"Understanding A Retail Enterprise Using Spreadsheet Analysis" Prepared To Accompany

The House
"Understanding A Retail Enterprise Using

Spreadsheet Analysis"
Prepared To Accompany
Retailing, Fifth Edition

by
Robert F. Lusch
University of Oklahoma
Patrick Dunne
Texas Tech University
Copyright © 2005 by South-Western
All right reserved. No part of this product may be reproduced,

transmitted or used in any form or by any means except as
provided in the South-Western end-user license agreement found
in the disk package.
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PREFACE
The House is a spreadsheet analysis of the financial performance of

a family clothing store in a small college town. As you read and work with
the material in this electronic text, you can answer the problems and, if
necessary, print out your answers. The software used is Microsoft Office,
which integrates word processing (Microsoft Word) and spreadsheet
analysis (Excel). You will be able to work the problems as they are
presented since the spreadsheet worksheets are embedded into this
electronic text.
Although the spreadsheet problems are designed for computer
computation, it is possible to do all the required computations with a
calculator or by hand. Also, if you wish, you can create your own
spreadsheet programs on software other than Excel, such as Lotus 1-2-3.
If you are having problems setting up your spreadsheet please review a
tutorial on spreadsheets, see a computer lab advisor, or seek help from
your instructor who may be able to help you directly or refer you to
someone that may be of help.
The spreadsheet model is introduced in five phases which increase
in sophistication. Generally the spreadsheet exercises can be used with
any of the many retail principles and retail management textbooks on the
market. The five phases coincide with the first four parts of Retailing
(2002) by Dunne, Lusch and Griffith, however, as previously stated, the
exercises are applicable to other books. Two exercises are developed to
accompany each chapter in the first thirteen chapters of Retailing. In the
first phase, one only needs to be familiar with a few basic accounting
concepts. This phase is used to acquaint you with a basic return on asset
model. Such a model is a good frame of reference for managing profit
performance in retailing. The second phase introduces critical
environmental forces such as consumer behavior, channel behavior,
competitor behavior, legal constraints, and how changes in these
environments influence store performance. In the third phase we
incorporate certain location concepts which allow different location
decisions to be assessed. The fourth phase introduces and develops a
sixth-month merchandise budget. Finally, in phase five, certain retail
decisions such as pricing, promotion, and merchandising are discussed
and a model is developed to assess how different retail decisions will
influence store performance.
Throughout the spreadsheet exercises you will be presented with
problems that you can work to develop an understanding of important
retail concepts. However, in all exercises you will be sensitized to the fact
that everything that happens in retailing has a bottom line financial
impact. The problems are presented in brief overview scenarios of a The
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House, which is a family clothing store. You will be provided with an
electronic spreadsheet which you will use to simulate the effects of the
decisions made or phenomena occurring in The House.
Once you become familiar with the spreadsheet models introduced
in The House, you can use them to further your understanding and study
of retailing. For example, the models presented can be used in a variety
of ways.
• The models can be used to further acquaint you with how

financial performance of a store changes as a result of certain
changes in the external environment and decisions that store
managers make. This can be done by modifying some of the
assumptions in the exercises you will be presented.
• The models can be used to help you design and simulate a retail
store that you might consider opening.
• The models can be used to help you develop your own problems
that allow you to explore the many interrelationships found in
retailing.
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SPREADSHEET ANALYSIS
Spreadsheet analysis, often referred to as worksheet analysis, is a

computerized version of a tablet of paper with columns and rows.
Historically, accountants or business people, when analyzing financial
data and other numerical data, would work with pads of paper and an
adding machine or calculator. Today such a cumbersome way of working
and computing is not necessary. This is because many brands of
computer software can provide an electronic pad of paper with columns
and rows in which data can be input and easily manipulated. This brief
overview of spreadsheet software is not intended to be comprehensive in
scope. If you are not familiar with spreadsheet software you should
consult your instructor.
In an electronic worksheet or spreadsheet there is the potential for
hundreds or thousands of rows and columns. The intersection of each row
and column is referred to as a cell. You should check the specific brand of
software you are using to determine how rows and columns can be
handled. However, even the simplest of spreadsheet programs will be
able to handle the problems presented in The House. Most spreadsheet
or worksheet software have analysis and presentation features. The
analysis portion of the software deals with how to manipulate numerical
data in the various cells of the worksheet. The presentation features deal
with how to display the results of your analysis. Our brief overview of
spreadsheet analysis will discuss some fundamentals of analysis. Since
the presentation features vary substantially with each brand of software,
you should consult the instruction manual for the software you are using.
It will be helpful for you to learn how to print tables of data and also to
present the data in a graphical format.
Fundamental Concepts
• A cell is the intersection of a column and row.

• Columns are defined by letters and rows are defined by
numbers. For example the first cell in the worksheet is defined
as A1. If we want the cell that is the intersection of the third
column and tenth row it would be labeled C10.
• The title is the description you give the worksheet. This can be
composed of both alphabetical and numerical symbols.
• Mathematical symbols often used are: + for addition, - for
subtraction, * for multiplication, and / for division.
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Entering Data
Data is entered into a spreadsheet by highlighting the cell the data

will be entered into and then typing in the numerical data. Only
numerical data can be input.
Entering Formulas
Typically a formula is entered by highlighting the cell in the

spreadsheet where the formula is applicable. For example if we want to
subtract the value in C3 from the value in C1, the formula would be: = C1
- C3. If we add C1 and C3 the formula would be: = C1 + C3; if we
multiply C1 by C3 we would have: = C1*C3; if we divide C1 by C3 we
would have: = C1/C3.
Entering Percents
In The House whenever you have a percent to enter into the

spreadsheet, such as the gross margin percent, it is entered in decimal
form. For instance a 38% gross margin is entered as .38. You should also
keep this in mind when you view your results. For example, if you obtain
a return on assets of .12 you need to mentally move the decimal place
two positions to the right to obtain a 12% return on assets.
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INTRODUCTION
Anne and Fred Harris are owners and operators of The House. The
House is a family apparel store in Hamilton, a small midwestern
community of 6,237 households (excluding college students) comprising
16,529 permanent residents. Hamilton is located at the crossroads of
State Highway #43 and #62. In addition to the permanent residents
there are 2,800 full-time students who attend a small private college.
These college students, many of whom have roommates, occupy 1650
separate apartments, dormitory rooms, or other residences that are
separate from the permanent resident population. Thus, the total
households consist of 6,237 permanent and 1,650 nonpermanent, or
college student households, for a total of 7,887 households. On the other
hand the total population is 19,329, which consists of 16,529 permanent
residents and 2,800 college students.
Background
Hamilton is centrally located near several other communities. The

next largest town is Troy, which is 39 miles to the east and has a
population of 24,675. However, there are five smaller towns within a 15-
mile radius and range in size from 1400 to 4100 and have a total
population of 17,900. Anne and Fred took over the management of The
House after Ann's father, the founder of the store, retired in 2001. Anne's
father, Bill Henderson, started The House in 1960 after he graduated
from the local college. Initially, The House was a menswear store with
college men as its target market. However, over the years, Bill Henderson
found that the college men's market was too thin to support a store and
thus in 1963 Bill added women's apparel targeted at college females. In
1965 Bill, once again, broadened The House’s target market and added
apparel to appeal to all age groups including children.
Anne and Fred had been married for five years when they moved to
Hamilton in late October 2001 to takeover management of The House. At
the time, Fred was an assistant store manager at a JC Penney store in
Cleveland and Anne was a registered nurse at a Cleveland hospital. Anne
found the pressure of nursing in a big city hospital too demanding and
she looked favorably upon the idea of returning to Hamilton. She recalled
fondly where she grew up and the idea of managing the family business
sounded appealing. Fred was also excited about managing and owning
his own store.
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Purchase of Business
Mr. Henderson offered to sell The House to Anne and Bill for the
book value of its fixtures, equipment and inventory or $575,000. The
fixtures and equipment were valued at $75,000. The House occupied a
7000 square foot building in downtown Hamilton. The building was owned
by Mr. Henderson who agreed to lease the building to Anne and Bill for
$3,000 per month. In addition, he agreed to take a downpayment of
$125,000 on the $575,000 purchase price and to finance the remaining
$450,000 on a three year 8% interest only note with interest of $3000
due the first of each month. At the end of three years they would need to
obtain permanent financing from a source other than Mr. Henderson.
After some serious thought Anne and Fred agreed to purchase The
House from Anne's father. They took possession of the store on
November 1, 2001 just in time for the Christmas season. In 2001 sales
were $1,325,132 and of this amount $348,200 occurred during November
and December. Total assets at year-end 2001 were $585,100, which
included $158,700 in cash and $351,400 in inventory (at cost).
The House is open Monday through Wednesday from 10:00 a.m. to
6 p.m. and on Thursday through Saturday from 10 a.m. to 9 p.m. The
House is closed on Sunday and also on Thanksgiving Day, Christmas and
New Years Day. Fred and Anne work in the store daily. However, Friday
and Saturday are their busiest days. They have four full-time
salespeople, four part-time salespeople, one full-time janitor, one
bookkeeper, an accounts payable and accounts receivable clerk, a
secretary who also serves as a receptionist, and a full-time buyer who
buys womenswear and children's apparel. Mr. Henderson, in addition to
running the store the last forty years, also served as the menswear
buyer. He has agreed to continue to perform this activity for the next 12
months for a retainer of $12,000 and to take Fred along on three buying
trips. After the 12-month transition, Fred will perform the buying function
for the menswear line.
Operating Characteristics
The House has 40% of its sales in menswear, 35% in womenswear,

and 25% in children apparel. In total, The House has 1765 stockkeeping
units (SKUs). Due to the variety of merchandise, prices vary considerably.
In 2001 the average transaction size was $53.45 (before sales tax) which
included on average 4.0 items. However, prices for any single item can
vary from $1.49 to $459.00. The permanent residents of Hamilton seem
to enjoy shopping at The House as evidenced by the fact that 65% of
Hamilton's total households visited The House at least once during 2001.
These households visited the store an average of 7.8 times in 2001.
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Importantly, not all store visits result in a purchase. In 2001 only 62% of
store visits resulted in a purchase.
The House has been operating on a 38% gross margin and Fred and
Anne expect this to continue for 2002. They have carefully analyzed their
expected costs for 2002 and estimate fixed operating costs per month at
$25,640 and variable operating costs at 11.2% of sales. The fixed
operating costs include a $1200 monthly salary each for Fred and Anne.
Variable operating costs include advertising costs of 3.2% of sales.
Retail Environment
The retail environment of Hamilton is typical of small college towns.

There are four gasoline stations, two convenience stores, two
supermarkets, a bakery, a butcher shop, a womenswear store, a Dollar
General department store, a jewelry and gift store, a television and home
appliance store, a furniture store, an office supply and equipment store, a
True Value Hardware store, and a Wal*Mart. There is also a dry cleaner,
two Laundromats, two banks, a travel agency, six churches, one funeral
home, two used car dealers, a Chevrolet Dealership, a Ford Dealership, a
farm and feed supply store, a movie theater, two real estate agencies,
three insurance agencies, five barbers/beauticians, six fast food
restaurants, two grills that cater to college students, two family style
cafes, an Optometrist, four family physicians, a Pediatrician, an
Optometrist, and three dentists. The House is located on the town square
where a bank, county government offices, one of the family style cafes,
the womenswear store and the Family Dollar department store exist.
There are also two vacant stores on the Town Square, which have been
vacant for 18-24 months. Also on the town square is an insurance agent,
real estate agent, barber, travel agent, and two law offices. At the
eastern edge of town there is an eight year old, 85,000 square foot
Wal*Mart discount department store. The local college is a half-mile north
of downtown Hamilton.
Special Note
You will probably find it helpful to reread this brief description of

The House before you begin each exercise. Data is provided in this
description which can be used to help solve some of the exercises.
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PHASE ONE SPREADSHEET MODEL:
BASIC CONCEPTS
The problems you will work in phase one relate to part

one--"Introduction To Retailing" of Retailing (2002) by Dunne, Lusch and
Griffith. For phase one you need to understand the following concepts:
• Net Sales is the dollar value of annual sales.
• Cost of Merchandise Sold is the monetary amount owed or

paid suppliers (including freight) for the merchandise the retailer
sells during the period. Cost of merchandise as a percent of
sales is 100% minus the gross margin percent.
• Gross Margin is the Net Sales minus the Cost of Merchandise

Sold. Gross margin percent is the Gross Margin as a percent of
sales.
• Variable Operating Cost are costs that increase

proportionately with the sales volume of the store. For example
if variable costs are 30% of sales then for each one-dollar
increase in sales the variable costs rise 30 cents. Common
examples of variable costs in retailing are sales commissions
and advertising.
• Fixed Operating Costs are the costs the retailer incurs

regardless of the level of sales. Common fixed costs in retailing
are insurance, interest on debt, certain salaries, and rent.
• Total Operating Cost is the sum of fixed operating and

variable operating costs.
• Net Profit is the amount remaining after total operating costs

are subtracted from gross margin.
• Total Assets is the value of the things the retailer owns, which
it uses to operate its business. Examples of assets include
fixtures, equipment, cash and inventory.
Also you will need to know that the notation used is as follows: (+)
designates addition, (-) designates subtraction, (/) designates division, (*)
designates multiplication. Incidentally, this is the only level of math you
will need to work the simulation exercises. When multiplication occurs
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you can round off your answer to the nearest one-hundredth of a decimal
(i.e. have two digits to the right of the decimal point) or you should feel
free to use higher precision if you desire. Naturally, when a series of
multiplications occur a rounding error will occur. You should not be
worried about such minor differences in computations.
In addition to the preceding, you need to understand some
important relationships between the preceding concepts. These
relationships are best understood in terms of three basic financial ratios.
Repeatedly throughout the simulations you will see that the impact of
changes in the retail business have an ultimate effect on these three
financial ratios.
• Net Profit Margin is the ratio of net profits divided by net

sales. If the net profit margin is 3%, it says that on each dollar of
sales the retailer has earned 3 cents of net profit.
• Asset Turnover is the ratio of net sales divided by total assets.

If this ratio is 4 times, it says that the retailer generates $4 in
sales for each dollar invested in assets.
• Return on Assets is net profit divided by total assets. If the

return on assets is 12%, it says that the retailer has earned 12
cents on each dollar invested in assets.
You also need to know that the net profit margin multiplied by the rate of
asset turnover yields return on assets. This basic relationship is
illustrated with the following equation:
(net profit/net sales) * (net sales/total assets) = (net profit/total

assets)
OR
(net profit margin) * (asset turnover) = (return on assets)
The simulation model you will be working with in phase one will
look like the following:
SAMPLE SPREADSHEET
PHASE ONE
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Baseline Model Model-A Model-B
net sales $1,325,132
cost of merchandise sold $821,582
gross margin $503,550
variable operating cost $148,415
fixed operating cost $307,680
total operating cost $456,095
net profit $47,455
net profit margin 3.58%
asset turnover 2.265
return on assets 8.11%
If you double click on this spreadsheet you will bring up the Excel
software. You can click on the different cells in this spreadsheet and see
how each of the elements is defined. Note that for each cell we either
entered a number or a formula. For example for net sales we entered
$1,325,132, however, for cost of merchandise sold we entered the
formula: Net Sales * (1 - gross margin %) or B2 * (1 - .38). B2 is the
location of net sales and .38 represents the 38% gross margin percent
The House experienced.
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PHASE ONE
EXERCISE ONE-A
The Negative Impact of External Forces on

Store Performance
Anne and Fred just learned that Creative Ceramics, a producer of

ceramic giftware, has announced it will close its plant which employs 175
people. The employees of Creative Ceramics represent 155 households
with a total population of 450. It is estimated that two-thirds of these
households will leave Hamilton for other employment. Anne and Fred
estimate that the effect of this will be to lower sales between 3 and 5%
for 2002 from their 2001 level. Please simulate the impact of a 3%, 4%,
and 5% decline in 2002 sales on the net profit margin, asset turnover,
and return on assets.
The spreadsheet you will need to run this simulation is attached.
You will need to double click on this spreadsheet, which will bring up the
Excel software. Please note that all rows and columns have been labeled,
however, you need to enter the formula for each row item that occurs
under the three scenarios (3%, 4%, and 5% sales declines) in the
simulation. If the formula or number does not change from the baseline,
you can simply copy these formulas or numbers into the empty cells
under the various scenarios. HINT--one way to do this is to simply
copy all of the data or formulas in column one (baseline model)
into the following three columns. Once this is done you can go
into the sales cells (B2, C2, D2) and alter the level of sales. All of
the remaining changes will be made automatically due to the
simulation nature of this software. Be sure to save your work and
print a copy once you are satisfied with its correctness. After you
complete your simulation there are two questions you need to answer.
These can be answered by typing your responses below the questions,
saving your work, printing a copy, and handing it in to the instructor if
required.
.
EXERCISE ONE-A
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Baseline Model 3% sales drop 4% sales drop 5% sales drop
cost of mdse sold $821,582
var operating cost $148,415
net profit $47,455
QUESTIONS
1. Which financial ratio was most impacted by the decline in population?

Why?
2. Which costs are affected by the sales decline? Why?
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PHASE ONE
EXERCISE ONE-B
The Positive Impact of External Forces on

Store Performance
Anne and Fred just learned that the local gift and jewelry store is
cutting back its line of women’s apparel and giftware. The apparel
consisted largely of scarves, silk blouses, nightwear, and sweaters. As a
result, they expect that sales at The House will rise 1% or 2% in 2002
compared to 2001.
You will need to double click on this spreadsheet which will bring up the
under the three scenarios (1%, 1.5%, and 2% sales increase) in the
under the various scenarios. HINT--one way to do this is to simply
copy all of the data or formulas in column one (baseline model)
into the following three columns. Once this is done you can go
into the sales cells (B2, C2, D2) and alter the level of sales. All of
the remaining changes will be made automatically due to the
simulation nature of this software. Be sure to save your work and
print a copy once you are satisfied with its correctness. After you
complete your simulation there are two questions you need to answer.
These can be answered by typing your responses below the questions,
saving your work, printing a copy and handing it in to the instructor if
required.
EXERCISE ONE-B
Baseline Model 1% sales increase1.5% sales increase2% sales increase

$1,325,132
$821,582
$503,550
$148,415
$307,680
$456,095
$47,455
3.58%
2.265
8.11%
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QUESTIONS
1. Which financial ratio was most impacted by the reduction in
competition? Why?
2. Which costs are affected by the sales increase? Why?
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PHASE ONE
EXERCISE TWO-A
The Impact of Different Marketing and Financial

Strategies on Store Performance
Anne and Fred Harris have decided that in 2002 they will pursue a
new marketing and financial strategy in which their goal will be a higher
market share. They have noted that many households have been
shopping for apparel out of town, especially in Troy, which has a 400,000
square foot covered mall that includes two department stores and 18
specialty stores. Anne and Fred have developed two alternative
strategies: (a) they would increase store hours by being open seven days
a week and thus fixed costs would rise from $25,640 monthly to $30,000
per month, but as a result they expect a 15% sales increase; (b) they
would keep store hours the same but would introduce a mail order
catalog to be mailed four times a year to all households in town and to
the five outlying towns. Under this alternative the fixed operating costs
would rise to $40,000 and variable operating costs would increase by
1.2% of sales. Sales would be projected to increase 36%. Under either
strategy they do not expect a rise in total assets. With the increased
store hours Fred and Anne Harris have no need to invest in additional
inventory, store fixtures, or other assets. In the case of the direct mail
program the production and mailing of the catalog will be contracted out,
therefore no additional investment in assets will be required. Which
alternative should they pursue?
under the two scenarios (expanded store hours or direct mail catalog) in
the simulation. If the formula or number does not change from the
baseline, you can simply copy these formulas or numbers into the empty
cells under the various scenarios. Be sure to save your work and print a
copy once you are satisfied with its correctness. After you complete your
simulation there are two questions you need to answer. These can be
answered by typing your responses below the questions, saving your
work, printing a copy, and handing it in to the instructor if required.
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EXERCISE TWO-A
Baseline Model Expand Store Hours Direct Mail Catalog

$1,325,132
$821,582
$503,550
$148,415
$307,680
$456,095
$47,455
3.58%
2.265
8.11%
QUESTIONS
1. Should The House change its financial and marketing strategy? Why?
2. What are some of the reasons that the projections made for either the
expanded store hours scenario or the direct mail catalog scenario may
not materialize as projected? Is one option more risky?
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PHASE ONE
EXERCISE TWO-B
The Impact of Different Marketing and Financial

Strategies on Store Performance
The House is considering handling a line of higher priced women's

dresses. They believe that these higher priced dresses ($95-$295) will
result in a sales increase of 7%. To provide a proper merchandise
assortment, an additional investment in inventory of $38,000 would be
required. It is expected that as a result of this 7% sales increase, due to
the sale of higher priced dresses, the storewide gross margin percent
would rise by 1%.
Total assets at year-end 2001 were $585,100, which included
$58,700 in cash and $351,400 in inventory (at cost). The House could
finance the additional inventory with a combination of cash and trade
credit. If this strategy is pursued then total assets will remain at
$585,100 but cash on hand will decline. However, Anne and Fred are
concerned that the company have an adequate level of cash on hand for
emergencies or opportunistic buys. As a result, they are considering
investing another $12,000 in cash in the business. If this strategy is
pursued then total assets would rise to $597,100. What will happen to
financial performance if they invest the additional $12,000 vs. financing
the inventory from existing resources in the business?
under the two scenarios (finance internally or finance externally) in the
under the various scenarios. Be sure to save your work and print a copy
once you are satisfied with its correctness. After you complete your
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EXERCISE TWO-B
Baseline Model Fin Inv Internally Fin Inv Externally

variable op cost $148,415
fixed op cost $307,680
total op cost $456,095
net profit $47,455
QUESTIONS
1. Which alternative should be used to finance the increased inventory

investment? Why?
2. What are some of the other factors that need to be considered when
making this decision? Please explain.
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PHASE TWO SPREADSHEET MODEL:
BASIC CONCEPTS
The problems you will work in phase two relate to Part Two--"The
Retailing Environment" of Retailing by Dunne, Lusch and Griffith. For
Phase Two of The House you need to understand concepts related to the
retailing environment. These concepts deal with the customer,
competition, channel, and the legal environment. The following concepts
are important to understand:
• market coverage is the number of households residing in the

trade area of the retail store; this is also often called the number
of prospects.
• penetration level is the percent of households residing in the

trade area of the retail store who visit the store within a year.
• average shopping frequency is the average number of times

a year that a household visits the store.
• traffic is the total number of household visits to the store

annually.
• closure is the percent of households who visit the store that

end up purchasing.
• transactions are the annual number of customers who make a

purchase.
• average transaction size is the average dollar value of a

transaction
You also need to understand the following relationships between

the preceding concepts:
• traffic = (market coverage) * (penetration level) * (average

shopping frequency)
• transactions = (traffic) * (closure)
• net sales = (transactions) * (average transaction size)
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For example, if a retailer has a market coverage of 20,000 households,
has a penetration level of 60%, and the typical household visits the store
six times annually, then the traffic will be (20,000)*(60%)*(6) or 72,000.
In brief, the store has 72,000 household visits a year. Now consider that
the closure on these visits is 50% then the number of transactions on an
annual basis is (72,000)*(50%) or 36,000. Finally, if the average
transaction size is $10 then the annual net sales would be (36,000)*($10)
or $360,000.
SAMPLE SPREADSHEET
PHASE TWO

market coverage 7887
penetration level 0.65
avg shopping frequency 7.8
traffic 39987
closure 0.62
transactions 24792
avg transaction size $53.45
net profit $47,455
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PHASE TWO
EXERCISE THREE-A
The Impact of Improved Demographics on

Store Performance
Anne and Fred have merchandised The House to appeal to a broad

spectrum of households. At the local college, enrollments are projected to
rise by 600 students next year and 20 additional faculty will be recruited.
In the past, Anne and Fred have found that both faculty and college
students spend more on clothing and shop often at The House. However,
students tend to spend mostly on fill-in items, while purchasing their
more complete wardrobe needs elsewhere, usually at their permanent
home. On the other hand, faculty tend to purchase most of their clothing
needs at The House.
Based on these improved demographics, Anne and Fred are
projecting that for 2002 that the market coverage would rise to 8,100
from 7,887. For 2001, the average shopping frequency was 7.8 times per
year, average transaction size was $53.45, and closure was 62%. They
do not expect a change in these statistics. What would happen to the
financial performance of The House under this scenario?
under the scenario (8,100 market coverage) in the simulation. If the
formula or number does not change from the baseline, you can simply
copy these formulas or numbers into the empty cells under the various
scenarios. Be sure to save your work and print a copy of it once you are
satisfied with its correctness. After you complete your simulation there
are two questions you need to answer. These can be answered by typing
your responses below the questions, saving your work, printing a copy
and handing it in to the instructor if required.
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EXERCISE THREE-A
Baseline Model Improved Mkt Coverage

traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. Why did a modest increase in market coverage have such a significant

influence on store performance?
2. Should The House attempt to appeal more to college students and

faculty? Why or why not?
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PHASE TWO
EXERCISE THREE-B
The Impact of Altering the

Target Market
on Store Performance
Anne and Fred have noted that many of their customers are middle
age households in the community. These are good loyal customers,
however, The House could do a better job of attracting college students
and encouraging them to purchase their entire, or most, of their college
wardrobe needs at The House. Fred decided to invite to lunch five college
males who were active in fraternities. Similarly, Anne invited to lunch five
coeds who were active in their sorority. At the lunch both Fred and Anne
asked them why they don't purchase more of their wardrobe needs at
The House. Both groups felt The House was a good choice for fill in and
staple purchases such as underwear and hose and an occasional sport
shirt or casual dress. However, the students (both male and female)
believed that The House had a very poor selection of casual clothing for
college students. In addition, they did not like shopping at a store that
catered to all family members.
That evening Anne and Fred brainstormed while they had dinner.
They decided that one possible way to serve the college market would be
to develop a special area within their store called the College Shop. In
this shop within the store they would feature cotton twill slacks and
dresses, polo style sport shirts, belts, Bass loafers, and moderately priced
tweed and navy blazers for men, white oxford dress shirts, and a
selection of ties.
To help promote the College Shop they would also appoint a fashion
advisory board of three college males and three college females, meet
with them monthly, and pay them $50 per meeting. In addition, they
would commit to advertising weekly in the college newspaper, but this
cost would be reallocated from their existing advertising budget. Finally,
it was estimated that a total inventory investment of $85,000 would be
needed for the College Shop, however, $35,000 of this amount could be
reallocated from current merchandise lines that would be phased out.
The additional $50,000 inventory investment would be financed with
existing cash balances and trade payables. Anne and Fred expected that
penetration among college students would rise to 55%, thus increasing
the market penetration to 70% from 65%. To be conservative in their
estimates they assumed that closure and average transaction size would
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be unaffected but that average shopping frequency would rise to eight
times per year.
under the two scenarios (70% penetration & average shopping frequency
7.8 or 70% penetration & average shopping frequency 8.0) in the
work, printing a copy and handing it in to the instructor if required.
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EXERCISE THREE-B
Baseline Model 70% Pen & Avg Frq 7.8 70% Pen & Avg Frq 8.0
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the impact of the College Shop strategy on traffic and

transactions? Why is traffic so important in retailing?
2. Why does the net profit margin improve so dramatically?
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PHASE TWO
EXERCISE FOUR-A
The Impact of Increased Competition From Dollar General

and Wal*Mart on Store Performance
Anne’s father, the prior owner of The House, left a complete set of
books for 20 years. Fred was able to enter the annual sales data into his
personal computer and graph annual sales over time. What became very
clear was that sales increases would almost identically match the general
rate of inflation. This suggested that The House probably had not
experienced any real growth in sales since 1980. During this period the
competitive situation has also been quite stable. However, recently the
local Dollar General store reconfigured its store layout to devote more
space to womenswear. At the same time the local Wal*Mart has devoted
more space to womenswear. As a consequence, more women are
shopping locally for clothing at these two stores. Fred and Anne estimate
that average shopping frequency could drop to 7.5 or possibly as low as
7.0 times a year. What would be the impact on store performance?
under the two scenarios (average shopping frequency 7.5 or average
shopping frequency 7.0) in the simulation. If the formula or number does
not change from the baseline, you can simply copy these formulas or
numbers into the empty cells under the various scenarios. Be sure to
save your work and print a copy once you are satisfied with its
correctness. After you complete your simulation there are two questions
you need to answer. These can be answered by typing your responses
below the questions, saving your work, printing a copy and handing it in
to the instructor if required.
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EXERCISE FOUR-A
Baseline Model Avg Shopping Frq = 7.5 Avg Shopping Frq = 7.0
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. Why did the drop in average shopping frequency have such a dramatic
impact on store performance?
2. Should The House attempt to take a counter competitive action? If so

what do you recommend?
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PHASE TWO
EXERCISE FOUR-B
The Impact of Increased Competition from

Direct Mail Retailers on Store Performance
Recently the residents of Hamilton have been receiving an

increasing number of direct mail catalogs from retailers such as L.L.
Bean, Lands End, Eddie Bauer, and J. Peterman. These direct marketers
offer good quality apparel for a fair price and provide 2-5 day delivery of
merchandise via Federal Express. Fred estimates that this increased
competition will have two impacts: lower average shopper frequency and
reduced average transaction size. If each of these dropped 5%, what
would happen to store performance? If each dropped 10%, what would
happen to store performance?
under the two scenarios (average shopping frequency and average
transaction size drop 5% or 10%) in the simulation. If the formula or
number does not change from the baseline, you can simply copy these
formulas or numbers into the empty cells under the various scenarios. Be
sure to save your work and print a copy once you are satisfied with its
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EXERCISE FOUR-B
Baseline Model Avg Frq & Trn Sze Drp 5% Avg Frq & Trn Sze Drp 10%
avg shop frequency 7.8
traffic 39987
closure rate 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. Which financial ratios are affected by this increased competition?

Why?
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2. What actions might The House take to combat this direct mail
competition?
PHASE TWO
EXERCISE FIVE-A
Evaluating Alternative Distribution Channels
Anne and Fred have been traveling twice a year to the Apparel
Market in New York City. Recently they learned of an apparel wholesaler
who sells primarily via an electronic catalog. Customers of this wholesaler
can use their personal computer and their telephone to access this
catalog and receive color pictures of all merchandise. All orders can be
placed and paid electronically. To purchase the proper modem and
software will cost $500 and telephone charges would be $50 monthly.
This $500 for software and modem should be treated as an increased
cost vs. an asset since it is likely that regular software updates and new
modems that are faster will be purchased annually. The wholesaler sells
apparel at the same prices as could be obtained by purchasing direct
from manufacturers. In addition this wholesaler pays all freight charges
on orders over $4,500. Currently Fred and Anne are paying all freight
charges, therefore they expect to save 2% of sales. Since Anne and Fred
will only need to take one trip a year to New York City to observe apparel
trends, they will also save $5,850 per year in travel costs. What would be
the impact on store performance of switching to this wholesaler?
under the new wholesaler scenario in the simulation. If the formula or
formulas or numbers into the empty cells under the new scenario. Be
below the questions, saving your work, printing a copy, and handing it in
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EXERCISE FIVE-A
Baseline Model Use New Wholesaler

traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the financial impact of switching to the new wholesaler?
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2. What other advantages might accrue to The House as a result of
dealing with this wholesaler? How might these impact other variables in
the simulation model?
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PHASE TWO
EXERCISE FIVE-B
The Impact of New Merchandise Supply Sources
Recently, while attending a state-wide Chamber of Commerce

meeting, Fred met Carolyn Neal, who was the owner of a cut and sew
apparel manufacturing facility in a small town in the southeastern part of
the state. Carolyn was primarily making apparel for large retailers such
as Wal*Mart, however, she felt she was becoming too dependent on only
a few large customers and wanted to diversify her customer base. Fred
obtained her business card. When he returned home he called Carolyn
and arranged for Anne and himself to have dinner with her to discuss
some business possibilities. Carolyn suggested she manufacture a line of
private label women's and girl's apparel. If The House could guarantee to
purchase $20,000 per quarter with a minimum order of $15,000, and pay
within 30 days of shipment, then Carolyn would be willing to private label
merchandise for The House. Both Fred and Anne believe that their own
store apparel label will help enhance the image of The House and,
consequently, attract more business.
After discussing the possibility for a few weeks, Fred and Anne
decided to move forward on contracting for the development of their own
store brand of women's and girl's apparel. They negotiated a price that
would essentially increase their storewide gross margin to 40%, however,
with the high minimum order size, their inventory investment would rise
by $16,000, and thus they expect total assets to rise a similar amount.
The House will spend an additional $20,000 a year on advertising this
new line of merchandise. It is estimated that the new private label will
result in penetration increasing to 67% or 68%.
under the two scenarios (penetration 67% or 68%) in the simulation. If
the formula or number does not change from the baseline, you can
simply copy these formulas or numbers into the empty cells under the
various scenarios. Be sure to save your work and print a copy once you
are satisfied with its correctness. After you complete your simulation
there are two questions you need to answer. These can be answered by
typing your responses below the questions, saving your work, printing a
copy, and handing it in to the instructor if required.
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EXERCISE FIVE-B
Baseline Model Penetration 67% Penetration 68%

traffic 39987
closure rate 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the financial impact of developing and marketing the private

brand of women's and girl's apparel?
2. What other advantages might accrue to The House as a result of

developing a private brand? How might these impact other variables in
the simulation model?
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PHASE TWO
EXERCISE SIX-A
The Impact of Changing Local Legislation

on Store Performance
Recently, legislation was passed and will take effect in early 2002
that will require commercial buildings to have sprinkler systems for fire
control purposes. The building The House occupies is 45 years old and is
not equipped with a sprinkler system. Anne and Fred recently received a
letter from Bill Henderson (Anne's father) informing them that he can't
afford the $42,000 to install the sprinkler at the current lease rate of
$3,000 monthly. The Harris’ lease expires at the end of 2001 and Bill
Henderson has presented them two options. Option one is to extend their
lease until 2006 and have The House pay the leasehold improvement
costs, and then write these leasehold improvements off over the five
years of the new lease. Under this option their rent would remain at
$3000 monthly. The House would use its line of credit at the bank to
borrow $42,000 at 10% interest. The sixty monthly principal and interest
payments on this loan would be $892.38 and the entire amount could be
written off as a business expense. Option two would be to enter into a
new annual lease at $4000 per month. Which option should they take?
under the two scenarios (increased rent vs. making leasehold
improvements) in the simulation. HINT: For the leasehold
improvement option, assume that total assets rise by $42,000,
which is the amount of leasehold improvements. If the formula or
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EXERCISE SIX-A
Baseline Model Leasehold Expense New Lease

traffic 39987
closure rate 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the financial impact of the different lease options?
2. If the leasehold option is pursued, what other considerations need to

be made?
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PHASE TWO
EXERCISE SIX-B
The Impact of a National Sales Tax on

Store Performance
Anne and Fred just learned that the federal government is

considering enacting a national sales tax of 1 or 2% on all non-food
purchases. So that customers of The House will not feel this impact if the
federal government proceeds with this tax, they have decided to absorb
the costs of this federal legislation. Please simulate the impact of this
action on the net profit margin, asset turnover, and return on assets.
under the two scenarios (1% national sales tax or 2% national sales tax)
in the simulation. HINT: For the absorption of the rise in sales tax,
increase the variable operating expenses. If the formula or number
does not change from the baseline, you can simply copy these formulas
or numbers into the empty cells under the various scenarios. Be sure to
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EXERCISE SIX-B
Baseline Model 1% Natl Sales Tax2% Natl Sales Tax

traffic 39987
closure rate 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. Which financial ratio was most impacted by the national sales tax? Why?
2. Should The House attempt to absorb all of the national sales tax into its
cost of doing business and not pass on any increase to the customer? Why or
why not?
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PHASE THREE SPREADSHEET MODEL:
BASIC CONCEPTS
The problems you will work in phase three relate to Part

Three--"Location Analysis" of Retailing (2002) by Dunne, Lusch and
Griffith. The new concepts you need to be familiar with concern the trade
area of a retail store. Previously we discussed market coverage. In this
phase we learn about the determinants of market coverage. An
understanding of the following terms is necessary:
• trade area is the geographic area from which a retailer draws

its customers.
• trade radius is the number of miles from the store from which
customers are attracted. This concept assumes that a store's
trade area is represented by a circle surrounding the store. The
trade radius would be the radius of that circle.
• population density is the number of people or households per

square mile within the store's trade area. In this simulation we
use households as the measure of population density.
If one combines the concept of market coverage, which we

introduced in phase two, with the preceding concepts, one can obtain the
following relationship.
market coverage = (22/7) * (trade radius squared) * (population

or household density)
To understand the preceding you need to recall that the formula for
the area of a circle is pi times the square of the radius of the circle.
Where pi is the mathematical constant of 22/7 or 3.142857. Recall that
we are assuming that the trade area is circular. If we take pi times the
radius squared we get the number of square miles in a circle or the
number of square miles in the trade area. If we then multiply this by the
population or household density we obtain the total number of people or
households in the trade area, or what we refer to as market coverage.
The spreadsheet model you will be working with in the phase three
exercises is as follows:
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SAMPLE SPREADSHEET
PHASE THREE

trade radius 3
population density 278.833
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
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PHASE THREE
EXERCISE SEVEN-A
Evaluating a New Location for The House
Currently The House is located on the Town Square and draws

customers from a three-mile radius that encompasses the entire
community.
Fred and Anne are considering opening a second store at the edge
of town across the street from the Wal*Mart Discount Department Store.
The Wal*Mart attracts people from the local community and the
surrounding five smaller towns which are within a 15-mile radius of the
Wal*Mart. The population density within this 15-mile trade area averages
21.2 households per square mile.
The building Fred and Anne are considering leasing is 4500 square
feet. Hours of operation would be 10 a.m. to 8 p.m., Monday-Saturday.
They expect monthly fixed operating costs (which include rent) to
be $9000 and variable operating costs to be 12% of sales. They expect
that the average transaction size will be $ 37.50. This is considerably
lower than their main store because they believe that most customers
will be attracted to shop at the store while they are making a trip to
Wal*Mart. Thus, they believe most purchases will be fill-in purchases and
not as a result of a destination visit to the store to purchase specific
merchandise. The gross margin percent is expected to be the same as for
the main store of The House.
Virtually all of the visits will be due to intercepting traffic from the
Wal*Mart across the street. They estimate that the Wal*Mart has a 90%
penetration level and an average shopping frequency of 14. Fred and
Anne estimate that their penetration the first year will be 36% and the
average shopping frequency will be 2.5 times per year. In the second
year they expect the penetration to rise to 42% and average shopping
frequency to rise to 3.0 times per year. For both years they estimate
closure will be 65%.
Approximately $80,000 will need to be invested in leasehold
improvements and fixtures and $140,000 in inventory. They will also plan
to have $30,000 in cash available when they start business for
unexpected expenses or losses. Thus, they expect their total assets to be
$250,000.
under the two scenarios (year one and year two of the new retail store) in
the simulation. Note that there are no baseline formulas for this problem.
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Since you are starting a new store there is no base of comparison. Thus
for the first year you need to enter the formula and/or data for each row.
HINT: You can refer back the phase three prototype model to see
how some of the formulas are set up. If the formula or number does
not change from the baseline you can simply copy these formulas or
numbers into the empty cells under the various scenarios. Be sure to
to the instructor if required
EXERCISE SEVEN-A
Year One Year Two

trade radius
population density
market coverage
penetration level
avg shopping frquency
traffic
closure
transactions
avg transaction size
net sales
cost of mdse sold
gross margin
varaible op cost
fixed op cost
total op cost
net profit
net profit margin
asset turnover
return on assets
QUESTIONS
1. Is the proposed new location for The House economically viable?

Explain.
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2. Do you have any suggested strategies that would make The House
more profitable in the first year of operation?
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PHASE THREE
EXERCISE SEVEN-B
The Impact of a Second Location on the Existing Location
Fred and Anne are concerned with how their proposed new store
may impact the performance of their existing store. Both believe their
trade area will continue to be a three-mile radius within which the
population density is 278.833 households per square mile. However,
because their new store will somewhat cannibalize their existing store,
they have predicted that their penetration would drop to 62% and
average shopping frequency would decline to 7.5 times. On the other
hand, they believe that they can partially counteract this cannibalization
by working more diligently to improve closure. They believe that closure
can rise from 62% to 65% with more selling effort.
under the cannibalization scenario. If the formula or number does not
change from the baseline, you can simply copy these formulas or
numbers into the empty cells under the cannibalization scenario. Be sure
to save your work and print a copy once you are satisfied with its
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EXERCISE SEVEN-B
Baseline Model Cannibilization

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the financial impact of the proposed new store on the existing
store?
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2. Can you think of any other things that might be done to minimize the
cannibalization effect of the new store?
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PHASE FOUR SPREADSHEET MODEL:
BASIC CONCEPTS
The problems you will work in phase four relate to chapters 8 and 9
in Part Four--"Managing Retail Operations" of Retailing (2002) by Dunne,
Lusch and Griffith.
Chapters 8 and 9 deal with financial planning but focus primarily on
developing a six-month merchandise budget. For the problems in this
section you need to understand the following concepts which will allow
you to develop a six-month merchandise budget.
• planned sales for the month = (planned sales percentage for

the month)*(planned total sales)
• planned BOM stock for the month. There are three methods
we will deal with:
1. the stock-to-sales method. The planned BOM stock for

the month = (planned sales for the month)*(planned BOM
Stock-to-Sales Ratio for the month)
2. the basic stock method. The planned BOM stock for the
month = basic stock + planned monthly sales. Where the
basic stock = average stock for the season - average
monthly sales for the season
3. the percentage variation method. The planned BOM

stock for the month = (average stock for
season)*(1/2)[1+(planned sales for the month/average
monthly sales)]
• planned retail reductions for the month = (planned sales

for the month)*(planned retail reduction percentage for the
month)
• planned EOM stock for the month = (planned BOM stock for
the following month)
• planned purchases at retail for the month = (planned sales

for the month) + (planned retail reductions for the month) +
(planned EOM stock for the month) - (planned BOM stock for the
month)
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• planned purchases at cost for the month = (planned
purchases at retail for the month) * (100% - planned initial mark
up percentage)
• planned initial markup for the month = (planned purchases

at retail for the month) - (planned purchases at cost for the
month)
• planned gross margin for the month = (planned initial

markup for the month) - (planned retail reductions for the
month)
The merchandise budget for exercises 8a and 8b will be as follows. For

exercises 9a and 9b the framework will be slightly modified and this will
be explained shortly. Please note that this sample budget is not yet set
up as a spreadsheet, it is simply a table which represents what a six-
month merchandise budget should look like.
SAMPLE
SIX-MONTH MERCHANDISE BUDGET
Feb March April May June July Total

Planned
BOM
Stock
Planned
Sales
Planned
Retail Re-
ductions
Planned
EOM
Stock
Planned
Purchases
at Retail
Planned
Purchases
at Cost
Planned
Initial
Markup
Planned
Gross
Margin
Planned
BOM Stock
-to-Sales
Ratio
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Planned
Sales
Percentage
Planned
Retail
Reduction
Percentage
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PHASE FOUR
EXERCISE EIGHT-A
Developing a Six Month Merchandise Budget

Using BOM Stock to Sales Method
Anne Harris is in the process of developing the merchandise budget

for The House for the first six months of 2002. Planned sales for the first
half of 2002 are $620,000 and this is divided as follows: February = 9%,
March = 11%, April = 14%, May = 21%; June = 22%; July = 23%. Planned
total retail reductions are 5% for February and March, 8% for April and
May, and 12% for June and July. The planned initial markup percentage is
47%. The planned BOM Stock-to-Sales ratio for each month is as follows:
February = 5.9, March = 5.2, April = 5.0, May = 5.0, June = 4.0, July =
5.0. Also they want to begin the second half of the year with $650,000 in
inventory at retail.
Excel software. Please note that all rows and columns have been labeled.
You will need to study the formulas below and enter them into the
spreadsheet. Be sure to save your work and print a copy of it once you
are satisfied with its correctness.
The formula for each row is as follows:
• planned BOM stock for the month = (planned sales for the
month)*(planned BOM Stock-to-Sales Ratio for the month)

the month)*(planned total sales or $620,000)

month)

month)
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purchases at retail for the month) * (1.0 - planned initial mark up
percentage)

month)

month)
• planned BOM stock-to-sales ratio = 5.9 for February, 5.2 for

March, 5.0 for April and May, 4.0 for June and 5.0 for July.
• planned sales percentage by month = February 9%, March

11%, April 14%, May 21%, June 22%, July 23%.
• planned retail reduction percentage by month = 5% for

February and March, 8% for April and May, and 12% for June and
July.
EXERCISE EIGHT-A
Feb-98 Mar-98 Apr-98 May-98 J un-98 J ul-98 Total

Plan BOM Stock
Plan Sales
Plan Rtl Reductions
Plan EOM Stock
Plan Purch @ Rtl
Plan Purch @ Cost
Plan Initial Markup
Plan Gross Margin
Plan BOM Stk to Sales
Plan Sales %
Plan Rtl Reduction %
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PHASE FOUR
EXERCISE EIGHT-B

BOM Stock to Sales Method

for The House for the first six months of 2002. Planned sales for the first
half of 2002 are $620,000 and this is divided as follows: February = 9%,
March = 11%, April = 14%, May = 21%; June = 22%; July = 23%. Planned
total retail reductions are 8% for February and March, 5% for April and
May, and 10% for June and July. The planned initial markup percentage is
47%. The planned BOM Stock-to-Sales ratio for each month is as follows:
February = 6.1, March = 5.3, April and May = 5.0, and June = 4.1, July =
5.2. Also they want to begin the second half of the year with $650,000 in
inventory at retail.
spreadsheet. Be sure to save your work and print a copy of it once you
are satisfied with its correctness.
• planned BOM stock for the month = (planned sales for the
month)*(planned BOM Stock-to-Sales Ratio for the month)


month)

month)
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percentage)

month)

month)
• planned BOM stock-to-sales ratio = 6.1 for February, 5.3 for

March, 5.0 for April and May, 4.1 for June, and 5.2 for July.


July.
EXERCISE EIGHT-B

Plan BOM Stock
Plan Sales
Plan Rtl Reductions
Plan EOM Stock
Plan Purch @ Rtl
Plan Purch @ Cost
Plan Initial Markup
Plan Gross Margin
Plan BOM Stk to Sales
Plan Sales %
Plan Rtl Reduction %
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PHASE FOUR
EXERCISE NINE-A

Using the Basic Stock Method

for The House for the first six months of 2002. They have decided to
utilize the basic stock method of merchandise budgeting. Planned sales
for the first half of 2002 are $620,000 and this is divided as follows:
February = 9%, March = 11%, April = 14%, May = 21%; June = 22%; and
July = 23%. Planned total retail reductions are 8% for February and
March, 5% for April and May, and 12% for June and July. The planned
initial markup percentage is 47%. They desire the rate of inventory
turnover for the season to be two times. Also they want to begin the
second half of the year with $390,000 in inventory at retail.
spreadsheet. Be sure to save your work and print a copy once you are
satisfied with its correctness.
• planned BOM stock for the month = basic stock + planned

monthly sales
• basic stock = average stock for the season - average monthly

sales for the season
• average monthly sales for the season = total planned sales

for the season/number of months in the season
• average stock for the season = total planned sales for the
season/estimated inventory turnover rate for the season


month)
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month)

percentage)

month)

month)


July.
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EXERCISE NINE-A
Feb-98 Mar-98 Apr-98 May J un-98 J ul-98 Total

Plan BOM Stock
Basic Stock
Avg Monthly Sales
Avg Stk for Season
Plan Sales
Plan Rtl Reductions
Plan EOM Stock
Plan Purch at Rtl
Plan Purch at Cost
Plan Initial Markup
Plan Gross Margin
Plan Sales %
Plan Rtl Reductn %
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PHASE FOUR
EXERCISE NINE-B

Using the Percentage Variation Method

for The House for the first six months of 2002. They have decided to
utilize the percentage variation method of merchandise budgeting.
Planned sales for the first half of 2002 are $620,000 and this is divided as
follows: February = 9%, March = 11%, April = 14%, May = 21%; June =
22%; July = 23%. Planned total retail reductions are 8% for February and
March, 5% for April and May, and 12% for June and July. The planned
initial markup percentage is 47%. They desire the rate of inventory
turnover for the season to be two times. Also they want to begin the
second half of the year with $390,000 in inventory at retail.
spreadsheet. Be sure to save your work and print a copy once you are
satisfied with its correctness.
• planned BOM stock for the month = average stock for

season *(1/2)[1+(planned sales for the month/average monthly
sales)]
• average monthly sales for the season = total planned sales

for the season/number of months in the season
• average stock for the season = total planned sales for the
season/estimated inventory turnover rate for the season


month)
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month)

percentage)

month)

month)


July.
EXERCISE NINE-B

Plan BOM Stock
Avg Monthly Sales
Avg Stck for Season
Plan Sales
Plan Rtl Reductions
Plan EOM Stock
Plan Purch at Rtl
Plan Purch at Cost
Plan Initial Markup
Plan Gross Margin
Plan Sales %
Plan Rtl Reductn %
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PHASE FIVE SPREADSHEET MODEL:
BASIC CONCEPTS
The problems you will work in phase five relate to chapters 9-13 in
Part Four--"Managing Retail Operations" of Retailing (2002) by Dunne,
Lusch and Griffith. These decisions are primarily merchandising, pricing,
advertising and promotion, store design and layout, and personal selling.
To complete the problems in this section you need to understand
the following concepts:
• average number of items purchased is the number of items

the typical customer purchases on a visit to the store
• average item price is the average price which a customer pays

for an item purchased at the store
• total items purchased is the total number of items that are

sold by the store over a one year period
Utilizing the preceding concepts coupled with the concept of total

transactions we can establish the following relationships.
• average transaction size = (average number of items

purchased) * ( average item price)
• average number of items purchased = (total items

purchased)/(total transactions)
The spreadsheet model you will be working with in the phase five
exercises is as follows:
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SAMPLE SPREADSHEET
PHASE FIVE

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
avg no. of items purchsed 5
total items purchased 123960
average item price $10.69
average tranaction size $53.45
net profit $47,455
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PHASE FIVE
EXERCISE TEN-A
Evaluating the Impact of a Price Increase
Fred and Anne have built a very loyal group of customers that
patronize The House. Although only 62% of visitors actually make a
purchase, they purchase an average of five items. These items have an
average item price of $10.69, which results in an average transaction
size of $53.45. The cost of goods is 62% of sales and the gross margin
return on sales is 38%. Anne has argued that they should be less
concerned with closure and more concerned with higher prices and thus a
higher gross margin percent. She has proposed that they raise prices by
10%. Under this scenario the cost of goods sold as a percent of sales
would be (.62/1.1) or 56.36% and the gross margin return on sales would
be 43.64% (100% - 56.36%).
Fred has argued that if they raise prices by 10% that average items
sold per customer would drop 20%. On the other hand, Anne argues that
their customers are not that aware of prices and that although some
customers will decide not to buy due to the higher prices, that this will
not be large. She believes that a 10% price increase will result in a 12%
drop in average items purchased.
under the two scenarios (10% price increase and 12% or 20% reduction
in average number of items purchased) in the simulation. If the formula
or number does not change from the baseline, you can simply copy these
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EXERCISE TEN-A
Baseline Model Av Itms Purch Drp 12% Av Itms Purch Drp 20%
trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
avg no. of items purchs 5
total items purchs 123960
cost of mdse $821,581
net profit $47,455
QUESTIONS
1. Should prices be raised by 10%? Explain.
2. Are there other parameters in the model that might be influenced by

the price increase? Explain.
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PHASE FIVE
EXERCISE TEN-B
Evaluating the Impact of a Price Decrease
Fred mentioned to Anne if a price increase of 10% were to be

profitable then shouldn't they also consider what might happen if they
dropped prices by 10%? He argued that with a 10% price decrease that
the average number of items purchased would go up by at least 20%.
Anne disagreed because she felt that customers would not notice a 10%
price decrease. She felt that if prices went down 10% that at most the
average number of items purchased would rise by 12%. Under this
scenario the cost of goods sold as a percent of sales would be (.62/.9) or
68.89% and the gross margin percent would be 31.11% (100% - 68.89%).
under the two scenarios (10% price reduction and 12% or 20% increase
in average number of items purchased) in the simulation. If the formula
or number does not change from the baseline, you can simply copy these
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EXERCISE TEN-B
Baseline Model Av Itms Prchs Up 12% Av Itms Prchs Up 20%

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
avg no. of items prchs 5
total items prchs 123960
cost of mdse $821,581
net profit $47,455
QUESTIONS
1. Evaluate the financial impact of the proposed price decrease.
2. What other considerations should be taken into account other than the
impact on closure of the proposed price decrease? Why are these other
considerations important?
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PHASE FIVE
EXERCISE ELEVEN-A
Evaluating the Impact of a New Advertising Campaign
The advertising and promotion for The House consists of a half-

page advertisement in the Saturday newspaper, a weekly one-inch
advertisement in two church bulletins, a full-page advertisement in the
high school yearbook, sponsorship of a float in the Fourth of July parade,
and sponsorship of the local high school football and basketball teams.
The local newspaper advertising is $300 per week, the advertisements in
the church bulletins is $1000 per year, the ad in the yearbook is $500,
the parade float is $2500, and the team sponsorships are $2500 each. In
addition, there are a variety of other advertising and promotions that
vary each year but generally total less than $20,000 annually. Advertising
has been approximately 3.2% of sales.
Currently all of the advertising/promotion has a long-run objective
of improving store performance by promoting the store image. Anne
believes that the advertising expenditures need to have a short-term
objective such as attracting new customers and increasing patronage
from existing customers. She also believes that The House needs to
spend a minimum of $1,500 per month with expenditures concentrated
during periods of peak demand (March-May and November-December).
Anne has recommended the following advertising expenditures:
January and February = $1,500, March = $2,000, April and May = $3,000,
June = $2,000, July-September = $1,500, October = $4,000, November -
December = $7,000. Furthermore, 40% would be spent on the local AM
Radio station and 60% on the local newspaper. All advertising will feature
items on sale. As a result, Anne believes that penetration will rise to 68%
and the average number of items purchased will rise from 5.0 to 5.2 or
5.3. Since advertising will be directed at the local trade area, she does
not expect the trade radius to increase.
under the two scenarios (average items 5.2 or 5.3) in the simulation. If
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copy, and handing it in to the instructor if required
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EXERCISE ELEVEN-A
Baseline Model av itms prchs = 5.2 av itms prchs = 5.3

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
avg no. of items prchsd 5
total items prchsd 123960
net profit $47,455
QUESTIONS
1. Should The House change the advertising strategy? Explain.
2. Are there any problems in switching the advertising program from

short-term sales objectives to the long run objective of store image
enhancement? How might these problems be overcome?
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PHASE FIVE
EXERCISE ELEVEN-B
Using Advertising to Expand the Trade Area
There are five smaller towns that surround the community of

Hamilton where The House is located. Generally people in these towns
travel regularly to Hamilton to shop at Wal*Mart. These towns are within
a 15-mile radius and range in size from 520 to 1650 households.
However, five miles to the east is a town of 610 households and five
miles to the west is a town of 642 households. Fred believes that The
House should begin an advertising program in each of these towns. Each
town has a small weekly newspaper which could be used to reach these
geographic markets. With this expanded trade area of five miles, the
total households of the trade area would be 9,139, (7,887 + 610 + 642).
The density of households in this five-mile circular trade area is 116.315
households per square mile.
The annual cost of advertising twice a month in these two weekly
newspapers would be $7600. With this advertising expenditure, Fred
estimates that penetration would decline to 62% and average shopping
frequency would drop to 7.5 times. This would occur because of the
larger size of the trade area and the inherent increased travel time for
the typical customer. However, with the larger number of households to
serve, he believes that such an advertising strategy would be profitable.
Anne also believes that such an approach would be valuable but wonders
if they shouldn't consider what would happen if average shopping
frequency declined to 7.2 times.
under the two scenarios (average shopping frequency = 7.5 or 7.2) in the
work, printing a copy, and handing it in to the instructor if required
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EXERCISE ELEVEN-B
Baseline Model Av Shopping Fqcy 7.5 Av Shopping Fqcy 7.3

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the financial impact of the proposed advertising strategy?
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2. How might other promotional efforts be tied into this advertising
strategy?
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PHASE FIVE
EXERCISE TWELVE-A
The Impact of a Store Layout and Design Strategy
Anne just returned from attending a three-day executive

development program on high performance retailing. One of the topics
she was especially interested in was how to design a store's environment
to enhance the store's image. She was considering a major remodeling of
The House. Anne envisioned three major changes. First she felt that the
orange carpeting was inconsistent with the store's image and usually
conflicted with the apparel being displayed. Therefore, she was
considering installing new flooring and freshly painting the walls and
ceiling. The cost of the flooring and painting would be $10,000. Next, she
wanted to install a C.D. sound system which consisted of a six-disc
changer, amplifier, and four speakers in each of the four corners of the
store. She also wanted to purchase 30 recordings of classical and big
band music. The cost of this system would be $2800. Third, she wanted
an entire new set of fixtures and tables upon which to display the
merchandise. A local carpenter has given her an estimate to custom build
these fixtures. The cost would be $24,000. These improvements would be
expected to have a five-year life and, thus, the $36,800 written off over
the next five years would be $7360 per year.
When Anne told Fred of her planned changes he balked at the
$36,800 in expenditures. He couldn't understand how such changes
would have any influence on store performance. He was very clear that
these changes would not bring more customers into the store. Anne
conceded on this point but argued that the impact would be felt through
a higher closure. Because people would feel more comfortable in the
store and probably browse more, she felt that closure would rise. The
instructor in the course she attended mentioned that a remodeling effort,
if properly conducted, would increase sales by 20-30%. Nonetheless,
Anne was very uncertain on what the impact on closure would be and
thus her conservative estimate was that it might only increase to 65%,
however, her optimistic estimate was that closure would rise to 70%.
under the two scenarios (closure = 65% or 70%) in the simulation. If the
formula or number does not change from the baseline, you can simply
copy these formulas or numbers into the empty cells under the various
scenarios. HINT--Treat the amount of the remodeling as a
permanent increase in assets even though these assets will be
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depreciated over five years. Be sure to save your work and print a
work, printing a copy, and handing it in to the instructor if required
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EXERCISE TWELVE-A
Baseline Model Closure = 65% Closure = 70%

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. What is the financial impact of the store layout and design strategy?
2. Do you see any ways that The House could reduce the risk of this store
layout and design strategy? Please explain.
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PHASE FIVE
EXERCISE TWELVE-B
A Further Evaluation of a Store Layout and Design Strategy
Anne contacted Larry Jones, the instructor she had in the "High
Performance Retailing" executive development seminar. Larry lived 150
miles north and agreed to drive down to visit Anne and Fred on Friday
morning to hear about their plans. He said he would like to visit with
them for about an hour and also spend some time visiting other stores on
the Town Square and driving around town. He hoped to accomplish all of
this in 4-5 hours so he could leave town by 4 p.m. Anne and Fred agreed
to pay him $2000 for his services and billed this expense to the year end
2001 financial statements.
Larry was very impressed with the plans that Anne had developed.
Based on his prior experience and the target market of The House, he
estimated that closure would rise to 70%. He explained that they were
correct in assuming that all of the benefit of the remodeling would occur
once people had entered the store. However, he did believe, based on
the large number of people visiting the Town Square to go to the U.S.
Post Office, local government offices, and obtain other services, that if
they could also remodel the exterior of the store that penetration could
be expected to rise. Also he felt the dark brown wooden storefront
projected an image that was inconsistent with the remodeled interior. He
suggested that they use a red brick front, utilizing old or used brick, and
that a new sign be installed to call attention to the store. With these
additional changes he felt that not only would closure rise, but that
penetration would easily rise to 67% or 68%. Larry also mentioned that if
other businesses on the town square could remodel their store or building
exteriors, that more people might find it pleasant to visit the Town
Square.
After Larry left town, Anne called their landlord, Bill Henderson,
who was also Anne's father. She told him of her plans to remodel the
store and suggested that if Fred and her do the interior remodeling, that
Bill should pay for the exterior remodeling. Anne had obtained a cost
estimate of $15,000 which she mentioned to her dad. After some
negotiating, Bill Henderson and Anne decided to split the cost of the
exterior remodeling. Like the interior remodeling, they decided to write
this expenditure off over 60 months.
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under the two scenarios (penetration = 67% or 68%) in the simulation. If
various scenarios. HINT--Treat the amount of the exterior
remodeling as a permanent increase in assets even though these
assets will be depreciated over five years. Also be sure to include
the interior remodeling into the simulation model (see Exercise
12-a). Be sure to save your work and print a copy once you are satisfied
with its correctness. After you complete your simulation there are two
questions you need to answer. These can be answered by typing your
responses below the questions, saving your work, printing a copy, and
handing it in to the instructor if required
EXERCISE TWELVE-B
Baseline Model Penetration 67% Penetration 68%

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. Should the recommendations of Larry Jones be acted upon?
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2. Are there any other things that could be done with The House to
further enhance the store's atmosphere?
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PHASE FIVE
EXERCISE THIRTEEN-A
Evaluating the Impact of a Personal Shopping Service
Several years before Bill Henderson sold The House to Anne and
Fred he started maintaining a database on regular customers. This
database revealed that about 60% of the business is from a core of 900
households. Many of these households are two income households where
both husband and wife work full time. These individuals are always
pressed for time and put off shopping until the last moment, however,
when they purchase, their average transaction size is $181. Fred and
Anne both believe that these customers would be very supportive of a
personal shopping service.
Fred and Anne believe that as part of their database they could
record the birth dates, anniversaries, and other significant dates for all
family members, relatives, and significant friends. They could then offer
to customers a personal shopping service where gifts for friends could be
purchased and the apparel needs of the household could be handled.
Fred and Anne are quite uncertain about the impact of this personal
shopping service. They believe that it might increase total transactions
by 1,000 to 1,600 per year and that the average transaction size for
these transactions will be $65 (excluding delivery charges). To do a
promotional mailing to the 900 target households with an enclosed
questionnaire and participation form would cost $2,000. They anticipate
sending out this questionnaire annually so customers can provide
information to update the database. Furthermore, they plan to spend
$5,000 annually promoting this new shopping service.
under the two scenarios (1,000 or 1,600 personal shopping transactions)
in the simulation. If the formula or number does not change from the
baseline, you can simply copy these formulas or numbers into the empty
cells under the various scenarios. Be sure to save your work and print a
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EXERCISE THIRTEEN-A
Baseline Model 1000 Prs Shp 1600 Prs Shp

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
prs shopping trans $0.00
av trans prs shop tran $0.00
net profit $47,455
QUESTIONS
1. Should The House institute a personal shopping service?
2. Do you have any suggestions on how the personal shopping service

might become more profitable?
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PHASE FIVE
EXERCISE THIRTEEN-B
Evaluating a Salesforce Training Program
The House employs several clerks that work full or part-time while
either Anne or Fred are in the store. Neither Fred, Anne, nor the clerks
attempt to do any selling. If someone needs help, they are there to assist
but otherwise no type of selling occurs. Fred recently read an article in a
trade publication that emphasized the role of order getters vs. order
takers. Fred initially thought that given the low average item price in the
store that any selling effort would not be worth the effort or would be
ineffective. However, one of the things the article emphasized was the
role of suggestion selling. He thought this had some real possibility. For
example, if a customer bought a shirt the clerk could suggest a tie or
slacks. After Fred visited with Anne about his ideas she mentioned that
one of the reasons that closure might be low (62%) was because of
virtually no selling effort in the store. She argued that by being a bit
more aggressive, but still polite and courteous, that the closure rate
would rise.
Fred became aware of a retail personal selling seminar being
offered in New York. This course was tied in with one of the major apparel
shows and was a day in length and cost $395 per person. For an
additional $100 each participant would receive a weekly newsletter with
helpful selling tips. The course was taught by Martha Hernandez, who
had 20 years experience as an apparel buyer, salesperson, and business
owner. Martha had launched a chain of 12 womenswear stores in the late
1970s, which she subsequently sold for $6.5 million.
Fred and Anne decided to both attend and to take their four full-
time clerks. The total cost including travel, registration, lodging, and the
one-year subscription for the weekly newsletter was $12,000. Based on
the brochures promoting the program and some of his own analysis and
projections, Bill set a goal of increasing closure to 68% and the average
number of items purchased to 5.3. He also thought that a possibility
existed of closure reaching 70%.
under the two scenarios (closure = 68% and 70%) in the simulation. If
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copy, and handing it in to the instructor if required.
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EXERCISE THIRTEEN-B
Baseline Model Closure 68% Closure 70%

trade radius 3
penetration 0.65
traffic 39987
closure 0.62
transactions 24792
net profit $47,455
QUESTIONS
1. Should Fred and Anne follow through with the personal selling seminar
as planned? Why?
2. Are there any other suggestions you have to improve the personal
selling strategy of The House?
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Western
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The House

"Understanding A Retail Enterprise Using

Retailing, Fifth Edition

Copyright © 2005 by South-Western

All right reserved. No part of this product may be reproduced,

The House is a spreadsheet analysis of the financial performance of

• The models can be used to further acquaint you with how

Spreadsheet analysis, often referred to as worksheet analysis, is a

• A cell is the intersection of a column and row.

Data is entered into a spreadsheet by highlighting the cell the data

Typically a formula is entered by highlighting the cell in the

In The House whenever you have a percent to enter into the

Hamilton is centrally located near several other communities. The

The House has 40% of its sales in menswear, 35% in womenswear,

The retail environment of Hamilton is typical of small college towns.

You will probably find it helpful to reread this brief description of

The problems you will work in phase one relate to part

• Net Sales is the dollar value of annual sales.

• Cost of Merchandise Sold is the monetary amount owed or

• Gross Margin is the Net Sales minus the Cost of Merchandise

• Variable Operating Cost are costs that increase

• Fixed Operating Costs are the costs the retailer incurs

• Total Operating Cost is the sum of fixed operating and

• Net Profit is the amount remaining after total operating costs

• Net Profit Margin is the ratio of net profits divided by net

• Asset Turnover is the ratio of net sales divided by total assets.

• Return on Assets is net profit divided by total assets. If the

(net profit/net sales) * (net sales/total assets) = (net profit/total

(net profit margin) * (asset turnover) = (return on assets)

The Negative Impact of External Forces on

Anne and Fred just learned that Creative Ceramics, a producer of

1. Which financial ratio was most impacted by the decline in population?

2. Which costs are affected by the sales decline? Why?

The Positive Impact of External Forces on

Baseline Model 1% sales increase1.5% sales increase2% sales increase

1. Which financial ratio was most impacted by the reduction in

2. Which costs are affected by the sales increase? Why?

The Impact of Different Marketing and Financial

Baseline Model Expand Store Hours Direct Mail Catalog

The Impact of Different Marketing and Financial

The House is considering handling a line of higher priced women's

Baseline Model Fin Inv Internally Fin Inv Externally

1. Which alternative should be used to finance the increased inventory

• market coverage is the number of households residing in the

• penetration level is the percent of households residing in the

• average shopping frequency is the average number of times

• traffic is the total number of household visits to the store

• closure is the percent of households who visit the store that

• transactions are the annual number of customers who make a

• average transaction size is the average dollar value of a

You also need to understand the following relationships between

• traffic = (market coverage) * (penetration level) * (average

• transactions = (traffic) * (closure)

• net sales = (transactions) * (average transaction size)

Baseline Model Model-A Model-B

The Impact of Improved Demographics on

Anne and Fred have merchandised The House to appeal to a broad

Baseline Model Improved Mkt Coverage

1. Why did a modest increase in market coverage have such a significant

2. Should The House attempt to appeal more to college students and

The Impact of Altering the

1. What is the impact of the College Shop strategy on traffic and