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Lecture Overview• Merchandising overview• The Buying Function• Merchandise Planning• Procurement and Category Management• Pricing• Evaluating Merchandise Performance
Merchandising Activities involved in acquiring particular goods and/or services and making them available at the places, times, and prices and in the quantity that enable a retailer to reach its goals. AMA defines Merchandising as “the planning involved in marketing the right merchandise at the right place at the right time in the right quantities at the right price.”• Merchandising is both an art and a science.
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.• Merchandise management is the sum of: – Analysis – planning – procurement, – handling and – control of merchandise investments of a retail operation
Product management vs. merchandise management• Product management deals with issues and set of decisions related to the selection and removal of products from the retailers’ portfolio• Merchandise management relates to the selection of the right quantity of the product and ensures its availability at the right place and time (Pantaloon offers fashion and leather accessories, cosmetics, perfumes, jewellery for women and formals, smart casuals, denims, mens accessories for men)
Factors affecting Merchandising• Type of Store• Size of Organization• Organization Structure• Merchandise to be carried These factors also affect the Merchandising Philosophy of the retailer.
The Merchandiser’s Role & Responsibilities• Planning Activities of a Divisional Merchandise Manager (DMM)• Directing – Forecasting sale for forthcoming budget period• Coordinating – Translating the forecast into• Controlling inventory levels in terms of rupees – Inspiring commitment & performance on the part of merchandisers & buyers – Assessing merchandise and buyer’s performance
Buyer’s Roles & Responsibilities• Role is to select and order the merchandise skillfully.• Central Buyers, Associate Buyers and assistant or Junior Buyers• Key responsibilities – Developing the merchandising strategies for the product line, store or organization. – Planning & selecting merchandise assortments – Vendor selection, development and management, negotiating with the vendor. – Pricing the merchandise to achieve the targets. – Inventory Management – allocation of merchandise to various stores.• Some organizations also have ‘Purchase agents’.
Function of Buying for Different Types of Stores• Buying for an independent Store• Buying for a Chain store or a chain of department stores – Central Buying Plans – Central Merchandising Plans• Buying for Non-Store retailers
The Buying Function• Critical Function of Merchandising• Starts with Preparation of the Buying Plan, called “Open to Buy” or OTB.• OTB refers to merchandise budgeted for purchase during a certain period of time for which the stocks have not yet been ordered. It is also the process of forecasting sales and purchase
The Buying FunctionElements of an efficient OTB plan: – Sales Forecast – Forward cover – Stock required – Opening Stock – Intake requirement – On order – Open to receive (OTB quantity) – Closing stock
Advantages of An OTB Plan• The OTB plan enables retailers to estimate in advance the amount of working capital to be employed in inventory.• It helps ensure the right inventory level to support planned sales and to attain the best Gross Margin Return On Inventory (GMROI).• It places restraints on merchandise commitments so that the store receives the right merchandise at the right time and not before or after.• It enables a continuous flow of fresh merchandise into the store during the season.• OTB plan establishes goals for the purpose of measurement and control.• It provides the organization more opportunities for cost control, thereby improving profitability.
Lifestyle Merchandising• Proving merchandise or knowingly adopting a merchandising strategy, which will serve the needs of a specific target audience, in keeping with the lifestyles they lead.
Merchandising Planning• Planning and control of the merchandise inventory of the retail firm, in a manner which balances between the expectations of the target customers and the strategy of the firm.• Benefits for Retailers – Provides with right assortment of goods, with adequate depth at the right place; Increased stock turns thereby releasing working capital.• Benefits for Customers – Increases the choices available to him, reduces the situation of out-of- stock.
Process of Merchandise Management Store (Format) Strategy Merchandise Sourcing Planning . Make or buy Allocation . Vendor PerformanceBusiness Merchandise . Product of . Price identification Monitoring &Strategy Strategy . Range . Negotiation Merchandise Evaluation to the stores . Assortment . Placing the . Space order Store Operations Strategy
Implications on Other Departments• Finance – Payments to suppliers – Profitability measurement• Marketing – New Product introductions – Developing Advertisement – Developing Sales Promotions• Warehousing & Logistics – Details of Purchase order – Details of allocations• Store Operations – Space planning – Communication about new products & their features
Some Important concepts• The Merchandise Hierarchy Merchandise Merchandise Merchandise Style SKUCompany Department Classification category Sub-category Price point
Some Important concepts• Staple/Basic merchandise• Fashion Merchandise• Seasonal merchandise• Fad merchandise• Style• Assortment – Width of the assortment – Depth of the assortment – Consistency
Process of Merchandise Planning• Stage I: Developing the sales forecast • Reviewing past sales • Analyzing the changes in economic conditions • Analyzing the changes in the sales potential • Analyzing the changes in the marketing strategies of the retail organization and the competitors• Stage II: Developing the Merchandise Requirements Planning is done at two levels • Creation of Merchandise budget • The Assortment Plan
Process of Merchandise Planning Stage II Continued….Merchandise budget – A financial plan that indicates how much to invest in product inventories
Process of Merchandise Planning Stage II Continued….• Model Stock Plan• The Six-Month Merchandise Plan – Translating profit objective into a framework of merchandise planning & control Key components – Planed sales – Planned Purchases – Planned reductions – Planned Markup – Gross margin – B.O.M. & E.O.M. planned inventory levels
Process of Merchandise Planning Stage II Continued….• Planed sales – Projected sales for the planned period.• Planned Purchases – Planned purchases = Planned sales + Planned Reductions + Planned EOM – Planned BOM – Planned Purchases at Cost = Planned purchase at Retail X (100% - Initial mark up %)• Planned reductions – Planned Markdowns – Employee Discounts – Shrinkage
Process of Merchandise Planning Stage II Continued….• Planned Markup – Markup in Rupees= Selling Price- Cost Price – Markup percent = Markup in rupees/ Retail Price• Gross margin – Gross Margin = Selling price – cost – reduction• B.O.M. & E.O.M (Planned Inventory Levels) – Stock/sales ratio (BOM) Method • BOM Inventory = Planned Monthly Sales X Stock-sales ratio – Weekly Supply Method • No. of weeks to be stocked = No. of weeks in the period/Stock turnover in the period Average weekly sales = Estimating total sales in the period/ the no. of weeks in the period BOM Stock = Average weekly sales X No. of weeks to be stocked – Percentage Variation Method • BOM Stock = Avg. stock for the season *1/2*[1+(Planned sales for the month / Average monthly sales)] – Basic Stock Method • BOM stock = Planned sales for month + Avg. Inventory – Avg. monthly sales = Planned sales for the month + Basic Stock
Process of Merchandise Planning• Stage III: Merchandise Control – The open-to-buy • Limits overbuying & underbuying • Prevents loss of sale due to unavailability of stock • Maintain purchases within the budgeted limits • Reduce markdowns which may arise due to excess buying – Calculation of the Open-to-buy Open-to-buy = Planned EOM stock – projected EOM Stock Projected EOM stock = Actual BOM stock + Actual Addition to Stock + Actual on Order – Planned monthly sale – Planned Reductions for the month
Process of Merchandise Planning Stage IV Continued…• Stage IV: Assortment Planning – Determining the quantities of each product to be purchased as per the overall merchandise plan. Factors Affecting Assortment Plan: • Type of Merchandise (Staple, fashion, convenience etc) • Type of Brands • Level of exclusivity • Money available for buying • Target for merchandise turnover • Space available in the store • Market constraints – The Range Plan – The Model Stock Plan
Model stock plan• Identify the attributes considered by the customer in purchasing the product – Focuses on features or attributes and availability in terms of sizes and brands (Pantaloon focuses on men’s and women’s wear, varied sizes and brands)• Identify number of levels under each attribute – List levels available in respective product category on offer to target segment in view of preferences and similar offerings of competitors 1. Type of Shirt (Dress, Casual, Formal, Sport) 2. Size (Small Medium, Larger XL) 3. Sleeve Length (Full Sleeves, Short Sleeves)• Allocate total rupees or units to respective product categories Type Dress Casual Formal Sport % of sales 10 40 20 30 Sizes Small Medium Large XL % of sales 25 40 25 10 Sleeve Length Full Half % of sales 30 70 An acid test for a retailer planning for the optimal merchandise mix (includes ordering cost, transportation, and stocking cost)
Merchandise Procurement• Whether merchandise will be manufactured in- house or to be sourced from a vendor As per the retail model, the mix is decided: – National/Regional Brands – Private Labels or own Brands – Combination of both• Merchandise Sourcing – Finding or seeking out Products from different places, manufacturers or suppliers. – Affects availability of stock, margins earned by retailers, and the stock turn.
Method of Procuring Merchandise1. Identifying the source of supply 1. Negotiating with the source – Domestic or International – Trade discounts2. Contacting and evaluating the – Quantity discounts source – Seasonal Discounts – Criteria for potential Vendors – Cash discounts • The target market to be served 2. Establishing Vendor Relations • The Image of the retail – Mutual Trust Organization • The merchandise and prices – Open Communication offered – Common Goals • Terms & Services offered by – Credible Commitments Vendors • 3. Analyzing Vendor Vendor’s reputation & reliability Performance • Adaptability of the vendor in terms of schedules
Private Label/Own Brand• Products or a line of Merchandise which is owned, controlled, merchandised and sold by the retailer in his own store or chain of stores.• Can be the Store’s own name or a name created exclusively by that store. – Store Brands – Westside, Big Bazaar – Umbrella Brand – Bare, Stop – Individual Brands
Private Label/Own brand• private label sales have showed an increase in terms of both value and volume across countries• labels enhance store profitability by increasing pressure on branded manufacturers• labels can be used to increase margins or offer products at lower prices• better control over price, delivery, and quality, ensures a strong brand identity for a retailer• effective private label programme to include all elements of the value proposition—price, quality, and product differentiation
Advantages of Private Labels• Filling up the need gap in the marketplace.• Retailer can offer a unique and differentiated product, thereby creating a competitive advantage.• Retailer can respond to changes in consumers tastes and preferences faster.• Retailer can earn a higher margin than other brands by controlling the costs.
Creation of private labels• Define the objective• Define the gaps in the market• Decision on Make-or-buy and sourcing• Determine the marketing and sales strategy• Determine the measure of performance
Category management• Category management: process of managing a retail business with the objective of maximizing the sales and profits of a category rather than the performance of individual brands or models. – The distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value.• Advantages: – increased sales – reduced inventory management – improved route and warehouse management
Reason for Emergence of Category management• Consumer Change• Competitive pressure• Economic and efficiency considerations• Advancement in Information Technology
Components of Category Management• Strategy• Business processes• Performance measurement• Organizational Capabilities• Trading Partner Relationships• Information Technology
What is Price?• Basis for exchange. What the retailer is willing to sell product/service for; what the consumer is willing to pay to obtain product/service• No intrinsic value to ANYTHING. If the customer is willing to pay the price, that’s what the product is “worth.”
Pricing Challenges for Retailers1. All the sales in past decades have conditioned consumers to never pay full price2. Economic recession makes price more important – raises the “value” issue.3. Stores with “everyday low prices” are increasingly important.4. Profitability depends upon 1. Profit margin on the offering 2. The cost involved in selling the merchandise
Retail pricing objectives• Retail pricing objectives or goals provide direction to the whole pricing process• Retailers determine their objectives as the first step in pricing• Objectives – Profit – market share – Target Sales – Meet or prevent competition
Methods of setting price1. Cost oriented – take merchandise cost and add fixed percent markup2. Demand oriented – price is what customer will pay3. Competition oriented – price at par, above or below the competitors’ prices.Which is preferred by marketers? Why?
Retail pricing: approaches and strategies• discount orientation - low prices are used as the major tool for competitive advantage - store portrays a low status image and offers fewer shopping frills - profit margins are kept low to target price based customers• at-the market orientation - store with at-the-market orientation normally sets average prices - offers solid service to middle-class shoppers - margins are average to good and stocks moderate to above quality products• upscale orientation - upscale orientation competitive advantage is derived from the prestigious image of the store - the profit margins per unit are high coupled with higher operating costs and lower inventory turnover
Pricing approaches and retail marketing mixRetail Price below market Price at market Price abovemarketing price price market pricemix variableLocation No parking, poor Central business Monopoly, layout, district, proximity compatible location inaccessible to competition to target segmentService Self-service, limited Support for sales Personalizedattributes offerings, no sales people attention to customers, home delivery, exchange facility, customized offeringsAssortment Limited variety Medium Extensive assortmentStore Poor quality fixtures, Compatible store Inviting, impressiveenvironment limited space to environment store décor, visual move around, wall merchandise shelves, untidy attractive
Pricing strategy• Every day low pricing(EDLP)• High-Low pricing• Loss Leader pricing• Market Skimming pricing• Market Penetration pricing• Psychological pricing - prestige pricing - reference pricing• Odd Pricing• Multiple unit pricing• Bundled pricing
Pricing strategy contd Traditional pricing Pre-emptive pricing Extinction pricing Perceive value pricing Demand–oriented pricing Fixed and variable pricing
Price Sensitivity and Demand• Economic theory – set prices based on price sensitivity Elasticity = percent change in quantity sold/percent change in price
Elements of Retail Price• Fixed Costs• Variable Costs• Determining the Price – Break Even Analysis – Mark Up Pricing • Cumulative Mark Up • Initial Mark Up • Maintained Mark Up
Break Even Analysis• Break Even Point – the point at which the retailer neither makes profits nor suffers losses. Break Even Revenue = Fixed Costs/ 1- (Variable cost per unit/ selling price per unit) Break Even Units = Fixed Costs/ Unit Contribution Margin
Mark Up PricingRetail Price = Cost + Mark UpMark up = Retail Price – CostMark Up% (Based on Retail Price) = Mark up in Rupee/Retail PriceMark Up% (Based on Cost) = Mark up in Rupee/Cost
Markups• Initial markup – retail selling price initially set for the merchandise minus the cost of merchandise• Maintained markup – the actual sales realized for the merchandise minus its costs• Cumulative Mark Up is calculated for a group of products
Some important definitions• Initial markup – amount product is initially marked up Original selling price = cost + initial markup• Maintained markup – amount the retailer expects to make on the sale of a particular item Maintained markup=Net sales – COGS Maintained markup% = Maintained MU/Net Sales• Maintained Selling Price = Initial Selling Price- Reductions
Example Net sales Rs.120,000- COGS 58,000 Maintained markup 62,000- cash discounts 3,000 Gross Margin 59,000
Initial MU Calculations• Initial Markup=Maintained Markup + Reductions Net sales + Reductions OR in percent terms• Initial Markup%=Maintained Markup% + Reductions% 100% + Reductions%
Example• Assume reductions = Rs. 14,400Initial MU = 62,000 + 14,400 = 56.85% 120,000 + 14,400OR in % terms = 51.67% + 12% = 56.85% 100% + 12%** Initial MU is always greater than maintained MU if there are reductions
RSP, Cost and Mark UpRetail Selling Price – Cost = Mark UpSo if RSP is Rs.100 and MU is 56.85%, what is cost?100 = cost + (56.85% x RSP)100 = cost + (56.85% x 100)100 = cost + 56.8543.15 = costKeep in mind here is that you are taking % MU of RSP NOT of Cost
Adjustments to Price• Markdown• Markdown Cancellation• Additional markups
Markdowns• Reductions in initial retail selling price• Reasons for taking markdowns Clearance (get rid of stuff) Promotional (build store traffic)• Always calculate markdowns as a % of the the last RSP• Selling price = Rs 25; markdown = Rs.5 Markdown % = 5/25 = 20%
Markdown Cancellation• Amount by which price is raised after a sale used only for promotional markdowns only in effect up to initial retail price
Additional Markup• Increase in the initial selling price• Rare, but does happen• Why?
How Can Retailers Reduce Price Competition?• Develop lines of private label merchandise• Negotiate with national brands manufacturers for exclusive distribution rights• Have vendors make unique products for the retailer.
Evaluating Merchandise Performance• Inventory Turnover or Merchandise Stock Turnover – measures how long inventory is on hand before it is sold. – Inventory Turnover = Net Sales/ Avg Inventory at retail Or = Cost of merchandise sold/ Avg inventory at cost Or = Units sold/avg units in inventory Most common Methods are gross margin% (measures relative profitability) and weeks cover (measures how effectively the stock gets turned).
Analyzing Merchandising PerformanceThree methods• ABC Analysis (based on Pareto principle)• Sell Through Analysis• Multiple Attribute method
GMROI (Gross Margin Return on Inventory) It is a critical performance measure for merchandising and buying. Margin = Turnover at MRP – Cost of Goods Sold GMROI = (Margin)/(Average Inventory Holding) or, = gross margin/average inventory at cost• Means of getting better GMROI – Reducing the Cost of Goods Sold by achieving better buying efficiencies. – Increasing the stock turnover rate by reducing the average inventory held.
Other methods• Reorder Point – considers safety stock, speed of sale of the product, lead time.• Economic Order Quantity (EOQ) – considers sale of product, cost, discounts, cost of holding inventory. EOQ = 2DS/IC D = annual demand, S = Cost of placing order I = percentage of annual carrying cost to unit cost C = Unit cost of an item• Direct Product Profit (DPP) – contribution profit of individual retail items in individual stores DPP = Item’s gross margin+ discounts& Allowances earned – direct handling, selling and inventory holding costs.