Retail management

1. Retail Management
Merchandise Management

2. Lecture Overview
• Merchandising overview
• The Buying Function
• Merchandise Planning
• Procurement and Category Management
• Pricing
• Evaluating Merchandise Performance

3. 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.

4. 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

5. 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, men's accessories for men)

6. 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.

7. 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

8. 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’.

9. 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

10. 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

11. The Buying Function
Elements of an efficient OTB plan:
– Sales Forecast
– Forward cover
– Stock required
– Opening Stock
– Intake requirement
– On order
– Open to receive (OTB quantity)
– Closing stock

12. 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.

13. 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.

14. 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.

15. Process of Merchandise
Management
Store (Format) Strategy
Merchandise Sourcing
Planning . Make or buy
Allocation
. Vendor Performance
Business Merchandise . Product of
. Price identification Monitoring &
Strategy Strategy . Range . Negotiation
Merchandise
Evaluation
to the stores
. Assortment . Placing the
. Space order
Store Operations Strategy

16. 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

17. Some Important concepts
• The Merchandise Hierarchy
Merchandise Merchandise Merchandise Style SKU
Company Department Classification category Sub-category Price point

18. Some Important concepts
• Staple/Basic merchandise
• Fashion Merchandise
• Seasonal merchandise
• Fad merchandise
• Style
• Assortment
– Width of the assortment
– Depth of the assortment
– Consistency

19. 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

20. Process of Merchandise Planning
Stage II Continued….
Merchandise budget – A financial plan that indicates how
much to invest in product inventories

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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)

27. 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.

28. Method of Procuring Merchandise
1. Identifying the source of supply 1. Negotiating with the source
– Domestic or International – Trade discounts
2. 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

29. 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

30. 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

31. 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.

32. 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

33. 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

34. Reason for Emergence of Category
management
• Consumer Change
• Competitive pressure
• Economic and efficiency considerations
• Advancement in Information Technology

35. Components of Category
Management
• Strategy
• Business processes
• Performance measurement
• Organizational Capabilities
• Trading Partner Relationships
• Information Technology

36. Category Management Process
• Step 1: Category Definition
– Narrowly defined
– Broadly defined
• Step 2: Defining the Category Role
– Destination Categories
– Preferred/routine Categories
– Occasional/Seasonal Categories
– Convenience Categories

37. Category Management Process
• Step 3: Category Assessment
– Quadrant analysis by Brian Harris
Sleepers Winners
Questionable Opportunities

38. Category Management Process
• Step 4: Category Performance Measures
– In terms of sales. Margins. Gross Margin return on Investment
(GMROI)
– Typical measures are – Sales, Profits, Market Share, Inventory
turnover, Consumer transactions, etc.
• Stage 5: Category Strategies
– Traffic Building
– Transaction Building
– Turf Defending
– Profit Generating
– Cash generating
– Excitement creating
– Image enhancing

39. Category Management Process
• Step 6: Category Tactics
– Determination of optimal category pricing,
promotion, assortment and shelf management.
• Step 7: Category Plan implementation
• Step 8: category review

40. RETAIL PRICING

41. 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.”

42. Pricing Challenges for Retailers
1. All the sales in past decades have conditioned
consumers to never pay full price
2. 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

43. Factors affecting Retail Price
Store Policies
Target Market Competitor’s
Retail Price Price
& demand
Economic
Conditions

44. External influences on retail pricing
strategy
Legal issues
•Price Discrimination
•Vertical Price Fixing
•Horizontal Price Fixing
Competitors •Predatory Pricing
Suppliers Pricing Government
•Economic
Customers •Convenience oriented
•Image Oriented
•Variety Oriented
•Loyalty Oriented

45. 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

46. Methods of setting price
1. Cost oriented – take merchandise cost
and add fixed percent markup
2. Demand oriented – price is what
customer will pay
3. Competition oriented – price at par,
above or below the competitors’ prices.
Which is preferred by marketers? Why?

47. 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

48. Pricing approaches and retail marketing mix
Retail Price below market Price at market Price above
marketing price price market price
mix variable
Location No parking, poor Central business Monopoly,
layout, district, proximity compatible location
inaccessible to competition to target segment
Service Self-service, limited Support for sales Personalized
attributes offerings, no sales people attention to
customers, home
delivery, exchange
facility, customized
offerings
Assortment Limited variety Medium Extensive
assortment
Store Poor quality fixtures, Compatible store Inviting, impressive
environment limited space to environment store décor, visual
move around, wall merchandise
shelves, untidy attractive

49. 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

50. Pricing strategy contd
 Traditional pricing
 Pre-emptive pricing
 Extinction pricing
 Perceive value pricing
 Demand–oriented pricing
 Fixed and variable pricing

51. Price Sensitivity and Demand
• Economic theory – set prices based on price
sensitivity
Elasticity = percent change in quantity sold/percent change in price

52. 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

53. 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

54. Mark Up Pricing
Retail Price = Cost + Mark Up
Mark up = Retail Price – Cost
Mark Up% (Based on Retail Price)
= Mark up in Rupee/Retail Price
Mark Up% (Based on Cost)
= Mark up in Rupee/Cost

55. 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

56. 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

57. Example
Net sales Rs.120,000
- COGS 58,000
Maintained markup 62,000
- cash discounts 3,000
Gross Margin 59,000

58. Initial MU Calculations
• Initial Markup=Maintained Markup + Reductions
Net sales + Reductions
OR in percent terms
• Initial Markup%=Maintained Markup% + Reductions%
100% + Reductions%

59. Example
• Assume reductions = Rs. 14,400
Initial MU = 62,000 + 14,400 = 56.85%
120,000 + 14,400
OR in % terms
= 51.67% + 12% = 56.85%
100% + 12%
** Initial MU is always greater than maintained MU
if there are reductions

60. RSP, Cost and Mark Up
Retail Selling Price – Cost = Mark Up
So 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 + 56.85
43.15 = cost
Keep in mind here is that you are taking % MU of
RSP NOT of Cost

61. Adjustments to Price
• Markdown
• Markdown Cancellation
• Additional markups

62. 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%

63. Markdown Cancellation
• Amount by which price is raised after a
sale used only for promotional markdowns
only in effect up to initial retail price

64. Additional Markup
• Increase in the initial selling price
• Rare, but does happen
• Why?

65. 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.

66. 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).

67. Analyzing Merchandising
Performance
Three methods
• ABC Analysis (based on Pareto principle)
• Sell Through Analysis
• Multiple Attribute method

68. 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.

69. 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.