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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