retail merchandising

RETAIL MERCHANDISING

What is Merchandising

• Merchandising consists of the activities involved in acquiring particular goods and services and making them available at the places, times, prices and quantities that enable a retailer to reach its goals.

• A merchandising philosophy sets the guiding principles for all the merchandising decisions the retailer makes.

• Must reflect the target market desires, retailers institution type, the marketplace positioning, the defined value chain, supplier capabilities, cost, competitors and product trends.

• Drives every product decision, from what product lines to carry to shelf space allotted to different products to inventory turnover to pricing.

Merchandising Philosophy

Retailer needs to decide: • Breadth of assortment (narrow or wide)• Depth of assortment (deep or shallow)• Quality of assortment (high/med/low)• Store brands or national brands• Pricing policies

Merchandise management

• Includes the planning, acquisition, analysis, handling and control of merchandise and investment of the retail operation

- analysis: needs & wants of the target audience- Planning: for future sale of merchandise- acquisition: procurement from distributors and mfgs- Handling: merchandise available at required store at

right time and right condition- Control: Amount of money spent on buying

• Micro merchandising: Retailer adjusts shelf space allocations to respond to customer and other differences amongst the local markets. Data mined through the data base. Eg space for cereals for adults.

• Cross merchandise: carries complementary goods and services to encourage shopper to buy more. Eg apparel stores and accessories (shirts and scarves, frypans and scrubbers)

ATTRIBUTES AND FUNCTIONS AFFECTING THE BUYING ORGANIZATION

LEVEL OF FORMALITY

Formal• Distinct retail task with separate dept• includes functions of acquiring the merchandise and making it available for sale•Used by larger firms• Full time, specialized merchandisers•Clarity of responsibilities

Informal• Not a distinct task• Same personnel carry out buying (merchandising) and other retail functions• Small retailers• Responsibility and authority are not clear cut• Low costs and flexibility• less emphasis on merchandise planning

DEGREE OF CENTRALIZATION

Centralized• All buying (multichain) done at the HQ• Adv include integration of effort, strict controls, consistent image proximity to top mgt, staff support, volume discounts ,• Disadv: inflexibility, time delays, excessive uniformity, poor morale at local stores

Decentralized• All buying done locally• Adv include adaptability to local conditions, quick order processing, good employee morale due to local autonomy• Disadv: disjointed planning, inconsistent planning, l limited controls,loss of volume discounts

Organizational breadth

• In general buying organization, one or several people buy all of the firms merchandise

• Eg owner of small store: does all the buying himself. Good for small retail store, saves cost and personnel

• Specialized organization: Separate buyers for each section. Greater expertise and more personnel required

Personnel Resources

• Retailer can choose between an inside buying organization and an outside buying organization.

• Inside buying: staffed by retailers personnel and decisions are made by permanent employees. Used by very large retailers and very small retailers

• Outside buying: external source is hired on a fee basis. Used by small or medium sized retailers.

• Resident buying office: touch with key market trends, provide data and contacts.

• Cooperative buying: Group of retailers come together to avail of volume discounts

Functions performed

• Merchandising view: oversee all buying and selling functions ,including assortments, advt, pricing, point of sale displays, employee utilization and personal selling approaches

• Buying view: Merchandise personnel oversee the buying of products, advt and pricing while in store personnel oversee the assortments, displays, employee utilization and sales presentation

Buyer

• Responsible for selecting the merchandise to be carried and the strategy to market that merchandise.

• Devises and controls sales and profit projections for a product category

• Plans proper merchandise assortments,styling,sizes,qty• Negotiates with and evaluates the vendors• Oversees in store displays• Attuned to trends in marketplace, must be able to

bargain with suppliers, travel to the market place• Prepare detailed business plans

Staffing

Divisional Merchandise manager

Buyer

Associate buyer

Assistant buyer

Store manager

Assistant Store manager

Sales Manager

Assistant Sales Manager

Merchandising track Store management track

MERCHANDISING PLANNING

Role of Merchandise Manager

• Planning : Policy formulation, forecasting sales for budget period, estimate consumer demand and impact of changes occurring in retail environment

• Directing: Guiding and training of buyers• Co-ordinating: coordinate buying effort of

many buyers and fit into stores image• Controlling: assessing buyers performance

Types of Merchandise

• Staple: regular products carried Eg milk, eggs, bread

• Assortment: Apparel, furniture• Fashion : Products which have a cyclical sales

due to changing tastes and lifestyles• Seasonal: change according to seasons Eg AC• Fad: high sales for a short period of time Eg

Harry Potter

Type of stock plans

• Basic stock list: specifies the inventory level, color, brand, style, category, size, pack etc

• Model Stock plan: project no of specific items such as no of red, green and blue sweaters. Items are ordered according to popular size and colors

• Never out stock plan: enough products so that they are not out of stock

Planning process

• Done in advance, time to buy merchandise , have it delivered and send it to stores

• Analysis of consumers needs and wants, consumer buying process, sale of high selling products,interaction with sales staff ,analysis of external sources of information

• Steps:1. Developing a sales forecast2. Determining a merchandise requirements3. Merchandise Control- The Open to Buy4. Assortment Planning

Analysis and Developing the Sales forecast

• Forecasting involves what a consumers may do under a given set of conditions

• Determines the inventory need for the product or category

• Based on targets given by top management• Typically answer : How much, new products, price?• Made for a specific time period ie weeks, season short

term or long term• Aware of the changes in tastes and attitudes of the

consumers, size of target market and changes in spending patterns

Analysis and Developing the Sales forecast

• Process:o Reviewing past sales.o Analysing the economic conditions.: direct link

to consumer spending patternso Analysing the sales potential: demographic

changes in market and products to be soldo The marketing strategy of the competitors.o Creating the forecast.: estimate

Determining the Merchandise Requirements

• Planning at Merchandise takes place at two levels:

- The creation of merchandise budget- The assortment plan• Merchandise budget: financial plan as to how

much to invest in product inventories in monetary terms

Merchandise Budget

• Sales plan: how much of each product needs to be sold, dept wise/storewise etc

• Stock Support plan: How much of inventory is needed to achieve those sales

• Planned reductions: incase of product not selling• Planned purchase level: Qty of each product that

needs to be procured from the market• Gross margins (diff between cost of goods sold and

sales) that each dept contributes to the overall profitability

Methods of Inventory planning

• The Basic Stock Method• The Percentage Variation Method• The Week’s Supply Method• The Stock / Sales Ratio Method

Basic Stock Method

• Retailer believes that it is necessary to have a given level of inventory at all times. Min amt of inventory that needs to be maintained for a product ,category or store even during times of low sale

• Basic Stock = Avg.stk for the season – Avg mthly sales for the season where,• Average Monthly Sales for the season = Total Planned Sales for

the season / No. of months in the season• Avg. stock for the season = Total Planned Sales for the

season/Estimated inventory turnover rate for the season.• BOM(Beginning of month) Stock = Planned Monthly Sales +

Basic Stock.

The Percentage Variation Method

• Used when the stock turnover rate is more than 6 times/year

• Basic premise is that inventory levels should reflect the actual sales

• BOM stock = Avg stock for the season x ½ [1+planned sales for the month / Average Monthly Sales ]

Weeks Supply

• Followed by grocers who follow inventories weekly, and whose sales don’t fluctuate substantially

The Week’s Supply Method is calculated as under: No of weeks to be stocked = the number of weeks in

the period / Stock turnover rate for the period Avg weekly sales = Estimated total sales for the period /

The no. of weeks in the period BOM Stock = Avg weekly sales x no of weeks to be

stocked

Stock to Sales Ratio Method

• This method is very easy, however requires the retailer to have a beginning of the month stock/sales ratio. This ratio tells the retailer how much inventory is needed for the month.

• Stock to Sales Ratio = Value of Inventory / Actual sales

• Planned BOM Inventory = Stock – Sales Ratio x Planned Sales

The Stock Turnover Rate

• An effective measure at which products or merchandise moves in and out of retail store at a given period

• Stock Turnover Rate = Planned Sales ( for the period) / Planned Average Inventory ( for the period)

Six month merchandise plan

• Done after a inventory plan, merchandise plan

• This plan is prepared for six months• Merchandise budget should be prepared in

advance of selling season• Easy to understand• economy is changing, plan for 6 months• Flexible budgets

The Six Month Merchandise Plan Six Month Merchandise Budget

M1 M2 M3 M4 M5 M6 Total

BOM Last Yr

Plan

Revised

Actual

Sales Last Yr

Plan

Revised

Actual

Reductions Last Yr

Plan

Revised

Actual

EOM Stock Last Yr

Plan

Revised

Actual

Retail Purchases

Last Yr

Plan

Revised

Actual

Purchase Cost Last Yr

Plan

Revised

Actual

Initial Mark Up Last Yr

Plan

Revised

Actual

Gross Margin % Last Yr

Plan

Revised

Actual

On order EOM Last Yr

Plan

Revised

Actual

• Depends on the sales for the month & reductions, merchandise buying can be adjusted.

• Maintains relation between stock and sales• Controlling the money to buy – The Open to Buy (OTB) • Limits overbuying & under buying• Prevents loss of sales due to unavailability of required

stock• Maintains purchases within the budgeted limits• Reduces markdowns which may arise due to excess

buying

Merchandise Control- Open to Buy

Open to Buy

• OTB is always calculated for the current and future periods

• Open to Buy = Planned EOM Stock – Projected EOM Stock

• Projected EOM Stock = Average BOM Stock + Actual Additions to Stock + Actual on Order – Planned Monthly Sale – Planned Reductions for the month

Assortment Planning

• Assortment is the selection of merchandise a retailer carries. Includes breadth of the product categories and the variety within each category

• Need to choose quality of the merchandise- expensive/moderately priced/inexpensive items

• Width of assortment: number of distinct goods and services (product lines) a retailer carries

• Depth of assortment: Refers to variety in any one goods /service category (product line) a retailer carries

Brands

• As a part of assortment planning, retailer chooses a proper mix of manufacturer, private and generic brands.

• Manufacturer brands are produced and controlled by mfgs. Well known ,presold by advts, represent max quality to consumers. Eg Coke,Sony etc

• Private /dealer/store brands: Names designated by retailers, more profitable, better controlled ,not sold by competing retailers ,less expensive and may lead to loyalty

• Generic brands: Form of private brands have plain packages ,secondary shelf locations etc

Factors to consider before planning Merchandise quality

Factor Relevance for planning

Target Market Match merchandise quality to wishes of the desired target market

Competition Sell similar quality (as that of competition) or different quality to appeal to different target market

Retailers image Relate item quality with customer perception of the retailer

Store location Impact of location on image which in turn impacts competitors and in turn quality

Stock Turnover High quality-high prices yield lower turnover

Profitability High quality- high profit, lower quality- more turnover, more profit

Mfg vs private brands Mfg brands may connote better quality than store brands for consumers

Factors to consider before planning Merchandise quality

Factor Relevance for planning

Customer services offered Know that high quality goods require more personal selling, alterations, delivery etc unlike lesser quality merchandise

Personnel Employ skilled personnel for higher quality merchandise

Perceived goods/service benefits Analyse consumers. Lesser quality –functional benefits. High quality- status/services

Constrained decision making Franchisee/chain store managers- no control over products.

RETAIL ASSORTMENT STRATEGIES

Wide & Deep : (many product lines & large variety in each)

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

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

Wide & Shallow : (many product lines & limited variety in each)

Advantages•Broad market•High level of customer traffic•Emphasis on convenience customer•One stop shopping•Less costly than wide and deep

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

Narrow &Deep: (few product lines & large variety in each)

Advantages•Specialist image•Good customer choice in categories• 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 and cycles• Greater effort required to increase the store size• Little/no scrambled merchandizing

Narrow &Shallow: (few product lines & few variety in each)

Advantages•Aimed at convenience customers• Least costly•High turnover of items

Disadvantages• Little width and depth•No one stop shopping• Some disappointed customers•Weak image•Limited customer loyalty•Small trading area• Little/no scrambled merchandising

Depth & Breadth of merchandise

DEPARTMENT

PRODUCT LINE

BREADTH

DEPTH

STYLES COLOURS SIZES

ZODIAC VAN HEUSEN LOUIS PHILLIPPE ARROW

SHIRTS TROUSERS ACCESSORIES

MENSWEAR

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Model Stock Plan

• The model stock plan gives the precise items and quantities that should be on hand for each merchandise line.A model stock plan needs to be compiled for each line of merchandise.


Steps involved …

• Identify the attributes that the customer would consider in buying the product.

• Decide on the levels under each attribute.• Allocate the total money or the units to the

respective item categories.


Creating a model stock plan

• A retailer has allocated Rs. 1 lakh to buying shirts. Assuming that the purchase price for the shirts is Rs.100, he will be able to stock 1,000 shirts.

• Create a model stock plan.


• Identify the number of levels under each attribute.

Type of shirt – Dress, Casual, Formal, SportSize – Small, Medium, Large, Extra LargeSleeve Length – Full Sleeves, Short SleevesCollar Type – Saville, Button DownColor – White, Blue, Cream, GreyFabric – Cotton, Cotton Blend


Type Dress Casual Formal Sport

% of Sales 10 40 20 30

Sizes Small Medium Large Extra Large

% of Sales 25 40 25 10

Sleeve Length Full Sleeves Half Sleeves

% of Sales 30 70

Allocate the total units to the respective item categories


Men’s Shirts100% (1,000)

Dress10% (100)

Casual40% (400)

Formal(20%) 200

Sport30% (300)

Small25% (100)

Medium40% (160)

Large25% (100)

Extra Large10% (40)

Full Sleeves30% (48)

Half Sleeves70% (112)

Button Down40% (45)

Saville60% (67)

White40% (18)

Blue30% (14)

Cream20% (9)

Grey10% (4)

Cotton25% (4)

Cotton Blend75% (14)

CATEGORY MANAGEMENT

Merchandise Category- A planning unit

• Retail- a business responding to change.• Faces demanding customer, intense competition and pressure on costs• This combination of business condition and advances in technology –

created an opportunity for new approach- Category management• A merchandise category is the basic unit of analysis for making

merchandising management decisions• A merchandise category is an assortment of items that customers may

see as substitutes of each other• Eg A department store- offers all brands, sizes ,colors of girls dresses. A

mother before purchase decision may consider whole set. Lower price of one –increase sale of that type but decrease sale of other type. Thus a buyers decision of lowering price and promoting specific SKU may affect sales of other SKU s in that category

Category management

• Category Management can be defined as the distributor / supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value

• Thus, a category is an assortment of items that the customer sees as reasonable substitutes of each other.

Category Management

• A focus for better understanding the customer needs as a basis for the retailers and suppliers, strategies, goals and work processes

• Technology and information- key enabler• Use this information to tailor the product according

to consumer needs• Offering is aimed at providing customer satisfaction

and maximizing returns for the organization• Sometimes results in reevaluation of business

practices

Core Components of Category Management

Performance Measurement

Trading PartnerRelationships Information

Technology

OrganisationalCapabilities

Strategy and Business Process

Category Management Business Process

Category Definition

Category Role

Category Assessment

Category Scorecard

Category Strategies

Category Tactics

Plan Implementation

CATEGORY REVIEw

Category Definition: Should be based on how the consumer buys. For eg : for a grocery it would be aerated drinks one category, ready to cook meals- another.

Category Role: Determines the priority and importance of various categories in overall business Destination category: Main offering for the store For eg Supermarket- groceries

Routine or Preferred category : customer buys from that retailer as a routine /habit: Eg toothpaste/soaps

Occasional or Seasonal Category :not purchased often Eg umbrellas Convenience Category: finds convenient to purchase from a

neighbourhood retailer Eg bread/eggs Category Assessment: Evaluation with respect to the turnover,

profits, ROA & the consumers, the market, the retailer & the supplier.

Category Performance Measures: Setting measurable targets in terms of Sales, Margins and GMROI (Gross Margin Return on Investment)

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Category Strategies: Traffic building, transaction building, turf defending, profit generating, excitement creating or image enhancing

Category Tactics: Assortments, Pricing, Promotions and Merchandise Presentation

Plan Implementation Category Review

The Category Captain

• A preferred vendor works with the retailer to develop a better understanding of customer behavior, create assortments that satisfy consumer needs and improve profitability of the merchandise category

• Aids the retailer in developing a category• Overall view of the category – focus and networking with

different retailers• Eg Kraft foods- supermarkets give Kraft access to store

information and competitor sales. Works with store managers regarding assortments, product placement on shelves, promotion, pricing for all brands in that category

Advantages

• Can increase profits• Merchandise management easier

Disadvantages

• “Letting a fox into henhouse”• Eg Kraft may try to maximize its own sales at

expense of competition• Can suggest an assortment plan which

includes its SKUs and exclude SKU a which are more profitable to the retailer

• Could block smaller brands

The Category Management Process – Indian Context

Develop

initial merchandi

se/ category

portfolio

Assess

potential and refin

e merchandise/

category

portfolio

Develop

merchandi

se/ category

strategy and

tactical

plan

Develop

performan

ce criteri

a and management metri

cs

Location

Positioning

Customers

Implement plan

Review merchandise/category performance