McGregor’s Limited: Department Store

1. McGregor’s department from its inception has laid a great emphasis on personal service of its clients. James McGregor, the current president doesn’t want to destroy its old-world charm, which differentiates it from the other departmental stores. But at the same time he is worried that with an old-fashioned image, he will not be able to attract young customers and eventually would lead to over reliance on the middle aged and elderly clientele.

2. This year for McGregor’s, the revenue from sales increased by 7.5% which is greater than the retail average of 4.9%. McGregor believes that by attracting young customers and selling special goods like glassware and foreign china, it is possible to further speedup turnover, achieve greater efficiency and greater profits.

3. In the late 1980s there had been a wave of mergers. The companies had become vulnerable to mergers because they ignored changing demographics and emerging forms of retailing, failed to control high expense structure and integrate operations. In the backdrop of these mergers, McGregor believes that even though the company is doing well it needed to further improve its profitability, efficiency and turnover to prevent trouble.

4. McGregor plans to transform the store’s image by recruiting younger salespeople. But despite offering competitive wages, he is unable to recruit younger staff. He believes that by modifying some of the hierarchical personnel practices he will be able to attract younger salespeople by offering extra incentives to them.

5. One of the hierarchical practices he is planning to change is the Employee’s Discount scheme. In the current scheme, employees with a higher rank get a higher discount. According to this scheme, the newly recruited sales people are eligible only for a 10% discount. Also because of 33% discount offered to its senior executives, the profitability of low margin goods like appliances is severely affected.

6. McGregor wishes to implement a new 3-tier policy in which the discount would vary according to the type of goods purchased and not the rank of the employee.

The advantages of this scheme are:

* Will attract younger salespeople, since they too get higher discounts.

* Financial benefit: Savings of $17,859 (See Exhibit 1).

* Improve the operational efficiency of billing

The roadblock for this scheme is the resistance it will face from the senior executives and buyers.

* Step 2: Problem Statement

Increase profitability and change the old fashioned image of the store.

* Step 3: Statement of Objectives

Short term Objectives:

1. Speed up turnover of goods, increase efficiency and greater profitability.

2. Change the store reputation of being old fashioned and attract young customers.

3. Retain the existing clientele.

Long term Objectives:

1. Greater profits.

2. Prevent the risk of takeover.

* Step 4: Criteria/Constraints

Criteria:

1. Improve efficiency and profitability

2. Cost-Benefit Analysis

Constraints:

1. Should not be detrimental to the employee (executive & sales people) morale.

2. Retain the old charm & the existing clientele.

* Step 5: Generation of Options

A) Implement the new Employee Discount scheme proposed by McGregor

A1) Inform all employees simultaneously & implement it with immediate effect.

A2) Offer the executives & buyers other benefits/incentives to make up for the benefits they loose.

B) Cut overhead and administrative expenses. Do away with services for which the cost of service outweighs the value of the product.

C) Store a wide variety of goods for the young customers. Offer discounts/schemes on the high profit margin goods like clothes.

D) Offer slashed prices on all goods. Enter the Bargain Market.

* Step 6: Evaluation of Options

Option A:

Advantages:

By implementing the new discount scheme, the salespeople stand to gain and hence this will attract younger salespeople. With young and attractive salespeople, the younger generation can better relate to them and will be attracted to the store.

In the new scheme, discount is based on the type of good and not on the rank of the employee. This will reduce the billing time and effort.

Disadvantages:

In the old scheme, the executives and buyers enjoyed a discount of 33% on all goods. Under the new scheme the discount they will get will me much lesser.

Option A1: Inform all employees simultaneously & implement it with immediate effect. Senior executives and the buyers will resist this change. This might hinder in the smooth functioning of the store.

Option A2: The financial gain from this scheme is equal to just about 0.5% (See Exhibit 2) of the profits. This gain isn’t worth the resistance of the executives. So offer them other benefits/incentives (Ex: Higher annual salary hike) to make up for the benefit they will loose. This will make both the sales people and the executives happy.

Option B:

The company can improve its profits by cutting down its overhead costs and administrative expenses.

Ex: Currently it offers free delivery to account customers within thirty miles of Boston. In some instances, the cost of delivery exceeds the value of the good itself. To reduce such costs, free delivery can be given only for orders above a fixed value.

Though this would cut costs and improve profitability, this could lead to loosing existing customers who valued these personal services. Also it would destroy the old-world charm that distinguished McGregor’s from other departmental stores.

Option C:

Store a wide variety of goods for the young customers. Offer discounts on the high profit margin goods like clothes.

By offering discounts on high profit margin goods, young customers would be attracted to the store. They will visit the store for the discounts, and will get impressed by the wide variety of goods that the store has to offer for them. This will make them regular customers to the store.

Option D:

Offer slashed prices on all goods. Enter the Bargain Market. This could lead to higher sales and higher turnover for the store.

But there are already stores like Wal Mart which can afford to offer lower prices because of their Economies of Scale. It would be difficult to compete with them and hence could lead to lesser profits.

* Step 7: Decision Making

The store needs to change its old fashioned image and attract young customers. To achieve that, it needs to hire younger salespeople, sell a wide variety of goods pertaining to the youth and offer discounts. The company should implement Option A2 & Option C.

* Step 8: Implementation

1. Meet the senior executives and the buyers and explain them the new employee discount scheme and the need to implement it. Offer them other incentives/benefits and get their buy-in for implementing the new scheme.

2. Inform all departments about the new scheme and put it into immediate effect.

3. Advertise about the new discount scheme for the salespeople and recruit them.

4. Conduct a survey to find the goods that the young customers would like to buy and procure them.

5. Offer discounts on goods with high profit margins. Advertise these offers and discounts.

* Step 9: Contingency Plan

If McGregor’s is still unable to recruit younger staff with the new employee discount scheme in place, increase the wages offered to them.

If even with discounts, there is no increase in the young customers, promote and extensively advertise schemes like ‘Scratch and Win’, ‘Freebies’, ‘Lucky Dip, etc,. to catch the eye of youth.

Appendix

* Exhibit 1

Assumption:

The average discount for the for all grades is 15%

Grade Total Bill (in $) Discount (Old Scheme) Discount (New Scheme)

1 53,856 17,950 (33.3%) 8,078(15%)

2 91,520 22,880 (25.0%) 13,728(15%)

3 88,774 17,755 (20.0%) 13,316(15%)

4 17,864 3,037 (17.0%) 2,679(15%)

5 29,462 4,419 (15.0%) 4,419(15%)

6 122,848 12,285 (10.0%) 18,427(15%)

Total 78,326 60,467

Savings in Discount = $17,859

In Actual, the spending by the senior executives will go down because of a reduction in the discount rate and the spending by the sales people will go up because of an increase in discount. These effects can be assumed to cancel each other.

* Exhibit 2

Savings in Discount = $17,859

Current Year Net Earnings = $3,726,939

Savings in Discount as a percentage of Net Earnings = 0.5%