Retail Management - How do extreme value retailers make a profit when their prices and average transactions are so low
Retail Management - How do extreme value retailers make a profit when their prices and average transactions are so low
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Retail Management
CASE 1 Rainforest Café: A Wild Place to
Shop and Eat
Steve Schussler the first Rainforest Café
in the Mall of America, the largest enclosed mall in the worlds, in 1994. Before
opening this unique retail store and theme restaurant, Schussler tested the
concept for 12 years, eventually building a prototype in his Minneapolis home.
It was not easy sharing a house with parrots, butterflies, tortoises, and
tropical fish, but Schussler’s creativity resulted in a highly profitable and
fast-growing chain.
In
1996, the Rainforest Cafés (www.rainforstcafe.com), located in Chicago;
Washington, DC; Fort Lauderdale, Florida; and Disney World in Orlando, Florida,
in addition to the Mall of America in Minneapolis, Minnesota, generated $48.7
million in sales and $5.9 million profits. They offer a unique and exciting
atmosphere, with state-of-the-art décor and animatronics that recreate a
tropical rain forest in 20,000 to 30,000 square feet. The cafés are divided in
to a restaurant seating 300 to 600 people and a retail store stocking 3,000
SKUs of unique merchandise.
Retail
merchandise accounts for 30 percent of the revenues generated by the cafés.
Most theme restaurants stock fewer than 20 SKUs. At Rainforest, the merchandise
emphasizes eight proprietary jungle animals featured as animated characters in
the restaurant. They include Bamba the gorilla, Cha Cha the tree frog, and
Ozzie the orangutan. In addition to stuffed animals and toys, the characters
are utilized on clothing and gifts and in animated films and children’s books.
The
menu features dishes such as Leaping Lizard Lettuce Wraps, Rasta Pasta, Seafood
Galapagos, Jamaica Me Crazy, and Eye of the Ocelot (meatloaf topped with sautéed
mushrooms on a bed of caramelized onions). The restaurants have live tropical
birds and fish plus animated crocodiles and monkeys, trumpeting elephants,
gorillas beating their chests, cascading waterfalls surrounded by cool mist,
simulated thunder and lightning, continuous tropical rain storms, and huge
mushroom canapés. As Schussler said, “Our cafés feature the sophistication of a
Warner Brothers store with the animation of Disney.”
Rainforest
Cafés contribute to the local community through an outreach program. Over
300,000 schoolchildren visit the cafés each year to hear curators talk about
the vanishing rain forests and endangered species. All coins dropped into the
Wishing Pond and Parking Meter in the cafés are donated to causes involving
endangered species and tropical deforestation.
Technology
is used in the Rainforest Cafés to increase efficiency and profits. When a
party enters the restaurant, the host (called a tour guide) enters the party’s
name in a computer, which prints a “passport” indicating the party’s name,
size, and estimated seating time. The party can then go shopping or
sightseeing, knowing it will be ushered into the dining room within 5 to 10
minutes of the assigned seating time. When the party returns, the computer
tells the “safari guide” the table at which the party will be seated. Tour and
safari guides communicate with one another using headsets. This technology
enables the Rainforest Cafés to turn tables five to six times a day compared
with two to three turns in a typical restaurant.
The
company expanded rapidly. By 2000, it had annual sales of $200 million but
earned only $8 million in profits from 28 locations. Many of the locations were
in regional malls rather than high-traffic entertainment centers at which the
restaurants were initially located. As of 2005, Rainforest café was the only
restaurant concept at all three U.S. Disney locations. This restaurant can be
found in 16 states and Canada, China, Mexico, and Europe.
After
a protracted negotiation, Rainforest Café was acquired by Landry’s, which
operates 300 restaurants in 36 states under the trade names Joe’s Crab Shack,
Landry’s Seafood House, Crab House, Charley’s Crab, Chart House, Rainforest
Café, and Saltgrass Steak House, generated $1.2 billion in revenue in 2004.
Tilman Fertitta, the founder and CEO of Landry’s, explains his strategy for
operating restaurants: “Our approach was always been simple. Put good concepts
in good locations. Rainforest is a strong concept. The problem wasn’t with sales.
The worst stores do $5 million a year. That’s very different from other
entertainment chains like Planet Hollywood and Hard Rock Café. The major
problem was poor locations in shopping centers with high lease costs.”
Following the acquisition, Landry’s closed a number of Rainforest’s mall
locations but opened up new locations in London’s Piccadilly Circus, Euro
Disney outside Paris, Niagara Falls, the MGM Grand Hotel and Casino in Las
Vegas, and Fisherman’s Wharf in San Francisco.
DISCUSSION
QUESTIONS
- What is Rainforest Café’s retail
offering and target market?
- Were malls good locations for
Rainforest Cafés? Why or why not? What would be the best location types?
- Many retailers have tried to make their stores more entertaining. In a number of cases, these efforts have failed. What are the pros and cons of providing a lot of entertainment in a retail store or restaurant?
CASE
2 Providing a Retail Experience: Build-A-Bear Workshop
Today’s consumers want good value, low
prices, and convenience, but they also are attracted to a great shopping
experience. Build-A-Bear Workshop, a chain with over 170 stores generating $300
million in annual sales, is a teddy-bear-themed entertainment retailer whose
stores are playgrounds for children.
The
stores are exactly what the name says: Customers, or builders, choose an
unstuffed animal and, working with the retailer’s staff, move through eight
“creation stations” to build their own bear. At the first station, the
Stuffiteria, children can pick fluff from bins marked “Love,” “Hugs and
Kisses,” “Friendship,” and “Kindness.” The stuffing is sent through a long,
clear tube and into a stuffing machine. A sales associate holds the bear to a
small tube while the builder pumps a foot peddle. In seconds, the bear takes its
form. Before the stitching, builders must insert a heart. The builders follow
the sales associates’ instructions and rub the heart between their hands to
make it warm. They then close their eyes, make a wish, and kiss the heart
before putting it inside the bear. After selecting a name and having it
stitched on the bear, builders take their bears to the Fluff Me station, where
they brush their bears on a “bathtub” that features spigots blowing air.
Finally, they move to a computer station to create a birth certificate for
their bear.
Bears
are sent home in Club Condo boxes, which act as mini-houses complete with
windows and doors. Besides adding value as playhouses, the boxes advertise
Build-A-Bear to the child’s friends. “[You] could buy a bear anywhere” says
Maxine Clark, founder and Chief Executive Bear. “It’s the experience that
customers are looking for.” The experience is depicted on the retailer’s Web
site, www.buildabear.com.
Customers
pay about $25 for the basic bear, but they can also buy sound, clothing, and
accessories for their bear. To keep the experience fresh, Build-A-Bear
regularly introduces new and limited-edition animals. Cloths and accessories
are also updated to reflect current trends. There are also in-store birthday
parties and an official CD. To make sure that customers have a great experience
every time they visit, all sales associates attend a three-week training
program at “Bear University,” and the firm offers incentive bear styles
arriving weekly. Build-A-Bear stores also feature seasonal merchandise such as
a King of the Grill bear for Father’s Day and a Sweetheart bear for Valentine’s
Day.
Refact
The origin of the teddy bear was a 1930
incident in which President Teddy Roosevelt refused to shoot a cub while bear
hunting. The spared animal was thereafter referred to as the Teddy Bear.
|
DISCUSSION QUESTIONS
- Is the
Build-A-Bear concept a fad, or does it have staying power?
- What can Build-A-Bear do to generate repeat visits to the store?
CASE 3 WeddingChannel.com
Anne is sitting at her desk eating her
lunch and surfing the Internet. For a few months, she has been preparing for
her wedding, which will take place in less than a month. She found many helpful
articles that gave her some good ideas. These articles also helped her face
reality and change her childhood dreams of a white carriage pulled by a team of
horses to a stretch limo. She gave up the Snow White wedding gown with a
15-foot train and has now settled on a sleek sheath gown.
In
planning her big day, Anne used the help of WeddingChannel.com to make a
checklist of what she needs to do. The Web site helped her organize a guest
list, design and buy her invitations, set up a gift registry, and post some
information for her friends about how she and Steven met. They met in college
and are from different cities; therefore, they decided to have their wedding
somewhere in between where their friends and family could meet. She used the
resources provided on WeddingChannel.com to book the chapel and restaurant
where the reception would be held.
Every
year, $72 billion is spent on weddings in the United States. The average
American wedding ceremony costs $22,000. The average age of brides is 24.5,
while the average groom is 26.5 year of age. With these statistics, it is no wonder
that WeddingChannel.com has become so popular. Its target market is 18 to 35
years. Approximately 48 percent of engaged couples plan to use the Internet to
help plan their wedding. WeddingChannel.com’s goal is to help couples make
their special day easier to plan and save time finding up-to-date information.
WeddingChannel.com
began on July 15, 1997. The venture has helped not only brides-to-be but also
retailers. Over $100 million was spent purchasing gifts through the site in
2003. WeddingChannel.com’s patented registry system searches 1.5 million
registries from its many retail partners, including Federated Department Stores
(Macy’s, Bloomingdale’s, Burdines, Goldsmith’s-Macy’s, Lazarus-Macy’s and
Rich’s-Macy’s), Tiffany & Co., Crate and Barrel, Neiman Marcus,
Williams-Sonoma, Pottery Barn, Recreational Equipment, Inc. (REI), JCPenney,
and others.
With
access to so many registered couples, WeddingChannel.com has an attractive
market. “Consistently, our targeted marketing tactics have resulted in five
times the average Internet response rate, providing the most effective platform
for companies to build their brand messages during a significant life stage
when brand loyalties are being developed,” said Adam Berger, president and CEO of
WeddingChannel.com. About 89 percent of all gift purchasers buy wedding gifts
from a registry.
WeddingChannel.com
is not only the largest bridal registry online, but it also provides a
comprehensive site that couples can use to plan their wedding. WeddingChannel.com
is a virtual community that provides services for couples who have many
questions. Where do brides start first? Most start with finding the perfect
dress. WeddingChannel.com offers over 20,000 styles of wedding gowns, including
both designer brands and less expensive brands. It also provides a great way to
sort through the many different styles by offering different buttons to select
sleeve length, silhouette, length, and neckline. It even has a virtual model so
the bride-to-be can see how she would look in a particular style of gown. The
site also provides many interactive tools that help couples make a budget,
guest list, wedding page, and registry. There are also many articles that range
from finding a reception site to planning a dream honeymoon.
WeddingChannel.com
is unique because it is a comprehensive destination for couples planning their
wedding. This interactive Web page allows for couples to make a customized
Internet page describing how they met, how they became engaged, their wedding
party, and the theme/colors for the big day. Guests can go online and shop at
the well-known stores associated with WeddingChannel.com and conveniently
purchase exactly what the couple needs for their future together.
 |
| Retail Management - How do extreme value retailers make a profit when their prices and average transactions are so low |
DISCUSSION
QUESTIONS
(1) What are the keys to making
WeddingChannel.com a success from the perspective of the companies investing in
it?
2 Why
would a retailer want to invest in a virtual community like WeddingChannel.com?
- Can you
think of other retailers that might benefit from developing a virtual
community
CASE 4 The Chen Family Buys Bicycles
The Chens live in Riverside, California,
west of Los Angeles. Terry is a physics professor at the University of
California, Riverside. His wife Cheryl is a volunteer, working 10 hour a week
at the Crisis Center. They have two children: Judy, age 10, and Mark, age 8.
In
February, Cheryl’s parents sent her $100 to buy a bicycle for Judy’s birthday.
They bought Judy her first bike when she was five. Now they wanted to buy her a
full-size bike for her eleventh birthday. Even though Cheryl’s parents felt
every child should have a bike, Cheryl didn’t think Judy really wanted one.
Judy and most of her friends didn’t ride their bikes often, and she was afraid
to ride to school because of traffic. So Cheryl decided to buy her the cheapest
full-size bicycle she could find.
Since
most of Judy’s friends didn’t have full-size bikes, she didn’t know much about
them and had no preferences for a brand or type. To learn more about the types
available and their prices, Cheryl and Judy checked the JCPenney catalog. After
looking through the catalog, Judy said the only thing she cared about was the
color. She wanted a blue bike, blue being her favorite color.
Using
the Yellow Pages, Cheryl called several local outlets selling bikes. To her
surprise, she found that a local hardware store actually had the best prices
for a 26-inch bicycle, even lower than Toys “R” Us and Wal-Mart.
Cheryl
drove to the hardware store, went straight to the toy department, and selected a
blue bicycle before a salesperson approached her. She took the bike to the cash
register and paid for it. After making the purchase, the Chens found out that
the bike was cheap in all senses. The chrome plating on the wheels was very
thin and rusted away in six months. Both tires split and had to be replaced.
A
year later, Cheryl’s grandparents sent another $100 for a bike for Mark. From
their experience with Judy’s bike, the Chens realized that the lowest-priced
bike might not be the least expensive option in the long run. Mark is very
active and somewhat careless, so the Chens wanted to buy a sturdy bike. Mark
said he wanted a red, 21-speed, lightweight bike with an aluminum frame,
cross-country tires, and a full reflector kit.
The
Chens were concerned that Mark wouldn’t maintain an expensive bike with all
these features. When they saw an ad for a bicycle sale at Kmart, Cheryl and
Terry went to the store with Mark. A salesperson approached them at an outdoor
display of bikes and directed them to the sporting goods department inside the
store. There they found row after row of red 10-speed bikes with minimal
accessories—the type of bike Cheryl and Terry felt was ideal for Mark.
A
salesperson approached them and tried to interest them in a more expensive bike.
Terry dislikes salespeople trying to push something on him and interrupted her
in mid-sentence. He said he wanted to look at the bikes on his own. With a
little suggestion, Mark decided he wanted one of these bikes. His desire for
accessories was satisfied when they bought a multifunction sports computer for
the bike. After buying a bike for Mark, Terry decided he’d like a bike for
himself to ride on weekends. Terry had ridden bikes since he was five; in
graduate school, before he was married, he’d owned a 10-speed; and he
frequently took 50-mile rides with friends. But he hadn’t owned a bike since
moving to Riverside 15 years ago.
Terry
didn’t know much about current types of bicycles. He bought a copy of Bicycling
at a newsstand to see what was available. He also went to the library to read
Consumer Reports’ evaluation of road, mountain, and hybrid bikes. Based on this
information, he decided he wanted a Serrato. It had all the features he wanted:
a lightweight frame, durable construction, and a comfort sports saddle. When
Terry called the discount stores and bicycle shops, he found they didn’t carry
the Serrato brand. He then decided he might not really need a bike. After all,
he’d been with out one for 15 years.
One
day, after lunch, he was walking back to his office and saw a small bicycle
shop. The shop was run down, with bicycle parts scattered across the floor. The
owner, a young man in grease-covered shorts, was fixing a bike. As Terry was
looking around, the owner approached him and asked him if he liked to bicycle.
Terry said he used to but had given in up when he moved to Riverside. The owner
said that was a shame because there were a lot of nice places to tour around
Riverside.
As
their conversation continued, Terry mentioned his interest in a Serrato and his
disappointment in not finding a store in Riverside that sold them. The owner
said that he could order a Serrato for Terry but that they weren’t in inventory
and delivery took between six and eight weeks. He suggested a Ross and showed
Terry one he currently had in stock. They thought the $500 price was too high,
but the owner convinced him to try it next weekend. They would ride together in
the country. The owner and some of his friends took a 60-mile tour with Terry.
Terry enjoyed the experience, recalling his college days. After the tour, Terry
bought the Ross.
DISCUSSION
QUESTIONS
- Outline the decision-making process for each of the Chens’ bicycle purchases.
- Compare
the different purchase processes for the three bikes. What stimulated each
of them? What factors were considered in making the store choice decisions
and purchase decisions?
- Go to the student side of the Online Learning Center (OLC) and click on multiattribute model. Construct a multiattribute model for each purchase decision. How do the attributes considered and importance weights vary for each decision?
CASE
5 Consumer Buying Behaviors—Is Wal-Mart in Vogue?
The September 2005 issue of Vogue magazine contained eight pages of
advertisements from the world’s largest retailer, Wal-Mart. The other 792 pages
contained advertisements from Ralph Lauren, The Gap, Saks Fifth Avenue, Dior,
Estee Lauder, Gucci, Lancome, St. John, Louis Vuitton, Bill Blass, Yves Saint
Laurent, L’Oreal, Guess Mitchael Kors, David Yurman, Clinique, Marc Jacobs,
Burberry, Calvin Klein, Manolo Blahnik, Donna Karan, Paul Mitchell, Vera Wang,
And Jimmy Choo, to name just a portion of the brands in this fall issue.
The
ads from Wal-Mart feature real customers including a martial artist, a
musician, a mom, students, a cake decorator, a professor of art, and a
fundraiser. Each woman is shown with a “Her Style” profile, locating her
Wal-Mart and indicating what she is wearing in the photograph from Wal-Mart and
from her own closet. These ads are a departure from the smiley-faced,
low-price-focused messages seen from Wal-Mart in the past.
Do
Wal-Mart ads belong in Vogue
magazine? To help answer this question, complete the diagram in Exhibit 1 by
describing the characteristics and attributes of the Wal-Mart shopper and the Vogue magazine reader. Use the following
segmentation bases to complete this exercise:
Is
Wal-Mart in Vogue?
Wal-Mart Shopper Vogue Reader
Exhibit
1 Overlap of Wal-Mart and Vogue Target Markets
Demographic Gender, age, race, life stage, birth
era, family size/stage, residence tenure (own/rent), marital status.
Geographic Region, city size, climate, metropolitan
area, density (urban, suburb, rural).
Psychographic Personality, values, lifestyles,
activities, interests, opinions.
Socioeconomic Income, education, occupation.
Benefits
sought To meet
customers’ desires.
Usages
Rate Purchase behavior
(frequency), brand loyalty.
DISCUSSION
QUESTIONS
- Is there
an overlap in these two consumer segments?
- Can
Wal-Mart changes its image and appeal to an upscale shopper, or should it
stick to loyal, cash-strapped customers?
- Would you
recommend that Wal-Mart purchase additional pages in Vogue magazine this
year? Explain your rationale.
CASE 6 Dollar General and Family Dollar
Cater to an Underserved Market Segment
Dollar General, headquartered in
Goodlettsville, Tennessee, and Family Dollar, based in Mathews, North Carolina,
are the two leading retailers in the fastest growing segment of the industry,
referred to as extreme value retailing. In 2005, Dollar General has over 7,500
stores in 30 states with sales surpassing $7 billion. Its annual growth in
sales has been above 20 percent for the last six years. Family Dollar, with
5,600 stores in 44 states, generated over $5 billion in sales in 2004. Both
retailers are opening new stores at rates exceeding a store a day.
The
extreme value retail format has become increasingly popular among a variety of
customers, including rural and urban shoppers, low-to middle-income young
families, ethnic groups, and older customers with fixed incomes. Consumers have
come to trust both of these retailers to provide good quality merchandise at
low prices without the hassle of crowds and lines. The breakdown by geographic
segments is 25 percent rural, 33 percent urban, and 44 percent suburban. This
distribution is about the same as the sales distribution for Wal-Mart and Kmart
stores. About 25 percent of U.S. households shop at an extreme value retailer
once a month.
Sometimes
these firms are grouped under the category of dollar retailers-retailers that
sell merchandise priced under one dollar. While Dollar General and Family
Dollar keep their prices typically under $15, most of their merchandise is
priced over a dollar. Family Dollar has multiple price points, whereas Dollar
General prices its merchandise at even-dollar price points.
About
50 percent of the merchandise sold in the stores is consumables (pet supplies,
food, paper, household cleaning and personal care products), with the remaining
sales equally divided among basic clothing, hardware and seasonal merchandise,
and home products. The percentage of consumable sales has been increasing over
the past five years. Basic stock is supplemented with opportunistic buys of
closeout/liquidation and impulse merchandise giving the impression of a
changing merchandise mix in the stores.
Vendors
are developing new products and packaging to meet the needs of these extreme
value retailers. For example, Fruit of the Loom typically sells men’s underwear
in a nine-pack, but it offers small packs to value retailers. Procter &
Gamble and Johnson Products also sell smaller sizes of hair care products with
lower retail prices to extreme value retail chains.
Most
of their locations are in the Southeast, where the companies are headquartered.
The stores are small, 6,000 to 8,000 square feet, primarily located in small
towns with populations under 40,000 and in suburban strip shopping centers.
Because the stores are relatively small, it is easy to find good locations in
almost any market the retailers choose to enter.
Initially,
these extreme value retailers focused on low-income communities that were too
small to support a large Wal-Mart or Kmart discount store. Residents of these
towns appreciate the convenience of buying merchandise close to their homes
rather than driving 30 minutes to a discount store in a larger town. Many of
their customers walk to the stores. Not only are the stores closer to
customers, but shoppers are able to park closer to the stores in uncrowded
parking lots and avoid long checkout lines. With a small store, customers can
get in easily, find what they are looking for, and get out in a few minutes.
The average transaction is between $8 and $9. To maximize operating
efficiencies, the retailers typically open a cluster of stores in a geographic
area before entering a new area. Dollar General and Family Dollar are now
opening stores in suburban strip shopping centers, using space that has been
abandoned by drugstores that moved to stand-alone locations.
At
one time, these extreme value retailers advertised sales using circulars. But
both Dollar General and Family Dollar reduced their advertising expenses when
they converted to an everyday low-pricing strategy. This cost saving allowed the
retailers to pass even more savings on to their customers.
A
recent Family Dollar annual report stated, “Supply chain efficiencies are vital
to the success of any retailer, particularly one growing as fast as Family
Dollar.” Thus, Family Dollar and Dollar General are making significant
investments in point-of-sale terminals, store-level inventory tracking systems,
automated distribution centers, space allocation software, and replenishment
systems to reduce stockouts and increase inventory turnover.
DISCUSSION
QUESTIONS
- What is the target market of extreme value retailers like Dollar General and Family Dollar?
- Why are customers increasingly patronizing these extreme value retailer stores?
- How do
extreme value retailers make a profit when their prices and average
transactions are so low?
- Can
extreme value retailers defend themselves against general merchandise
discount retailers like Wal-Mart, or will Wal-Mart eventually drive them
out of business? Why?
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