Merchandising

Activities involved in acquiring particular

goods/services and making them available at
the places, times, prices, and quantities that
enable a retailer to reach its goals.
 Buyer
 Responsible for selecting the merchandise to be carried by
a retailer.
 Devises prices, sales and profit projections for a product
category.
 Plans proper merchandise assortments, styling, sizes,
quantities.
 Negotiates with vendors.
 Prepares detailed plans on employee utilization, personal
selling approaches.
 Oversees in-store displays, advertising.
Merchandising and Store
Functions Performed
 Buyers manage buying functions:
 Buying
 Advertising
 Pricing
 In-store personnel manage other tasks:
 Assortments
 Point-of-sale displays
 Employee utilization
 Personal selling approaches
Grouping Tasks into Jobs
Tasks Jobs
Displaying merchandise, customer contact, gift wrapping, Sales personnel
customer follow-up
Entering transaction data, handling cash and credit Cashier(s)
purchases, gift wrapping
Receiving merchandise, checking incoming shipments, Inventory personnel
marking merchandise, inventory storage and control,
returning merchandise to vendors
Window dressing, interior display setups, use of mobile Display personnel
displays
Billing customers, credit operations, customer research Credit personnel
Merchandise repairs and alterations, resolution of Customer service personnel
complaints, customer research
Cleaning store, replacing old fixtures Janitorial personnel
Employee management, sales forecasting, budgeting, pricing, Management personnel
coordinating tasks
Devising Merchandise Plans
Forecasts
 These are projections of expected retail sales
for given periods.
 Components:
 Overall company projections

 Product category projections

 Item-by-item projections

 Store-by-store projections (if a chain)

Factors in Planning
Merchandise Innovativeness - 1
FACTOR RELEVANCE for PLANNING
Target market(s) Evaluate whether the target market is
conservative or innovative

Goods/service Consider each new offering on the basis of

growth potential rapidity of initial sales, maximum sales
potential per time period, and length of
sales life

Fashion trends Understand fashion trends

Retailer image Carry goods/services that reinforce the

firm’s image
Factors in Planning
Merchandise Innovativeness - 2
FACTOR RELEVANCE for PLANNING
Competition Lead or follow competition in the selection
of new goods/services

Customer segments Segment customers by dividing

merchandise into established-product
displays and new-product displays

Responsiveness to Carry new offerings when requested by the

consumers target market

Amount of Consider all possible investment for each

investment new good/service: product costs, new
fixtures, and additional personnel
Factors in Planning
Merchandise Innovativeness - 3
FACTOR RELEVANCE for PLANNING
Profitability Assess each new offering for potential
profits

Risk Be aware of the possible tarnishing of the

retailer’s image, investment costs, and
opportunity costs

Declining goods/ Delete older goods/services if sales and/or

services profits are too low
Structured Guidelines for Pruning Products

 Select items for possible elimination on the basis of

declining sales, prices, profits, and appearance of
substitutes.
 Gather and analyze detailed financial/ miscellaneous
data about these items.
 Consider non-deletion strategies such as cutting costs,
revising promotion efforts, adjusting prices, and
cooperating with other retailers.
 After making a deletion decision, do not overlook
timing, inventory, etc.
Retail Assortment Strategies
Width of assortment refers to the number of
distinct goods/service categories (product lines) a
retailer carries.
Depth of assortment refers to the variety in any
one goods/service category (product line) a retailer
carries.
14-13
 Category Management
 Category management is a merchandising technique used
to improve productivity.
 Total range of products sold by a retailer is broken down
into discreet groups of similar or related products known
as product categories.
 It is a way to manage a retail business that focuses on the
performance of product category results rather than
individual brands.
 It arranges product groupings into strategic business units
to better meet consumer needs and to achieve sales and
profit goals.
Underlying Logic
 Little amount of profit can be got through price negotiations,
greater profit is made by increasing total level of sales in a
category
 The relationship between retailer and supplier is more
collaborative in nature (not adversarial) with more
openness and information sharing.
 Each category is run like a “mini-business,” managed by
both the retailer and suppliers, with its own category
turnover and profitability targets.
 Suppliers are expected to propose actions (such as new
products or promotions) only if they add to total category
sales and shopper satisfaction.
 How does it work?
 The retailer has access to valuable data on buying
behaviour.
 The manufacturer or category captain (usually one with
the largest market share) has an extremely good
understanding of the category.
 In this relationship, the category captain gets access to
shopping data for not only its own brands but also the
competition’s.
 The model ensures that the retailer gets a certain growth in
the category compared with its competitors (better returns
on per-square-foot basis).
 The category captain’s volumes also grow.
 To the brand, it may not result in any margin saving
but ensures a long-term, mutually advantageous
relationship based on growing volumes, commitment to
the brand, and growing category offtake.
 It may appear that the brand is helping in growing a
competitor brand. But in the long term, the pie becomes
bigger for everyone, benefiting the brand (which initiated
it) the most.
 Manufacturers gain in bottom-line and profitability.
The idea is to sell the higher-value, higher-margin
products so that both the retail outlet and the category
leader stands to gain.
 Typically, the category captain would take care of the
stocking, supply chain and back-end & front-end
manning for the retailer in the category concerned.

REASON FOR GROWTH IN CATEGORY MANAGEMENT

– development of software at the back-end operations
whereby the vendor is directly updated on the sales and
can add value to the category without using lopsided
judgment.
Solving problems in category management
To maximize profitability, decide quantities to buy from 3
vendors for 3 products called 1, 2 and 3:
Stocks not to exceed 1000 SKUs
Margins per unit sold are Rs.20, Rs.28, and Rs.35
Space reqd. per unit of SKU is 0.5 sq.ft, 0.8 sq. ft and 1 sq.ft
Total space available is 800 sq.ft.
Total budget available is Rs.300,000
Purchase price per unit is Rs.200, Rs.300 and Rs.400

Use linear programming to solve

Codification
 The lowest level at which data needs to be captured by a
store representative is at the size and price levels.
 The format in which this data is to be captured is usually
implemented at the billing stage.
 For determining the SKU being sold, material code is most
important representation for store manager.
PA-A8MFFCHNCL represents “Park Avenue brand of
Autumn 8 Men’s Full Formal Shirt with Check Design
and Normal Collar of L size”.
 For each product category the material or style code would
differ depending on the number of levels on which data
needs to be captured.
A sample bill
1. Define category:
in terms of products included/excluded so as to be either inter-
related or substitutable when it comes to meeting consumer
needs.
2. Assign a role to the category based on several questions:
role can be niche, staples or fill-ins. Other roles can be –
destination, preferred, convenience, occasional or seasonal
 How important is the category to the consumer?
 How important is the category to the retailer?
 How important is the category to the retailer’s competitors?
 What is the category’s outlook in the marketplace?

3. Assess the category to find opportunities for

improvement:
understand existing performance through sales, billing value per
customer, footfall, conversion ratio, category profitability

Steps for good category management - 1

 Category roles
 Destination categories (2% - 7%)
 Most important category for retailer

 Store is well known for selling of this category due to the best collection
available at the best prices (e.g. consumers checking products and prices of
air conditioners and refrigerators at Chroma, Terry Wool collection in
Raymond’s)

 These categories do not need heavy promotion

 Retailer’s objective is to deliver value through products in this category,

build a distinct position for the store in the minds of consumers

 Preferred categories (55% - 60%)

 These are there in the store to build sales and volume for the store based on
the sheer strength of quality, range, price and image for giving value for
money

 Retailer takes effort in promoting sales of these categories as they bring

profits, cash flow and ROI
Category roles
 Convenience categories (15% - 20%)
 Consumer may not like to go shopping for his/her peripheral needs,
stores which help him overcome this are preferred over other stores,
even if consumer has to spend little extra on such items (e.g.
Raymond’s store selling socks, wallets, handkerchiefs, belts)
 These categories turn out to be more profitable than other categories

 Occasional/seasonal categories (15% - 20%)

 Not there in the store throughout the year
 Appear during seasons (sweaters in winters) or occasions (festivals)
 Good source of profit
 Particular attention to stock levels

 By dividing categories among different roles retailer can

divide his resources like stock investment, space and
marketing spends, based on such division
What manufacturers feel about
retailers
Successful applications
 Retailers act as equal partners.

 Retailers get input from manufacturers so they put

the best possible plan together.
 Retailers are open minded and willing to change.

 Retailers that give manufacturers proper lead

time—and timely goals and suggestions—receive the
highest-quality work.
Unsuccessful applications
 Different goals among retailers’ senior managers,
category managers and operations managers impede
the process.
 Retailers have a “template fixation.” Yet, a template
alone cannot explain why shoppers choose a given
product or category.
 Retailers expect manufacturers to do more than their
share or to pay more than their share for gathering
and analyzing data.
What retailers feel about
manufacturers
 Successful applications
 Manufacturers gather data on consumer purchases
and make recommendations to retailers.
 Manufacturers with clearly defined and supported
plans are viewed favorably.
 Manufacturers help retailers understand how to get
more out of shopper traffic, build shopper loyalty,
incremental volume and return on merchandising
assets.
Unsuccessful applications
 Manufacturers make recommendations that
consistently favor own brands.
 Manufacturers just drop a completed template
off with their retailers.
 Manufacturers do not maintain confidentiality
for shared data or recommendations.
Applying Category Management

High
Low

Less More
 HIGH
LOW

HIGH LOW
Analyzing product categories:
Growth-share matrix
Stars
 Product categories with a high market share (preferred
role, some destination role)
 Include products brought frequently and high penetration
 Critical to continued future success
 Hold onto one’s share in competition from new entrants
 May need cash to sustain their growth by transferring
funds from cash-cow categories
 As categories mature, they enter into cash cow quadrant,
preferable to dogs
 Stars – marketing strategy
 Support current marketing programs
 Avoid ‘out of stock’ possibilities so as not to lose
customers
 Add on new items to category, to make the range
complete
 Regular review of pricing, do selective price reduction
if necessary
 Maintain a close monitoring on sales to stock ratio
along with GMROI
 Cash cows
 Enjoy high market share (some destination categories)
 Contribute significantly to overall sale but have low growth
rate
 Exploit the lead market position by generating cash flows
(high profit margins, lower marketing expenses)
 Not to devote any new investment, just to maintain position
 Cash flow generated is transferred to stars and question mark
 Not cut expenses as it will push category to dog status (lose
profits)
Cash cows – marketing strategy
 Reallocate space (sales-to-stock ratio)
 Have cross promotion with items in star category
 Key items of category not under-promoted w.r.t.
competitors
 Question Mark
 Categories have low market share, high market growth

 Convenience products that act as fill-ins or value

enhancers (chicken/paneer masala in shop)
 If analysis shows category has chance of developing into
star position, retailer should transfer funds from cash cow
to build question mark category into star
 If not, retailer turns this category into a niche one/divests
from this category – category may turn into dog
Question Mark – marketing strategy

 Reduce number of slow-moving items, re-look

allocation of space
 Identify sub-categories for retaining items with good
sales-to-stock ratio – turn them into stars
 Weed out slow movers, add new fast moving items

 Tie-up promotions with stars or cash cows

Dogs
 Categories with low market share, low growth rate

 Retailer may not be able to get much profit

 Do not fit with plans of retail store

 May have lived up their lives/categories introduced

due to sudden fad

 Objective is to get into niche area with good

growth/withdraw or close business
Dogs – marketing strategy

 Make a thorough review of the assortment vis-à-

vis market needs
 Check possibility for increasing prices/discounts

 Assign the space to other categories by reducing

space of existing categories