MERCHANDISE

PLANNING

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 What is Merchandising?
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 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 2
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 Merchandising

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 The Merchandiser: Role and Responsibilities
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 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 10
 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 12
SO HOW ARE MERCHANTS
EVALUATED?

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 GMROI
Gross Margin Return on Investment

A measurement of how many gross

margin dollars are earned on every
dollar of inventory investment made
by the buyer

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GMROI
Inventory 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 GMROI
Asset 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

Uncontrollable
 Controllable Seasonality
 Promotions Weather
 Store Locations Competitive Activity
Product Availability
 Merchandise Economic Conditions
Placement
 Cannabalization

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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 Strategies
Wide and Shallow
Wide and Deep
 Advantages
 Advantages
- Broad market
- Broad market
- High level of customer traffic
- Full selection of items
- Emphasis on convenience
- High level of customer customer
traffic
- Less costly than wide and deep
- Customer loyalty
- One-step shopping
- One-stop shopping
- No disappointed customers
 Disadvantages
- Low variety within product line
 Disadvantages
- Some disappointed customers
- High inventory investment
- Weak image
- General image
- Many items with low turnover
- Many items with low
turnover - Reduced customer loyalty
- Some obsolete
merchandise 37
Retail Assortment Strategies
Narrow & Deep Narrow & shallow
 Advantages  Advantages
- Specialist image - Aimed at convenience
- Good customer choice in customers
category(ies) - Least costly
- Specialized personnel - High turnover items
- Customer loyalty
- No disappointed customers
- Less costly than wide and
deep

 Disadvantages
- Too much emphasis on Disadvantages
one category - Little width and depth
- No one-stop shopping - No one-stop shopping
- More susceptible to - Some disappointed customer
trends/cycles - Weak image
- Greater effort needed to - Limited customer loyalty
enlarge the size of the - Small trading area
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 Shirts
Dependent 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
4x4x2x2x5x2x3 = 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
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 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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