What are the characteristics of the Discount Operations?

In many ways, the discount operation is similar to the classification of retail organizations. Their tables of organization are often comparable to the chains and the titles and people involved in purchasing are also similar. The characteristics that are different most often are concerned with merchandising philosophy and product acquisition.

1. Merchandising Philosophies

Whereas the traditional retailer bases its merchandising philosophies on the full markup when it prices its goods, the discounter operates on the concept of selling merchandise at a price lower than the full markup. The specifics of markup involve the amount that is added to the wholesale cost of the merchandise to arrive at the selling price or retail. Typically, traditional department stores and chain organizations mark up their merchandise anywhere from 50 to 60 percent, and sometimes even more. The discounter, on the other hand, works at a lower markup, often 20 to 25 percent less than traditional counterparts. By working at these lower prices, the sales volume is generally greater than if the full retail prices were charged.

The inventories are replete with brand names that are immediately recognized by the shoppers who frequent these operations.

Since, the profit margins are often affected by the lower markups philosophy, more and more of the discount operations are infusing their inventories with private brands that are exclusive to their companies. By doing so, they are able to obtain better markups than those achieved on the merchandise they purchase from vendors. The approach to this type of merchandising is often through the development of celebrity labels and brands. One of the earliest marriages of this type was undertaken in 1985 between Kmart and actress Jaclyn Smith, who designed an apparel line exclusively for Kmart. With its success, Kmart soon entered into another celebrity agreement with Martha Stewart, the guru of home design.

Other retailers whose operations are primarily discount oriented also subscribe to the private brand concept.

2. Product Acquisition

The buyers and merchandisers who purchase for this retail classification are often the industry’s major purchasers. Since, they represent many of the country’s major retail operations in terms of volume, their purchasing requirements are considerable. They, like their traditional buyer counterparts, travel far and wide to procure the best available merchandise for their retail outlets. Their purchases are made from nationally known manufacturers, lesser-known producers, market specialists such as resident buying offices and merchandise brokers, and developers of private brands.

Nationally Known Manufacturer

A walk through any discount operation immediately brings to your attention well-known brands and labels that are often found in more traditionally oriented retail outlets. The only difference is the price. Whether it is apparel, accessories, home furnishings, or food products, the labels are immediately familiar ones. With the enormous sums these buyers are ready to commit, the manufacturers are eager to make the sale. While the prices they pay for the goods are the same as those paid by the traditionalists who generally purchase in smaller quantities, often they are given special consideration because of the extent of the orders. There might be promotional allowances, delivery priority, or the waiver of shipping charges in lieu of lower prices.

Although, the nature of these purchases might cause you to reason that they should be rewarded with lower wholesale prices, the Robinson Patman Act, a key piece of federal legislation, disallows price discrimination no matter what the size of the order.

This act was established to protect smaller purchasers and to make the playing field a level one in which all merchants can do business. The law does have one provision that often enables the discounter to gain a price advantage: if the manufacturer can prove that the size of a large order saves money in the production of goods, the savings may be passed on to the purchaser.

You might wonder why manufacturers who sell to traditional merchants would sell to the discounters as well, and perhaps jeopardize their relationships with traditional companies. Aside from the fact that discounters generally purchase more than their conventional retailing counterparts, the manufacturers are bound by law to sell to any qualified retailers; in addition, they cannot force them to maintain predetermined prices. At one point, producers were able to dictate the prices retailers had to charge their customers through the use of fair-trade agreements. These agreements forced all retailers to charge the same prices for the same goods. The concept was declared unconstitutional and prevented such price restrictions.

In terms of who is able to purchase from a particular vendor, the law is also quite clear that any company may buy from any producer as long as it is able to pay for the goods in a timely manner as stated on the purchase order. Many years ago, vendors were able to pick and choose their retail customers and provide exclusivity for those they chose. As unfair trading became illegal, so did the exclusive arrangements that were once prevalent in the industry.

The advantage of being able to offer those brands and labels that are nationally advertised and immediately recognized by the consumer has given the discounter an edge that makes his or her operation a place where consumers may find an abundance of quality items at value prices.

Lesser-Known Producers

Although, the inclusion of well-known brands in a discounter’s inventory provides the company with instant product recognition and contributes to the retailer’s company loyalty, the markups achieved on these items are generally low. To make up for these lower prices, most discounters elect to augment their better-known brands with merchandise from lesser-known producers. By doing so, the latter group of products may be marked at a higher percentage; so that their inclusion in the inventory will help the company to bolster its average markup. This is not to say that poor-quality goods should be merchandised along with the nationally advertised brands.

While the better-recognized product lines are easy to select, their unheralded counterparts are often difficult to find. The challenge is for the company’s merchandising team to locate vendors whose goods haven’t gained national attention, but at the same time make a perfect fit in its merchandise mix. A great deal of scouting, both here and abroad, must be undertaken to locate these potentially successful products. It is not unusual for the company’s buyers to venture off to third-world nations that often produce goods of this nature.

Another advantage that is often realized in the procurement of such goods is the willingness of the manufacturers to provide incentives to the retailer. It might be in the form of promotional dollars that could be used to call attention to the items, free shipping, and better terms that include extended payment periods.

It is the negotiation ability of buyers of these lesser-known products that often provides an edge to the retailers they represent.

Market Specialists

In every wholesale industry, there are specialists whose task it is to locate merchandise from vendors that will satisfy the needs of potential clients.

These companies are divided into two groups: the resident buying office and the merchandise broker.

Their general roles are somewhat similar in that each is in business to bring together buyers and sellers.

  • Resident Buying Offices: Market specialists called Resident Buying Offices (RBOs) often serve the fashion apparel and accessories markets. They are generally separate organizations that have as their members’ retailers that operate fashion-oriented companies. Their major function is to locate vendors with desirable merchandise that will satisfy the product needs of those they represent. Their ability to bring together sellers and buyers makes them important to both parties. The vendor is able to locate potential customers who might otherwise be difficult to find. The buyer has the advantage of locating quality merchandise without having to scour the globe, a costly and time-consuming venture. When both parties are satisfied, the result is a perfect “merchandising” marriage. Resident buying offices charge their retail clients a fee for their services.
  • Merchandise Brokers: Another type of business that brings together vendors and retailers for the purposes of merchandise procurement is the merchandise broker. Their role is similar to the RBO except that the merchandise offerings are not restricted to fashion apparel and accessories, and the fee for the service is paid by the vendor. Often, products of this nature are for closeouts that the vendor wishes to dispose of in a timely manner.

3. Timing of the Purchase

As is the case with purchasing planning for every retail classification, be it the traditional retailer, the off-site operation, or a value-oriented operation, the timing of the purchase is vital to the success of the company. When to bring the products into the brick-and-mortar outlets or catalogs is a very important factor to consider. If it is earlier than the shopper is willing to buy, then monies will be required to pay the invoices long before sales are made. If the goods arrive too late, potential sales will be lost.

Unlike the traditional buyer who has timing requirements generally early in the season as dictated by the industry in which it operates, the discounter must deal with different purchasing timetables according to the types of goods that will be incorporated in the inventory. For its regular product purchases, it buys the same as its traditional counterparts, whenever the season opens. For the discounter’s own brands, the planning and purchasing must also coincide with the preestablished dates set by the leading vendors in the wholesale markets. For manufacturer’s closeouts, which are often included in the merchandise mix, the timing is of an opportunistic nature, or whenever the “bargains” become available.

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