Chapter 12 Managing Merchandise Assortments Mc GrawHillIrwin Retailing

Chapter 12 Managing Merchandise Assortments Mc. Graw-Hill/Irwin Retailing Management, 6/e Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

2 Merchandise Management Retail Communication Mix Buying Systems Planning Merchandise Assortments Buying Merchandise Pricing

3 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 c) image 100/Punch. Stock

Merchandise Management and Investment Portfolio Management • Dollars to invest in inventory • Invest in “hot” merchandise • Save a little for opportunities (open to buy) • Monitor portfolio • Sell losers (markdowns) 4

Standard Merchandise Classification Scheme and Organizational Chart 5

6 Merchandise Management Issues

7 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

8 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. The Mc. Graw-Hill Companies, Inc. /Andrew Resek, photographer

9 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 Stockbyte/Punchstock Images

11 The Buying Organization Ryan Mc. Vay/Getty Images Merchandise Group…………Men’s wear Department…………. Young Men’s wear Classification…………. . Pants Category…………. . Jeans Sock Keeping Unit (SKU)…. . Levi, 501, size 26 waist, 32 inseam

12 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 SO HOW ARE MERCHANTS EVALUATED?

13 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

14 GMROI Inventory Productivity Measures GMROI = Gross Margin Percent x sales to stock ratio = gross margin net sales = x net sales avg inventory at cost gross margin avg inventory at cost

15 ROI and GMROI Asset Productivity Measures Strategic Corporate Level • Return on Assets = Net Profit Total Assets Merchandise Management Level • GROI = Gross Margin Avg Inventory

16 Illustration of GMROI

17 GMROI for Selected Department in Discount Stores

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

19 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

Inventory Turnover and Stock-to-Sale Ratio Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Sock-to-Sales Ratio = inventory 20 Cost of goods sold Average inventory at cost Net Sales Average cost of

21 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

22 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…

23 …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

24 Merchandise Planning Process

25 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) Royalty-Free/CORBIS

26 The Category Product Life Cycle

27 Variations in the Category Life Cycle

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

29 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? Ryan Mc. Vay/Getty Images

30 Forecasting Fashion Merchandise Categories Retailers develop fashion forecasts by relying on: • • • Previous sales data Personal awareness Fashion and trend services Vendors Traditional market research The Mc. Graw-Hill Companies, Inc. /Lars A. Niki, photographer

31 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 Ryan Mc. Vay/Getty Images

Collaboration, Planning, Forecasting, and Replenishment Systems (CPFR) 32 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

33 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.

34 Assortment Plan for Girls’ Jeans

Is This Store Heavy on Variety? On Assortment? Photo. Link/Getty Images 35

36 Determining Variety and Assortment Photo. Link/Getty Images • Profitability of Merchandise Mix • Corporate Philosophy Toward Assortment • Physical Characteristics of Store • Complementary Merchandise • Retail strategy can determine this