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Retail category management

Case analysis on

Retail merchandising budget plan

Submitted by M.G.Bharath Kumar Roll no. 12

McFaddens Department store has been a profitable family owned business since its beginning in 1910. Last years sales volume was $180 million. More recently, however, many of its departments have been losing ground to national stores moving into the area. To complicate this problem, the National Retail Federation predicts a recession. The NRF estimates a 6.5 percent drop in sales in the coming year for the Pacific Coast, where McFaddens operates. Department 121 has one of the more profitable departments in the store, maintaining a gross margin of 55 percent. Its basic merchandise is young mens clothing. Last year, sales reached $2, 780,750 for the July-December season. The highest sales period is the back to school period in August, when autumn fashions are supported by strong promotional advertising. Reductions (including markdowns, discounts to employees, and shrinkages) typically run 20 percent of sales. The percentages of reductions are spread throughout the season as follows: July 10 August 20 September 15 October 10 November 10 December 35

By month, the percentage of annual sales for Department 121 within this six month period has been distributed as follows: July 3.5 3.5 3.5 3.0 August 10.1 10.3 10.5 10.3 September 9.2 9.5 9.6 9.8 October 6.4 6.8 6.2 6.6 November 4.8 5.3 5.5 5.5 December 9.1 8.8 8.2 8.0

2002 2003 2004 2005

A pre-Christmas sale has been planned in an attempt to counterbalance the slackened sales period following the first of the year. The buyer has decided to bring in some new merchandise for the sale to go along with the remaining fall fashion merchandise. The buyer expects that this will increase Decembers percentage of annual sales to 30 percent above what it would be without the sale. Top management has emphasized that the department should achieve a gross margin return on investment (GMROI) of 250 percent. Forecasted ending stock level in December is $758,000. Additional information is available on the historical stock-to-sales ratio for this type of department. This information is taken from a similar department in another store that happens to have a lower average stock to sales ratio: July 3.0 August 1.9 September 2.1 October 2.4 November 2.5 December 2.2

Selecting and buying merchandise for a retail operation is one of the keys to making the store a success. A buyer is an important member of a store's staff. The buyer must operate within a budget

so the store can be profitable. Deciding how much money to spend on merchandise and where to spend it is difficult at best.

(1) Learn what the total budget has been for previous years for all retail stock. If you know that you will spend the same amount of money this buying season, you know your budgeting constraints already. If you can spend more, your job will focus on making a decision about how to allocate available funds. (2) Know your merchandising cycle. If you sell winter coats, you have a different cycle than if you sell water skis. Check previous years' activity for cycles and sales volume. Know what was in stock at the beginning and end of each month, and what had to be discounted to be sold. That will make a difference in budget allocations for that department or that item. (3) Know your space constraints. Obviously what you buy has to have a place to be stored or displayed. If item are being stored somewhere, they are not being seen by the customer, so are not making any money. To write a budget, you must know how much merchandise must be stored and where before you can buy it. The more merchandise that can be displayed, the larger sales are. (4) Determine if your budget can be increased because of store remodeling and a possible increase in display space, and if you are changing some sales classifications, eliminating items or adding a new direction in sales? Consider these changes when compiling a merchandise budget. (5) Find out what your competition is doing. This can have a direct impact on your merchandise budget. Decide on what to spend and where based on your knowledge of what you and your competition are selling. (6) Know your demographics. These factors can change how much you spend on merchandise and its various classifications. (7) Determine your annual sales per square foot. Then divide by 52 to arrive at your estimated sales per week. Write your budget accordingly. You will not buy merchandise for a week if it sold badly the same week last year.


Plan for all losses from sales, markdowns, clearances, discounts, shoplifting, employee theft, damage to merchandise and record keeping errors. Factor this into your budget. (9) A merchandise budget must allow the store to fulfill sales goals, avoid being out of stock, prevent overstock and minimize inventory investment.

Learning objectives

 Introduce the objectives and principles of stock management  Understand the risks associated with getting buying quantities wrong

 Appreciate that different stock control approaches are applicable in various retail contexts  Understand the relationship between sales, stock levels and ordering quantities  Account for influences on product quantity requirement STOCK (INVENTORY) MANAGEMENT PRINCIPLES

 How much? By store, region, whole organisation For a day, week or whole season  Not enough? Stock out, lost sale, lost complementary sale, lost customer, poor image  Too much? Additional costs: stock investment, maintenance, use of space, reduced margin to clear  The Ideal? - one product sold, one taken into stock?  Stock management includes: stock control (controlling flow of physical product in line with sales) financial control (managing finance tied up in product) consideration of supply factors: discounts for large quantities, delivery quantities, lead times (time between order and delivery) and minimum quantities  Consistent demand  Relatively straightforward  Many systems based on the principles of the periodic review easy to administer adjustments can be made to ensure stock-out is avoided review time can be varied between products, according to lead times