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MERCHANDISE PLANNING

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What is Merchandising?

American Marketing Association has defined merchandising as, ‘ the planning involved in marketing the right merchandise at the right place at the right time in the right quantities at the right price.’

It is achieving the ‘Five Rights’ Having the right product In the right quantity Available at the right place At the right time At the right price

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Merchandise Management

Process by which a retailer offers the right quantity of the right merchandise in the right place at the right time and meets the company’s financial goals.

Sense market trends Analyze sales data Make appropriate adjustments

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The Evolution Of Merchandising4

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The Merchandiser: Role and Responsibilities

Planning• formulating policies• forecasting sales

Directing• Guiding and training buyers

Co-ordinating• co-ordinating the buying effort

Controlling• assessing buyer’s performance

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Standard Merchandise Classification Scheme and Organizational Chart

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Merchandise Management Issues

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The Category

A merchandise category is an assortment of items that customers see as substitutes for each other.

Vendors might assign products to different categories based on differences in product attributes

Retailers might assign two products to same category based on common consumers and buying behavior

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Category Management

Category management is the process of managing a retail business with the objective of maximizing the sales and profits of a category.

Department stores manage at category level, but grocery stores manage merchandise around brands and vendors

Objective is to maximize the sales and profits of the entire category, not just a particular brand.

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Category Captain

Selected vendor responsible for managing a category

Vendors frequently have more information and analytical skills about the category in which they compete than retailers

Helps retailer understand consumer behavior Creates assortments that satisfy the customer Improves profitability of category

Problems Vendor category captain may have different

goals than retailer

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Antitrust Consideration

The vendor category captain could collude with retailer to fix prices

It could block brands from access to shelf space

Category captains need to temper zeal for control over retailers

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Evaluating Merchandise Management Performance

Merchandise managers have control over The merchandise they buy The price at which the merchandise is sold The cost of the merchandise

Merchandise managers do not have control over Operating expenses Human resources Real estate Supply chain management Information systems

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SO HOW ARE MERCHANTS EVALUATED?

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GMROIGross Margin Return on Investment

A measurement of how many gross margin dollars are earned on every dollar of inventory investment made by the buyer

Digital Vision / Getty Images

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GMROIInventory Productivity Measures

GMROI = Gross Margin Percent x sales to stock ratio

= gross margin x net sales

net sales avg inventory at cost

= gross margin

avg inventory at cost

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ROI and GMROIAsset Productivity Measures

Strategic Corporate Level Return on Assets = Net Profit

Total Assets

Merchandise Management Level GROI = Gross Margin

Avg Inventory

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Illustration of GMROI

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GMROI for Selected Department in Discount Stores

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Calculating Inventory Turnover

Inventory turnover = Net Sales Average inventory at retail

Inventory turnover = Cost of goods sold Average inventory at cost

Avg. inventory =Month1 +Month2 + Month 3 +… Number of months

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Inventory Turnover

Month Retail Value of Inventory EOM January $22,000 EOM February 33,000 EOM March 38,000 Total Inventory $93,000

Average inventory = $93,000 ÷ 3 = $31,000

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Inventory Turnover and Stock-to-Sale Ratio

Inventory turnover = Net Sales Average inventory at retail

Inventory turnover = Cost of goods sold Average inventory at cost

Sock-to-Sales Ratio = Net Sales Average cost of

inventory

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Advantages of Rapid Turnover

Increased sales volume Less risk of obsolescence and

markdowns Improved salesperson morale More resources to take advantage of

new buying opportunities

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Approaches for Improving Inventory Turnover

Reduce number of categories Reduce number of SKUs within a category Reduce number of items in a SKU

BUT if a customer can’t find their size or color or brand, patronage and sales decrease!

another approach…

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…another approach

To improve inventory turnover Buy merchandise more often Buy in smaller quantities which should reduce

average inventory without reducing sales

BUT by buying smaller quantities Buyers can’t take advantage of quantity

discounts so Gross margin decreases Operating expenses increase Buyers need to spend more time placing orders

and monitoring deliveries

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Merchandise Planning Process

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Developing a Sales Forecast

Understanding the nature of the product life cycle

Collecting data on sales of product and comparable products

Using statistical techniques to project sales

Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand (CPFR)

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The Category Product Life Cycle

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Variations in the Category Life Cycle

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Factors Affecting Sales Projections

Controllable Promotions Store Locations Merchandise

Placement Cannabalization

UncontrollableSeasonalityWeatherCompetitive ActivityProduct AvailabilityEconomic Conditions

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Fad vs. Fashion

How do buyers tell the difference?

Is it compatible with changes in consumer lifestyles?

Does the innovation provide real benefits? Is the innovation compatible with other

changes in the marketplace? Who is adopting the trend?

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Forecasting Fashion Merchandise Categories

Retailers develop fashion forecasts by relying on:

Previous sales data Personal awareness Fashion and trend services Vendors Traditional market research

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Personal Awareness

How do fashion buyers know the trends?

Internet chat rooms Look in closets Go to the movies Go to rock concerts Go to nightclubs

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Collaboration, Planning, Forecasting, and Replenishment Systems (CPFR)

Systems used by retailers and vendors to work together to insure that the right merchandise is at the right place at the right time.– Benefits both retailers and vendors– Increases fill rate, reduces stockouts, increases

inventory turns

www.cpfr.org

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Assortment Planning

Variety is the number of different merchandising categories within a store or department

Assortment is the number of SKUs within a category.

Product availability defines the percentage of demand for a particular SKU that is satisfied.

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Is This Store Heavy on Variety? On Assortment?

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Retail Assortment Strategies

Wide & deep - Many categories & large assortment in each category

Wide & shallow- Many categories & limited assortment in each category

Narrow & deep- Few categories & large assortment in each

Narrow & shallow- Few categories & limited assortment n each

Q. Advantages - Disadvantages of each & where what / which is appropriate ?

`Shelf space is at a premium’

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Retail Assortment StrategiesWide and Deep Advantages

- Broad market- Full selection of items- High level of customer traffic- Customer loyalty- One-stop shopping- No disappointed customers

Disadvantages- High inventory investment- General image- Many items with low turnover- Some obsolete merchandise

Wide and Shallow Advantages

- Broad market- High level of customer traffic- Emphasis on convenience customer- Less costly than wide and deep- One-step shopping

Disadvantages- Low variety within product line- Some disappointed customers- Weak image- Many items with low turnover- Reduced customer loyalty

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Retail Assortment StrategiesNarrow & Deep Advantages

- Specialist image- Good customer choice in category(ies)- Specialized personnel- Customer loyalty- No disappointed customers- Less costly than wide and deep

Disadvantages- Too much emphasis on one category- No one-stop shopping- More susceptible to trends/cycles- Greater effort needed to enlarge the size of the trading area

Narrow & shallow Advantages

- Aimed at convenience customers- Least costly- High turnover items

Disadvantages- Little width and depth- No one-stop shopping- Some disappointed customer- Weak image- Limited customer loyalty- Small trading area

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Determining Variety and Assortment

Profitability of Merchandise Mix

Corporate Philosophy Toward Assortment

Physical Characteristics of Store

Complementary Merchandise

Retail strategy can determine this

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Model Stock Plan : Mens ShirtsDependent Variables Customer profile – psychographic / demographic Buying behavior – occasion / frequency of purchase/ budget Stores positioning vis-a-vis product product category

Product Attributes – Some Variables

Type Dressy, casual, sports, work 4

Size S, M, L, XL 4

Sleeve Long, short 2

Collar Button-down, normal 2

Color Blue, white, beige, pink, off-white 5

Fabric Cotton, poly-mix 2

Price 3 Price points 3

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Model Stock Plan : Mens Shirts (contd…)

If the store decides to keep one SKU of each type its initial inventory will be

4 x 4 x 2 x 2 x 5 x 2 x 3 = 1920 SKU’s

@ Avg. cost of Rs.300 = Rs. 576, 000

Clearly the final decision will be based on the dominant dependent variable(s) and a retailer may not be able to offer the entire range but offer a more selective collection.

Successful retailers know that they will have to allow some customers to walkout empty handed.

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The Implications of Merchandise Planning

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Lifestyle Merchandising

When a retailer provides merchandise or knowingly adopts a merchandise strategy, which will serve the needs of a specific target audience in keeping with the lifestyles they lead, it is termed as lifestyle merchandising.

It includes products like- watches, bags, exclusive cosmetics, skincare, body-care, etc.

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