5th Edition

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

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

Merchandise Management Issues

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.

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.

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 Problems Vendor category captain may have different goals than retailer

Standard Merchandise Classification Scheme and Organizational Chart

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

GMROI Productivity Measures Gross Margin Inventory Input Output

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

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

Illustration of GMROI

Gross Margin %, Inventory Turnover,& 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

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 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

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

Disadvantages of Rapid Rate of Turnover Lowered sales volume Increased cost of goods sold Increased buying and ordering time

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)

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

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

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

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

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

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

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.

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

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

Is This Store Heavy on Variety? On Assortment?

Determining Variety and Assortment Profitability of Merchandise Mix Corporate Philosophy Toward Assortment Physical Characteristics of Store Complementary Merchandise

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

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