Lecture Retailing management (6/e): Chapter 12 - Levy Weitz

Lecture Retailing management (6/e): Chapter 12 - Managing merchandise assortments. The following will be discussed in this chapter: Merchandise management, merchandise management and investment portfolio management,...

Retailing Management, 6/e Copyright © 2007 by The McGraw­Hill Companies, Inc. All rights reserved.

Managing Merchandise

Assortments

Merchandise Management

Systems

Planning Merchandise Assortments

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

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)

Scheme and Organizational Chart

Merchandise Management Issues

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

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

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

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

The Buying Organization

Merchandise Group…………Men’s wear

Department………….……….Young Men’s wear Classification………….…… Pants

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

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

Digital Vision / Getty Images

Inventory Productivity Measures

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

ROI and GMROI Asset Productivity Measures

Strategic Corporate Level

• Return on Assets = Net Profit

Total Assets

Merchandise Management Level

• GROI = Gross Margin

Avg Inventory

Illustration of GMROI

GMROI for Selected Department in Discount Stores

Calculating Inventory Turnover

– Inventory turnover = Net Sales

Average inventory at retail

– Inventory turnover = Cost of goods sold

Average inventory at cost

– Average inventory = Month1 + Month2 + Month 3 +…

Number of months

Stock-to-Sale Ratio

Inventory turnover = Net Sales Average inventory

at retail

Inventory turnover = Cost of goods sold

Average inventory at cost

Sock-to-Sales Ratio = Net Sales

Average cost of inventory

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

Approaches for Improving Inventory Turnover

• Reduce number of categories

• Reduce number of SKUs within a category

• Reduce number of items in a SKU

color or brand, patronage and sales

decrease!

another

approach…

…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

Merchandise Planning Process

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

The Category Product Life Cycle

Variations in the Category Life Cycle

Factors Affecting Sales Projections

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

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

Personal Awareness

How do fashion buyers know the trends?

• Internet chat rooms

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

Assortment Planning

Variety is the number of different

merchandising categories within a store or

department

category

demand for a particular SKU that is satisfied

Assortment Plan for Girls’ Jeans

On Assortment?

PhotoLink/Getty Images

Determining Variety and Assortment

• Profitability of Merchandise Mix

• Corporate Philosophy Toward