Chapter 12
Managing Merchandise
Assortments
McGraw-Hill/Irwin
Retailing Management, 6/e
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
12-2
Merchandise Management
Retail
Communication
Mix
Buying
Systems
Planning
Merchandise
Assortments
Buying
Merchandise
Pricing
12-3
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) image100/PunchStock
12-4
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)
12-5
Standard Merchandise Classification
Scheme and Organizational Chart
12-6
Merchandise Management Issues
12-7
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
12-8
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 McGraw-Hill Companies, Inc./Andrew
Resek, photographer
12-9
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
12-10
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
12-11
The Buying Organization
Ryan McVay/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
12-12
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?
12-13
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
12-14
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
12-15
ROI and GMROI
Asset Productivity Measures
Strategic Corporate Level
• Return on Assets = Net Profit
Total Assets
Merchandise Management Level
• GROI
= Gross Margin
Avg Inventory
12-16
Illustration of GMROI
12-17
GMROI for Selected Department in Discount Stores
12-18
Calculating Inventory Turnover
– Inventory turnover =
– Inventory turnover =
– Average inventory =
Net Sales
Average inventory at retail
Cost of goods sold
Average inventory at cost
Month1 + Month2 + Month 3 +…
Number of months
12-19
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
12-20
Cost of goods sold
Average inventory at cost
Net Sales
Average cost of
12-21
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
12-22
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…
12-23
…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
12-24
Merchandise Planning Process
12-25
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
12-26
The Category Product Life Cycle
12-27
Variations in the Category Life Cycle
12-28
Factors Affecting Sales Projections
•
•
•
•
Controllable
Promotions
Store Locations
Merchandise
Placement
• Cannabalization
Uncontrollable
• Seasonality
• Weather
• Competitive Activity
• Product Availability
• Economic Conditions
12-29
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 McVay/Getty Images
12-30
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 McGraw-Hill Companies, Inc./Lars A. Niki, photographer
12-31
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 McVay/Getty Images
Collaboration, Planning, Forecasting,
and Replenishment Systems (CPFR)
12-32
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
12-33
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.
12-34
Assortment Plan for Girls’ Jeans
Is This Store Heavy on Variety?
On Assortment?
PhotoLink/Getty Images
12-35
12-36
Determining Variety and Assortment
PhotoLink/Getty Images
• Profitability of Merchandise Mix
• Corporate Philosophy Toward
Assortment
• Physical Characteristics of Store
• Complementary Merchandise
• Retail strategy can determine this