Respond to case questions fully at end of case-No brief responses.

Peterson’s

Peterson’s is a women’s apparel store that grew out of a bridal store that Liz Peterson’s mother started in 1949.  When Liz worked at Peterson’s while in high school, she was amazed at how hard her mother worked to help would-be brides plan their perfect wedding ensemble.  Often the soon-to-be brides and their mothers would make last-minute changes in color themes and fabric, and Liz’s mother had to work with her seamstress and fabric suppliers to meet their clients’ desires.  It was difficult for Liz’s mother to charge the real cost for all of these changes, but she felt in the long run that it was good for business.  The problem was that the positive word of mouth was too successful.  As a result, the community’s soon-to-be brides began to expect this level of service with last-minute demands.

Liz returned home in 1967 after graduating with a degree in merchandising from the University of Kentucky to assist her mom in operating the store.  Sadly her mother died in 1973 of an unexpected severe heart attack, and Liz took over the operation of Peterson’s.  The peak season for weddings is between March and September.  After her first peak season in running the store on her own, she decided to close down on October 30 and reopen on March 1 of the following year.  When she reopened Peterson’s on March 1, 1975, it was at the beginning of the rise of women in professional and managerial roles.  She thus designed Peterson’s to appeal to the 22- to 40-year old career-oriented female.  The store was a resounding success.  In the prior 10 years, the best annual profit was $17,000 but in Liz’s first year under this new concept the net profit was $67,000 on sales of $844,000.  For a 5,000-square-foot store, this was sensational productivity.  In 1977, Liz gave birth to twin daughters, Marcy and Tracy.

Today, Marcy is successfully practicing law, but Tracy returned home in 2007 with the goal of purchasing the store from her mother.  Prior to returning, Tracy had worked for a regional department store chain as an assistant buyer in the children’s department and then as head buyer for home furnishings.  When Marcy joined Peterson’s she got involved in the store operations to help her understand that aspect of retailing.  At first, Liz made Tracy the assistant store manager; in 2010, she became store manager.  Now Liz is semiretired, and Tracey reports to Tony Valesco, who is the general manager of Peterson’s and essentially runs the entire operation.  Tony has been at the store since 1981 when she began in the stockroom and has not only been dedicated and loyal employee but also a great merchandiser.  Tracy will replace her in 2015 when Tony retires.

Two years ago, Tony decided it was time for Peterson’s to undergo a major renovation.  Although the store had been remodeled in 1982 and 1996, it was now time to do a major upgrade.  The store needed an entire new heating and cooling system, new flooring and ceilings, exterior renovation, and replacement of the outdated fixtures, some of which dated back to the late-1960s.  In addition, the 4,000-square foot store next door was up for sale, and Tony convinced Liz it would be a good acquisition and would allow Peterson’s to nearly double its space and enter into clothing for younger women (juniors) and also for the over-40 age group.  Peterson’s had been very successful at targeting the career-oriented female, but as these women moved into their 50s and retirement, they found the merchandise selection at Peterson’s to be not very relevant to their needs and suited to their fashion tastes.  The renovation was expensive and time consuming.  Tony felt the entire project could be done in three months and for $1.2 million, but the project extended to six months; when asbestos was discovered in the additional space acquired, the cost escalated to $1.5 million.

Because the store’s core customer was now the over-50 woman, Tracy wanted to devote 2,500 square feet of the added space to juniors and teen department hoping to attract the daughters and granddaughters of her customers and their friends.  The floor plan was a loop layout.  This layout exposes shoppers to the most amount of merchandise.  However, given the dimensions of the store, the rear left and right sections of the store were rather deep; as a result, shoppers and the merchandise often is not in clear view of the associates and management team.  In fact, some of the fixtures that Tony selected were a bit too high and easy to hide behind.  Tony reasoned she wanted to create a three-dimensional look with a set of fixtures 8 feet high, then 5 feet high, and then 3 feet high.  The look was dramatic, but the hidden area behind the 8-feet fixtures appeared to be the source of increase shoplifting by teenage girls patronizing the store.

As part of the process of learning the overall store operations, Tracy was spending a lot of time going over the monthly, quarterly, and annual financial statements.  She was surprised that shrinkage had gone from 1.8 percent before they remodel to nearly 3.5 percent.  When she mentioned this to Tony as an area of concern, Tony brushed Tracy off with the comment, I know our shrinkage has almost doubled, but our sales per square foot are up 22 percent and our profits are up 30 percent since the remodel.  It is just a cost of doing business, and so let’s not worry.”  Tracy decided to ask two of her student interns from a local university to spend part of their summer analyzing the situation and deciding what could be done to reduce shrinkage.  The two students came up with two recommendations.  First, redo the store fixtures in the rear corners of the store.  This would cost an estimated $47,000.  Second, use new law that had been passed that allowed retailers to prosecute shoplifters for up to three times the cost of merchandise sold.  The students argued that if Peterson’s prosecutes the few shoppers it catches to the fullest extent possible, then the word would quickly get out to the juniors and teens that theft at Peterson’s is not worth the effort.  When Tracy sat down at her weekly Monday morning meeting with Tony, she presented these two options.  Tony replied, Tracy, you forgot the option I suggested months ago.  Let’s just not do anything about this problem.  We are making more money, so lets’ just view the increased theft as a cost of business.”  When Tracy was having dinner with Liz on Sunday afternoon, she mentioned the problem and asked advice, Liz replied, Tracy, I think you will find the answer if you think this through carefully.  Tony will be retiring in a couple of years, and she has a lot of wisdom, but if you want to challenge her you need to figure out how to proceed.  Tony has done a lot for our family, and I want the two of you to work this out and keep me out of the picture.  I have confidence in both of you.”

Questions

1. Is shoplifting just a cost of doing business?  Doesn’t Peterson’s have an obligation to encourage ethical behavior, especially among teens?

1. How should Tracy settle this issue with Tony?  Tracy is beginning to think that perhaps Tony is correct.  Perhaps if teenagers were prosecuted, some parents could get angry and stop shopping at Peterson’s.