{"id":2011,"date":"2018-03-27T21:47:06","date_gmt":"2018-03-27T21:47:06","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/?post_type=chapter&#038;p=2011"},"modified":"2024-04-25T02:50:23","modified_gmt":"2024-04-25T02:50:23","slug":"why-it-matters-financial-strategies-in-retail","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/chapter\/why-it-matters-financial-strategies-in-retail\/","title":{"raw":"Why It Matters: Financial Strategies in Retail","rendered":"Why It Matters: Financial Strategies in Retail"},"content":{"raw":"Distribution channels are the ways that products or services get to the end user and all the activities that bridge the producers with consumers. Distribution channels include:\r\n<ul>\r\n \t<li><strong>Logistics:<\/strong> assembly, warehousing, sorting, and transportation<\/li>\r\n \t<li><strong>Facilitation:<\/strong> channel coordination, marketing, promotion, financing, and post-purchase service and maintenance<\/li>\r\n \t<li><strong>Transaction:<\/strong> buying, selling, and the associated assumption of risk<\/li>\r\n<\/ul>\r\nThese activities support the exchange of goods, transferring products and services to the consumer and transferring payments back to the producer. Some producers leverage intermediaries, like wholesalers and retailers, for facilitation and transaction activities.\r\n\r\nThis indirect channel is a very familiar because it\u2019s what we most frequently associate with retail, especially in the grocery industry. We understand that while the inclusion of intermediaries does add some complexity, it has two critical benefits.\r\n\r\nFirst, this channel arrangement allows for the individual actors, producers, and intermediaries, to specialize, thereby increasing efficiency and reducing costs. Further, because of the exchanges throughout the marketing channel, risk is managed and mitigated. A producer does not own the entirety of their inventory as they try to sell products to individual consumers. Instead, they sell part of the inventory to a collection of wholesalers and retailers who undertake some risk and ultimately market the product to consumers. These wholesalers and retailers will realize greater revenue for the same product compared to the producer, but this is an appropriate offset for the risk of holding inventory.\r\n\r\n<img class=\"size-medium wp-image-5907 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2986\/2018\/03\/05011253\/white-fruit-sweet-summer-meal-food-538743-pxhere.com_-300x200.jpg\" alt=\"decorative image\" width=\"300\" height=\"200\" \/>\r\n\r\nHow do the wholesalers and retailers realize greater revenue for the same product? And, why is it necessary to have an offset for the risk of holding inventory? Does this make sense?\r\n\r\nLet\u2019s start with the first question, \u201cHow do the wholesalers and retailers realize greater revenue for the same product?\u201d\r\n\r\nSimply, they acquire the good at a lower cost than the price at which they ultimately sell it. Consider the example of a retailer that buys a case (24 units) of yogurt from the manufacturer for $12.00:\r\n<ul>\r\n \t<li>Wholesale Cost = $12.00<\/li>\r\n \t<li>Wholesale Cost per Unit = $12.00 divided by 24 units = $.50 per cup ($12.00 \/ 24= $ .50)<\/li>\r\n<\/ul>\r\nIf a retailer sold each cup for $.50 per unit, then they\u2019d create very big problems for themselves. That is, they would cover the costs of the product, but not the costs of rent, utilities, advertising, labor, and administrative costs, such as printing tags, managing inventory, and schedule staffing. In other words, they\u2019d find themselves running deficits, meaning they were running their business at a loss. Not adding the additional costs to each is a very fast path to bankruptcy and closure.\r\n\r\nSo what is the alternative?\r\n\r\nRetailers sell their products at prices above cost. This difference is called <strong>gross margin<\/strong> and is used to absorb the cost of running a business. Let\u2019s look again at our yogurt:\r\n<ul>\r\n \t<li>Wholesale Cost = $12.00<\/li>\r\n \t<li>Wholesale Cost per Unit = $12.00 \/ 24 = $.50 per cup<\/li>\r\n<\/ul>\r\nNow add the additional costs:\r\n<ul>\r\n \t<li>Retail Price = $.79 per cup<\/li>\r\n \t<li>Gross Margin Dollars = $.79 - $.50 = $.29<\/li>\r\n \t<li>Gross Margin Percent = $.29 \/ $.79 = 36.7%<\/li>\r\n<\/ul>\r\nNow, $.29 per selling unit of yogurt may not seem like much, especially in the face of rent, utilities, advertising, labor, and administrative costs. And, in truth, it isn\u2019t when you consider that the store is making margin on almost every single item that is placed in the shopper\u2019s basket, scanned through the register and carried out of the store. It\u2019s the margin on each of these items that keep the store in business.\r\n\r\nNow, for the second question: \"Why is it necessary to have an offset for the risk of holding inventory?\u201d\r\n\r\nAs we noted above, retailers incur a number of different operating expenses, but, there are also risks associated with holding inventory, including spoilage, damages, and slippage or theft. That is, in the grocery industry products can spoil or age past their \u201cBest If Used By\u201d dates. If this occurs, the value of the product in inventory goes to $0.00. Simply, it can\u2019t be sold and has no commercial value, regardless of what the retailer paid for it.\r\n\r\nAnother consideration is to think about the complexity of the retail supply chain, where product is held in cartons, stacked on pallets, and stored in warehouses before it makes its way to the selling floor. Accidents happen. Pallets tip, spilling their wares. Forklifts back into product, making it unsaleable. Customers drop products and they sometimes dent cans and boxes. In many cases, this damaged product cannot be sold to consumers because it is no longer attractive to consumers. In these cases also, its commercial value is $0.00.\r\n\r\nThe same is true for <strong>slippage<\/strong>, the difference between the expected price and the actual price received. This can occur when items are mis-tagged, mis-scanned, or under-valued in some other way. This doesn\u2019t imply that the commercial value is $0.00. Instead, it simply reflects that the retailer did not realize 100% of the commercial value that they would have expected. In the same way, theft prevents the retailer from realizing the commercial value of the goods.\r\n\r\nFlood, fire, and obsolescence are other areas of risk associated with holding inventory. As you can see, these all create situations where the commercial value of goods can be impaired. For our purposes, let's consider another factor\u2014lost opportunity. That is, if we have some portion of our financial resources tied up in the cost of inventory, we may not be able to take advantage of other more attractive opportunities.\r\n\r\nLet\u2019s think again about our yogurt example.\r\n\r\nInstead of a purchase of a single case of product, let\u2019s expand to buy enough inventories to support 70 stores for one month. And, for the sake of this exercise, let\u2019s assume that each store sells two cases of this type of yogurt per week.\r\n<ul>\r\n \t<li>Weekly Volume = 2 weeks x 24 Cups x 70 Stores = 3,360 Cups<\/li>\r\n \t<li>Monthly Volume = 4 weeks x 3,360 = 13,440 Cups<\/li>\r\n \t<li>Total Cost of Goods = 13,440 x $.50 Wholesale Cost = $6,720.00<\/li>\r\n \t<li>Total Revenue = 13,440 Cups x $.79 Retail Price = $10,617.60<\/li>\r\n \t<li>Gross Margin Dollars = $10,617.60 Total Revenue - $6,720.00 Total Cost of Goods= $3,897.60<\/li>\r\n<\/ul>\r\nThis means that we\u2019d spend $6,720.00 to make $3,897.60 in gross margin dollars. This may sound good, but, what if we could\u2019ve spent the same to make $4,500 in gross margin dollars? $5,000? $6,000?\r\n\r\nBecause we had already invested $6,720.00 for yogurt, those dollars weren\u2019t available to buy other items. While we held the inventory and waited for the items to sell to return gross margin dollars to us, we were unable to consider other opportunities\u2013opportunities that might have been more attractive. This is one of the risks associated with holding inventory.\r\n\r\nYou might wonder, how do retailers know the right prices to charge to ensure they\u2019re able to manage operating costs and mitigate risk associated with holding inventory?\r\n\r\nUnfortunately, there isn\u2019t one answer that\u2019ll work perfectly for all situations and strategies. Instead, it\u2019s important for retail managers to be familiar with the concepts of accounting, and to be able to read and analyze financial statements.","rendered":"<p>Distribution channels are the ways that products or services get to the end user and all the activities that bridge the producers with consumers. Distribution channels include:<\/p>\n<ul>\n<li><strong>Logistics:<\/strong> assembly, warehousing, sorting, and transportation<\/li>\n<li><strong>Facilitation:<\/strong> channel coordination, marketing, promotion, financing, and post-purchase service and maintenance<\/li>\n<li><strong>Transaction:<\/strong> buying, selling, and the associated assumption of risk<\/li>\n<\/ul>\n<p>These activities support the exchange of goods, transferring products and services to the consumer and transferring payments back to the producer. Some producers leverage intermediaries, like wholesalers and retailers, for facilitation and transaction activities.<\/p>\n<p>This indirect channel is a very familiar because it\u2019s what we most frequently associate with retail, especially in the grocery industry. We understand that while the inclusion of intermediaries does add some complexity, it has two critical benefits.<\/p>\n<p>First, this channel arrangement allows for the individual actors, producers, and intermediaries, to specialize, thereby increasing efficiency and reducing costs. Further, because of the exchanges throughout the marketing channel, risk is managed and mitigated. A producer does not own the entirety of their inventory as they try to sell products to individual consumers. Instead, they sell part of the inventory to a collection of wholesalers and retailers who undertake some risk and ultimately market the product to consumers. These wholesalers and retailers will realize greater revenue for the same product compared to the producer, but this is an appropriate offset for the risk of holding inventory.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-5907 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2986\/2018\/03\/05011253\/white-fruit-sweet-summer-meal-food-538743-pxhere.com_-300x200.jpg\" alt=\"decorative image\" width=\"300\" height=\"200\" \/><\/p>\n<p>How do the wholesalers and retailers realize greater revenue for the same product? And, why is it necessary to have an offset for the risk of holding inventory? Does this make sense?<\/p>\n<p>Let\u2019s start with the first question, \u201cHow do the wholesalers and retailers realize greater revenue for the same product?\u201d<\/p>\n<p>Simply, they acquire the good at a lower cost than the price at which they ultimately sell it. Consider the example of a retailer that buys a case (24 units) of yogurt from the manufacturer for $12.00:<\/p>\n<ul>\n<li>Wholesale Cost = $12.00<\/li>\n<li>Wholesale Cost per Unit = $12.00 divided by 24 units = $.50 per cup ($12.00 \/ 24= $ .50)<\/li>\n<\/ul>\n<p>If a retailer sold each cup for $.50 per unit, then they\u2019d create very big problems for themselves. That is, they would cover the costs of the product, but not the costs of rent, utilities, advertising, labor, and administrative costs, such as printing tags, managing inventory, and schedule staffing. In other words, they\u2019d find themselves running deficits, meaning they were running their business at a loss. Not adding the additional costs to each is a very fast path to bankruptcy and closure.<\/p>\n<p>So what is the alternative?<\/p>\n<p>Retailers sell their products at prices above cost. This difference is called <strong>gross margin<\/strong> and is used to absorb the cost of running a business. Let\u2019s look again at our yogurt:<\/p>\n<ul>\n<li>Wholesale Cost = $12.00<\/li>\n<li>Wholesale Cost per Unit = $12.00 \/ 24 = $.50 per cup<\/li>\n<\/ul>\n<p>Now add the additional costs:<\/p>\n<ul>\n<li>Retail Price = $.79 per cup<\/li>\n<li>Gross Margin Dollars = $.79 &#8211; $.50 = $.29<\/li>\n<li>Gross Margin Percent = $.29 \/ $.79 = 36.7%<\/li>\n<\/ul>\n<p>Now, $.29 per selling unit of yogurt may not seem like much, especially in the face of rent, utilities, advertising, labor, and administrative costs. And, in truth, it isn\u2019t when you consider that the store is making margin on almost every single item that is placed in the shopper\u2019s basket, scanned through the register and carried out of the store. It\u2019s the margin on each of these items that keep the store in business.<\/p>\n<p>Now, for the second question: &#8220;Why is it necessary to have an offset for the risk of holding inventory?\u201d<\/p>\n<p>As we noted above, retailers incur a number of different operating expenses, but, there are also risks associated with holding inventory, including spoilage, damages, and slippage or theft. That is, in the grocery industry products can spoil or age past their \u201cBest If Used By\u201d dates. If this occurs, the value of the product in inventory goes to $0.00. Simply, it can\u2019t be sold and has no commercial value, regardless of what the retailer paid for it.<\/p>\n<p>Another consideration is to think about the complexity of the retail supply chain, where product is held in cartons, stacked on pallets, and stored in warehouses before it makes its way to the selling floor. Accidents happen. Pallets tip, spilling their wares. Forklifts back into product, making it unsaleable. Customers drop products and they sometimes dent cans and boxes. In many cases, this damaged product cannot be sold to consumers because it is no longer attractive to consumers. In these cases also, its commercial value is $0.00.<\/p>\n<p>The same is true for <strong>slippage<\/strong>, the difference between the expected price and the actual price received. This can occur when items are mis-tagged, mis-scanned, or under-valued in some other way. This doesn\u2019t imply that the commercial value is $0.00. Instead, it simply reflects that the retailer did not realize 100% of the commercial value that they would have expected. In the same way, theft prevents the retailer from realizing the commercial value of the goods.<\/p>\n<p>Flood, fire, and obsolescence are other areas of risk associated with holding inventory. As you can see, these all create situations where the commercial value of goods can be impaired. For our purposes, let&#8217;s consider another factor\u2014lost opportunity. That is, if we have some portion of our financial resources tied up in the cost of inventory, we may not be able to take advantage of other more attractive opportunities.<\/p>\n<p>Let\u2019s think again about our yogurt example.<\/p>\n<p>Instead of a purchase of a single case of product, let\u2019s expand to buy enough inventories to support 70 stores for one month. And, for the sake of this exercise, let\u2019s assume that each store sells two cases of this type of yogurt per week.<\/p>\n<ul>\n<li>Weekly Volume = 2 weeks x 24 Cups x 70 Stores = 3,360 Cups<\/li>\n<li>Monthly Volume = 4 weeks x 3,360 = 13,440 Cups<\/li>\n<li>Total Cost of Goods = 13,440 x $.50 Wholesale Cost = $6,720.00<\/li>\n<li>Total Revenue = 13,440 Cups x $.79 Retail Price = $10,617.60<\/li>\n<li>Gross Margin Dollars = $10,617.60 Total Revenue &#8211; $6,720.00 Total Cost of Goods= $3,897.60<\/li>\n<\/ul>\n<p>This means that we\u2019d spend $6,720.00 to make $3,897.60 in gross margin dollars. This may sound good, but, what if we could\u2019ve spent the same to make $4,500 in gross margin dollars? $5,000? $6,000?<\/p>\n<p>Because we had already invested $6,720.00 for yogurt, those dollars weren\u2019t available to buy other items. While we held the inventory and waited for the items to sell to return gross margin dollars to us, we were unable to consider other opportunities\u2013opportunities that might have been more attractive. This is one of the risks associated with holding inventory.<\/p>\n<p>You might wonder, how do retailers know the right prices to charge to ensure they\u2019re able to manage operating costs and mitigate risk associated with holding inventory?<\/p>\n<p>Unfortunately, there isn\u2019t one answer that\u2019ll work perfectly for all situations and strategies. Instead, it\u2019s important for retail managers to be familiar with the concepts of accounting, and to be able to read and analyze financial statements.<\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-2011\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Why It Matters: Financial Strategies in Retail. <strong>Authored by<\/strong>: Patrick Williams. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Yogurt. <strong>Authored by<\/strong>: rawpixel.com. <strong>Provided by<\/strong>:  rawpixel.com. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pxhere.com\/en\/photo\/538743\">https:\/\/pxhere.com\/en\/photo\/538743<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":83755,"menu_order":1,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Why It Matters: Financial Strategies in Retail\",\"author\":\"Patrick Williams\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Yogurt\",\"author\":\"rawpixel.com\",\"organization\":\" rawpixel.com\",\"url\":\"https:\/\/pxhere.com\/en\/photo\/538743\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"60ff6213-7410-4e5c-9c45-230cd948cbcb","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-2011","chapter","type-chapter","status-publish","hentry"],"part":2010,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2011","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/users\/83755"}],"version-history":[{"count":8,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2011\/revisions"}],"predecessor-version":[{"id":5908,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2011\/revisions\/5908"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/parts\/2010"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2011\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/media?parent=2011"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapter-type?post=2011"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/contributor?post=2011"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/license?post=2011"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}