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Unit 3: Buying for Discount Operations

3.2.1 Merchandising Philosophies Notes

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.

Example: Costco has a wealth of products bearing its Kirkland brand name. With the
markups so low for its nationally branded goods, Costco makes up the difference with these
items that are available only at its warehouse outlets.

3.2.2 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.

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