5 th Edition PPT 12 1 Chapter 12

5 th Edition PPT 12 -1

Chapter 12 Planning Merchandise Assortments Mc. Graw-Hill/Irwin PPT 12 -2 Retailing Management, 5/e Levy/Weitz: Copyright © 2004 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Merchandise Management Retail Communication Mix Buying Systems Planning Merchandise Assortments Buying Merchandise PPT 12 -3 Pricing

Merchandise Management Issues PPT 12 -4

The Category A category is an assortment of items that the customer sees as reasonable substitutes for each other: girls’ apparel, laundry detergents, soup, DVD players. In merchandise management, we do everything at the category level. The category can mean different things to different retailers. PPT 12 -5

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. Breakfast cereal category vs. Kellogg Corn Flake Men’s knitted shirts vs. Polo shirts • One person managing the entire category and responsible for its success or failure. PPT 12 -6

Category Captain Selected vendor responsible for managing assortment of merchandise in a category • Vendors frequently have more information and analytical skills about the category in which they compete than retailers • Works with category Mgr ---Promotion, pricing, brand & product placement on shelves. • Problems – Vendor category captain may have different goals than retailer PPT 12 -7

Standard Merchandise Classification Scheme and Organizational Chart PPT 12 -8

The Buying Organization Merchandise Group…………Men’s wear Department…………. Young Men’s wear Classification…………. . Pants Category…………. . Jeans Stock Keeping Unit (SKU)…. Levi, 501, size 36 waist, 32 inseam PPT 12 -9

Organization of a Regional Department Store: Rich’s PPT 12 -10

GMROI Productivity Measures Inventory Input PPT 12 -11 Gross Margin Output

GMROI Inventory Productivity Measures Combine Gross Margin % and Inventory Turnover (sort of) Gross Margin% Inventory Turn GMROI = Gross Margin x Net Sales Avg Inventory @ cost GMROI = Gross Margin Avg Inventory (@ cost) Output (Margin Generated by Sales) Input (Inventory Investment in Inventory) PPT 12 -12

ROI and GMROI Asset Productivity Measures Strategic Corporate Level Return on Assets = Net Profit Total Assets Merchandise Management Level GMROI PPT 12 -13 = Gross Margin Avg Inventory @ cost

Illustration of GMROI PPT 12 -14

Gross Margin %, Inventory Turnover, & GMROI for Selected Department in Discount Stores PPT 12 -15

Calculating Inventory Turnover Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Cost of goods sold Average inventory at cost Average inventory = PPT 12 -16 Month 1 + Month 2 + Month 3 +… Number of months

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 PPT 12 -17

Inventory Turnover and Sales-to-Stock Ratio Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Cost of goods sold Average inventory at cost Stock-to-Sales Ratio = Net Sales Average cost of inventory PPT 12 -18

Advantages of Rapid Turnover • Increased sales volume • Less risk of obsolescence and markdowns • Improved salesperson morale • Money for market opportunities • Decreased operating expenses • Increased asset turnover PPT 12 -19

Disadvantages of Rapid Rate of Turnover • Lowered sales volume • Increased cost of goods sold • Increased buying and ordering time PPT 12 -20

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) PPT 12 -21

Total Retail Sales The Category Product Life Cycle Decline Growth Maturity Introduction Time Strategy variable Target market Variety Distribution Intensity Price PPT 12 -22 Promotion Introduction High-income Innovators One basic offering Limited or extensive Penetrating or skimming Informative Growth Maturity Mass market Decline Middle-income adapters Some variety Low-income and laggards Less variety Greater variety More retailers Wide range Lower prices Fewer retailers Lower prices Persuasive Competitive Limited

Variations of the Category Life Cycle Fashion Staple Seasonal Sales over many seasons No Yes Yes Sales of a specific style over many seasons No No Yes Sales vary dramatically from one season to the next No Yes TIME PPT 12 -23 TIME SALES (Sales against Time) SALES Illustration SALES Fad TIME

Data Sources for Developing Sales Forecasts • Previous Sales History • Published Sources - Buying Power Index (BPI), Monthly Retail Trade Report, Info. Scan, Claritas, general retail trade publications like Stores, WWD and Chain Store Age • Customer Information • Vendors and Resident Buying Offices PPT 12 -24

SALES ($000) DOLLARS Sales for Levi Jeans at Trendsetters Department Store Fall sales Winter sales Spring & summer sales YEAR PPT 12 -25

Factors Affecting Sales Projections Controllable Uncontrollable • Promotions • Seasonality • Store Locations • Weather • Merchandise Placement • Competitive Activity • Cannabalization • Product Availability • Economic Conditions PPT 12 -26

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 PPT 12 -27

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. PPT 12 -28

Assortment Plan for Girls’ Jeans Styles T R A D I T I O N A L Price levels Fabric composition $20 Reg denim Stonewashed $35 Reg denim Stonewashed $45 Reg denim Stonewashed Colors Light blue B O O T Light blue C U T Price levels Fabric composition $25 Reg denim Stonewashed $40 Reg denim Stonewashed Colors Light blue Indigo Black PPT 12 -29 Light blue

Size Distribution for Traditional $20 Denim Jeans in Light Blue for a Large Store SIZE Length 1 2 4 5 6 8 10 12 14 Short 2 4 7 6 8 5 7 4 2 % 9 17 30 26 34 21 30 17 9 units 2 4 7 5 8 4 6 3 2 % 9 17 30 21 34 17 26 12 9 units 0 2 2 2 3 2 2 1 0 % 0 9 9 9 12 9 9 4 0 units 100% 429 units Medium Long Total PPT 12 -30

Is This Store Heavy on Variety? On Assortment? PPT 12 -31

Determining Variety and Assortment • Profitability of Merchandise Mix • Corporate Philosophy Toward Assortment • Physical Characteristics of Store • Complementary Merchandise PPT 12 -32

Relationship between Inventory Investment and Product Availability Inventory investment Dollars 600 500 400 300 200 100 0 80 85 90 95 Product Availability (Percent) PPT 12 -33 100

Cycle and Backup Stock Units Available 150 - Order 96 Cycle Stock 100 Buffer Stock 50 - 0 - 1 2 3 Weeks PPT 12 -34 4