same inex-
himself on a profit-sharing program and a friendly, open, pensive hotels as his employees did. He died of leukemia
supportive atmosphere—business practices he had in 1992. Walmart is now the world’s largest corporation.
learned when working for JCPenney. He often led his
workers in the Walmart cheer: “Give me a W! Give me Sources: Michael Bergdahl, The Retail Revolution: How Wal-Mart Created a
an A! Give me an L! Give me a Squiggly! (Here, everybody Brave New World of Business (New York: Metropolitan Books, 2009); and
sort of does the twist. As part of Walmart’s campaign to Michael Bergdahl, The 10 Rules of Sam Walton: Success Secrets for Remark-
able Results (Hoboken, NJ: Wiley, 2006).
modernize its image, in 1998, it dropped the squiggly
from its trademark.) Give me an M! Give me an A!
Give me an R! Give me a T! What’s that spell? Walmart!
What’s that spell? Walmart! Who’s number one? THE DISCUSSION QUESTION
CUSTOMER!”
What were the key factors that led to Walmart’s
He offered his own formula for how a large company
phenomenal growth and dominance of the retail
should operate: “Think one store at a time. That sounds
industry?
easy enough, but it’s something we’ve constantly had to
 Introduction to the World of Retailing CHAPTER 1 19
double their starting salary in three to five years if they perform well. Senior buyers
and others in higher managerial positions and store managers make between
$120,000 and $300,000. (See Appendix 1A at the end of this chapter.)

Entrepreneurial Opportunities
Retailing also provides opportunities for people who wish to start their own busi-
ness. Some of the world’s most successful people are retailing entrepreneurs.
Many are well known because their names appear over stores’ doors; others you
may not recognize. Retailing View 1.2 examines the life of one of the world’s
greatest entrepreneurs, Sam Walton. Some other innovative retail entrepreneurs
include Jeff Bezos, Do Won and Jin Sook Chang, Ingvar Kamprad, and Howard
Schultz. These entrepreneurs came from humble backgrounds and changed the way
retailing is done.

Jeff Bezos (Amazon.com) After his research uncovered that Internet usage
was growing at a 2,300 percent annual rate in 1994, Jeffrey Bezos, the 30-year-old
son of a Cuban refugee, quit his job on Wall Street and left behind a hefty bonus
to start an Internet business. While his wife MacKenzie was driving their car
across country, Jeff pecked out his business plan on a laptop computer. By the time
they reached Seattle, he had rounded up the investment capital to launch the first
Internet book retailer. The company, Amazon.com, is named after the river that
carries the greatest amount of water, symbolizing Bezos’s objective of achieving
the greatest volume of Internet sales. Under his leadership, Amazon developed
technologies to make shopping on the Internet faster, easier, and more personal
than shopping in stores by offering personalized recommendations and home
pages. Amazon.com has become more than a bookstore. It is now the largest on-
line retailer, with annual sales greater than $48 billion. Amazon also provides
virtual stores and fulfillment services for many other retailers.26

Do Won and Jin Sook Chang (Forever 21) Do Won and Jin Sook Chang
are self-made billionaires. In 1984, they cofounded the “fast fashion” retail chain
Forever 21. The pair emigrated from South Korea in 1981 and became naturalized

Forever 21 founder Do Won

and his daughter Linda
Chang (senior marketing
manager) visiting their
flagship store in Times
Square.
20 SECTION I The World of Retailing

American citizens. The couple opened their first store in 1984, focused on trendy,
exciting clothing options. That year, sales grew from $35,000 to $700,000. For-
ever 21 has continued to experience explosive growth, as evidenced by recent store
openings, like a flagship Las Vegas attraction with 127,000 square feet, a massive
45,000-square-foot store in Los Angeles, and two new megastores in New York of
86,000 and 91,000 square feet. Today, it operates more than 500 stores worldwide
with more than 35,000 employees and projected sales of greater than $3.5 billion.
Forever 21 is a family operation with Do Won at the helm, Jin Sook in charge of
merchandising, eldest daughter Linda running marketing, and daughter Esther
managing visuals.27

Ingvar Kamprad (IKEA) Ingvar Kamprad, the founder of the Swedish-based

REFACT home furnishing retailer chain IKEA, was always an entrepreneur. His first busi-
The acronym IKEA is made ness was selling matches to neighbors from his bicycle. He discovered he could
up of the initials of the
make a good profit by buying matches in bulk and selling them individually at a
founder’s name (Ingvar
Kamprad) plus those of
low price. He then expanded to selling fish, Christmas tree decorations, seeds,
Elmtaryd, his family farm,
ballpoint pens, and pencils. By the time he was 17 years of age, he had earned a
and the nearby village reward for succeeding in school. His father gave him the money to establish what
Agunnaryd.28 is now IKEA. Like Sam Walton, the founder of Walmart, Kamprad is known for
his frugality. He drives an old Volvo, flies economy class, and encourages IKEA
employees to write on both sides of a sheet of paper. This thriftiness has translated
into a corporate philosophy of cost cutting throughout IKEA so that the chain can
offer quality furniture with innovative designs at low prices. According to Forbes
magazine, Kamprad is the richest person in Europe and the fourth-richest person
in the world, with an estimated net worth of around $33 billion.29

Howard Schulz (Starbucks) In 1982, Howard Schultz, a salesperson for a

REFACT plastic manufacturer, was hired as the new head of marketing for Starbucks, a
At $300 million, Starbucks coffee roaster with six cafés. Shortly after he was hired, he went Verona, Italy, to
spends more on health
attend an international housewares show. He had his first latte in Verona, but he
care insurance for its
employees than on coffee
saw something more important than the coffee. The café patrons were enjoying
beans.30
themselves while sipping their coffees in the elegant surroundings. He had a vision
of recreating the Old World magic and romance behind the Italian coffee bar. The
owner wanted to focus on his plan to sell roasted whole beans, and eventually
Schultz acquired Starbucks and began the company’s march across the world.
Schultz’s father struggled at low-paying jobs with little to show for it when he
died. “He was beaten down, he wasn’t respected,” Schultz said. “He had no health
insurance, and he had no workers’ compensation when he got hurt on the job.” So
with Starbucks, Schultz “wanted to build the kind of company that my father
never got a chance to work for, in which people were respected.” Due to this
childhood experience, Schultz initiated practices at Starbucks that are still uncom-
mon in retailing, such as providing comprehensive health care for all employees
working at least 20 hours a week, including coverage for unmarried spouses, and
offering an employee stock-option plan. In 2012, Starbucks’ sales were greater
than $11 billion from the 17,000 stores it operates in 40 countries.31
In the next section, we discuss the decisions that retailers make to design and
implement their retail strategy. This book is organized around this strategic
decision-making process.

THE RETAIL MANAGEMENT DECISION PROCESS

LO5 This book is organized around the management decisions that retailers make to
Understand the strategic
provide value to their customers and develop an advantage over their competitors.
retail management decision Exhibit 1–6 identifies the chapters in this book associated with each type of
process. decision.
 Introduction to the World of Retailing CHAPTER 1 21

THE WORLD OF RETAILING

EXHIBIT 1–6
Retail Management
1. Introduction to the World of Retailing
2. Types of Retailers
Decision Process
3. Multichannel Retailing
4. Customer Buying Behavior

RETAILING STRATEGY
5. Retail Marketing Strategy
6. Financial Strategy
7. Retail Locations
8. Site Location
9. Organization Structure and Human Resource Management
10. Information Systems and Supply Chain Management
11. Customer Relationship Management

MERCHANDISE MANAGEMENT STORE MANAGEMENT

12. Managing Merchandise 16. Managing the Store
Inventories 17. Store Layout, Design, and
13. Buying Merchandise Visual Merchandising
14. Pricing 18. Customer Service
15. Retail Communication Mix

Understanding the World of Retailing—Section I

The first step in the retail management decision process, as Exhibit 1–6 shows, is
understanding the world of retailing. Retail managers need to know the environ-
ment in which they operate before they can develop and implement effective
strategies. The first section of this book therefore provides a general overview of
the retailing industry and its customers.
The critical environmental factors in the world of retailing are (1) the macro-
environment and (2) the microenvironment. The impacts of the macroenviron-
ment—including technological, social, and ethical/legal/political factors—on
retailing are discussed throughout this book. For example, the influence of tech-
nology on the rise of multichannel retailing is reviewed in Chapter 3, the use of
new information and supply chain technologies are examined in Chapter 10, cus-
tomer relationship management systems are reviewed in Chapter 11, and new
communication technologies are discussed in Chapter 15.

Competitors The retailer’s microenvironment focuses specifically on its com-

petitors and customers. At first glance, identifying competitors appears easy: A
retailer’s primary competitors are other retailers that use the same retail approach.
Thus, department stores compete against other department stores, and supermar-
kets compete with other supermarkets. This competition between the same type
of retailers is called intratype competition.
Yet to appeal to a broader group of consumers, many retailers are increasing the
variety of merchandise they offer. By offering greater variety, retailers satisfy the needs
of customers seeking a one-stop shopping experience. For example, Walgreens has
added jewelry, accessories, and apparel to its already extensive health and beauty
categories to meet the lifestyle needs of its customers. Amazon seems to offer any
product you might ever want to buy or rent. When retailers offer merchandise not
typically associated with their type of store, such as clothing in a drugstore, the
result is scrambled merchandising. Scrambled merchandising increases
22 SECTION I The World of Retailing

Scrambled merchandise
increases the level of
intertype competition.

intertype competition, or competition among retailers that sell similar merchan-

dise using different types of retail outlets, such as drug and department stores.
Increasing intertype competition makes it harder for retailers to identify and
monitor their competition. In one sense, all retailers compete against one another
for the dollars that consumers spend on goods and services. But the intensity of
competition is greatest among retailers whose offerings are viewed as very similar.
Management’s view of competition also may differ depending on the manager’s
position within the retail firm. For example, the manager of the Saks Fifth Avenue
women’s sportswear department in Bergen County, New Jersey, views the other
women’s sportswear specialty stores in the Riverside Square mall as her major com-
petitors. But the Saks store manager views the Bloomingdale’s store in a nearby mall
as her strongest competitor. These differences in perspective arise because the
department sales manager is primarily concerned with customers for a specific cate-
gory of merchandise, whereas the store manager is concerned with customers seek-
ing the entire selection of all merchandise and services offered by a department store.
The chief executive officer (CEO) of a retail chain, in contrast, views competition
from a much broader perspective. For example, Nordstrom might identify its stron-
gest competitor as Saks, Neiman Marcus, Bloomingdale’s, and even Bluefly.com.
Chapter 2 discusses various types of retailers and their competitive strategies,
and Chapter 3 concentrates on different types of channels that retailers use to
complete transactions with their customers.

Customers The second factor in the microenvironment is customers. Retailers

must respond to broad demographic and lifestyle trends in our society, such as the
growth in the senior and minority segments of the U.S. population or the impor-
tance of shopping convenience to the increasing number of two-income families.
To develop and implement an effective strategy, retailers must understand why
customers shop, how they select a store, and how they select among that store’s
merchandise—the information found in Chapter 4.

Developing a Retail Strategy—Section II

The next stages in the retail management decision-making process, formulating
and implementing a retail strategy, are based on an understanding of the macro-
and microenvironments developed in the first section of this book. Section II
 Introduction to the World of Retailing CHAPTER 1 23

Toys R Us focuses on toys

and apparel for children,
while Walmart’s strategic
focus is much broader.

focuses on decisions related to developing a retail strategy, whereas Sections III

and IV pertain to decisions surrounding the implementation of the strategy and
building a long-term competitive advantage. The decisions discussed in Sections
III and IV are more tactical.
Retail Strategy The retail strategy identifies (1) the target market, or mar-
kets, toward which the retailer will direct its efforts; (2) the nature of the merchan-
dise and services the retailer will offer to satisfy the needs of the target market;
and (3) how the retailer will develop unique assets that enable it to achieve long-
term advantage over its competitors.
The nature of a retail strategy can be illustrated by comparing the strategies of
Walmart and Toys R Us. Initially, Walmart identified its target market as small
towns (fewer than 35,000 in population) in Arkansas, Texas, and Oklahoma. It
offered name-brand merchandise at low prices in a broad array of categories,
ranging from laundry detergent to girls’ dresses, but offerings in each category
were limited. Today, even as Walmart stores have expanded across the world, the
selection in each category remains limited. A Walmart store might have only
3 models of flat-screen television sets, while an electronic category specialist like
Best Buy might carry 30 models.
In contrast to Walmart, Toys R Us defines its primary target as consumers
living in suburban areas of large cities. Rather than carrying many merchandise
categories, Toys R Us stores specialize in toys and children’s apparel and carry
most types and brands currently available in the market. Walmart emphasizes self-
service: Customers select their merchandise, bring it to the checkout line, and
then carry it to their cars. But Toys R Us provides more customer service. It has
salespeople to assist customers with certain types of merchandise.
Because Walmart and Toys R Us both emphasize competitive prices, they have
made strategic decisions to sustain their low prices by developing a cost advantage
over their competitors. Both firms have sophisticated distribution and manage-
ment information systems to manage inventory. Their strong relationships with
their suppliers enable them to buy merchandise at low prices.
Strategic Decision Areas The key strategic decisions a retailer makes are
defining its target market and its financial objectives. Chapter 5 discusses how the
selection of a retail market strategy requires analyzing the environment and
24 SECTION I The World of Retailing

the firm’s strengths and weaknesses. When major environmental changes occur,
the current strategy and the reasoning behind it must be reexamined. The re-
tailer then decides what, if any, strategy changes are needed to take advantage of
new opportunities or avoid new threats in the environment. The retailer’s mar-
ket strategy must be consistent with the firm’s financial objectives. Chapter 6
reviews how financial variables, such as return on investment, inventory turn-
over, and profit margin, can be used to evaluate the market strategy and its
implementation.
The next set of strategic decisions involves the development of critical assets
that enable retailers to build strategic advantages. These strategic assets are loca-
tion, human resource, information and supply chain systems, supply chain organi-
zation, and customer loyalty.
Decisions regarding location (reviewed in Chapters 7 and 8) are important because
location is typically consumers’ top consideration when selecting a store. Generally,
consumers buy gas at the closest service station and patronize the shopping mall that’s
most convenient to their home or office. In addition, location offers an opportunity to
gain a long-term advantage over the competition. When a retailer has the best loca-
tion, a competing retailer must settle for the second-best location.
Retailing is a very labor-intensive industry. Employees play a critical role in
providing the services customers seek when patronizing a retailer. Chapter 9 out-
lines how retailers coordinate the activities of buyers, store managers, and sales
associates in the implementation of the retailing strategy.
Retail information and supply chain management systems also offer a signifi-
cant opportunity for retailers to gain strategic advantage. Chapter 10 reviews how
retailers are developing sophisticated computer and distribution technologies to
monitor flows of information and merchandise from vendors to retail distribution
centers to retail stores. These technologies are part of an overall inventory man-
agement system that enables retailers to (1) make sure desired merchandise is
available when customers want it and (2) minimize the retailer’s inventory
investment.
Retailers, like most businesses, want to develop repeat purchases and loyalty in
their best customers. Chapter 11 examines the process that retailers use to iden-
tify, design programs for, increase the share of wallet of, provide more value to,
and build loyalty among their best customers. The implementation decisions are
discussed in the next two sections.

Implementing the Retail Strategy—Sections III and IV

To implement a retail strategy, retailers develop a retail mix that satisfies the needs
of its target market better than that of its competitors. The retail mix is a set of
decisions retailers make to satisfy customer needs and influence their purchase
decisions. Elements in the retail mix (Exhibit 1–7) include the types of merchan-
dise and services offered, merchandise pricing, advertising and promotional

EXHIBIT 1–7
The Retail Mix Customer service Location
(18) (7, 8)

Store design Merchandise

and display RETAIL management
(17) STRATEGY (12, 13)

Communication
mix Pricing
(15) (14)
 Introduction to the World of Retailing CHAPTER 1 25
programs, store design, merchandise display, assistance to customers provided by
salespeople, and convenience of the store’s location. Section III reviews the imple-
mentation decisions made by buyers, and Section IV focuses on decisions made by
store managers.
Managers in the merchandise management area decide how much and what
types of merchandise to buy (Chapter 12), what vendors to use and how to interact
with them (Chapter 13), the retail prices to set (Chapter 14), and how to advertise
and promote merchandise (Chapter 15). Store managers must determine how to
recruit, select, and motivate sales associates (Chapter 16); where and how mer-
chandise will be displayed (Chapter 17); and the nature of services to provide for
customers (Chapter 18). Whole Foods Market is one of the fastest growing and
most profitable supermarket chains. In the next section, we illustrate the strategic
and more tactical decisions Whole Foods has made and continues to make to
achieve and sustain its success. The background of its founder and CEO, John
Mackey, is described in Retailing View 1.3.

Whole Foods Market: An Organic and Natural Food

Supermarket Chain
Retail Strategy In the 1960s, natural, organic foods were available only in
farmers’ markets or small specialty stores catering to counterculture consumers.
Consumers who patronized these health food stores felt that eating organic food
would liberate them from the grasp of big agribusiness and food processors that
were destroying the land with chemical pesticides, mistreating migrant farmwork-
ers, and encouraging people to consume unhealthy processed foods. Whole Foods’
strategy is to target health-conscious, environmentally conscious, middle-class
consumers by using a modern supermarket format, rather than small, specialty
health food stores. Its mission is to promote the vitality and well-being of all indi-
viduals by supplying the highest quality, most wholesome foods available.

Strategic Advantages Some of the strategic assets Whole Foods has devel-
oped over the years to provide long-term advantages are a strong brand image
that builds customer loyalty; committed employees who provide excellent cus-
tomer service; good relationships with organic food suppliers that ensures a supply
of organic food, even as demand for organic food grows faster than supply; an
efficient supply chain connecting local growers to a national store network; and
extensive information about its customers that it uses to develop assortments and
target promotions.

Merchandise Management In terms of merchandise, Whole Foods stores

offer the array of food categories typically found in a supermarket. However, the
assortment emphasizes organic and natural products that are fresh, nutritious, and
safe to eat. Products are free of artificial preservatives, colors, flavors, and sweeten-
ers, as well as hydrogenated fats and other unacceptable ingredients. In addition,
Whole Foods seeks out and supports local producers whose fruits and vegetables
meet its standards, particularly those who farm organically and are dedicated to
environmentally friendly, sustainable agriculture.
Whole Foods offers seven lines of private-label products. Buyers work with
artisan food producers and organic farmers to attain products sold under the
super-premium Authentic Food Artisan brand. Its core private brands are called
Whole Brands (department-specific products), Whole Foods (premium prod-
ucts), and Whole Kids Organic (organic products for children). The 365 Day
Everyday Value and 365 Day Organic Everyday Value line provide natural prod-
ucts at value prices.
Whole Foods communicates the benefits of its offering through its website
and social media. Its website has extensive information about natural and organic
 26 SECTION I The World of Retailing

1.3 R E TA I LI NG VI EW Whole Foods: The Birth of the

Organic Supermarket
John Mackey had a relatively conven-
tional, middle-class, suburban upbring-
ing. But it was the 1970s, so Mackey quit
college and embraced an alternative
lifestyle (e.g., long beard, wild hair).
After having worked for a time in a veg-
etarian collective, he solicited money
from family and friends so that he could
open a new sort of
REFACT co-op in 1978: or-
ganic food store
Whole Foods has a rule
on the first floor,
that no employee can
restaurant on the
have a salary greater than
second floor, and
19 times the average living quarters on
salary of store employees. the top of the old
On average, a U.S. CEO Victorian house he
makes 319 times the had found.
compensation of a pro- A couple of
duction worker in their years later, Mackey
companies.32 went further and
opened the first
Whole Foods store in a 10,000-square-
foot space that had once been a night-
club. In keeping with its history, Mackey
made sure his natural food store was no
stodgy, boring site with just granola. He
stocked beer, meat, and wine, and he
“loved it. I loved retail. I loved being
around food. I loved natural foods. I
loved organic foods. I loved the whole
idea of it. And a thought entered into my
mind that maybe this is what I could do.”
But being a grocer was not a particu-
larly popular aspiration with his family.
His mother, a former teacher, strongly
discouraged his interest in Whole Foods.
According to Mackey’s account, on her
deathbed in 1987, she asked him to
promise to return to school to get his
college degree; when he demurred, she
complained, “I wish you’d just give up
that stupid health-food store. Your fa-
ther and I gave you a fine mind, and Whole Foods founder and CEO, John Mackey
you’re wasting it being a grocer.”
He never did give up on his “stupid” store, though. Bread & Circus, it gained access to the Boston chain’s
Instead, as the concept spread across the United States, famed seafood procurement expertise.
Mackey adopted and adapted his ideas to fit local
tastes. Through decentralized decision-making units, Sources: www.wholefoodsmarket.com/company-info/whole-foods-market-
Whole Foods stores could choose to stock items specific history; and Nick Paumgarten, “Food Fighter,” New Yorker, January 4, 2010.
to the preferences of the local markets, like live lob-
sters in Portland, Maine, or a kombucha bar in Venice,
California. Through acquisitions, Whole Foods gained
additional knowledge, too. In buying Wellspring DISCUSSION QUESTION
Grocery, it learned about private-label options. The
What factors in Whole Foods’ macro- and
purchase of Mrs. Gooch’s provided Whole Foods with
microenvironment contributed to its success?
insights into diet supplements. When it purchased
 Introduction to the World of Retailing CHAPTER 1 27

Employees at Whole Foods

participate in decision
making through self-
managed teams.

foods. Its iPhone app provides not just the location information about the nearest
Whole Foods store (by zip code) but also approximately 2,000 recipes, searchable
by various criteria, including diet restrictions, ingredients, budgets, or family
appeal. The “On Hand” option allows users to input the items on their pantry
shelves and receive recommendations for some meal options. Moreover, the app
offers special deals for each store, right next to a map that shows customers how
to get there.33
Whole Foods also uses social media extensively. A global manager and commu-
nity manager assigned at every store are responsible for customer engagement. A
single Global Online Community Manager runs the company’s central Twitter
link, @Whole Foods. Most of the tweets in this realm come from individual
customers with questions, complaints, or suggestions. The manager makes sure to
respond almost immediately, to ensure that no customers get the sense Whole
Foods is uninterested or ignoring their concerns. Then, in each community,
another manager attends to local needs, including special deal postings, charity
opportunities, and upcoming events. A Los Angeles store located on Third Street
owns the Twitter handle @WholeFoods3rdSt; a Mount Washington location, near
Baltimore, tweets from the @WholeFoodsMTW account.34

Store Management All Whole Foods employees are organized into self-
managed teams that meet regularly to discuss issues and solve problems. Almost
all team members have stock options in the firm. They also receive a 20 percent
discount in stores. Their personal wellness accounts help them cover health care
expenses, both for themselves and their domestic partners. To select the benefits
package, the entire company takes a vote every three years. Whole Foods thus has
been on Fortune magazine’s “100 Best Companies to Work For” list for 13 con-
secutive years.35
Whole Foods’ decisions on visual merchandising and store design reinforce its
strategy.36 Its stores are designed to make grocery shopping fun—to transform a
supermarket into an interactive theater with corporate staff serving as the pro-
ducer and store management as the director. Sections of its newer stores are de-
signed with self-contained architecture that curves inward, creating a feeling of
intimacy that encourages shoppers to linger. The warm feeling of the store is en-
hanced by signs made of an eco-friendly, woodlike material rather than plastic. Art
gallery–type lighting focuses attention on produce.
28 SECTION I The World of Retailing

Finally, Whole Foods’ store management provides excellent customer service.

Curious about the life of a chicken in the display case? It comes with a 16-page
booklet and an invitation to visit the live chickens at the company’s Pennsylvania
farm. Want to know the name of the farmer who grew those organic tomatoes?
That information, along with some personal details, is readily available. Curious
about the fish you’re getting dressed at the free filleting station? The employee
can offer not just ideas for cooking it but also the identity of the Whole Foods
boat and the captain who caught it for you.37

Ethical and Legal Considerations

When making the decisions discussed previously, managers need to consider the
ethical and legal implications of their decisions, in addition to the effects that
those decisions have on the profitability of their firms and the satisfaction of their
customers. Ethics are the principles governing individuals and companies that
establish appropriate behavior and indicate what is right and wrong. Defining the
term is easy, but determining what the principles are is difficult. What one person
thinks is ethical, another may consider unethical.
What is ethical can vary from country to country and from industry to industry.
For example, offering bribes to overcome bureaucratic roadblocks is an accepted
practice in Middle Eastern countries but is considered unethical, and even illegal,
in the United States. Ethical principles also can change over time. For example,
some years ago, doctors and lawyers who advertised their services were considered
unethical. Today, such advertising is accepted as common practice.
Examples of difficult situations that retail managers face include the following:
• Should a retailer sell merchandise that it suspects was made using child labor?
• Should a retailer advertise that its prices are the lowest available in the market,
even though some are not?
• Should a retail buyer accept an expensive gift from a vendor?
• Should a retailer charge a supplier a fee for getting a new item in its store?
• Should retail salespeople use a high-pressure sales approach when they know
the product is not the best for the customer’s needs?
• Should a retailer disclose product information that may affect whether or not
it is purchased?
• Should a retailer promote a product as being “on sale” if it never sold at a
higher, nonsale price?
• Should a retailer offer credit at a higher interest rate or sell products at higher
prices in stores patronized mostly by low-income customers?
Laws dictate which activities society has deemed to be clearly wrong, those
activities for which retailers and their employees will be punished through the
federal or state legal systems. However, most business decisions are not regulated
by laws. Often retail managers have to rely on their firms’ and industries’ codes of
ethics and/or their own codes of ethics to determine the right thing to do.
Many companies have codes of ethics to provide guidelines for their employees
in making their ethical decisions. These ethical policies provide a clear sense of
right and wrong so that companies and their customers can depend on their em-
ployees when questionable situations arise. However, in many situations, retail
managers need to rely on their personal code of ethics—their personal sense of
what is right or wrong.
Exhibit 1–8 lists some questions you can ask yourself to determine whether a
behavior or activity is unethical. The questions emphasize that ethical behavior is
determined by widely accepted views of what is right and wrong. Thus, you should
engage only in activities about which you would be proud to tell your family,
friends, employer, and customers. If the answer to any of these questions is yes, the
behavior or activity is probably unethical, and you should not do it.
 Introduction to the World of Retailing CHAPTER 1 29

1. Would I be embarrassed if a customer found out about this behavior? EXHIBIT 1–8
2. Would my supervisor disapprove of this behavior? Checklist for Making
3. Would most coworkers feel that this behavior is unusual?
Ethical Decisions
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 was publicized in a newspaper article?
9. Would society be worse off if everyone engaged in this behavior or activity?

Your firm can strongly affect the ethical choices you will have to make. When
you view your firm’s policies or requests as improper, you have three choices:
1. Ignore your personal values, and do what your company asks you to do. Self-respect
suffers when you have to compromise your principles to please an employer. If
you take this path, you will probably feel guilty and be dissatisfied with your
job in the long run.
2. Take a stand, and tell your employer what you think. Try to influence the decisions
and policies of your company and supervisors.
3. Refuse to compromise your principles. Taking this path may mean you will get
fired or be forced to quit.
You should not take a job with a company whose products, policies, and con-
duct conflict with your standards. Before taking a job, investigate the company’s
procedures and selling approach to see whether they conflict with your personal
ethical standards. Throughout this text, we will highlight the legal and ethical
issues associated with the retail decisions made by managers.

SUMMARY
LO1 Identify retailing activities. Before the availability of modern information sys-
Retailing is defined as a set of business activities tems, it was difficult for retailers to lower costs
that add value to the products and services sold to through economies of scale, and larger retailers had
consumers for their personal or family use. These limited advantages over small local or regional re-
value-added activities include providing assort- tailers. With these information systems, retailers are
ments, breaking bulk, holding inventory, and able to efficiently and effectively manage millions of
providing services. customer transactions with thousands of stores and
suppliers across the globe.
LO2 Realize the importance of retailing in the U.S.
and world economies. LO4 Recognize the opportunities in retailing for you.
Retailing plays an important role in the U.S. econ- Retailing offers opportunities for exciting, challeng-
omy. One out of four workers in the United States ing careers, either by working for a retail firm or
works for a retailer or for a company selling prod- starting your own business. Aspects of retail careers
ucts to a retailer, and the U.S. retail sector accounts are discussed in Appendix 1A. Suggestions about
for about the same percentage of the U.S. GDP as starting your own business appear in Appendix A
the entire manufacturing sector. Retailing also at the end of the book.
plays an important role in developing economies.
LO5 Understand the strategic retail management
Some business scholars feel that there is need for
decision process.
modern retail methods to be used to serve consum-
ers at the bottom of the pyramid. The retail management decision process involves
developing a strategy for creating a competitive ad-
LO3 Analyze the changing retail industry. vantage in the marketplace and then developing a
The retail industry has changed dramatically over retail mix to implement that strategy. The strategic
the last 50 years. Many well-known national and decisions, discussed in the first section of this text-
international retailers were small startup companies book, involve selecting a target market; defining
50 years ago. Now the industry is dominated by large the nature of the retailer’s offering; and building a
firms. The development of information systems is competitive advantage through locations, human
one the forces facilitating the growth of large retailers. resource management, information and supply