Merchandise
Management
Retailing Mix
Merchandise
Product Variety
& Assortment
Personnel
& Store Location
Service Levels
Target
Market
Presentation
Ambience Promotions/
Store Layout Communication
Visual Merchandising
Pricing
EDLP
High-Low
Economy/Premium
Merchandise:
Goods/Products/Wares/Stocks that are offered
to be bought and sold
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 financial
goals
• Many factors help good management of
merchandise
– Sense of market trends
– Analysis of sales data
– Right suppliers/partners
– Negotiation abilities
– Quick adaptations to changing situations
Merchandise is Big Investment
• Merchandising management can be
compared to Investment Portfolio
Management
– Asset allocation/Budget planning
– Identification of ‘’hot” sectors/categories to
invest in
– Sell losers
– Continuous Monitoring of portfolio
Most retailers manage
merchandise as ‘categories’
• Goodday
– Cashew
• 50gm
• 100gm
• 200gm
– Pista
• 50gm
• 100gm
• 200gm
– Butter
• 50gm
• 100gm+100gm (promotion)
• 200gm
• 500gm
Category
• Most retailers manage overall merchandise by
grouping/classifying them as categories
• Organizational structures also usually reflect this basic
level of grouping
• A merchandise category is an assortment of items that
customers may 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
Can/should all ‘categories’ be
treated equal?
Common Principles of
Managing Categories
• Categories are similar to strategic business units
• Categories have strategic roles – Managing
them go beyond simple inventory management
• Category Managers control their share of
company assets
• Priorities for each category should be clearly laid
out and performance measures need to be
monitored
Category Roles
• Categories play different roles in the overall
assortment of merchandise that a retailer carries
• Category roles can be classified based on
shoppers’ perspective
– Destination Category
– Routine/Core Category
– Occasional/Seasonal Category
– Convenience Category
• Category roles are also seen/classified from
retailer’s perspective
– Traffic Builder
– Perception/Image Builder
– Cash cow
18-12
18-14
Category Management
• Category management is the process of managing a
retail business with the objective of maximizing the sales
and profits of a category
• Objective is to maximize the sales and profits of the
entire category, not just a particular brand.
• Many retailers use one of the suppliers/brands as a
‘’Category Captain’’
• Suppliers may have more understanding of consumer
behavior
• Analytical expertise and other resources of supplier can be
utilized
• Category captain may not always be the market leader,
retailers look for expertise and commitment to partner
• Chosen category captain needs to play an impartial role
Evaluating Category Performance
Merchandise managers have control over
• The merchandise they buy
• The cost of the merchandise
• The price at which the merchandise is sold (not
always)
Merchandise managers do/may not have control over
• Operating expenses
• Human resources
• Real estate
• Supply chain management
• Information systems
SO HOW SHOULD CATEGORY MANAGERS
BE EVALUATED?
Commonly used measures for
category performance
• Sales
– Absolute volume/value of sales, Sales growth (YOY), Sales per
square feet, sales per transaction etc.
• Profits
– Gross profit in value, gross profit in %, profit per sq ft, GMROI
etc.
• Inventory turnover
– Turnover of stocks, sales to inventory, number of SKUs
carried/reduced/introduced, number of SKUs that contributed
to majority of sales etc.
• Customer Transactions
– Basket size, number of transactions in category, items per bill,
bills to walk-in (conversion ratio) etc.
Which one is a better category?
Dairy Products Personal Care
Average Sales (Rs) 150,000 200,000
Gross Margin % 5% 20%
Average Inventory (Rs) 10,000 100,000
GMROI
Gross Margin Return on Investment
A measurement of how many gross margin dollars/rupees
are earned on every dollar/rupee of inventory investment
made by the buyer
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
GMROI
Dairy Products Personal Care
Average Sales (Rs) 150,000 200,000
Gross Margin % 5% 20%
Average Inventory (Rs) 10,000 100,000
Gross Margin 7,500 40,000
Sales-Stock Ratio 15 2
GMROI 75% 40%
Advantages of Rapid Turnover
• Increased sales volume
• Less risk of obsolescence and
markdowns
• Merchandise remain fresh
• More resources to take advantage of
new buying opportunities
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!
Alternative approach
To Improve inventory turnover
• Buy merchandise more often
• Buy in smaller quantities which should reduce
average inventory without reducing sales
But buying smaller quantities
• May reduce ability to get quantity discounts and
hence gross margin
• Will increase operating expenses
• Lead to buyers spending more time placing orders
and monitoring deliveries
Merchandise Management is a
process that involves various stages
Forecast Category Develop an
Sales Assortment Plan
Inventory
Management Plans
Determine appropriate
(Supplier/Main
inventory Levels
warehouse/Store
Level)
Monitoring/
Merchandise
Buying/Sourcing Plan Performance
Evaluation
Merchandise Management process
Forecast Category Develop an
Sales Assortment Plan
Inventory
Management Plans
Determine appropriate
(Supplier/Main
inventory Levels
warehouse/Store
Level)
Monitoring/
Merchandise
Buying/Sourcing Plan Performance
Evaluation
Developing Sales Forecast
• Accuracy of forecast impacts in many ways
– Cash flow, inventory, space utilization, logistics/supply mechanisms
• Variety of methods are used
– Intuitive forecasting to use of statistical tools
• A number of factors need to be considered
– Historical Sales
– Category life cycle
– External factors (like weather, events)
– Promotions
– Market Trend (inputs from research)
– Inputs from vendors/external agencies (CPFR)
• Forecasting varies depending on type of merchandise
– Staple/Basic Merchandise
– Seasonal Merchandise
– Fashion/FAD Merchandise
Factors Affecting Sales Projections
• Controllable Uncontrollable
• Store Promotions • Seasonality
• Merchandise • Weather
Placement • Competitive Activity
• Category Location • Product Availability
• Economic Conditions
Forecasting for Service Retailers
• Tougher than product forecasting
• Offering perishes end of day and not end of season
• Task for service retailers is to match capacity with demand
or vice versa
– A seat left vacant in a restaurant/bus/flight is unused capacity and
lost revenue
– A diner returning from a restaurant due to lack of space/passenger
offloaded from plane due to over booking is also lost revenue
opportunity
• Appointments/Advance Bookings/Overbooking are all
methods devised to address this challenge
• A good forecast of demand helps plan staffing levels and
even product forecasting in case of services that include
them (like food in a restaurant)
Merchandise Management process
Forecast Category Develop an
Sales Assortment Plan
Inventory
Management Plans
Determine appropriate
(Supplier/Main
inventory Levels
warehouse/Store
Level)
Monitoring/
Merchandise
Buying/Sourcing Plan Performance
Evaluation
Category Variety & Assortment
Variety is the number of different merchandising
categories within a store or department (Breadth
of product categories on offer)
Assortment is the number of SKUs within a
category (Depth within a category)
Product availability defines the percentage of
demand for a particular product that is satisfied.
Relationship between Inventory
Investment and Product Availability
600
500
400
300
200
100
0
80 85 90 95 100
Product Availability (Percent)
Assortment Plan for Jeans Store
A store is planning for an assortment as below
Type Jeans for Men, Jeans for Women
Cut/Fitting/Style 4 Different Fittings/Cuts (Straight cut/Boot cut etc)
Finish 3 Finishes (Stone wash, Regular Denim etc)
Colours 5 Shades/Colours
Sizes 9 Sizes
How many SKUs would this store be offering?
Variety and Assortment Depends on
• Retail Strategy & Corporate Philosophy
• Profitability of Merchandise Mix
• Physical Characteristics of Store
• Effect of assortment size on buying
behaviour
Merchandise Management process
Forecast Category Develop an
Sales Assortment Plan
Inventory
Management Plans
Determine appropriate
(Supplier/Main
inventory Levels
warehouse/Store
Level)
Monitoring/
Merchandise
Buying/Sourcing Plan Performance
Evaluation
Control Systems for Managing Inventory
• Merchandise Budget Plan
– Specifies how much money can be spent each month
to achieve the sales, margin, inventory turnover, and
GMROI objectives.
• Open to Buy System
– Monitors how much was spent and how much is left to
spend
• Physical Inventory Control Mechanisms
– Level of Backup Stock
– Order Points
– Perpetual Inventory & Automated Continuous
Replenishment
Merchandise Management process
Forecast Category Develop an
Sales Assortment Plan
Inventory
Management Plans
Determine appropriate
(Supplier/Main
inventory Levels
warehouse/Store
Level)
Monitoring/
Merchandise
Buying/Sourcing Plan Performance
Evaluation
Merchandise Buying and Sourcing Decisions
• Brands to buy
– Private Label v/s National v/s Imported Brands
• Sourcing Plan
– Supplier Identification
– Negotiation (Front/Back Margins, Terms of Buying,
Exclusivity, Allowances, Transportation)
– Contracts/Agreements
– Alternative sources
• Buying Mechanisms
– Direct Buying, Binding Contracts
– Tenders, Reverse Auction
• Building Strategic Relations
– Collaborative Planning, VMI
Private Labels
Advantages Disadvantages
• Unique merchandise
• Need to develop
not available at
competitive outlets expertise in developing
• Difficult for customers and promoting brand
to compare price with • Unable to sell excess
competitors merchandise
• Higher margins • Typically less desirable
for customers
Merchandise Management process
Forecast Category Develop an
Sales Assortment Plan
Inventory
Management Plans
Determine appropriate
(Supplier/Main
inventory Levels
warehouse/Store
Level)
Monitoring/
Merchandise
Buying/Sourcing Plan Performance
Evaluation
Analysis & Evaluation of Merchandise
Management
• Sell-Through Analysis
• ABC Analysis
• Multi Attribute Evaluation for Vendors
Sell Through Analysis Evaluating Merchandise Plan
A sell-through analysis compares actual and planned sales to
determine whether more merchandise is needed to satisfy demand or
whether price reductions are required.
ABC Analysis
An ABC analysis identifies the performance of individual
SKUs in the assortment plan.
Rank - orders merchandise by some performance
measure determine which items:
– should never be out of stock.
– should be allowed to be out of stock
occasionally.
– should be deleted from the stock selection.
ABC Analysis Rank Merchandise
By Performance Measures
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
Multiattribute Method for Evaluating Vendors
The multiattribute method for
evaluating vendors uses a
weighted average score for
each vendor. The score is
based on the importance of
various issues and the vendor’s
performance on those issues.
Multiattribute Method for Evaluating Vendors
Performance Evaluation of Individual
Brands Across Issues
Importance
Evaluation Brand A Brand B Brand C Brand D
Issues of Issues (I) (Pa) (Pb) (Pc) (Pd)
(1) (2) (3) (4) (5) (6)
Vendor reputation 9 5 9 4 8
Service 8 6 6 4 6
Meets delivery dates 6 5 7 4 4
Merchandise quality 5 5 4 6 5
Markup opportunity 5 5 4 4 5
Country of origin 6 5 3 3 8
Product fashionability 7 6 6 3 8
Selling history 3 5 5 5 5
Promotional assistance 4 5 3 4 7
n
I *P
Overall evaluation = 290 298 212 341
j ij
i =1
Retail Performance Measures
• Most retailers set their own performance
measures
• Some commonly used measures are
– Gross Margin Return on Inventory Investment
– Gross Margin per Square foot
– Gross Margin per employee
– Return on Equity
– Sales on Inventory
– Sales per transaction
– Customer Traffic/Hour (foot fall)
– Shrinkage to sales ratio
Legal & Ethical Issues in
Merchandise Management
Legal and Ethical Issues in
Merchandise Management
• Contractual Disputes
• Commercial Bribery
• Not maintaining agreed Resale Price
• Chargebacks (penalties for suppliers)
– Charges for shrinkages, slow movement etc.
– Sometime small mistakes are penalized
• Slotting/Listing Allowances/Back Margins
– Fee charged to vendor for space in store
– Bigger retailers have better negotiation power
– Used to make up for profits
Legal and Ethical Issues
• Forced Buybacks
• Counterfeit Merchandise
• Grey Markets and Diverted Merchandise
• Exclusivity Agreements
– Exclusive Territories
– Exclusive dealings
Ethical Sourcing
• Ethical Sourcing Policies include
– Determining where all purchased goods originated and
the manner in which they were made
– Knowledge of the suppliers’ workplace principles
– Inclusion of ethics as a criterion in supplier performance
rating
– Independent verification of vendor compliance
– Provision of detailed ethical sourcing expectations/ethical
code to suppliers
Fair trade
• Fair trade is a system/movement aimed at
offering ‘the most disadvantaged
producers in developing countries the
opportunity to move out of poverty through
creating market access under beneficial
rather than exploitative terms.
• Objective is to empower producers to
develop their own business and wider
communities through international trade’
• Encourages community development by
guaranteeing minimum prices and
conditions
• Many major retailers in Europe offer Fair
Trade products in their merchandise
• Fair Trade sales growing at about 15%+
(est. € 6.4 bn in 2016)
Merchandise Management-As a
whole
Determine
Forecast Category Develop an
appropriate
Sales Assortment Plan
inventory Levels
Monitoring/ Merchandise Inventory
Performance Buying/Sourcing Management
Evaluation Plan Plans
Legal & Ethical Requirements
