Retail Pricing Strategy

One of the most crucial areas of decision making for retailers is pricing. Yet, we have found that small firms often do not have well-conceived pricing plans. And many such firms seem to panic (or ignore the problem) when large discount-oriented retailers enter their trading areas – or become more aggressive. This is not necessary; small retailers can prosper in today's discount-oriented environment, as long as they have a good understanding of their niche in the marketplace.

With this in mind, we have prepared this six-part series on pricing. We offer a number of tips to help you improve your pricing decisions. In this article, we begin with several questions for you to consider. When you address these questions for your firm, always ask yourself the rationable behind your answers:

Do you have an overall pricing philosophy? What is it? (high end, medium, or low end)

What are the characteristics of the people who shop at your store? For what reasons do they shop at your store? (for low prices, for convenience, for service, etc.) Is this consistent with your pricing philosophy?

How do you compute prices?

When setting prices, do you take all of your operating costs into account? (including your own salary)
How does your store use manufacturer suggested list prices?

Are your prices "fair" to the customers who shop at your store? What does the term "fair" mean to you?

Do you or one of your employees visit competing retailers to check on their prices? Do you check competitors' ads for prices? If you do check competitors' prices, how does your firm react to what you learn?

How often do you change prices? Does this vary by product category?

How often do you run sales? Does this vary by product category?

Do you plan for stock shortages (due to shrinkage and clerical errors) when setting prices? How?

Do you use price lining? (whereby you sell items at a range of prices, such $12, $17, and $25 dollar ties)

Do you advertise prices? Where?

Do you let customers bargain over the prices of any items?

How do you use prices in competing with larger retailers? (such as Wal-Mart, Home Depot, Toys "R" Us, etc.)

Have you formed a buying group (cooperative) with other small retailers to get better terms on your purchases?

Do you use odd prices ($4.95, $59.95) rather than even prices ($5.00, $60)?
When you take a physical inventory, how do you compute the value of the merchandise remaining in stock?

Do you understand the difference between an initial markup and a maintained markup? Do you use these concepts in setting your prices?

How are prices displayed in your store? (shelf labels, price tags on individual items, etc.)

What payment method(s) do you accept? (cash, check, store charge, bank card)

Do you understand both of these terms: Elastic demand? Inelastic demand?

What do you think about everyday low pricing

By Joel R. Evans, Ph.D.& Barry Berman, Ph.D

Retail Merchandise Optimization

In today's economy, retailers are looking for ways to improve financial performance without adding stores. With the increased pressures of competition, eroding margins, lack of differentiation, and having achieved many of the back-office and supply chain efficiencies available to reduce costs, the focus of retail executives has shifted to growing comparable store sales and increasing margin through more effective merchandising.

Because inventory is one of the most significant investments retailers make, it's no surprise that they are beginning to reevaluate merchandising strategies. Traditionally, deciding how much merchandise to buy, which stores to put it in, and the best price for each item has been one of the least efficient processes in a retailer's business. Based on a study by Accenture, it is estimated that the top-tier U.S. retailers could gain $20 billion in incremental gross margin dollars by employing Merchandise Optimization technology.

Merchandise Optimization is an emerging category of solutions that help retailers make more profitable buying, allocating, and pricing decisions based on customer demand. As with any emerging market, there are various names for pieces of the merchandising puzzle: Pricing and Revenue Optimization, Demand Based Management, Retail Revenue Management, etc. Regardless of name, the concepts covered by Merchandise Optimization are important to the success of all major retailers.

As merchandising experts, retailers excel at making strategic merchandising decisions such as picking best-selling items for next season's assortment. However, because they are responsible for thousands of items and hundreds of stores, a large portion of their time is spent on data analysis and number crunching. Merchandise Optimization technology acts like a merchant's personal assistant by automating the tedious analysis of sales and demand information, generating a common forecast that incorporates store-level information about long- and short-lifecycle products, and providing them with the tools they need to make the more profitable buying, allocating and pricing decisions.

"Merchandise Optimization is a power tool for the retail industry," said Scott Friend, president of ProfitLogic. "Merchants without the right tools spend far too much time collecting information and manually analyzing spreadsheet data just to keep up with 1000s of decisions every day. Merchants empowered with Merchandise Optimization tools spend their time making decisions based on centralized, organized and pre-analyzed demand information. This frees up their time to do what they excel at -- being merchants."

One of the areas that cause retailers the greatest pain is markdowns. More than 60 percent of sales in department stores and specialty chains come from marked-down merchandise, according to Levy & Weitz in Retailing Management. Tremendous financial benefit is available if price changes are executed at the right time and deep enough to spur demand. If merchants markdown merchandise too early, they are stuck with inventory shortages, dissatisfied customers, and lost gross margin. If they markdown merchandise too late, which is typically the case, they are left with excess inventory at the end of the season, have difficulty finding room for new merchandise, and sacrifice gross margin dollars. Because Markdown Optimization is one of the quickest and easiest ways for retailers to drive productivity from their inventory investment, it's an excellent place to get started on the road to using Merchandise Optimization across the entire merchandising process.

By Profit Logic

Reducing the Cost of Fixturing and Merchandising Programs

If you could achieve one significant breakthrough in your store planning process, what would it be? Most store planning professionals agree that their ultimate goal is to reduce the total cost of remerchandising and store build outs. But how do you go about the process of achieving that goal?

Some executives might just direct their staffs to cut budgets in a given area and let them figure out how to control expenses. But is this the most effective way to reduce the total cost to the company? When direct operating budgets are cut, indirect costs can increase. When the front lines are not able to perform functions in the most efficient manner, these burdens often shift back to support departments. Many of the store build out costs are covered by corporate operating budgets such as freight, merchandising, design, and plannogramming.

And is slashing budgets always the answer? Scheduling freight is a tricky business. If no one is managing your freight, chances are, you let your vendors route your shipments. You pay whatever bill they send you. This may reduce your staffing budget, but is certainly does not reduce total costs. Our job as store planners is to conduct the entire process for maximum benefit to the company.

It is all a mater of perspective. Are you sitting in a tree on a high branch looking down? Or, are you standing on a nearby mountain examining all the trees below? Slicing and dicing individual operating budgets puts you on the proverbial branch.

I recently facilitated a store-planning symposium with market leaders from a diverse section of retail segments. They brainstormed specific goals to reduce the cost of store fixturing and merchandising programs. Here is a sample from their long list:

1. To improve the quality and effectiveness of their workforces,2. To reduce errors caused by date and design changes,

3. To reduce errors and inefficiencies caused by inadequate communication both internally and throughout the supply chain,

4. To eliminate documentation errors that increase setup and construction costs,

5. To improve vendor performance tracking and feedback mechanisms,

6. To reduce lost sales during remerchandising activities,

7. To use technology to minimize the cost of all transactions, and

8. To reduce construction cycle times.

Every store planner that I meet has the same goals... to be able to build new stores or remodel existing stores better, faster, smarter and cheaper than their competition.

Cycle time is a manufacturing term. It refers to the total amount of time that it takes to perform a given function. It can refer to a macro function such as remerchandising an entire store. Or, it can refer to a micro function such as the time it takes to setup a particular point-of-purchase display.

At the symposium, we asked what lessons that we could all learn from lean manufacturers. At first, store planners will give me the raised eyebrow when I start talking about manufacturing. They quickly see the connection between manufacturing any product and manufacturing a store. Every store planner that I meet has the same goals as do lean manufacturers: to be able to build new stores or remodel existing stores better, faster, smarter and cheaper than their competition.

Let's look at Toyota. Toyota was once a manufacturer of "cheap Japanese automobiles." Now a model of quality and technology, American automakers have entered into numerous joint ventures with Toyota. The benefit to Toyota is that they have enjoyed greater access to our markets. The benefit to American automakers is that they have had the opportunity to learn the secrets of Toyota’s success.

Toyota's winning ways began with Taiichi Ono when he began to attack "waste" in the production system as a strategic issue. He taught his workforce to identify and eliminate unnecessary movements, materials and time in the production system. No amount of waste was too small to eliminate. No person was exempt from generating process improvement ideas.

The call to eliminate waste was not limited to direct labor and materials, but overhead as well. Most overhead is considered to be waste, and should by definition be minimized. Taiichi Ono identified seven elements of waste:

1. Correction

2. Unnecessary -- processing steps

3. Waiting

4. Moving people and goods around

5. Excess inventory

6. Production of goods and services that no one wants

7. Obsolescence

Thus, the Toyota Production System and lean thinking was born.

By Pam Mitchell

Indonesia Retail Law May Limit Expansion of Carrefour

Dec. 28 (Bloomberg) -- Indonesia's government passed a law designed to restrict store locations for retail chain operators including Carrefour SA and PT Matahari Putra Prima.

``The outlet locations of modern and traditional retailers should be administered more properly,'' Trade Minister Mari Pangestu told reporters in Jakarta today. Local governments in Indonesia's 33 provinces ``will have the authority to implement this zoning rule,'' she said, without providing other details on the new law.

Indonesia is following Thailand and state governments in India in trying to appease owners of small shops, which are losing market share to retail chains. The new law could force companies such as Carrefour, Europe's biggest retailer, to build new outlets outside cities.

``Competition is very tight,'' Handaka Santosa, chairman of the Indonesian Retail Merchants Association, said in a telephone interview. ``Large retailers with more capital certainly have bigger power, so regulation is needed.''

Eight of the 37 stores operated in Indonesia by Paris-based Carrefour were opened this year, Irawan D. Kadarman, corporate affairs director at PT Carrefour Indonesia said in a phone interview today. He declined to comment on the new zoning rule.

Carrefour's 23 hypermarkets in the capital of Jakarta and its greater area and 14 in other cities in Java, Sumatra and Sulawesi islands compete with Matahari, Indonesia's largest department store operator by sales.

Matahari had 83 department stores and 27 hypermarkets as of May and planned to spend 1.1 trillion rupiah ($117 million) to open five department stores and 12 hypermarkets this year.
Indonesia's total grocery sales rose to 63.59 trillion rupiah in 2006, up from 57.24 trillion rupiah the previous year, according to ACNielsen data.

By Wahyudi S

Top Global Retailers

Following is a chart of the largest global food retailers. Sales figures are for the latest financial year. Companies included must have a third of their sales from food.

Rank Company Headquarters Top Executive Sales in Billions No. of stores
1 Wal-Mart Stores U.S. H. Lee Scott Jr $312.40 6,380
2 Carrefour France José Luis Duran $92.6 12,179
3 Tesco U.K. Terry Leahy $69.6 2,365
4 Metro Group Germany Hans-Joachim $69.3 2,458
5 Kroger U.S. David B. Dillon $60.6 3,726
6 Ahold Netherlands Anders Moberg $55.3 6,422
7 Costco U.S. James Sinegal $52. 9 460
8 Rewe Germany Achim Egner $51.8 11,242
9 Schwarz Group Germany Klaus Gehrig $45.8 7,299
10 Aldi Germany Hartmuth $45.0e 7,788

Source: M+M Planet Retail,

Tiens To Expand International Market withBannerStore

China-based Tiens has announced plans to set up directly-run supermarkets on a global basis, aiming to have 3000 to 4000 supermarkets both directly-run and franchised.

Li Jinyuan, chairman of Tiens, says that the development focus of Tiens this year will be expanding its supermarket operation in order to escape the traditional pattern of its labor network. The first directly-run supermarket of Tiens will be located in Tianjin, where the head office of Tiens is located, and will be opened on February 8.

Tiens will open 50 directly-run supermarkets in the north of the Yangtze River by the end of this year and then expand to the areas in the south of the Yangtse River next year.

Li says that by 2010, Tiens will have 1000 directly-run supermarkets and 2000 to 3000 franchised stores around the world. He also says that each Tiens supermarket will provide more than 10000 kinds of goods, including fresh food, fruit, commodities, clothes and home appliances Tiens hopes to compete with the world's retailing giant Wal-Mart.

Founded in 1992, Tiens is a large-scale global enterprise with operations in over 190 countries and regions with a customer base of over 10 million.

Lost in the Supermarket ??

Why the 'cheap food revolution' hasn't reached poor countries Most people don't think twice as they pass spring apples from the southern hemisphere as they enter the supermarket, but they are participating in a cheap food revolution that has swept the industrialized world over the past couple of generations. The supermarket is the last step in a complicated global process that has changed every aspect of how we produce and consume food. In theory, the arrival of supermarkets in a country should bring with it the "cheap food" that we have enjoyed for so many years.

In a probing study, Bart Minten of the International Food Policy Research Institute asks: "The Food Retail Revolution in Poor Countries: Is It Coming or Is It Over?" Using the African island nation of Madagascar—171st out of 181 countries in the IMF's calculations of purchasing power based on GDP—as his case study, Minten shows that "cheap food" isn't so cheap for poor countries. Multi-national chains have turned their attention to the developing world, where the demand for lower prices would seem universally higher. For instance, supermarkets jumped from 10%-20% to 50%-60% of food retail from 1990 to the early 2000s in most of South America, and free market disciples have praised the multinationals for bringing cheap food to the poor.

The Economist, in fact, described one of the chains in Madagascar as the "Wal-Mart of Africa," and praised it for bringing low-priced goods to the poor. The problem is: the poor aren't coming. At the heart of the problem is a classic cost-benefit analysis by the consumer. For his study, Minten showed pictures taken of various items (rice, meat, tomatoes) from the newer supermarket chains to a sample of Malagasy shoppers. The respondents overwhelmingly agreed that the multinational chains had higher quality goods, but says Minten, "when I control for quality attributes, I find that food prices in the global retail chains are 40%-90% higher than those in traditional retail markets." Malagasy shoppers were not willing to pay the high prices. Minten finds that the local markets operate at very low margins and carry local foods of widely varying quality largely untouched by modern agriculture, both of which would be unacceptable to a multinational company.

According to Minten, "it thus seems that agriculture for local consumption in poor countries will be largely bypassed by the global food retail revolution." If the chains do survive in poorer countries, they will likely remain exclusively the domain of the middle classes, especially so in the poorest African countries.

Source: University of Chicago Press Journals

Retail Inventory Turnover

How hard is the money you have invested working for you? You’ve probably been asked that question several times by stock brokers or "investment counselors." No, I’m not going to try to sell you mutual funds. This article isn’t about how you are managing your personal investments. Instead, we are going to look at the performance of your company’s largest asset: inventory.

The Concept of Inventory Turnover

Say you sell $10,000 worth of a product (at cost) each year. Total revenue received from sales of the product is $12,500. If we bought the entire $10,000 worth of the product on January 1st, at the end of the year we would have made a $2,500 gross profit on an investment of $10,000.

But do we have to buy the entire $10,000 worth of the product at one time? What if we bought $5,000 worth of the product on January 1st. Then, just before running out of stock, we bought an additional $5,000 worth of the product with part of the revenues received from selling the first shipment. At the end of the year we’ve still sold $10,000 worth of the product, still made $2,500 gross profit, but on an investment of about $5,000.

Could we make the same gross profit on an even smaller investment? What if we were to buy $2,500 dollars worth of material. Sell most of it. Buy another $2,500 dollars worth of the product. Sell most of that shipment and then repeat the process two more times before the end of the year. The annual gross profit of $2,500 is now generated with an investment of about $2,500.

Which investment option is better? Selling $10,000 worth of a product (and making $2,500 gross profit) with an investment of $10,000, $5,000 or $2,500? The best option is $2,500. Investing $2,500 (rather than $10,000) frees up $7,500 that can be used for other purposes... such as stocking other products that have the potential of generating additional profits.

Every time we sell an amount of a product, product line, or other group of items equal to the average amount of money we have invested in those items, we have "turned" our inventory. The inventory turnover rate measures the number of times we have turned our inventory during the past 12 months.

Here is a list of the turnover rates from our example:

AnnualCost ofGoods Sold InventoryInvestment AnnualInventoryTurns
$10,000 $10,000 1
$10,000 $ 5,000 2
$10,000 $ 2,500 4

The Inventory Turnover Formula

Inventory turnover is calculated with the following formula:

Cost of Goods Sold from Stock Sales during the Past 12 Months / Average Inventory Investment during the Past 12 Months

There are several things to keep in mind when calculating turnover rates:
1. Only consider cost of goods sold from stock sales which are filled from warehouse inventory. Non-stock items and direct shipments are not included. Sure, these sales are important, but don’t involve your warehouse stock (i.e. your investment in inventory).
2. The cost of goods sold figure in the formula includes transfers of stocked products to other branches and quantities of these products used for internal purposes such as repairs and assemblies.
3. Inventory turnover is based on the cost of items (what you paid for them) not sales dollars (what you sold them for).

Inventory turnover depends on the average value of stocked inventory. To determine your average inventory investment:

1. Calculate the total value of every product in inventory (quantity on-hand times cost) every month, on the same day of the month. Be sure to be consistent in using the same cost basis (average cost, last cost, replacement cost, etc.) in calculating both the cost of goods sold and average inventory investment.
2. If your inventory levels tends to fluctuate throughout the month, calculate your total inventory value on the first and fifteenth of every month.
3. Determine the average inventory value by averaging of all of inventory valuations recorded during the past 12 months.

Turnover Goals

As you determine your inventory turnover goals, consider the average gross margin you receive on the sale of products. Most distributors who have 20% - 30% gross margins should strive to achieve an overall turnover rate of five to six turns per year. Distributors with lower margins require higher stock turnover. If your company enjoys high gross margins, you can afford to turn your inventory less often.

A turnover rate of six turns per year doesn’t mean that the stock of every item will turn six times. The stock of popular, fast moving items should turn more often (up to 12 times per year). Slow moving items may turn only once, or not at all.

Finally, calculate inventory turnover separately for every product line in every warehouse. This will allow you to identify situations in which your inventory is not providing an adequate return on your investment. To improve inventory turnover, consider reducing the quantity you normally buy from the supplier. Inventory turns improve when you buy less of product, more often.

You have limited funds available to invest in inventory. You cannot stock a lifetime supply of every item. In order to generate the cash necessary to pay your bills and return a profit, you must sell the material you’ve bought. The inventory turnover rate measures how quickly you are moving inventory through your warehouse. Combined with other measurements such as customer service level and return on investment, inventory turnover can provide an accurate barometer of your success.

Retail Holiday Preparation

While most people are wrapping up their back-to-school shopping, retailers are gearing up for feast day of ramadhan and Christmas

It seems strange to the rest of the world that holiday preparation is already underway in many stores. Those of us in retail know this truth about the holiday shopping season: you are either planning for it, in the midst of it, or recovering from it.

Traditionally, retail sales spike during the holidays. For some it is a flash between feastday of Ramadhan and Christmas, for others the season lasts from October to January. Whatever your sales pattern, if you want to have a successful holiday season, now is the time to be "making a list and checking it twice." If not, you'll be frozen out come the holidays.

If you are part of a chain, you probably already have a list of tasks to accomplish to prepare for the holiday shopping blitz.

Pay attention to it. It can mean the difference between a good season and a great one, or even a great season and a bad one.

Even if you are a single store or a store that doesn't get specialized holiday preparation guidance, it's not too early to start getting ready for the holiday season.

Here are holiday season preparation basics to consider:

Break out your budget and review it. Make necessary modifications now instead of scrambling in september
Start hiring and training the holiday staff. Don't wait. New employees need time to become proficient before the rush hits.
Work out your promotions, marketing and line up your advertising. Determine price matching, raincheck and special order policies. Take a look at your return policy and consider extending any 30 day limits.
Plan your store merchandise setup. Have a strategy for condensing product as it sells down and won't be restocked. A little work now means a better looking and more shopper friendly store later.
Determine how you will stock for sales. Consider having a dedicated stocking crew before or after hours so that the day staff can concentrate on customer service.
Design a holiday shopping theme for your store. Your atmosphere and decor should enhance your shoppers' experience and make them enjoy visiting, and buying, at your store.
Start stocking up on important customer needs
Perform any maintenance needed now. Give the restrooms a coat of paint. Replace any worn mats, bad carts, or burnt light bulbs. You will need to continue maintenance throughout the season, but take care of the big things now.
Make sure you have adequate room for merchandise processing and warehousing. Arrange for any off-site storage locations, truck permits or delivery schedule changes.
Prepare your after holiday clearance strategy.
Figure out how you will handle after Christmas returns from customer service, to rewrapping, to restocking. Advanced planning for returns can actually improve sales when the buying customers aren't competing with the returning customers for your employees time.

You should have your plan in place and tested before your holiday selling season starts, usually in August. Planning now gives you more time, greater flexibility, plus happier customers and employees later.