MK13 - Profile of Retail Environment _ACV_ Tutorial_Fall2023

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1 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 1 MK323 – Marketing Management Tutorial: Profile of the Retail Environment (ACV and Distribution) Tutorial created by Jonathan Hibbard and Deborah Utter Revised by Jonathan Hibbard and Lorri Veidenheimer October, 2023 This tutorial is your roadmap for creating a successful distribution strategy for your project. We help you understand how to build a profile of the retail environment so you can measure all commodity volume — a metric critical to your forecast. We’ve created strategy rules to mimic the difficulty for an upstart to attain widespread distribution. We review your salesforce options and costs, expected research, and we spend the bulk of this tutorial helping you breakdown the year-by-year decisions and calculations. Your distribution strategy explains how your channel mix changes over the five-year plan, indicates the price you will sell the product into each channel, the margins that channel players will earn, the sales volume in each channel, and the ACV that you use in the sales forecast. Distribution Assumptions and Rules: • In Years 1 and 2, teams are required to use independent retailers--small chains with less than 20 stores--as well as Amazon, which will be your only strictly online retailer o Once you have a retail sales history, larger, or national chains and mass merchants will be more likely to accept your product into a portion of their retail locations o The year you enter national retailers you, will experience channel conflict and should reduce your Independent channel ACV by 20%. Please show this conflict analysis in your workshop and in your final plan • In Year 3, teams are allowed to enter one large chain store (see notes on store acceptance and penetration) • In Year 4, teams are allowed to enter one mass merchant (see notes on store acceptance and penetration) • Assume if you enter a chain, e.g., Walgreens, that all of their online sales also includes any data you find about Walgreens • Teams may not sell only on Amazon for all five years • No teams are allowed to use QVC and Home Shopping Network or similar channels for their products as the likelihood of acceptance is very low • Maximum ACV for your target segment CANNOT exceed 35% (and will likely be lower) Salesforce There are basically two ways to sell to retailers:

2 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 2 • Either you “contract” with a party (agents, brokers, manufacturer reps, etc.). The names for these parties vary depending on the industry and but for simplicity we will call them manufacturers’ reps • Larger firms may have their own company salespeople who call on retailers Due to the high costs of a company salesforce, all Core teams will use manufacturers’ reps to sell to ALL retailers, except Amazon. Manufacturers’ reps are independent sales reps and DO NOT work for your firm. Typically, a manufacturers’ rep sells 8 -10 complementary product lines to the same retailers that don't compete with one another. You do not pay their salary but pay a commission on each unit sold. Assume that commission is 10% of the price you sell to the retailer. This should be a line item in your FE Base Case Income statement. Your own management team will sell directly to Amazon and there is no commission on those sales. Online Sales/Distribution: Selling to online retailers works differently from than that of brick-and-mortar retail stores. In order to simplify this process, all of your online sales will come from Amazon. • Use the rule of thumb that Amazon charges a 40% margin for their services to list your product as well as pick, pack, and ship to the end consumer. This means if your retail selling price is $100, Amazon will keep $40 and you will receive $60. You would also want to account for the cost of shipping to Amazon’s distr ibution center (as noted in OM) • You will not sell from your own website, but your website should indicate that customers can “click” and go directly to Amazon to purchase. Your website does not have to actually be linked to Amazon ordering • See OM guidelines to account for the IS costs Distribution Research Primary Research: We expect each team to perform at least two in-depth interviews with channel/industry experts to identify the needs of the trade in your category. (You may not interview BU professors or staff.) Create a summary table of these interviews to present at your MK17 Workshop. (See Tools/MK/Market Research/Guidance for Shopper Observation & Expert Interview Research.pptx for more information.) Secondary Research : To identify the % of volume sold through retail channels and relative retailer’s sales in your category use industry trade reports and Pardee library data sources (Mintel oxygen, MRI+). No one source will have what you need. Also, see the “Supply Chain and Distribution” link from the SM323: New Product Development guide page All Commodity Volume (ACV) ACV is a measure of distribution reach. It is based on sales in the stores NOT the number of stores. It is a ratio that you will calculate each year and can be expressed as:

3 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 3 Sales of the product category in stores in which your product will be sold ---------------------------------------------------------- Total product category sales To calculate this ratio, you must first know your distribution strategy: ▪ what stores you will target and in what years ▪ what stores will accept you, and ▪ what level of penetration will you reach in those stores Steps to Create Your Profile of the Retail Environment and Calculate Your ACV The profile of the retail environment is an analysis of all the channels of distribution where your product could be sold during you r team’s five -year plan to gain distribution in various channels. Broadly, these channels are likely to include online retailers, small independent retailers (sometimes called “mom -and pop s”) , chain stores (e.g., Best Buy, CVS, and supermarket chains), mass merchants (e.g., Walmart, Target) and possibly warehouse stores (e.g., Sam’s Clubs, Costco) . All Commodity Volume (ACV) is a measure of distribution reach, and ACV is part of your BASES model. To calculate ACV, you must have a strong understanding of the retail environment in which you will market your product. Thus, each team needs to build a Profile of the Retail Environment. The following steps will allow you to build this profile and to calculate your ACV. Step 1. Identify your product’s category Step 2. Estimate category sales and breakdown category sales by type of retailer group Step 3. Identify major players for each type of retailer group and their category sales Step 4. Determine which retailer(s) you would target Step 5. Estimate acceptance and store penetration Step 6. Calculate ACV Step 7. Assess Channel conflict Step 8. Create table of units sold by TYPE of retailer Step 1: Identify your product’s category To build a Profile of the Retail Environment determine the product category in which your product will compete. For example, assume your Core product is a hair accessory which provides an innovative and easy way for girls, age 12-18, to put their hair into various styles. Likely you would identify your category as “girl’s hair accessories” and then move on to Step 2. However, if your product is the girl’s hair accessory and you are unable to find sufficient data on this product category, you would move “up” to a higher level category such as hair products , or “up” even further to a higher-level category such as health and beauty or even higher “up” to personal care (depending on what data you can locate) . It is preferable and better for the team to use the “lowest” category possible, i.e., most relevant to your product.

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4 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 4 Another way to help identify the channels where your product is be sold is to find a similar product that might resemble your product category in retail distribution. For the hair accessory example, perhaps you might look at nonprescription sunglasses. The next step would be to use the existing data to build a “unique” prof ile for your product category. If you find a channel in the profile you are trying to adjust for your category that does not make sense for your product’s profile, modify the data for a better fit. For instance, if the sunglasses example includes 4% distribution through optometrists, you need to remove that 4% and distribute it proportionately over the other categories since you know the hair accessory would never be sold at an optometrist’s office. Step 2: Estimate category sales and breakdown category sales by type of retailer groups Once you have determined your product category, find sales dollar data that will help you estimate the size of your category. To develop an accurate retail profile you MUST include all retailer groups where the product category is sold -- even if you do not think you will sell through certain types of retailers. Exhibit 1 below provides an example of a profile of the retail environment for the girls ’ hair accessories category. Exhibit 1 Girls ’ Hair Accessory Category $100M in Retail Sales, 2020 Exhibit 1 Use CMS footnotes for your sources The channels above are only examples. As might be expected, girls’ hair accessories could be sold at many other types of places (grocery stores, etc.) so as you create your own profile you will need to find all the types of stores that would sell your category and place them into the profile as seen in Exhibit 1 . • If the data you find for your category has wholesaler sales, you need to remove that from the total sales of your category as you are calculating the profile of the RETAIL environment only • If the data you find for your category has its own brand stores, e.g. Lego, Disney, you should include it in the profile but know that you cannot enter those retailers Independent drug stores 15% Online 5% Drug Store Chains 30% Mass Merchandiser s 50%

5 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 5 Online Category: All teams will use the rule of thumb that online sales will generate a 12% ACV. You can assume this will remain constant for all the years you sell you product online. If you find that online represents either more or less than 12% (as with the example above), you should adjust your ACV profile accordingly, so it still adds to 100% but distribute the other % proportionally among the remaining channels. In the example provided in Exhibit 1, the team would adjust the Profile of the Retail Environment pie chart by increasing the Online “ slice ” to 12% and reducing all the others proportionately to ensure the total remains 100%. In other words, you would remove 4% from Mass Merchandisers, 2% from Drug Store chains, 1% from Independent Stores and add the 7% to Online. Here is the adjusted Profile of Retail Environment from the above example. Exhibit 2 Girls’ Hair Acce ssory Category $100M in Retail Sales, 2020 Use CMS footnotes for your sources Step 3: Identify major players for each type of retailer group and their category sales For each type of retailer group, identify the largest players and their relative share of the category sales. For instance, drug store chains represent 28% of the category as shown in Exhibit 2. We found data e that the largest players in the drug store chain group for girl’s hair accessories are Walgreens, CVS, and Rite Aid. While you may not find data to identify specific ACV for the major retailers in your channel, we want you to at least identify the relative strength of these retailers. 13% Walgreens 10% CVS 4% Rite Aid 1% Other chains 28% Drug Store chains Mass Merchandiser 46% Drug Store chains 28% Independent Stores 14% Online 12%

6 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 6 Repeat Step 3 for each retailer group on the pie chart (except independents and online). Step 4: Determine which retailer(s) you would target Next, determine which retailers you plan on targeting (and in what year) to try to get your product accepted in those retailers. From the Distribution Assumptions on page 1, recall in Years 1 and 2, you may only enter independent and online retailers (only Amazon). In Year 3 you may enter chain retailers, and in Year 4 you may enter Mass Merchants and/or Warehouse Clubs. Step 5: Estimate retailer acceptance and store penetration for independents, chains and mass merchants for each year. Now that you have determined which retailers will be targeted for possible distribution of your product, you need to estimate: • Retailer acceptance - how many retailers who you target will actually carry your product. • Store penetration – of those retailers who elect to carry your product how many of their stores will they carry it in. Retailer Acceptance: Independent Stores: Assume there are about 5,000 independent retailers that sell your category of products. You and your independent manufacturer representatives will develop an independent retailer sales strategy to call on the most important or influential independent retailers in a city or region. It takes a great deal of tenacity to convince retailers to take on a new item and distribution acceptance can take time. In the girl’s hair accessory category , independent retailers have 14% ACV but your product (and many new products) may only have 3-4% ACV by the end of Year 1. That may grow to 5-6% in Year 2 and 7- 8% in Year 3. Chain Stores: Assume it is Year 3 and you now have sufficient sales history to target chains, and you want to target drug store chains. You have determined from your profile of the retail environment that drug store chains comprise 28% of your category sales. You have also determined that there are 3 major drug store chains and that these three drug store chains sell about 28% of the ACV for their category, namely drugstores. From Step 3, your research has determined that the largest chain drugstore in the girl’s hair accessory categor y is Walgreens, the second largest is CVS, followed by Rite Aid and then “other” chains. As a rule of thumb assume that ONE of those three chains would accept your product in the year in which you target chains. Notice, you are identifying which of the chains would accept your product. To be conservative you should assume that the chain with market share in the “middle,” e.g., CVS, would be the one that accepts your product. If there is no “middle size” chain, you can use two small size chains.

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7 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 7 Mass Merchants: Assume it is Year 4 and you are now allowed to target mass merchants. You can use the same logic for mass merchants as you have used for chain stores. Store Penetration: We want you to understand that chains and mass merchants will not place your product in all of their stores. It is likely that your product would get into 50% of the stores in the first year of distribution and 70% thereafter. Store penetration at independents is 100% because we assume them to be single location stores. Step 6: Calculate ACV We give you total ACV for your project for your BASES model forecast: Year 1 = 14%; Year 2 = 17%; Year 3 = 22%; Year 4 = 27%; Year 5 = 33% Further directions on determining the year-over- year channel mix and manufacturer’s selling price and margins for each channel are in the ACV Workshop note. We do, however, want you to understand basic ACV calculations. Using the examples from above, we can calculate ACV for Year 3 (assume you will sell the hair accessory product nationwide). Based on Step 4, we know that we can sell in independent drug stores, online (Amazon), and one chain drug store in Year 3. ACV from independent stores = 8% (before channel conflict adjustment) ACV from online = 12% (See Step 2.) ACV from chain store (CVS) = 5% (10% x 50% penetration) TOTAL ACV = 25% Step 7: Assess Channel Conflict You should assume that once national or regional retailers (chain stores, mass merchants such as Wal- Mart, Target, etc.) start to carry your product, there will be a reduction in the proportion of your sales that are from independents. Independent retailers differentiate their stores from chains and mass merchants because they cannot compete on price so once your product begin appearing in chains, independent retails will begin to drop it. There is channel conflict because independent retailers are small and do not benefit from economies of scale. Not only are the prices they pay for products from manufacturers higher than chain/mass retailers, they need higher margins to cover their overhead. Hence, in almost all cases, independents charge their customers more than other retailers for the same items. Show this channel conflict in your BASES model forecast. Assume a channel conflict of 20% in Year 3.

8 © Boston University. It is a violation of BU’s Academic Conduct Code to post this material anywhere. 8 In the girl ’ s hair accessory example, recalculate their ACV after adjusting for channel conflict as follows: ACV from independent stores after 20% channel conflict 8% * 80% = 6.4% ACV from online = 12% ACV from chain store (CVS) = 5% TOTAL ACV = 23.24% Step 8: Calculate Units Sold by Type of Retailer Since ACV is calculated using various types of retailers, each team must know how many units are sold to a particular type of retailer for each year. These units sold are calculated based on the ACV % from that specific channel. For our hair accessories example, after a team ran their full BASES model, they projected 46,000 units in year 3. They used the ACV percentages from Step 7 to determine the units by channel, e.g., online = 12% out of their total ACV of 23.24%, so it represents 51.64% of their uni t’s sales (23,754 units). One would make similar calculations for independents and drugstores. They projected the distribution shown below for their product. SAMPLE: Distribution by Type of Retailer Online Independent Stores Drugstores Mass merchandisers Year 3 Units 23,754 12,351 9,897 0 You should provide a table similar to this with units sold by type of retailer for each year. It will also include a calculation of the revenue you are earning from each channel based on the margin and the units sold by channel. Over your five-year plan, your ACV should increase as your product is accepted into larger stores and more stores. Note: “Other” group in your ACV Pie Chart Sometimes a team finds data from a source that lists “Other” as a group of retailers who sell your product category. Do your best to use other data sources to find out what retailers are in the “ Other ” profile so that you can eliminate “ Other ” and have a more precise breakdown. If you cannot determine which retailers are listed in “ Other ” then it is not possible to use the “ Other ” slice in your profile for your ACV calculations.

MK13 - Profile of Retail Environment _ACV_ Tutorial_Fall2023

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