Retail Pricing

15-2
Why is Pricing Important?
Pricing decision is important because customers have
alternatives to choose from and are better informed

Customers are in a position to seek good value

Value = perceived benefits
price

So, retailers can increase value and stimulate sales by
increasing benefits or reducing price.
17-3
A Framework for Developing a Retail Price
Strategy
17-4
How to
Determine
Direct
Product
Profitability
15-5
15-6
Considerations in Setting Retail Prices
17-7
Integration of Approaches to Price
Strategy
- If prices are reduced, will revenues increase greatly?
(Demand orientation)
- Should different prices be charged for a product based
on negotiations with customers, seasonality, and so on?
(Demand orientation)
- Will a given price level allow a traditional markup to be
attained? (Cost orientation)
- What price level is necessary for a product requiring
special costs? (Cost orientation)
- What price levels are competitors setting? (Competitive
orientation)
- Can above-market prices be set due to a superior
image? (Competitive orientation)
17-8
Specific Pricing Decisions
15-9
Customer Price sensitivity and Cost
When increases



can decrease


as fewer customers feel the product is a good value


price
sales
Relationship between Price Sensitivity and Demand
15-10
An approach used to measure the price sensitivity of customers
Price Experiment
Results of Price Experiments
Number of movie tickets sold at difference prices
15-11
Price sensitivity of customers
(demand curve)
Quantity Sold at Different Prices
If customers are very price sensitive,
Sales decrease significantly
with price increase
15-12
Profit at Different Prices
15-13
Price Elasticity
Elasticity = percent change in quantity sold
percent change in price
A commonly used measure of price sensitivity
15-14
Price Elasticity
Assume that a retailer originally priced a private-
label DVD play at $90 and raised the price to
$100. Prior to raising the price, the retailer was
selling 1,500 units a week.
When the price was increased, sales dropped to
1,100 units per week. What is the price elasticity
of the product?
15-15
Price Elasticity
Elasticity = percent change in quantity sold
percent change in price

= (new quantity sold old quantity sold)/old quantity sold
(new price old price)/(old price)

= (1100-1500)/1500
(100-90)/90

= -0.2667
.1111

= -2.4005
Price elasticity is a negative number because the quantity sold usually
Decreases when prices increase. When price elasticity is greater than
- 1, the target market for a product is viewed to be price insensitive
15-16
Price Elasticity by Product Type

Substitutable products/services
Products/services necessitates
Products that are expensive
relative to a consumers income

Price Elasticity
Price Elasticity
Historically, the price elasticity of gasoline has been greater than -1,
so increases in price have not led to a proportional decrease in sales.
15-17
Price Elasticity
For products with price elasticity less than -1, the price that maximizes
profits can be determined by the following formula:



Profit maximizing price = price elasticity x cost
price elasticity +1
15-18
Profit-Maximizing Price
in Relation to Price Elasticity
If the private-label DVD player costs $50, the
profit-maximizing price would be $85.70



Profit maximizing price = price elasticity x cost
price elasticity +1




= -2.4005 x $50
-2.4005 +1
= $85.70
15-19
Collecting and Using Competitive Price
Data
Most retailers routinely collect price data about their
competitors to adjust their prices to remain competitive
15-20
How Can Retailers Reduce Price Competition?
Develop lines of private label merchandise
Negotiate with national brands manufacturers for
exclusive distribution rights
Have vendors make unique products for the
retailer
PhotoLink/Getty Images

15-21
Retailers Use Private Label Products to
Increase Value
15-22
Should bars be allowed
to have ladies night
when women are
admitted either for free
or at a reduced rate
and, once inside,
served drinks at
reduced prices? Is this
illegal price
discrimination?
15-23
Setting Retail Prices
How Do Retailers Set Retail Prices?

Theoretically, retailers maximize their profits by setting
prices based on the price sensitivity of customers and
the cost of merchandise and considering the prices
being charged by competitors.

In reality, Retailers need to set price for over 50,000 SKUs
many times during year
Set prices based on pre-determined markup and
merchandise cost
Make adjustments to markup price based on customer
price sensitivity and competition

15-24
Retail Price and Markup (MU)
Retail Price
$125
Cost of
Merchandise
$75
Margin
$50
Markup as a Percent
of Retail Price
40% = $50/$125
Retail Price = cost + markup
MU% = retail price cost
retail price
15-25
Retail Price

Retail price = Cost of merchandise + Markup

Retail price = Cost of merchandise + Retail price x Markup %


Retail price = Cost of merchandise
1 Markup % (as a fraction)
15-26
Markups
Initial markup retail selling price initially
set for the merchandise minus the cost
of the merchandise.

Maintained markup the
actual sales realized for the
merchandise minus its costs
15-27
Initial and Maintained Markup
Initial Retail
Price $1.00
Cost of
Merchandise
$.60
Maintained
Markup
$.30
Maintained Markup as a
Percent of Actual Sales
33% = $.30/$.90
Reductions
$.10
15-28
Initial markup
Maintained markup %
(as a percent of planned
actual sales)
Reductions %
(as a percent of planned
actual sales)
+
Initial markup %
=
Reductions %
(as a percent of planned
actual sales)
100%
+
planned retail reductions fall into three types:
markdowns, employee discounts, and stock
shortages
15-29
Initial Markup and Initial Retail Price
Merchandise costs $.60. If the buyer planned on reductions of 10%
of sales and wanted a maintained markup of 33% for the
merchandise ,
Initial markup %
33% + ($0.10/$0.90 = 11.11%)
100% + 11.11%
= =
40%
Initial retail price = Cost
1 Initial markup %
$0.60
1 0.40
=
$1.00
=
15-30
Merchandising Optimization Software
Setting prices by simply marking up merchandise cost
neglect other factors (e.g., price sensitivity, competition,
the sales of complementary products)
Merchandising Optimization Software
Utilize a set of algorithms that analyzes past and
current merchandise sales prices
Estimates the relationship between prices and sales
generated
Determines the optimal (most profitable) initial price
for the merchandise and size and timing for
markdowns
15-31
Profit Impact of Setting a Retail Price:
The Use of Break-Even Analysis
A retailer might want to know
Break-even sales to generate a target profit
Break-even volume and dollars to justify introducing a new
product, product line, or department
Break-even sales change needed to cover a price change
Break-even analysis
Determines, on the basis of a consideration of fixed and variable
costs, how much merchandise needs to be sold to achieve a
break-even (zero) profit
Fixed costs: dont change with the quantity of product produced
and sold
Variable costs: vary directly with the quantity of product
produced and sold (e.g., direct labor and materials used in
producing a product)

15-32
Breakeven Analysis
Understanding the Implication of Fixed and Variable Cost




Break-even
quantity

Fixed cost
=
Actual unit sales price - Unit variable cost
Unit Sales
Fixed Costs
Contribution/Unit
Breakeven
point
The quantity at which total revenue equals total cost, and then profit
Occurs for additional sales
15-33
Illustration of Breakeven Analysis:
Break-even volume of a new private-label product
PETsMART is interested in developing private label, dry
dog food targeting owners of older dogs that will sell for
$12 a bag. The cost of developing the dog food is
$700,000.
This includes salaries for the design team and testing
the product. The variable cost of purchasing the product
from a private-label manufacturer is $5. How many
cargo pants does American Eagle Outfitter have to sell
to breakeven on its $400,000 investment?
15-34
Illustration of Breakeven Analysis:
Break-even volume of a new private-label product
Fixed cost
Actual unit sales price Unit variable cost
Break-even quantity =
$700,000
$12 $5
=
Now assume that PETsMART wants to make $100,000 profit from it
$700,000 + $100,000
$12 $5
=
= 114,286 bags
15-35
Illustration of Breakeven Analysis:
Break-even Sales of a new private-label product
Fixed cost
Actual unit sales price Unit variable cost
Break-even quantity =
$700,000 + $100,000
$10 $5
=
= 160,000 bags
Now PETsMART is considering lowering the price to $10 with the same
profit goal. How many units does PETsMART need sell then to make
the same profit from the price cut?
Unit sales must increase by 40%
15-36
Maximize Profits through
Price Discrimination
Want Charge Every Customer the Maximum
They Are Willing to Pay

Problem
Dont know willingness to pay
With list prices, cant prevent high willingness to
pay customers from buying at low price

15-37
Price Adjustments
Retailers adjust prices over time (markdowns) and
for different customer segments (variable
pricing)

Why do retailers take markdowns?
How do they optimize markdown decisions?
How do they reduce the amount of markdowns by
working with vendors?
How do they liquidate markdown merchandise?
What are the mechanics of taking markdowns?
15-38
Reasons for Taking Markdowns

Clearance Markdowns to get
rid of slow-moving, obsolete
merchandise

Promotional Markdowns
To increase sales and promote
merchandise
To Increase traffic flow and
sale of complementary
products generate excitement
through a sale

To generate cash to buy
additional merchandise
15-39
Optimizing Markdown Decisions
Traditional Approach- Use a set of arbitrary rules
Sell-Through: Identifies markdown items when its
weekly sell-through percentages fall below a certain
level
Rule-based: Cuts prices on the basis of how long the
merchandise has been in the store
Markdown Optimization
Software is used to determine when and how much
markdowns should be taken to produce the best
results by continually updating pricing forecasts on
the basis of actual sales and factoring in differences
in price sensitivities
15-40
Markdown Optimization Software
ProfitLogic
15-41
Liquidating Markdown Merchandise
Sell the merchandise to another retailer
Consolidate the unsold merchandise
Place merchandise on Internet auction site
Donate merchandise to charity
Carry the merchandise over to the next season
15-42
Variable Pricing and Price Discrimination
Retailers use a variety of techniques to maximize profits by
charging different prices to different customers

Individualized Variable Pricing (First Degree of Price
Discrimination) Set unique price for each customer
equal to customers willingness to pay
Auctions, Personalized Internet Prices

Self-Selected Variable Pricing (Second Degree of Price
Discrimination) Offer the same price schedule to all
customers
Quantity discounts
Early Bird Special
Over Weekend Travel Discount


15-43
eBay: Auction on
porsche speeder 1960
15-44
Variable Pricing and Price Discrimination
Continued
Clearance Markdowns for Fashion Merchandise
Coupons
Price Bundling
McDonalds Value Meal
Multiple-Unit Pricing or Quantity Discount
Variable Pricing by Market Segments (Third Degree of
Price Discrimination) Charge different groups different
prices
Seniors Discounts
Kids Menu
Zone Pricing (Third Degree of Price Discrimination)
Charge different prices in different stores, markets,
regions


15-45
Solution to Problems in
Implementing Price Discrimination
Set prices based on customer
characteristics related to willingness
to pay
Fashion sensitive customers will pay
more so charge higher prices when
fashion first introduced reduce price
later in season
Price sensitive customers will expend
effort to get lower prices coupons
Elderly customers eat earlier and are
more price sensitive so offer early
bird specials
C. Borland/PhotoLink/Getty Images

15-46
Pricing Strategies: High/Low Pricing
Discount the initial prices through frequent sales
promotions

Advantages
Increases profits through price discrimination
Sales create excitement
Sells merchandise
Disadvantages
Train people to buy on deal and wait
Have an adverse effect on profits

15-47
Pricing Strategies: Everyday Low Pricing
Emphasizes the continuity of retail prices at a level
somewhere between the regular none-sale price and the
deep-discount sale price of high/low retailers
Doesnt mean lowest price
Retailers have adopted a low price guarantee policy to
reinforce their EDLP strategy
Advantages:
Assures customers of low prices
Reduces advertising and operating expenses
Reduces stockouts and improves inventory management
17-48
Wal-Mart and Everyday Low Pricing
15-49
Pricing Strategies
EDLP
Assures customers low
prices
Reduces advertising and
operating expenses
Better supply chain
management
Fewer stockouts
Higher inventory turns
Hi-Lo
Higher profits through
price discrimination
More excitement
Build short-term sales
and generates traffic

15-50
Pricing Services
Challenges due to
The need to match supply and demand
The difficulties customers have in determining
service quality
15-51
Matching Supply and Demand for Services


Yield Management:
The practice of adjusting prices up or down in response to
demand to control the sales generated
Services are intangible and thus cannot be stocked
Airline tickets Theater tickets, Concert tickets

Services have capacity constraints
Restaurants, Hotels, Flights, Concerts

Seats for some Hannah Montana concerts
go for $237 on StubHub, when the face
value for the ticket is $63
15-52
Determining Service Quality
Customers are likely to use price as an indicator of both service
costs and service quality This can depend on several factors:

Royalty-Free/CORBIS

Other information available to the
customer (Cues > Price)
When service cues to quality are
readily accessible
When brand names provide
evidence of a companys
reputation
When the level of advertising
communicates the companys
belief in the brand
The risk associated with the service
purchase (Price as a surrogate for
quality)
15-53
Pricing Techniques for Increasing Sales
Leader Pricing
Price Lining
Odd Pricing
15-54
Certain items are priced lower than normal to increase
customers traffic flow and/or boost sales of
complementary products
Best items: purchased frequently, primarily by price-
sensitive shoppers
Examples: bread, eggs, milk, disposable diapers
Might attract cherry pickers-economic benefits of
cherry picking arise from two sources: (i) higher
percent savings on items purchased (about 5%
higher); and equally important (ii) much larger market
baskets (about 67% larger in both dollar and units
terms).
Leader Pricing
15-55
Price Lining
A limited number of predetermined price points.
Ex: $59.99 (good), $89.99 (better), and 129.99
(best)
Benefits:
Eliminates confusion of many prices
Merchandising task is simplified
Gives buyers flexibility
Can get customers to trade up
15-56
Odd Pricing
A price that ends in an odd number (.9)
$2.99
Assumption:
Consumers perceive as $2 without noticing the digits
9 endings signal low prices
Retailers believe the practice increases sales, but
probably doesnt
Does delineate:
Type of store (downscale store might use it.)
Sale
17-57
Odd Pricing
15-58
Guidelines for Price-ending Decisions
When the price sensitivity of the market is high, it is advantageous to
raise or lower prices so they end in high numbers like 9.

When the price sensitivity of the market is NOT high, the risk to
ones image of using 9 is likely to outweigh the benefits. Even dollar
prices and round numbers are appropriate.

Upscale retailers appeal to price-sensitive segments of the market
through periodic discounting. Combination strategy works best:
break from standard of using round number endings to use 9
endings when communicating discounts and special offers.
15-59
Internet and Price Competition
The Internet offers unlimited shopping experience

Seeking lowest price? Use shopping bots or search
engines

These programs search for and provide lists of sites selling
what interests the consumer

Retailers using the electronic channel can reduce customer
emphasis on price by providing services and better
information.
15-60
The Three Most Important Things in Electronic Retailing
Location, location, location

Information, information, information!!
Merchandise Budget
A plan of projected sales for
an upcoming season
including purchase
requirements and anticipated
price adjustments
Merchandise Budget
A plan of projected sales for
an upcoming season
including purchase
requirements and anticipated
price adjustments
Must be done in advance
due to lag time between
merchandising decisions,
ordering, shipping , delivery
and transfer to stores
Merchandise Budget - Decisions
CWhat are anticipated
Sales?
CHow much stock is
needed?
CWhat price reductions will
be needed to dispose of
product?
Merchandise Budget - Decisions
CWhat are anticipated
Sales?
CHow much stock is
needed?
CWhat price reductions will
be needed to dispose of
product?
CWhat additional purchases
must be made?
Merchandise Budget - Decisions
CWhat are anticipated
Sales?
CHow much stock is
needed?
CWhat price reductions will
be needed to dispose of
product?
CWhat additional purchases
must be made?
CWhat is planned gross
profit to be achieved?

Merchandise Budget - Rules
CPrepare budget in
advance of the selling
season

Merchandise Budget - Rules
CPrepare budget in
advance of the selling
season
CThe budget should be
easy to understand

Merchandise Budget - Rules
CPrepare budget in
advance of the selling
season
CThe budget should be
easy to understand
CThe budget should be
short term (3 or 6 months)
due to fluctuating economy

Merchandise Budget - Rules
CPrepare budget in
advance of the selling
season
CThe budget should be
easy to understand
CThe budget should be
short term (3 or 6 months)
due to fluctuating economy
CThe budget should be
flexible
Sample Six-Month Merchandise
Budget

SIX-MONTH MERCHANDISE BUDGET
Housewares Department
FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
BOM
Stock
Sales
Reductions
SIX-MONTH MERCHANDISE BUDGET
Housewares Department
FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
EOM
STOCK
RETAIL
PURCHASES
PURCHASES
COST
Sample Six-Month Merchandise
Budget

SIX-MONTH MERCHANDISE BUDGET
Housewares Department
FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
INITIAL
MARK-UP
GROSS
MARGIN
DOLLARS
BOM
STOCK/
SALES
RATIO
Sample Six-Month Merchandise
Budget

SIX-MONTH MERCHANDISE BUDGET
Housewares Department
FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
LAST YEAR
PLAN
REVISED
ACTUAL
LAST YEAR
PLAN
REVISED
ACTUAL
SALES
%
RETAIL
REDUCTION
%
STOCKTURN: Last Year_________________________Plan_______________Actual_________
ON ORDER-BEGINNING OF SEASON______________Plan_______________Actual_________
EOM INVENTORY FOR LAST MONTH______________Plan_______________Actual_________
REDUCTION PERCENTAGE___________________Plan__________________Actual_________
MARKUP PERCENTAGE__________________Plan______________________Actual_________
Sample Six-Month Merchandise
Budget

Exhibit 8.2
Two-Seasons Department Store, Dept. 353, Six-Month
Merchandise Budget

FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
1. Planned BOM Stock $225,000 $300,000 $300,000 $250,000 $375,000 $300,000 ---
2 Planned Sales 75,000 75,000 100,000 50,000 125,000 75,000 $500,000
3. Planned Retail
Reduction 7,500 7,500 5,000 7,500 6,250 16,250 50,000
4. Planned EOM Stock 300,000 300,000 250,000 375,000 300,000 250,000 ---
5. Planned Purchases
at Retail 157,500 82,500 55,000 182,500 56,250 41,250 575,000
6. Planned Purchases
at Cost 86,625 45,375 30,250 100,375 30,937.50 22,687.50 316,250
7. Planned Initial Markup 70,875 37,125 24,750 82,125 25,312.50 18,562.50 258,750
8. Planned Gross Margin 63,375 29,625 19,750 74,625 19,062.50 2,312.50 208,750
Retailing, 3rd Edition, Dunne and Lusch Copyright 1999 by Harcourt Brace & Company
All rights reserved.
Two-Seasons Department Store, Dept. 353, Six-Month
Merchandise Budget

FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
1. Planned BOM Stock $225,000 $300,000 $300,000 $250,000 $375,000 $300,000 ---
2 Planned Sales 75,000 75,000 100,000 50,000 125,000
75,000 $500,000
3. Planned Retail
Reduction 7,500 7,500 5,000 7,500 6,250
16,250 50,000
4. Planned EOM Stock 300,000 300,000 250,000 375,000 300,000 250,000 ---
5. Planned Purchases
at Retail 157,500 82,500 55,000 182,500 56,250 41,250 575,000
6. Planned Purchases
at Cost 86,625 45,375 30,250 100,375 30,937.50 22,687.50 316,250
7. Planned Initial Markup 70,875 37,125 24,750 82,125 25,312.50 18,562.50 258,750
8. Planned Gross Margin 63,375 29,625 19,750 74,625 19,062.50 2,312.50 208,750
FEBRUARY MARCH APRIL MAY JUNE JULY TOTAL
9. Planned BOM
Stock-to-Sales Ratio 3 4 3 5 3 4 ---
10.Planned Sales Percentage 15% 15% 20% 10% 25% 15% 100%
11.Planned Retail
Reduction Percentage 10% 10% 5% 15% 5% 21.67% 10%
Continued:
Planned Total Sales for the Period $500,000
Planned Total Retail Reduction Percentage for the Period 10%
Planned Initial Markup Percentage 45%
Planned BOM Stock for August $250,000
Two-Seasons Department Store, Dept. 353, Six-Month
Merchandise Budget

Formulas for the Six-Month
Merchandise Budget

(Planned Sales Percentage for the Month )
X (Planned Total Sales)
= (Planned Sales for the Month)
Determining Planned Sales for the Month
(Planned Sales for the Month ) X
(Planned BOM Stock-to-Sales Ratio for the Month)
= (Planned BOM Stock for the Month)
Determining Planned BOM Stock for the Month
Formulas for the Six-Month
Merchandise Budget

(Planned Sales for the Month ) X
(Planned Retail Reduction Percentage for the Month)
= (Planned Retail Reduction for the Month)
Determining Planned Retail Reductions
for the Month
Formulas for the Six-Month
Merchandise Budget

(Planned BOM Stock for the Following Month )
= (Planned EOM Stock for The Current Month)
Determining Planned EOM Stock for the Month
Formulas for the Six-Month
Merchandise Budget

(Planned Sales for the Month ) + (Planned Retail
Reductions for the Month) + (Planned EOM Stock for the
Month)
- (Planned BOM Stock for the Month) = (Planned
Purchases at Retail for the Month)
Determining Planned Purchases at Retail
for the Month
Exhibit 8.3
Formulas for the Six-Month
Merchandise Budget

(Planned Purchases at Retail for the Month )
X (100% - Planned Initial Markup Percentage)
= (Planned Purchases at Cost for the Month)
Determining Planned Purchases at Cost
for the Month
Formulas for the Six-Month
Merchandise Budget

(Planned Purchases at Retail for the Month )
(Planned Initial Markup Percentage) X
(Planned Initial Markup for the Month) =
OR
(Planned Purchases at Retail for the Month)
(Planned Purchases at Cost for the Month) -
(Planned Initial Markup for the Month) =
Determining Planned Initial Markup
for the Month
Exhibit 8.3
Formulas for the Six-Month
Merchandise Budget

(Planned Initial Markup for the Month)
- (Planned retail Reductions for the Month)
= (Planned Gross Margin for the Month)
Determining Planned Gross Margin
for the Month
Exhibit 8.3
Formulas for the Six-Month
Merchandise Budget

Accounting Information
Two main Financial Statements are:
Balance Sheet - shows retailers Assets,
Liabilities and Owners Equity at a specific
point in time
Income Statement - shows results of
retailers
operations over a period of time
Accounting Information
Two main Financial Statements are:
Balance Sheet - shows retailers Assets,
Liabilities and Owners Equity at a specific
point in time
Income Statement - shows results of
retailers
operations over a period of time
Financial statements normally
prepared monthly (every 4-5
weeks)
Accounting Information
Two main Financial Statements are:
Balance Sheet - shows retailers Assets,
Liabilities and Owners Equity at a specific
point in time
Income Statement - shows results of
retailers
operations over a period of time
Financial statements normally
prepared monthly (every 4-5
weeks)
Balance Sheet prepared for
combined chain; Income
Statement prepared for each store
(or smaller component)
Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances

Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales

Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales
- Cost of Goods Sold
Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales
- Cost of Goods Sold
= Gross Profit (or Margin)

Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales
- Cost of Goods Sold
= Gross Profit (or Margin)
- Store Operating Expenses
Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales
- Cost of Goods Sold
= Gross Profit (or Margin)
- Store Operating Expenses
= Store Operating Income

Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales
- Cost of Goods Sold
= Gross Profit (or Margin)
- Store Operating Expenses
= Store Operating Income
- Corporate Overhead
Income Statement
Typical Retail Income
Statement looks like this:
Gross Sales
- Sales Returns and
Allowances
= Net Sales
- Cost of Goods Sold
= Gross Profit (or Margin)
- Store Operating Expenses
= Store Operating Income
- Corporate Overhead
= Chain Net Income
Ratio Analysis
A Ratio is a relationship between two
elements of the financial statements
expressed as one number divided by
another. There are four basic types of
ratios:
* Operating Ratios - Measure how
efficiently retailer generates sales and
manages expenses
Ratio Analysis
A Ratio is a relationship between two
elements of the financial statements
expressed as one number divided by
another. There are four basic types of
ratios:
* Operating Ratios - Measure how
efficiently retailer generates sales and
manages expenses
-Liquidity Ratios - Measure whether the
retailer can meet short term payment
obligations
Ratio Analysis
A Ratio is a relationship between two
elements of the financial statements
expressed as one number divided by
another. There are four basic types of
ratios:
* Operating Ratios - Measure how
efficiently retailer generates sales and
manages expenses
-Liquidity Ratios - Measure whether the
retailer can meet short term payment
obligations
4 Leverage (or debt) Ratios - Measure the
degree a retailer is financed by owners or
creditors
Ratio Analysis
A Ratio is a relationship between two elements
of the financial statements expressed as one
number divided by another. There are four
basic types of ratios:
* Operating Ratios - Measure how efficiently
retailer generates sales and manages
expenses
-Liquidity Ratios - Measure whether the retailer
can meet short term payment obligations
4 Leverage (or debt) Ratios - Measure the
degree a retailer is financed by owners or
creditors
^ Profitability Ratios - measure how profitable the
retailer has been
Expense Allocation
Expenses for a retailer can occur at any level of
the following hierarchy
Product
Department
Store
Division
Region
Chain
Consolidated Company
Expenses also occur related to specific functions
such as advertising, personnel, buying,
transportation, etc.
Expense Allocation
Expenses for a retailer can occur at any level of
the following hierarchy
Product
Department
Store
Division
Region
Chain
Consolidated Company
Expenses also occur related to specific functions
such as advertising, personnel, buying,
transportation, etc.
Retailer must choose at what level and to what
degree cost allocations will take place
Inventory Systems
Control of inventory is critical to retail success
Inventory is controlled both for units (physical and in
dollars (accounting)
Basic Inventory formula is:
Beginning Inventory
+ Purchases .
Inventory Systems
Control of inventory is critical to retail success
Inventory is controlled both for units (physical and in
dollars (accounting)
Basic Inventory formula is:
Beginning Inventory
+ Purchases .
= Goods Available (total stock handled)
Inventory Systems
Control of inventory is critical to retail success
Inventory is controlled both for units (physical and in
dollars (accounting)
Basic Inventory formula is:
Beginning Inventory
+ Purchases .
= Goods Available (total stock handled)
- Goods sold
Inventory Systems
Control of inventory is critical to retail success
Inventory is controlled both for units (physical and in
dollars (accounting)
Basic Inventory formula is:
Beginning Inventory
+ Purchases .
= Goods Available (total stock handled)
- Goods sold
- Inventory shortages .

Inventory Systems
Control of inventory is critical to retail success
Inventory is controlled both for units (physical and in
dollars (accounting)
Basic Inventory formula is:
Beginning Inventory
+ Purchases .
= Goods Available (total stock handled)
- Goods sold
- Inventory shortages .
= Ending Inventory
Inventory Methods
Methods used include
Perpetual - every individual movement is tracked. Therefore
ending inventory is known without a physical count
(expensive to maintain, cant keep track of theft)
Periodic - Only purchases are tracked. Therefore a physical
inventory is needed to determine amount ($) sold and amount
($) remaining.

Inventory Methods
Methods used include
Perpetual - every individual movement is tracked. Therefore
ending inventory is known without a physical count
(expensive to maintain, cant keep track of theft)
Periodic - Only purchases are tracked. Therefore a physical
inventory is needed to determine amount ($) sold and amount
($) remaining.
Retail Method - Used for Accounting $ recordkeeping, not for
physical recordkeeping. Estimates amount of inventory sold
based upon estimated achieved gross profit . Can only be
determined if accurate through physical inventory
Retail Method of Inventory Valuation Example
Cost Retail
Inventory at Beginning of Period $14,000 $25,000
Purchases During the Period 30,000 45,000
Transportation Costs 1,000
Additional Markups 5,000
Merchandise Available for Sale 45,000 75,000
Cost to Retail Ratio and Percentage 45,000 / 75,000 = 60%
Net Sales 45,000
Markdowns 5,000
Total Reductions 50,000
Ending Inventory at Retail $25,000
Ending Inventory at Cost ($25,000 X .60) $15,000
Summary
Expertise at all other aspects
of retailing are irrelevant if
profit is not made on goods
sold
Financial management of
retail company includes
budgeting, recording,
security, mark-down
management and monitoring
of results