National Tsing Hua University



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Retailing Management

Fall 2009

Final Report

Jonathan Chia Zi Qing Student ID 9800413

Cheryl Chan Ying Qian Student ID 9800412

Ruby Chiang Hung Ju Student ID 9531003

Table of Contents

1. Introduction

2. 7-Eleven Convenience store

3. Taipei 101 Shopping Mall

4. H&M Store location analysis

5. Costco Warehouse Club field study report

6. Conclusion

Appendix

References

1.0 Introduction

This final report is a compilation of 4 retail research reports done on 4 different retail establishments. Each report covers a few major concepts in retailing management which includes retail strategy formulation, retail site evaluation, consumer buying behavior as well as many other tools on how to manage a retail outlet successfully. The report starts by analyzing a basic retail establishment – 7 eleven convenience store. We estimated the size of the convenience store as well as the number of stock keeping units in the store, analyzed the assortment mix and most importantly drew a sketch of the layout of the retail outlet; this will be covered in section 2 of the report. Next, we went on a field trip to study Taipei 101 shopping center. The focus of the field trip was to study the retail strategy of Taipei 101 and to suggest ideas on how to improve Taipei 101’s comparative advantage in the extremely competitive Hsin Yi district. Issues like consumer buying behavior, the importance of creating synergies between retail stores will be covered in depth in section 3 of this report. In section 4, we move on to evaluate possible retail locations for Swedish clothing giant H&M. In our evaluation, we included a detailed analysis on how we chose the location which closely follows the analog approach. Lastly, we visited membership warehouse giant Costco (Hsinchu) retail outlet. We also had the opportunity to interview the marketing staff of Costco. Issues on Costco’s information systems as well as inventory management practices and human resource management were raised and discussed during the interview and will thus be covered in section 5 of this report.

2. 7-Eleven Convenience store

The 7-Eleven convenience store concept was created in 1927 by Southland Corporation in the United States. It was not until 1979 that the President Chain Store Corp introduced 7-Eleven into Taiwan. As the leader in Taiwan’s retail market, 7-Eleven continuously develops new products and services to stay ahead of competition.

With the goal of contributing to their consumer’s quality of life based on daily conveniences, they no longer define themselves as a convenience store but instead as a community service center. 7-Eleven now has over 4,600 stores in Taiwan, starting from communities and street sides to schools, MRT stations, train stations, hospitals and shopping malls. Therefore, it is evident that 7-Eleven targets the group of people who are time conscious and who seek location conveniences.

Consumer Buying Behavior of 7-Eleven in National Chiao Tung University

7-Eleven in National Chiao Tung University (NCTU) mainly serves the northern part of the NCTU community. This area consists of students’ dormitories, sports facilities and classroom buildings. Therefore, the target markets consists of students, professors, school staffs and the public users of the sports facilities. From our observation, students make up the largest customer segments.

These consumers are seeking to satisfy utilitarian needs. They generally make purchases based on internal information. The food quality is therefore an important factor in maintaining customer loyalty. This will therefore result in consumers engaging in habitual decision making; consumers will automatically respond by buying the same products from 7-Eleven when the need arises.

Floor Layout

We know that consumers who are motivated by utilitarian needs typically shop in a more deliberate and efficient manner. Especially since the consumer base consists of students and professors who often have to rush back to lessons, the time spent on the buying process is critical. This means that 7-Eleven needs to make the shopping experience easy for consumers to locate and pay for the desired goods. Therefore, the floor layout, product replenishment process and the average check out time have to be efficient.

This is reflected in their floor layout depicted in Figure 2. The floor space is 16 square meters (8*8). The products are arranged in categories to make it easier for consumers to find their desired merchandises. In order to minimize the check out time, 7-Eleven hires 5 people, with 4 people at the counter and 1 person responsible for replenishing stock.

[pic] Figure 1: Layout of NCTU 7-Eleven

Product Categories and Major Brands of Assortments

The main consumer segment in NCTU 7-Eleven is students. However, they can be further differentiated into smaller segments. For example, there are foreign students who demand western meals such as pasta and local students that are looking for Chinese food. This is thus justified by the wide assortment of products in the store. You can find the classification of the Standard Industrial Classification (SIC) in the US on the categories of products sold in NCTU 7-Eleven in the appendix under table A1.

The major brand of each category is shown in Table 1 below. It is clear that most of the brands sold in 7-Eleven are either Uni-President or 7-Eleven’s private brand. Products of Weichuan, the major competitor of Uni-President, are not sold in 7-Eleven. Another interesting point to note is that 7-Eleven stocks up a large assortment of candies and snacks, this is to meet the impulse buying tendencies of students. Candies and snacks also tend to be comfort food for students when they are studying.

Table 1: Major brands of products in 7 Eleven

|Category |Major Brand(s) |

|Group 2024 Ice Cream and Frozen Desserts |Uni-President |

|Group 2026 Fluid Milk |Uni-President |

|Group 2037 Fruit Juices |Uni-President |

|Group 2038 Frozen Specialties |7-Eleven |

|Group 2051 Bread & other Bakery products |Uni-President |

|Group 2052 Cookies & Crackers |Ritz |

|Group 2064 Candy & other Confectionary Products |Wrigleys |

|Group 2065 Chocolate & Cocoa Products |Meiji |

|Group 2066 Chewing Gum |Wrigleys |

|Group 2086 Bottled, Canned Soft Drinks & Water |Uni-President, Wei Dan |

|Group 2096 Potato Chips, Corn Chips & Snacks |7-Eleven |

|Group 2099 Food Preparations |Uni-President, Wei Dan |

Evaluation of NCTU 7-Eleven Retail Strategy

Is NCTU 7-Eleven successful in attracting their targeted market to shop with them? Yes. The outlet is thriving due to its superior location compared to its competitor Family Mart which is located at the perimeter of the campus. This is a major advantage over its competitors as it provides good accessibility to the students. The products that 7-Eleven carries, caters to the needs of the students well. There is a wide array of fast food products which students can choose from. Products are packaged to be easily taken away as many students choose to have their meals in their dormitories. Thus, 7-Eleven have met the needs of the students effectively

Although 7-Eleven have the comparative advantage of a better location, they should not take this advantage for granted. Instead, they should build on this advantage and expand its product offerings. One way is to look into the area of preparing more fresh food instead of microwavable food; this will help attract a new group of customers who are more health conscious. This will therefore increase their customer base significantly.

3. Taipei 101 Shopping mall

The Taipei 101 shopping mall was opened on November 14, 2003. Being the tallest building in Taiwan, it has attracted many tourists. It houses many of the world’s most premium designer brands. Taipei 101 also has an office block providing prime office space of 58,000 pings. It is home to some of the world’s largest corporation like the Bank of America Corp, ING group and Google. However in recent years, many people are questioning the profitability of Taipei 101 shopping mall and its ability to compete effectively with the other malls and departmental stores in the Xin Yi district.

From these observations, Taipei 101 shopping mall’s target group are the affluent international tourists, high income white collar workers, high net worth individuals and young working professionals. These target markets can be further broken down into different market segments. We shall categorize the affluent international tourists, high net worth individuals and high income white collar workers under segment 1 and the young working professionals under segment 2.

The target groups in segment 1 can be demographically described as individuals between the ages of 35 to 65. Their annual income is at least USD 100,000. Psychosocially, they belong to the upper class in the society and thus have an image to uphold. The key behavior of this retail segment is that they are loyal to designer labels and are rarely seen in public using products manufactured by mass market labels.

Segment 2 consists of young working professionals. They are between the ages of 24 to 35. This segment consists mainly of fresh graduates in their first few years of their working life. Their annual income is between USD 25,000 to USD 40,000 and they belong to the middle class of society.

Consumer Buying Behavior

Consumers from segment 1 are individuals who go shopping for pleasure. They seek to satisfy more of their hedonic rather than utilitarian needs. Prices of the products are the least of their concerns; instead, they value the entire shopping experience more. Learning the latest fashion trends is also important to them as they are often invited to social events which require them to be well dressed. On the other hand, consumers from segment 2 go shopping to reward themselves. This can also be classified as satisfying their hedonic needs. It occurs when they receive their first pay check or a promotion and thus decide to reward themselves by buying a designer handbag or treating themselves to a good meal.

Nevertheless, the sources of information greatly influence both segments’ buying decisions. Both segments rely heavily on internal information as they refer to their past shopping experiences to help them decide where their preferred shopping destination is. Factors that influence them include ambience, environment, customer service and safety of the mall. However, they also refer to external information extensively as well; this is provided by advertisements and other people. In particular, reference groups play a very important role in influencing these two market segments’ buying decisions. For example, segment 1 consists of consumers that are members of an elite social class who often socialize and attend major functions. They tend to obtain information from their own social network about places to patronize and latest merchandise to buy. While segment 2 often look upon celebrities as the reference group to guide them on their selection of fashion.

Retail Mix

As mentioned in the introductory paragraph, understanding the consumers’ needs is the foundation of a good retail strategy. In the following parts of the report, we will demonstrate how Taipei 101 uses information of their market segments’ buying behavior to formulate their retail mix.

Mall Layout and Design

The layout of Taipei 101 shopping mall is designed to cater to the needs of the target segments. With reference to Figure 2, there are 3 main loops on each level, with escalators at each loop to facilitate accessibilities within each floor.

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Figure2. Taipei 101 shopping mall layout (Source: Taipei 101 store directory brochure).

In line with the needs of Taipei 101’s customers, a wider shopping aisle was constructed to allocate more public space. In order to create a comfortable shopping environment, yellow lighting is used to create a warm and cozy ambience. Classical music is also played in the background to enhance the shopping experience. The entire mall atmosphere and environment communicate to the target market that Taipei 101 is a hub for the latest fashion and finest dining in Taiwan.

Types of Stores

We recognize that segment 1 and segment 2 consists of consumers who go shopping to satisfy their hedonic needs. This has thus shaped the type of stores that Taipei 101 chooses to offer. With reference to Table 2, the mall offers mainly international designer labels and high end quality restaurants. Mass market labels and dining options are restricted to the basement level. Stores with the same characteristics are located together on the same level to aid shoppers in finding what they need easily.

Table 2: Description of each level in Taipei 101 shopping mall

|Level |Floor Guide |Description |Examples |

|Basement 1 |Grand Market |High quality food court and shops for urban |Jason’s market, Grand Market |

| | |living |Food Court |

|Level 1 |Avenue 101 |Popular region brands |Kenneth Cole, Bally, Ted Baker |

|Level 2 |The Designer Walk |Design oriented international brands |De Beers, Jean Paul Gaultier, |

| | | |Kookai |

|Level 3 |The Galleries Couture |European and global flagship stores |Cartier, Louis Vuitton, Celine |

|Level 4 |City Square |High end restaurants and cafes |Wasabi Buffet, Maxim’s de Paris|

|Level 5 |Financial Centre |Financial centre and banquet halls |International Banquet Hall |

Retail Communication Mix

The next stage is for Taipei 101 to develop its retail communication mix. The shoppers of Taipei 101 rely the most on external information, thus advertisements becomes the focal point of the communication mix. This includes using the internet, magazines, direct mails and endorsing celebrities to act as reference groups.

The hard copies of the brochures and timetable of the events are also sent directly to the consumers’ homes to keep them constantly updated on the latest promotions and events. Advertisements have also been introduced on the international stage. Taipei 101 had partnered with Taiwan Tourism Board to feature Taipei 101 in overseas advertisements.

Building a Sustainable and Competitive Advantage

The final element in the retail strategy is how to build a sustainable competitive advantage over its competitors. This became even more important now that Bellavita, a new shopping mall in the Xin Yi District, is competing for the same market as Taipei 101. One of the advantages Taipei 101 has is that it managed to position itself as a luxurious high end fashion hub successfully. This helps promotes loyalty and it means that the goods found in Taipei 101 signifies a high level of quality. This prevents shoppers in Taipei 101 from patronizing their competitors. Moreover, Taipei 101 builds a sustainable competitive advantage by offering excellent customer service. This includes providing a free shuttle bus service between the mall and the MRT station. You can also find a concierge, a currency exchange counter and a tax refund counter to minimize the inconveniences of the shoppers.

Evaluation of Taipei 101 Retail Strategy

Is Taipei 101 successful in attracting their targeted market to shop with them? Yes, but only to a certain extent. From our group’s observation, Taipei 101 has done well in creating a mall that is indeed luxurious and comfortable. Other malls in the Xin Yi district allocates up to 70% in retail space while Taipei 101 only allocates 45% to retail space leaving a large area to public space thus enhancing the shopping experience in Taipei 101.

Although Taipei 101 is very successful in creating depth in designer products, there are insufficient stores to cater to the mass market. If we refer back to our market segments, young working professionals make up one of the segments. Although this group of people craves for luxury goods, they also demand mass market labels. However, as mentioned above, out of 6 floors in Taipei 101, 5 floors are allocated to designer stores and only 1 floor to mass market stores. Therefore, there should be more diversity in terms of the stores offered. More mass market labels should be introduced into Taipei 101 to attract more people into the mall as this will inject vibrancy into the mall. They could consider possible candidates like Levi’s, Dorothy Perkins and Zara, as they are much more affordable and at the same time it will not jeopardize the image of Taipei 101 with their beautifully designed boutiques.

During the information search process of the consumer buying behavior, Taipei 101 mall managers can identify that the internet is an important search tool for shoppers of luxury products. Their objective at this stage is to limit potential customers search to Taipei 101’s website. They can therefore consider paying search engines like Google and Yahoo to list Taipei 101 on top of the search list when certain key words are typed into their systems. In addition, Taipei 101’s website is the first point of contact with their customers; therefore the usability of the website is very important. A quick survey of Taipei 101’s website revealed that although the website has an English version, it is not as complete as the Chinese version of the website as many details and features are left out of the English website.

Taipei 101 can consider working with the designer labels to put the latest fashion items on the Taipei 101’s website so that Taipei 101’s customers are aware that such a product is available. This can also help create a desire for the products when shoppers visit their website. In short, by having the advantage of a luxurious shopping environment, the next step Taipei 101 has to take is to inject diversity into its store mix. However with new players like Bellavita entering the Xin Yi district, Taipei 101’s position is being challenged. Therefore, to create a new sustainable advantage over its competitors, Taipei 101 needs to reposition itself. By taking a closer look at the Xin Yi district, the number of teenagers and young working professionals has increased significantly as the district now has cinemas and discos. With this new target segment in mind, Taipei 101 has to introduce more mass market labels to capture this new wave of demand in the Xin Yi district This will be crucial to its success in the future.

It is clear that the target markets, market segments and consumer behavior for Taipei 101 and 7-Eleven is different. This will result in a different retail strategy being applied respectively. Therefore it is important to highlight that a one size fits all retail strategy will not work in different retail environments. In each environment, the retailer that is able to devise and execute a strategy that satisfies each of their consumer segments effectively, will then be more successful than their competitors in the long run.

4. H&M store location analysis

Hennes & Mauritz (later abbreviated to H&M), is a well known Swedish apparel company worldwide, with 1,800 stores spread across 35 countries. H&M describes its mission as “offering fashion and quality at the best price”. This is why H&M stores always aim to be located in the best business location, whether it’s in a big city or shopping centre, where most of the fast fashion pursuers are gathered.

In Asia, H&M has already established retail stores in China, Korea, Japan, and Hong Kong. We predict that H&M has already started its evaluation of Taiwan market’s potential. Fashion centers usually are found in trade areas with high income level, in tourist areas, or in some central business districts. H&M’s stores are usually in a central business district (CBD), where it draws many people and employees, has high level of pedestrian traffic and large number of residents. Since Taipei City is the essential business center in Taiwan, it is believed that H&M will start its first store in Taipei. Therefore, in this report we are going to analyze the factors H&M considers for selecting a retail site in Taipei City, and then evaluate which location is best preferred.

Factors to Consider

There are a few factors to consider when choosing a location for a new store. The first is the target market. For H&M, they emphasize on fast fashion with good quality at the best price. Therefore their target customers are fashion pursuers who look for good quality at an affordable price. This is the main reason why H&M is always located at CBD for it has the highest pedestrian crowd. Second is the cost of operating stores. H&M has the practice of leasing the stores instead of buying them. This enables them to adapt to the changes of fast fashion trends. Third is to consider the number of stores to open. Whether H&M prefer to test the Taiwan market or to promote its brand will lead to different solutions. It is suggested that if H&M wants to promote its brand it should open more than one store. Next point under consideration is the characteristics of the trade area, the characteristics of the retail site and the estimated potential sales. The further analysis is shown below.

Trade Area

Due to the size of Taipei City and the convenient transportation system here, we define the trade areas in this city by the main shopping areas. There are a few main trade areas in Taipei City, such as Zhongxiao, Zhongshan, Taipei Train Station, Ximen, and Tienmu. The different characteristics we emphasize for each trade area are whether it’s a CBD, store accessibility, competition level, and demographic type. Table 3 shows their comparisons.

Table 3: Characteristics of Taipei Trade Areas

|Trade Area |Type |Accessibility |Competition Level |Demographic Type |

|Zhongxiao |CBD |Very High |Very High |Employees, fashion pursuers |

|Zhongshan |Artistic, Shopping |Medium |High |Unique fashion pursuers |

|TPE Train Station |Transportation center, cram |Very High |Medium |Employees, students, |

| |schools, old CBD | | |travelers |

|Ximen |Teenager recreation |High |Medium |Students |

|Tienmu |Residence |Medium |Medium |Foreigners, residents |

Zhongxiao trade area is from Zhongxiao Fuxing MRT station to Taipei City Hall MRT station. It is the main CBD in Taipei City; it has high level of pedestrian crowds formed by business workers, students, and shoppers who look for fashion. It has high accessibility due to the MRT stations and bus stations. Its competition level is very high because it has high density of department stores and single retailers. This is the area where fashion pursuers often visit. Next is the Zhongshan, it mainly consists of three department stores and few small retailers. In this area, there are an art museum and a theater that plays non-mainstream movies. Although the accessibility here is high, the people here look for unique and special looks instead of universal fashion; it is different from the fashion trend H&M offers. Nevertheless, the trade area here is too small. Next is the Taipei Train Station. This is an old Central Business District with one department store now filled with cram schools, food stands, computer stores, etc. It’s a mix of everything but very bad maintained. Recently a new department store opened, but the train station, serving as a physical barrier, divides it from the main pedestrian crowd. This area is not well planned, the reason it kept the crowd is due to its position as the main transportation center, and people do not come here to shop for trendy or quality clothing. Xi Men Ding is also one of the shopping areas in Taipei City. It is a teenager recreation area; the teenagers here follow the Japanese and Korean style instead of western. The last chosen trade area is Tienmu. Tienmu area has three department stores mostly visited by local residents. People do not travel to Tienmu to shop for fashion clothing now, for the individual small retailers have been moving their stores to Zhongxiao area these years and two of the three department stores are available at other areas in Taipei City. In short, we could see that the most suitable trade area in Taipei City to set up the first H&M store is the Zhongxiao area.

Retail Site

Once the trade area is chosen, the next step is to search for the retail site. To make the assortment of the retail site, the following factors should be analyzed: traffic flow and accessibility, visibility, adjacent stores, restrictions and costs, and rental fee. As it is mentioned above, the Zhongxiao area is where H&M should open its first store in Taipei City. Zhongxiao area can further be divided into the Zhongxiao Fu Xing (later called East Zone) to Zhongxiao Dun Hua and Xin Yi District. The following maps would help to evaluate these two retail sites. Figure 1 shows the map of the the East Zone. It is shown that the stores are located on the both sides of Zhong Xiao East Road. Other than department stores, there are also small retailers, specialty stores and restaurants along the street and in the alleys. The Sogo department stores often have the latest merchandise available in each product category. As for the Breeze Center, it is better known for its luxury goods. One of the main reasons Sogo could attract more customers than the Breeze Center is due to its location next to the MRT station as shown in Figure 2. Sogo department stores and Breeze Center is the main fashion icon of this area; therefore it is suggested to locate H&M nearby Zhongxiao Fu Xing MRT other than Zhongxiao Dun Hua MRT. Because the MRT exit is in front of Zhongxiao Sogo which gathers the crowd, it is also preferred to open H&M beside Zhongxiao Sogo where shopper’s visibility is high.

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Figure 2: East Zone

In Figure 2, it is seen that the shopping area is formed by department stores. However, nearly each H&M stores are individuals; it means that they do not locate themselves in department stores. This is a way to increase its store visibility. The only place that might be allowed to open an individual store is at Viewshow Cinema across from the Mitsukoshi A9 department store. However, the space and area are too small and is not the most ideal for H&M.

[pic] Figure 3: Xin Yi District

Even though the rent 10,000 NTD per ping per month in Xin Yi is cheaper than 13,000 NTD per ping per month in East Zone, the East Zone is still the preferred choice. Due to the most important factor of H&M’s location strategy-, the store’s visibility, East Zone retail site is more suitable for H&M to open its new store. Table 2 shows the comparison between these two retail sites.

|Retail Sites |Accessibility |Visibility |Adjacent Stores |Restriction & Cost |

|East Zone |Very High |High |Department Stores, Small |13,000NT/ping/month |

| | | |Retailers, Restaurants | |

|XinYi District |High |Medium |Department Stores |10,000NT/ping/month |

Table 4: Comparison between East Zone and Xin Yi District

Estimated Sales and Evaluation

After estimating the forecast sales at H&M for both Xin Yi District and East Zone we conclude that East Zone is the best location for H&M to open its first store in Taiwan. For Xin Yi District we tend to compare H&M with Mango due to their similarity. Therefore, the location H&M will be located at Xin Yi would be about the same as Mango. As shown in Table 3 below, we can see that the forecasted sales at H&M in Xin Yi district are less than East Zone.

|Xinyi District (Sales at Mango: NT5,940 ,000) |

|  |H&M |Mango |

|Average Store Size |136ping |121ping |

|Probability of Mango customer shopping at H&M: |

|(136/5)/[(136/5) + (121/5)] = 0.529 |

|Forecasted Sales at H&M = $0.529 * 5.94m = $3.14m |

|East Zone (Sales at Sogo: NT4,000,000,000) |

|  |H&M |Sogo |

|Average Store Size |136ping |3636ping |

|Probability of Sogo customer shopping at H&M |

|= (136/5)/[(136/5) + (3636/5)] = 0.036 |

|Forecasted sales at H&M = 0.036*(4b/3636*136 )= NT$5.3m |

Using Huff Gravity Model with λ= 1

Table 5: Forecasted Sales at H&M for East Zone and Xin Yi District

However, it is questioned that whether H&M will enter this market. By taking the total sales at H&M worldwide in 2008 and dividing it by the total shops it has around the world, we could see that the annual sales for each store is around 268.18 million NTD. This is much more than the number we estimated, if the estimated sales in Taiwan are far from the sales in other countries, there is little possibility that H&M will enter this market. There are some retail adjustments that the Taipei government should make, such as the adjacent stores in each area, laws, and other strategies. In conclusion, despite the question whether H&M will enter Taiwan market, in this report it has been concluded that the best location for it to open its new store is at Zhongxiao Fu Xing in Taipei.

5.0 Costco warehouse club field study report

Costco Wholesale Corporation is the largest membership warehouse club chain in the United States. Costco was founded in 1983 by current CEO and President of Costco, Jim Sinegal. As of July 2009; it is the 3rd largest retailer in the United States and 9th largest retailer in the world. At the end of the 2009 financial year when the world was still recovering from the subprime mortgage crisis, Costco managed to post a net profit of USD 1.28 billion dollars. Costco currently has 566 stores located worldwide. In Asia, it is located in Japan, South Korea and Taiwan. Considering the rapidly emerging markets with massive populations like China and India, the expansion opportunities in Asia are endless for Costco. What are the reasons for Costco’s success? In the following sections, we will discuss how Costco’s is able to train and maintain an efficient and loyal work force. Next, we will also show you how Costco minimize their stock out situations by implementing a highly reliable information and inventory management system. Lastly, how Costco manages their merchandize mix plays a crucial role to their retail success. The selection behind what merchandize they choose to offer in their stores will be covered in the last section of the report.

Human Resource Management

Costco’s organization structure models that of a national retail chain. In general, there will be four types of management, Strategic, merchandise, store and operations management. The two senior executives typically called the CEO and COO will be responsible for merchandising and operations respectively. Each of them will have smaller divisions who report to them. For example, the merchandising division who is responsible for procuring the merchandise sold in Costco, along with the buyers and planners will report to the CEO, while the store manager will report to the COO. However, Costco tries to have fewer managers to make the merchandise, human resource, marketing and financial decisions. This is because a centralized decision making can reduce overhead costs and increase efficiency as labor costs account for a significant percentage of a retailer’s total expenses. Thus, the effective management of the organization structure can very well translate into cost savings. Since Costco’s target markets are price sensitive consumers who seek high quality goods, Costco is very concerned about keeping a low cost on their organization structure. This explains why Costco’s decision making is centralized.

The organization and management of the employees is crucial in retailing because employees play a major role in performing its critical business functions. In manufacturing firms, machines can be used to perform the jobs that employees do. However, in retailing, retailers nonetheless have to rely on labor to perform the job of displaying items and purchasing products as well as catering to the customer’s needs and demands. This applies to Costco as well, the largest membership warehouse club chain in the United States. Hence, employees are a valuable asset to any retailer.

In Costco, every new employee will have to start work from the bottom regardless of their level of education. There is 3 month probation period as well. This helps senior management identify employees that are passionate about their job at Costco. This will then reduce their employment turnover rate and help build up a large pool of committed and loyal employees. Requiring every new employee to start work from the bottom will help to facilitate the buying and selling activities of the retail company as well as to help them understand how each department in Costco function. And when the needs arise, all employees in Costco will be competent enough to undertake the jobs of their colleagues. This is exceptionally crucial during peak periods as Costco can rely on their employees instead of hiring part timers that may deliver unsatisfactory customer service. Coordinating merchandises and store management in a large retail firm is difficult. Unlike small independent retailers who are able to easily coordinate their stores’ merchandises activities; large retailers like Costco have to organize the buying and selling function into separate divisions. However, this means that buyers, whose responsibility is to select products which appeal to the target market, have limited contact with the consumers, as well as with the store employees responsible for selling it. Hence, arranging for every employee to start from the bottom will not only increase buyer’s contact with the customer and store personnel who sell the product, but the first hand communication will also provide an invaluable feedback on its customer needs.

Costco operates in a warehouse-type setting. The average size of their warehouses is around 140,000 square feet. The first thing you encounter when you walk into a Costco store are a few Costco personnel at the escalator who will be making recommendations on the “great buy of the day’’ Located on the second floor in Costco, there will be items related to clothing apparels, photo service, optical, pharmacy area and tire centre. Fresh bakery, sushi, fresh deli, fresh fish and fresh meat sections are on the first floor. For specialty sections like the pharmacy and optical section, Costco ensures that there will certified pharmacists and opticians standing by to provide professional advices.

Number of personnel needed to run Hsinchu Costco

After taking into consideration the size and management practices of Costco Hsinchu, we have devised a rough estimate on the number of personnel needed to run Costco Hsinchu. Starting from the administrative department, we estimated the number of senior management to be 5 people which includes the managing director, general manager, operations manager, finance manager and chief purchasing officer. The membership department includes the staff working in the membership counter as well as staff deployed to source for potential clients to join the Costco membership program. The purchasing department has 5 category buyers which include apparels, fresh food produce, dry food and snacks, IT & electronics and Dairy products and frozen food. In the logistics department, it includes employees that are responsible for the replenishment of stock on the shelves. This process starts from the unloading of products from containers up to the restocking of the products on the shelves. Therefore the logistic department accounts for the fork lift drivers, employees to help in unloading products and replenishing the products on the shelves. Under floor personnel, it includes all the employees that have close or direct contact with the customers of Costco. In the pharmacy and optical departments, there are certified pharmacists and opticians to assist the customers which require professional advice. The food preparation department includes the employees of the bakery, butchery and the kitchen that prepares the roast chicken and pork ribs. The operations and maintenance department is responsible for the functionality of the facilities in Costco and thus includes 1 handyman and 3 cleaners. There are 18 checkout counters in total. Each counter is allocated 1 cashier and 1 assistant to help the customer back up their purchases and bring it to the car if required. Therefore assuming that during peak periods all the 18 counters are being utilized, a total of 36 personnel would be required to operate all 18 checkout counters. The number of personnel needed is summarized in table 3.

Table 3: Description of the number of personnel needed to run Costco Hsinchu

|DEPARTMENTS |PERSONNEL |

|ADMINISTRATIVE |  |

|Senior Management |5 |

|Membership Department |10 |

|Accounts Department |3 |

|Marketing Department |5 |

|Purchasing Department |5 |

|IT Department |2 |

|Logistics Department |30 |

|TOTAL ADMINSTRATIVE PERSONNEL |60 |

|  |  |

|FLOOR PERSONNEL |  |

|Pharmacy |5 |

|Optical |5 |

|Tire Center |5 |

|Food Preparation |15 |

|Operations and Maintenance |4 |

|Floor Helper/ Sample Personnel |10 |

|Checkout Counters |36 |

|TOTAL FLOOR PERSONNEL |80 |

|  |  |

|TOTAL PERSONNEL NEEDED |140 |

In figure 3, we included a sketch on Costco’s 1st floor layout. One of the key designs in the floor layout is having the office on the 2nd storey overlooking the 18 checkout counters. One of the key features of the store layout is that the store itself is a warehouse for Costco’s inventory; therefore all the aisles between shelves are very wide so that stocks can be replenished with ease. Even the frozen food inventories are stored in the freezer alongside the frozen food items that are meant to be picked out by customers during opening hours. With such a concept, store assistants can replenish the frozen food items any time. During peak hours, the store’s wide aisle is also able to accommodate a huge crowd as compared to traditional super markets. The numbers in figure 3 represents the number of employees working in that section of Costco. For example in the bakery section, there are 7 employees. Floor staffs are deployed throughout the store to advice customers on the day’s promotional items. There are also many sample counters throughout the store to let customers try out the latest products sold in Costco.

[pic]

Figure3: Hsinchu Costco 1st floor layout

Information systems and supply chain management

The information system used at Costco is known as the electronic data interchange (EDI). It is the computer-to-computer exchange of business documents between vendors and Costco. To be more precise, Costco communicates with employees among the company via an intranet, and communicates with people outside the organization via an extranet. The extranet is known as Costco’s CRX (Collaborative Retail Exchange) program provided by Information Resources Incorporation.

Costco will incorporate information about customer requests in their data warehouse. When a consumer makes a purchase, the information about the transaction is captured at the point-of-sale terminal and sent to the Costco’s information system (1). The buyer then uses this information to monitor and analyze sales and to decide on merchandise content (2). The key inventory management challenge at Costco is to control inventory at each warehouse in an effort to minimize stock outs and overstocks. Costco tackles this problem by using information technology to improve communications with its suppliers and placing the responsibility for the replenishing of stocks on the shoulders of these manufacturers/ suppliers with whom agreements have been entered into. This is known as vendor managed inventory system. When Costco decides on a supplier (4) for example, Kimberly-Clark, supplier of Huggies diapers, the supplier is given access to Costco’s CRX (Collaborative Retail Exchange) (3). This allows Kimberly-Clark to be able to access data showing information regarding inventory levels in each warehouse. The inventory method used at Costco is the continuous review system where inventory levels are monitored continuously with each sale. When the stock level reaches a certain point (re-order point), the inventory department of the supplier, e.g. Kimberly-Clark, would place an order that would replenish dwindling stock levels. This stock is then sent to the distribution centre (7) or directly to the Costco stores (3). The best inventory situation would be being at the safety stock level when the next order comes into the warehouse. However, Costco still has not adopted the use of RFID. Although it has the advantage of reducing theft, labour cost, and inventory cost and further streamlining the supply chain by keeping track of the merchandise, it is relatively expensive to be placed on all items. However, it can be anticipated that Costco will be utilizing this strategy nevertheless. Costco is merely waiting for the RFID system to stabilize and improve before it decides to implement RFID in its merchandises.

[pic] Figure 4: Costco’s information and inventory analysis process

Costco have a distribution centre from where they would distribute their merchandises to each store. According to the figure, Costco’s supply chain, suppliers will deliver the goods to Costco Deport. Their depots receive container-based shipments from manufacturers and reallocate these goods for combined shipment to their warehouses, then subsequently sold to customers. Costco practices cross docking. Seventy-five percent of Costco's goods are cross-docked, spending on average nine hours in a distribution center. Also, distributors deliver the remaining 25 percent of goods - fast-moving bulk goods like soda and potato chips and perishable items - directly to individual stores. Costco sometimes uses third-party logistics services. For example, Costco has selected Averitt Express to provide transportation and supply chain management services for its warehouse club operations in Texas. Averitt will handle the transportation of all retail items at selected Costco warehouse club stores, from meat and poultry products to televisions and computers.

[pic]

Figure 5: Costco’s supply chain management process

Merchandise management

Buyers would need to forecast the sales of the merchandises for each category by using information like previous sales data, personal data, vendors and traditional market research available to forecast future sales. This will give a gauge in developing the assortment plan. For Costco, they offer a majority of staple merchandise categories. And because staple merchandise items are continuously sold over the years, there is a history of sales for each SKU. Thus, Costco manages its inventory at the level of SKU, and the merchandise planning system would generally be focused on replacement orders. Furthermore, Costco will offer only few SKUs per category to reduce its inventory investment, inventory space and to avoid low merchandise turnover rate. In this respect, Costco offers only 4000 SKU. And the first thing a retailer wants to avoid when managing their merchandize is to have a situation when a certain merchandize turnover rate is low. When turnover rate is low, the product will look worn and damaged from the constant mishandling of the store customers. To avoid such a situation, Costco is very particular on the type of merchandize they choose to sell in the store. In Carrefour or A.mar, it is common to see that for 1 kind of detergent, there are at least 10 different kinds of brands offering a detergent that serves the same purpose. However in Costco, they only carry a few of the most popular brand of detergent. And it they are unable to find a suitable brand, they will source for suppliers to produce detergent under their own house brand – Kirkland Signature. For Dairy products like milk and eggs, if mishandled could cause serious health problems after human consumption. Thus Costco chose to only offer 1 brand of milk and eggs in the store so that they can ensure that these dairy products will always be safe for consumption. Other efforts to keep merchandize turnover rate high is to allow a probation period for new products to be introduced to the store. For example when a new coffee powder company passes all of Costco’s quality checks and assessments and has been given the green light to sell their products in the store, they will only order a small quantity first to test out the consumer’s responses to the product. If the response is good and the turnover rate for the product is high, the supplier will then be allowed to join Costco’s CRX (collaborative retail exchange) program whereby inventory will be managed by the vendor. In addition, while planning for the number of SKUs in that assortment, Costco has to take into the consideration of the space dedicated to that category. For example, Costco will limit the number of SKUs of televisions in stores because many models of televisions will take up too much space. At the same time, Costco will ensure that their buyers consider the complementary merchandise in the department too. Hence, Costco carries DVD players to go together with televisions.

A stock out situation in Costco is minimized since the warehouse stock is constantly monitored by their vendors using the CRX. However, in order to minimize the stock out situation, given that information on sales history is available, Costco will increase the amount of buffer stock with respect to the demand of the product. The amount of buffer stocks is affected by factors such as the lead time needed, fluctuations in demand and vendor’s product availability. The greater the fluctuations in demand and lead time needed, the greater the amount of buffer stock will be. Thus, Costco ensures that they maintain a good relationship with their vendors to decrease the lead time needed.

In addition, Costco has direct buying relationships with many producers of national brand name merchandise. One example is CP food products. Buyers of Costco will first discuss the performance of the vendor’s merchandise from previous sales and review the vendor’s offering for the coming season. However, carrying national brands can mean intense competition and lower gross margin because vendors assume the expense of designing, manufacturing and distributing the brand. Fellow competitor likes A.mart and Carrefour will also carry these national labels. Hence to differentiate their products from the rest of the competition, Costco also carries its home brand under Kirkland signature. Kirkland signature is Costco’s own store brand and it is known for its exceptional quality at an affordable price. This can help boost store loyalty as well.

During the process of buying merchandise, local merchandise vendors would need to present information such as the quality of product and uses of products that can have significant impact on retail sales for their products or the entire merchandise category. Additional information relating to the product’s market research is also requested when necessary so that it can help buyers to generate a category sales forecast. After which, buyers of both national brands and private label will engage in negotiating a series of issues with their vendors including markdown money, slotting fees, exclusivity items, terms of purchase and transportation costs. Costco usually has the power in the channel. They have the ability to purchase from alternative sources without significant damage to their operations and a lot of buying power which enables them to buy more products for lower prices per item.

6. Conclusion

Each report covered a few major concepts in retailing management which includes retail strategy formulation, retail site evaluation, consumer buying behavior, merchandise management as well as supply chain management. We have seen that many of these concepts are interlinked and require very good support from one another. For instance, a good inventory system requires strong and efficient supply chain management to complement it. And a store layout is designed such that it reflects the store’s retail strategy. It is a synergy of all these concepts that makes retailing management meaningful and successful.

Appendix

|Naics Industry Group code |Naics Individual Product code |Types of Products |

|Industry Group 201: Meat Products |2013: Sausages and Other Prepared Meat |Hot dogs |

| |Packages | |

| |2015: Poultry Slaughtering and Processing |Eggs, Tea Flavored Boiled Eggs, Kanto Cooking|

|Industry Group 202: Dairy Products |2024: Ice Cream and Frozen Desserts |Ice Cream |

| |2026: Fluid Milk |Milk, Yoghurt, Yoghurt Drink |

|Industry Group 203: Canned, Frozen, And |2032: Canned Specialties |Green Bean |

|Preserved Fruits, Vegetables, and Food | | |

|Specialties | | |

| |2034: Dried and Dehydrated Fruits, |Pocket Soup |

| |Vegetables, and Soup Mixes | |

| |2035: Pickled Fruits and Vegetables, |Kim chi |

| |Vegetable Sauces and Seasonings, and Salad | |

| |Dressings | |

| |2037: Frozen Fruits, Fruit Juices, and |Fruit Juices |

| |Vegetables | |

| |2038: Frozen Specialties, Not Elsewhere |Microwavable Food (Rice, Noodles, Burger, |

| |Classified |Pasta) |

|Industry Group 205: Bakery Products |2051: Bread and Other Bakery Products, |Bread, Sandwiches, Buns |

| |Except Cookies and Crackers | |

| |2052: Cookies and Crackers |  |

|Industry Group 206: Sugar And |2064: Candy and Other Confectionery Products|  |

|Confectionery Products | | |

| |2066: Chocolate and Cocoa Products |  |

| |2067: Chewing Gum |  |

| |2068: Salted and Roasted Nuts |Peanuts, Roasted almonds |

|Industry Group 207: Fats And Oils |2075: Soybean Oil Mills |Soybean Oil |

| |2076: Vegetable Oil Mills, Except Corn, |Olive Oil |

| |Cottonseed, and Soybean | |

|Industry Group 208: Beverages |2086: Bottled and Canned Soft Drinks and |Tea, Coffee, Soft Drinks, Water |

| |Carbonated Waters | |

|Industry Group 209: Miscellaneous Food |2091: Canned and Cured Fish |Canned tuna, Canned Eel |

|Preparations And Kindred | | |

| |2095: Roasted Coffee |  |

| |2096: Potato Chips, Corn Chips, and Similar |  |

| |Snacks | |

| |2097: Manufactured Ice |  |

| |2098: Macaroni, Spaghetti, Vermicelli, and |  |

| |Noodles | |

| |2099: Food Preparations |Sugar, Salt, Chili Sauce, Instant Noodles |

Table A1: List of products in 7-Eleven categorized by Naics codes

Source: eos/www/naics

References

Michael Levy, Barton A.Weitz, “Retailing Management 7th edition”, 2009, p.99, p.100, p.104, p.112, p.114, p.119, p.138, p.141, p.142, p,259, p.282, p.333, p.336, p.342, p.347, p.350, p.359, p.388, p.513

Patrick Kearns, “Taipei 101 hopes to set international standards”, Taipei Times, May 2003, p.11

Taipei 101 shopping mall store directory listing brochure, 2009

Nikki Kent, Kyle Edwards, Kris Hansen Professor Simpson, “Costco Wholesale Corporation: Marketing Audit”, Marketing 309, May 24,2007

Angela Wilson, “Costco rules, Wal-Mart Drools”, The Tyee, 20th Feb 2007

“Costco annual report”, Annual Report 2006 August

taipei-.tw, 2005 (accessed October 31st, 2009)

eos/www/naics, 2009 (accessed November 5th, 2009)

, 2009 (accessed November 2nd, 2009)

, 2009 (accessed November 2nd, 2009)

(accessed December 18th, 2009)

(assessed December 19th, 2009)

(accessed December 19th,2009 )

(assessed December 19th, 2009)

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Entrance

Media Shelf

HH Necessities

Drinks Machine

Refrigerator (beverages)

Storage Door

Refrigerator (dairy products)

Fast Food (microwavable)

Refrigerator

(ice cream & frozen desserts)

Counter

Confectionery Products

Fresh Food: (Bread/Toasts)

Instant Noodles

Fast Food (hotdogs/soup/eggs)

Fresh Food (buns)

Canned & Food Specialties

Fats and Oils

Cookies

Chips

Basic Necessities & Cosmetics

Shelves

Office tower

Escalators

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