Indian retailing is under going a process of evolution and is poised to undergo dramatic transformation.

The retail sector employs over 8 percent of national work force. But it characterized by a high degree of
fragmentation with over 5 million outlets. 96 per cent of whom are very small with an area of less than
50 m 2 . The retail universe more than doubled between 1978 and 1996 the number of outlets per 1000
people at an all India level, increased from 3.7 in 1978 to 5.6 in 1996 .For the urban sector alone , The
shop density increased from 4 per 1000 people in 1978 to 7.6 per 1000 people in 1996. Because of their
small size, the Indian retailer have very little bargaining power with manufacturer and perform only a
few of flows in marketing channels unlike in case of retailer in developed country. The corner grocer or
‘kirana’ store is a key element in retail in India due to the house wife’s unwillingness to go long distance
for purchasing daily needs. An empirical study was carried out by sinha et al(2002) to identify factors
that influenced consumer’s choice of a store. Although convenience and merchandise were the two
most important reasons for choosing a store, the choice criteria varied across product categories.
Convenience was indicated by consumer as the most important reason in the choice of groceries and
fruit outlet, chemists and life style item while merchandise was indicated as most of important in
durables, books and apparel. The success of any retail operation is largely based on the retailer’s ability
to provide the right goods to the consumer, at the right place, at the right time and at the right price.
The entire process of creating or procuring a product or serve needed by the consumer and ensuring
that it reaches the place where a consumer can buy it, is integral to the existence of any retail
organization. Merchandise management can be termed as the analysis, planning, acquisition, handling
and control of the merchandise investments of a retail operation. The process of merchandise
management includes the developing of strategies to ensure that the right product is bought at the right
price and I available at the right place, at the right time, in the right amount, in order to satisfy the needs
of the target customer. No one in retail can completely avoid any contact with merchandising activities.
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Merchandising is the day-to-day business of all retailers. As inventory is sold, new stock needs to be
purchased, displayed and sold. Hence, merchandising is often said to be at the core of retail
management. Merchandising traces its growth to the rise of organized retail in the world. Initially, as the
retailers operated only one or two stores, the function of buying the merchandise, pricing it, etc., were
much simpler. In many cases, the retailer did it himself. However, as retailers started adding stores and
categories, the workload on the buyers increased significantly. Often, buyers had little information or
time and they ended up using approximations based on sales volumes, to allocate merchandise between
stores. This sometimes, resulted in stores exchanging merchandise among them! In order to overcome
this limitation, the function of a planner came into being. The planner’s job was to act as a link between
the stores and the buyer. The de-linking of the function of planning and buying allowed better
interaction with the stores. Planners were able to devote more time to collecting and studying store
level data, the buyers on the other hand, were able to spend more time with the vendors. FACTORS
AFFECTING THE MERCHANDISING FUNCTION Merchandising does not function in isolation. It is affected
by various factors, like the organization structure, the size of the retail organization and the
merchandise to be carried. As in every retailing endeavor, the most fundamental activities are buying
merchandise and re-selling it to its customers. The owner or the manager, who may be assisted by the
sales person, may perform the buying function in the case of a single store. As the single store grows in
terms of business, it may add departments. Functional departmentalization may occur and the number
of persons involved in the buying process may increase. In the case of a chain store, the buying function
may be centralized or AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove
the line, buy a license. decentralized geographically, depending on the retail organization. Thus, the
nature of the organizations is an important factor affecting the function of merchandising. The
merchandise to be carried by a retailer largely determines responsibilities of the merchandiser. The
buying for basic merchandise is fairly different from the buying of fashion merchandise. Basic are those
products or items, which their retailer will always keep in stock. This primarily because these products
are always in demand and the sales variance is minimal from year to year. Example of basics would be
times like white shirts in clothing or items or items like pulses, oil, etc. Fashion products on the other
hand, are products, which may sell very well in one season or year and may not have any demand in the
next season. A merchandiser, who is handling fashion products, will need to spend more time in the
market, looking for products, which will suit the needs of the store’s consumers. He will also need to be
aware of the fashion forecasts and the trends in the international markets. The organization structure
that the retail organization adopts also affects the merchandising function. Some organizations may
demarcate the role f the buyer and the role of a merchandiser as separate functions, which in a smaller
organization, one person may carry out the all the duties. FUNCTIONS OF A MERCHANDISE MANAGER
The merchandise manager is responsible for particular lines of merchandise. For example, in
department store, there may be separate merchandise managers for menswear, women’s wear,
children’s wear, etc. They would be in charge of a group of buyers and their basic duties could be
divided into four areas; planning, directing, coordinating and controlling. 1. Planning Through the
merchandise managers may not directly be involved in the actual purchase of the merchandise, they
formulate the policies for the areas for which they are responsible. Forecasting the sales for the
forthcoming budget period is required and this involves the estimating of the consumer demand and the
impact of the changes occurring in the AcroPDF - A Quality PDF Writer and PDF Converter to create PDF
files. To remove the line, buy a license. retail environment. The sales forecasts are then translated into
budgets, to help the buyers work within the financial guidelines. 2. Organizing It involves the
establishment of an intentional structure of roles through determination and enumeration of the
activities required to achieve the goals of an enterprise and each part of it. The grouping of these
activities , the assignment of such groups of activities , the delegation of authority to carry them
out ,and provision for coordination of authority and informational relationship horizontally and vertically
to be carried out by the merchandise manager. 3. Directing Guiding and training buyers as and when the
need arises, is also a function of the merchandise manager. Many a times, the buyers have to be guided
to take additional markdowns for products, which may not be doing too well in the stores. Inspiring
commitment and performance on the part of the buyers is necessary. 4. Controlling Assessing not only
the merchandise performance, but also the buyer’s performance, is a part of the merchandise
manager’s job. Buying performance may be evaluated on the basis of the net sales, mark up percentage,
the gross margin percentages and the stock turn. This is necessary to provide controls and maintain high
performance results. 5. Co-ordinating Usually, merchandise managers supervise the work of more than
one buyer, hence, they need to co-ordinate the buying effort in terms of how well it fits in with the
store’s image and with the other products being bought by the other buyers. The structure of the
merchandise department largely depends on the organization structure adopted by the retail
organization. Retail snapshot 6/1 illustrates the function of buying and merchandising at one such retail
organization in India – shopper’s stop. This organization has defined the trading manager and the buyer
as the persons who will look after the merchandising function. AcroPDF - A Quality PDF Writer and PDF
Converter to create PDF files. To remove the line, buy a license. Functions of Merchandisers Inventory-
level management Achieving sales &profit margins Plan merchandise Availability management, as per
range plan Merchandising strategy & planning Processing of purchase orders Analysis of data & sales
budgeting Profitability Target & expense control Vendor/supplier relations for both, in house products
as well as for brands. While good merchandise management does not guarantee success, bad
merchandise management will almost certainly result in failure. MERCHANDISE PLANNING Retail
businesses, like all other businesses, exist with the aim of making a profit. The function revolves around
planning and control. Planning is of great importance, because it takes time to buy merchandise, have it
delivered, record the delivery in the company’s records and then, to send the merchandise to the right
stores. Analysis is the starting point of merchandising planning. The person who is to take the buying
decisions for a retail organization, must be aware of the consumer needs and wants. An understanding
of the consumer buying process is necessary. A part from this, a clear understanding is also necessary of
what products are actually selling and where. Information on this can be obtained from sale records. An
interaction with the sales staff is also needed, as they can offer valuable insights into conducted,
magazine and trade publications and trade associations are other sources of information. The
information thus gathered, needs to be analyzed. This analysis forms the basis of the sales forecast. The
first stage in merchandise planning is developing the sales forecast. Step I: Process of Planning Sales
Forecast Forecasting involves predicting as to what consumers may do under a AcroPDF - A Quality PDF
Writer and PDF Converter to create PDF files. To remove the line, buy a license. given set of conditions.
A sales forecast may be made by the merchandiser, based on the targets given by the top management
or may be handed down by the top management itself, depending on the retail organization. A sales
forecast is the first step in determining the inventory needs of the product or category. Forecasts are
typically developed to answer the following questions: How much of each product will need to be
purchased? Should new products be added to the merchandise assortment? What price should be
charged for the product? A sales forecast is usually made for a specific period of time, this may be weeks
or a season or a year. A forecast may be a short term—i.e., up to one year, or a long term—i.e., for a
period of more than a year. The person who is to make the forecast for the product group or category,
needs to be aware of the changes in the tastes and attitudes of the consumers, the size of the target
market and the changes in their spending patterns. The process of developing sales forecast involves the
following steps: 1. Identifying Past Sales A review of the past sales records is necessary to establish if
there is any pattern or trend in the sales figures. A look at the sales figures of the past year, for the same
period, would give an indication of the sales in the current year, given that the conditions tare constant.
2. Reviewing the Changes in the Economic Conditions It is necessary to take into account the changes
happening at the economic front, as this has a direct link to the consumer spending patterns. Economic
slowdowns, increase in unemployment levels, etc., all affect business. 3. Analyzing the changes in the
sales potential It is now necessary to relate the demographic changes in the market to that of the store
and the products to be sold. 4. Finding the changes in the marketing strategies of the retail organization
and the completion While creating the sales forecast, it is necessary to take into consideration, the
marketing strategy to be AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To
remove the line, buy a license. adopted by the organization and that of the competition. Is there a new
line of merchandise to be introduced, a new store to eb opened or an existing store to be remodeled?
All these factors need to be taken into consideration. 5. Creating the Sales Forecast After taking into
consideration the above-mentioned points, and estimate of the projected increase in the sales, is arrived
at. This is then applied to various products/ categories, to arrive at the projected sales figures. A sales
forecast is thus, an outline of what amount of sales need to be achieved, it tells us what amount of sales
are targeted and what revenues are expected from those targets. However, it does not give there
merchandiser any idea of the inventory levels that are required. This brings us to the second stage,
which involves the planning of the quantities of merchandise that would be required to achieve the
sales forecasted in Stage Step II: Identifying the Requirements Planning is essential to provide direction
and to serve as a basis of control for any merchandise department. In order to be able to provide the
right goods to the consumers, at the right place and time, one needs to plan a course of action. Planning
in merchandising is at two levels. 1. The creation of the Merchandise Budget, and 2. The Assortment
Plan. There are two methods of developing a merchandise plan. They are top down planning and bottom
up planning. In top down planning, the top management words on the sales plan and this is passed
down to the merchandising team. On the other hand, in bottom up planning, individual department
managers work on the estimated sales projections. These are then added up to arrive at the total sales
figures. After the sales forecasting exercise has been completed, inventory levels need to be planned.
The merchandise budget is the first stage in the planning of merchandise. It is a financial plan, which
gives an indication of how much to invest in product inventories, stated in monetary terms. AcroPDF - A
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merchandise budget usually comprises five parts: 1. The sales plan, i.e., how much of each product
needs to be sold; this may be department wise, division wise or store wise. 2. The stock support plan,
which tells us how much inventory or stock, is needed to achieve those sales. 3. The planned reduction,
which may need to be made in case the product, does not sell. 4. The planned purchase levels, i.e., the
quantity of each product that needs to be procured from the market. 5. The gross margins (the
difference between sales and cost of goods sold,) the department, division or store contributes to the
overall profitability of the company. Methods of Inventory Planning In order to be able to proceed with
merchandise planning, the method of inventory planning needs to be finalised. Any one of the four
methods given below can be used for planning the inventory levels needed. 1. The Basic Stock Method
2. The percentage Variation Method 3. The week’s Supply Method, and 4. The Stock/ Sales Ratio
Method. The Basic Stock Method This method of inventory planning is used when the retailer believes
that it is necessary to have a given level of inventory on hand, at all times. Basic stock is the minimum
amount of inventory that needs to be maintained for a product, category or store, even during times of
low sales. It is calculated as under: Basic Stock = Average stock for the season – Average monthly sales
for the season, where, Average monthly sales for the season = Total planned sales for the season
Number of months in the season Average Stock for the Season = Total Planned Sales for the season
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Estimated Inventory Turnover Rate for the Season Beginning of Month ( BOM) Stock = Planned Monthly
Sales + Basic Stock Illustration : Using the basic stock method, calculate BOM inventory for the month of
January, given the following information: Planned sales for the month of January : 40,000 Average
Monthly Sales : 50,000 Average monthly inventory : 60,000 Basic stock = 60,000-50,000 = 10,000 BOM
stock = 40,000+10,000 = 50,000 The Percentage Variation Method This method is normally used when
the stock turnover rate is more than six times a year. The basic premise behind this method of inventory
planning is that the inventory levels should reflect the actual sales. It is calculated as under: BOM Stock =
Avg Stock for season X ½ (1+ (Planned sales for the month / Average Monthly sales)] Illustration: Using
the Percentage Variation Method, calculate the BOM inventory for the month of January, given the
following information. Planned Sales for the month of January : 40,000 Average monthly Sales : 50,000
Average monthly inventory : 60,000 BOM Stock = Avg Stock for season X ½ [1+( Planned Sales for the
month / Average Monthly Sales)] AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files.
To remove the line, buy a license. BOM Stock = 60,000 X ½ X(1+ 40,000/50,000) = 60,000 X ½ X (1+1.2) =
60,000 X 1.1 = 66,000 Week’s Supply Method Retailers such as grocers, who plan; inventories on a
weekly, and not on a monthly basis, and whose sales do not fluctuate substantially, largely follow the
Week’s Supply Method. It is calculated as under: Number of Weeks to be Stocked = The Number in
Weeks in the period/stock turnover Rate for the period Average Weekly Sales = Estimated Total Sales for
the Period/The Number of Weeks in the Period BOM Stock = Average Weekly Sales X Number of Weeks
to be Stocked Stock to Sales Ratio Method: This is very easy to use, but it requires the retailer to have a
beginning of the month stock/sales ratio. It involves the maintaining of the inventory levels at a specific
ratio to the sales. This ratio tells the retailer how much inventory is needed at the beginning of the
month, to support the month’s estimated sales. Stock-Sales Ratio = Value of inventory/Actual Sales
Planned BOM Inventory = Stock Sales Ratio X Planned Sales. Illustration : Using the Stock to sales Ratio
Method, Calculate the BOM inventory for the month of January, given the following information. Stock
to sales Ratio = 1.4 Planned Sales for the month of January : 50,000 Planned BOM inventory = 1.4 X
50,000 = 70,000 The Stock Turnover RateAn effective measure of the speed with which products or
merchandise moves in and out of a retail store for a given period, is the Stock Turnover Rate. It is a
measure of efficiency and is usually calculated for a period, of six months or a year. It is calculated using
the following formula: AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove
the line, buy a license. Planned sales (for a period) = Stock turnover Planned Average Inventory (for the
period) The stock turnover rate is a measure of efficiently. Every department usually, ahs its own stock
turnover rate, as different merchandise need different speeds of selling. Typically, for grocery products,
the stock turnover rates needed would be much higher, as compared to those needed for products, the
stock turn over rates needed would be much higher, as compared to those needed for products like
apparel or toys., From the management’s perspective, the stock turnover indicates the level of capital
usage, i.e., turning money to inventory, inventory to money and then repeating the process again. Step
III: Merchandise Control The purpose of Open-to-buy is twofold. First, depending on the sales for the
month and the reductions, the merchandise buying can be adjusted. Secondly, the planned relation
Between the stock and sales can be maintained. When used effectively. Open to buy Ensures that the
buyer: 1. Limits overbuying and under buying, 2. Prevents loss of sale due to unavailability of the
required stock, 3. Maintains purchases within the budgeted limits, and 4. Reduces markdowns, which
may arise due to excess buying. When planning for any given month, the buyer will not be able to
purchase the amount equal to the planned stocks for the month. This is because there may be some
inventory already on hand or on order, but not yet delivered. Calculating the Open-to-buy The open-to-
buy amount available to a buyer, is Calculated using the simple formula stated below: Open-to-buy =
Planned EOM Stock – Projected EOM Stock Open-to-buy is always calculated for the current and future
periods. Continuing further with the same example that we took for calculating the AcroPDF - A Quality
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Merchandise Budget, we would arrive at the Open-to-Buy for various months, in the following manner.
One makes an assumption here that we are now in the month of February, and hence, that additional
data in the form of the actual sales and the reductions for the month of January, is now available to us.
Thus, the merchandise budget would appear with new Figures incorporated as follows: JANUARY
FEBRUARY MARCH APRIL MAY JUNE TOTAL PROJEC TED SALES 220000 198000 209000 22000 0 19800 0
22000 ACTUAL SALES 200000 MONTHL Y RED 12650 12650 18975 31625 31625 18975 ACTUAL RED
8500 BOM STOCK 396000 297000 313500 39600 0 29700 0 44000 0 ACTUAL BOM 350000 EOM STOCK
297000 313500 396000 29700 0 44000 0 50000 ACTUAL EOM 250000 MONTHL Y ADDNS TO STOCK
133650 227150 310475 15262 5 37262 5 29897 5 ACTUAL ADDNS ON ORDER 100000 100000 200000
150000 150000 Open- to- buy = Planned EOM Stock – Projected EOM Stock. Using the data given above,
we calculate the Open – to- Buy for the month of February as Projected EOM stock = Actual BOM Stock
+ Actual Additions to Stock + Actual on order – planned Monthly Sale – Planned Reductions for the
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month =250,000+200,000+150,000-198,000-12,650 =389,350 Now that the merchandiser has an idea as
to the amount available to make the purchases, he needs to decide on the merchandise or the products
that need to be bought. This process of deciding upon the products or merchandise to be bought and
then arriving at the quantity of each product or category of merchandise to be bought is termed as
Assortment Planning. Step IV: Assortment Planning Assortment Planning involves a determination of the
quantities of each product that will be purchased so as to fit into the overall merchandise plan. Details
of color, Size, brand, materials, etc., have to be specified. The main purpose of creating an assortment
plan is to create a balanced assortment of merchandise for the customer. Various factors affect the
assortment planning process. The first among these factors is the type; of merchandise that is to be
stocked in the retail store. Merchandise may be classified into basic or staple merchandise, fashion,
convenience or specialty goods. Fashion Merchandise: this type of merchandise has a high demand for a
relatively short period of time. Buying the right quantities at the right time is of great importance for this
category of products, as the demand for the product exists for a limited time. Excess buying may result
in heavy markdowns at the end of the season or when the product goes out of style. Examples of such
products include various cuts in jeans, which may be in style for a season, short lengths in kurtas, etc.,
Basic Merchandise these are products which consumers buy year in and year out. The store would
usually require these products, to be in stock at all times. Example of products, which may be classified
as staples are: men’s white shirts, socks, handkerchiefs, stationery, etc, Buying staple merchandise is
relatively easier, it can be easily done by analyzing the past sales records. Seasonal staples are those
products, which are in demand only at a particular time of the year, every year. For AcroPDF - A Quality
PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license. example, decorative
divas sold during Diwali in India, or decorative ornaments for Christmas, umbrellas and raincoats/rainy
shoes in the rainy season. The retailer’s policies with respect to the type of brands stocked and the level
of exclusivity to be maintained in the store, also affect the merchandise buying decisions. Thus, after
arriving at the amount of money available for investing in the inventory, a merchandiser would have to
determine the variety of the merchandise. Let us take the example of a merchandiser who is working
towards the assortment plan for the menswear department for a large retail store. He would start by
determining the product line, which is under consideration. A product line is a broad category of
products having similar characteristics and uses. Thus, in menswear, product lines could be shirts,
trousers, accessories, shoes, etc. He would then have to determine the breadth and depth to be offered
under the said product line the breadth refers to the number of brands carried within each product
classification. The depth on the other hand, refers to the number of choices offered to the customers
within each brand or product classification the same is illustrated in Fig 6.2 AcroPDF - A Quality PDF
Writer and PDF Converter to create PDF files. To remove the line, buy a license. DEPARTMENT
MENSWEAR PRODUCT LINE SHIRTS TROUSERS ACCESSORIES ZODIAC VANHEUSEN LOUIS PHILLIPPE
ARROW BREADTH STYLES COLOURS SIZE DEPTH Fig. Product Line Classification While a merchandiser
always works towards creating an optimal merchandise mix, various factors would affect his/her
decision. These would be the amount of money actually available for buying, the targets set by the
management for merchandise turnover, the space actually available within the stores for stocking the
merchandise and the market AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To
remove the line, buy a license. constraints. Working under these constraints, a buyer works towards
creating an optimal merchandise plan. Assortment Plan After determining the money available for
buying, a decision needs to be taken on what to buy and in what quantity to buy it. This results in the
creation of a the Model Stock Plan. The model stock plan gives the precise items and quantities that
need to be purchased for each merchandise line. To arrive at the model stock plan, they buyer needs to
identify the attributes that the customer would consider while buying the product, then decide on the
lees under each attribute and finally, allocate the total money available, or the units, to the respective
item categories. The following example illustrate the steps involved in preparing a Model Stock Plan: A
retailer has allocated Rs.10 lakhs to the buying of shirts. Assuming that the purchase price of each shirt
is Rs.100, he will be able to stock 10,000 shirts in the store. Step 1: The first thing that the retailer needs
to do is to identify which factors affect the customer’s buying decision. Let us assume that he identifies
them as type of shirt, color, size, style, fabric and sleeve length. Step 2: Identify the number of levels
under each attribute. In the given illustration, let ;us assume that he identifies the following levels. 1.
Type of shirt (Dress, Casual Formal, Sport) 2. Size (Small, Medium, Large, Extra Large) 3. Sleeve Length
(Full Sleeves, Short Sleeves) 4. Collar Type (Saville, Button Down) 5. Color (White, Blue, Cream, Grey) 6.
Fabric (Cotton, Cotton Blend) In this illustration, the basic attribute that the retailer identifies is the shirr
type that the customer would want to buy. Dress shirts account for 10 per cent of the sales, casual T-
shirts 40 percent, formal 20 percent and sports 10 percent. The retailer first calculates the casual shirts
that he needs to stock. He is aware that these shirts sell in the sizes—Small Medium, AcroPDF - A Quality
PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license. Large and Extra
Large in the percentage of 25:40:25:10 respectively. Full Sleeves account for 30 Percent of the medium
size sales and the balance is a half sleeve. Button down is 40 percent of half sleeve sales and the balance
is Saville. The fast selling color are white—10 percent of sales, blue 30 percent cream 20 percent Grey 10
percent, cotton Blends are 75 percent of the sales and the balance is cotton. Step 3: The third step is to
allocate the total units to the respective item categories. Thus, the units that are recommended for each
item are in direct proportion to the estimated demand patterns, as illustrated in fig . MENS SHIRTS Dress
CASUALS Formal Sport 10% 40% (160) 20% 200 30% (300) Small MEDIUM LARGE EXTRA LARGE 25%
(100) 40% (160) Half Sleeves 25% (100) 10% (40) AcroPDF - A Quality PDF Writer and PDF Converter to
create PDF files. To remove the line, buy a license. BUTTON DOWN SAVILLE 70% (112) 60% (67) WHITE
BLUE CREAM GREY 40%(18) 30% (14) 20% (9) 10%(4) COTTON COTTON BLEND 25% (4) 75% (14) Fig.
Model stock plan If a retailer were to increase the number of attribute to be taken into consideration,
the chances that the requires add product will match the customer’s needs are increased.
MERCHANDISE BUYING The basic role of a buyer is to find, evaluate and select merchandise for the
retail store. In this process, he needs cultivate sources for which suitable merchandise can be secured
for the retail organization. To do this effectively, he needs to answer the following questions: What to
buy? When to buy? How much to buy? Where and from whom to buy? The methods that a buyer can
use to determine the quantities to be purchased, have been covered in the previous chapter. This
chapter focuses on the buying techniques, which can be used by a buyer to AcroPDF - A Quality PDF
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supply. An integral part of the buying decision is the decision to make or buy the product. The concept
of the private label and how it is useful to retailers is discussed in detail. Category Management, which is
an important part of retail in the developed markets, is discussed in the last section of this chapter. A
buyer is a representative of his retail organization, and he plays a key role in developing relationships
with the manufacturers and vendors. This process starts with the identification of the sources of supply.
To start with, it is necessary to decide as to whether the merchandise is to be sourced from domestic or
regional markets or from international markets. This is largely related to the type of the retail
organization, the product being offered and the target consumer. For example, products like high
fashion garments, exclusive watches, perfumes, cosmetics, etc., may be obtained from the international
market. Merchandise buying is a four – step process, which involves: 1. Finding Supply Sources, 2.
Identifying Potential Supplier, 3. Meritrating the Supply Sources, and 4. Finalizing terms with the Supply
Sources. We now examine the four steps in detail. 1. Finding supply sources Domestic sources of supply
may be located by visiting central markets, trade shows or expositions may locate domestic sources of
supply, usually, each city has its own central market, where a large number of key suppliers are located.
A visit to such a location enables the buyer to understand the trends in the market and evaluate the new
resources and merchandise offerings. Trade shows and expositions are also good for finding new
sources of supply. In addition to buying from the domestic market, an organization may seek out foreign
sources, from where merchandise can be purchased. This is a common trend in the west where trade
barriers are considerably lower. As retailers today operate in a global marketplace, the sourcing of
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products from international markets is also a reality. The prime reasons for looking at international
sourcing could be the uniqueness of the merchandise, or the unavailability of the merchandise in the
domestic market. Low cost and good quality are also factors, which could affect this decision. On the
other hand, a retailer may also source from a foreign market simply because the merchandise is unique
and because certain customers are always looking for a unique product. A decision that is closely
associated with the branding decisions is to determine where the merchandise is made. Although
retailers buying manufacturer’s brands usually aren’t responsible for determining where the
merchandise is made, a product/s country of origin is often seen as a sign of quality. Costs associated
with Global sourcing Include: 1. Country or Origin: Many a times, where the merchandise has been
manufactured makes a high difference during the final sale of the product. 2. Foreign currency
fluctuations.: fluctuations in the international currency rates will all effect the buying price of the
product. At times, due to violent fluctuations in the price, sourcing products internationally may
suddenly become viable or unlivable. 3. Tariffs: also known as duties, they are taxes placed by a
government, on imports. Import tariffs shield domestic manufacturers from foreign competition and
raise money for the government. GATT & MFA regulations affect such matters. 4. Foreign Trade Zones:
These are special area within a country, that can be used for warehousing, packaging, inspection,
labeling, exhibition, assembly, fabrication, or Trans-shipment of imports, without being subject to that
country’s tariffs. 5. Cost of Carrying Inventory: Purchase of goods is always at a price. When the
merchandise is finally sold, it makes a very big difference on the carrying costs. 6. Transportation costs:
while sourcing products internationally, it is essential to keep in mind the cost that will be involved in
transporting the goods to the various markets that the retailer operates in. this is a cost which has to be
added to the cost of goods and eventually, affects the margins that can be earned. In order to source
goods from the international market, the retailers may use the facilities of the Resident Buying Offices
that it may have. For Example, a large number of international retailers have there buying office
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in India. The resident buying offices not only have an understanding of the local market, but once the
orders are placed, the offices can make out the contracts, follow up on the delivery and on the quality
control. Alternately, trade shows and wholesale market centers in various cities of the world, provide a
good opportunity for the buyers and seller to meet. While sourcing merchandise from India, a buyer has
to take into consideration, the taxes levied by the Central government, the state government and the
municipal taxes. Sales tax is a tax on the sales of goods. The liability to pay sales tax arises on making a
sale of goods. In India, the law for levying sales tax is provided for under the central sales tax act, 1966,
Excise the central government and the Rate of tax levy duties is uniform for a product, across the
country. The buyer also needs to take into consideration, the additions to the cost price that will come
about due to octroi, which is levied in cities like Mumbai and Kolkata. That Municipal Corporation of
Greater Mumbai levies octori on the invoice value of goods entering the city limits. Before taking a
decision on sourcing internationally, the buyer needs to check whether the product to be sourced falls
under the Open General List (OGL), the Restricted List or the Negative List. In case the goods fall under
the OGL, a special import License (SIL) is required. Currently, there are 700 products, which are on the
restricted list for imports and include, among other things, meat, dairy products, cheese, pulses, alcohol,
various types of fabrics and garments and a large number of consumer durable. If the retailer wishes to
import products which fall under the SIL, the Importer has to pay a premium and this again adds to the
cost of the product and at times, largely increases the landed cost of the merchandise. 11 Identifying
potential suppliers A decision now needs to be taken on the potential vendors. The following criteria
need to be kept in mind: 1. The target market for whom the merchandise is being purchased. AcroPDF -
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image of the retail organization and the fit between the product and the image of the retail
organization. 3. The merchandise and prices offered. 4. Terms and services offered by the vendor. 5. The
vendor’s reputation and reliability. The prime factor, which affects these decisions, is, whether the
merchandise offered by a vendor is compatible with the needs and wants of the customers. If the
merchandise is not right, the vendor should nor be considered. Vendors also fall under different levels of
dependability, with respect to the way that they conduct their business. Factors like the ability to meet
the delivery schedules, adherence to quality procedures and the terms offered, play an integral role
during vendor selection. The services provided by a vendor may also be deciding factor. These service
include cooperative advertising, return or exchange privileges, participation in store promotions and the
willingness to use the relevant technology. The retail buyer then needs to negotiate on the price, the
delivery dates, the discounts, the shipping terms and the possibilities of returns. While negotiating with
the vendors, it is necessary to keep in mind their history, their goals and constraints. At the same time,
the buyer needs to be aware tot the real deadlines and work towards fulfilling them. The following are
the types of discounts that could be available to the buyer: Trade Discounts These are reductions in the
manufacturer’s suggested retail price, granted to wholesalers or retailers. Chain Discounts This is the
traditional manner of discount8ing, where a number of different discounts are taken sequentially, from
the suggested retail price (e.g: 50-10-5). Quantity Discounts These can be cumulative and non-
cumulative. Retailers earn quantity discounts by purchasing certain quantities over a spiced period of
time. Seasonal DiscountThis is an additional discount; offered as a incentive to retailer to order
merchandise in advance of the normal buying season. Cash Discount It is the reduction in the invoice
cost for paying the AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the
line, buy a license. invoice, prior to the end of the discount period. Each retailer will have his own
criteria for the selection of vendors. The starting point may be a vendor registration form, which
provides the dateline address, the preferred mode of payment, the sales tax number, etc. Registration
with the relevant tax authorities, e.g. for Sales Tax, is a basic criteria used by many retailers to eliminate
suppliers. 111 Merit rating the supply sources Retailers have for lone, been wary of sharing information
with their suppliers. This hardly surprising – considering their traditionally competitive relationship, with
both sides trying to get the best of every deal. However, times have changed, and many retail
organizations work with their suppliers as a team, to create a competitive advantage. Shared
information is a vital component of this new approach, but only if the right information is shared with
the right people, for the right reasons. But how do we define there three “rights” ? the right people are
those individuals or organizations who can use the information you give them, to help you. To do this,
the retailer needs to understand the importance of the trading relationship, to both the sides. If the
retailer is a small customer of a big supplier, the latter may not be sufficiently interested in the retailer’s
business to bother using the information that he supplies however, if the information can be shown to
benefit the supplier tool he may use it to help the retailer. An example of this is a retail group that
received weekly deliveries from a confectionery company, but still found themselves out of stock for
some times. When details of their sales were given to the supplier, the latter was able to use its market
knowledge to project sale far more accurately than the retail group could. the supplier benefited by now
having to deliver at two – weekly intervals and the retailer benefited from lower stock holdings and less
out of stock problems However, not all suppliers will be capable of making good use of retail stock data
and this must be borne in mind while managing the supplier portfolio. The right information is that
information which right people can actually use, to give better service. As a simple example, take a new
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product being sold by a retail group with 100 outlets the stock is delivered through a single national
warehouse operated by the retailer and the retailer does not share information with the manufacturer
who supplies products to it. After the initial delivery is received at the warehouse, some stock is
immediately dispatched to the stores and selling commences. At this stage, the manufacturer has no
idea of how the sales are going. After a few weeks, the stores start sending in orders to replenish their
stock. But still, the manufacturer has no idea as to what is happening. In fact, the manufacturer will only;
be able to estimate the sales when the retailer places another order to replenish the warehouse. If the
retailer had shared the information on his sales and stock, with the manufacturer, the latter would then
have had the opportunity to anticipate out – of stock situation and to plan future actives and minimize
delays in new production runs. More significant than the sales figures, however, are the retailer’s sales
forecasts. Simply providing (historical) sales figures, may result in the manufacturer producing a forecast
which differs markedly from the retailer’s –and on which are based erroneous buying and production
plans. It is far better for the retailer to provide the manufacturer with the forecasts, reflecting the
planned future promotion plans, etc. There are numerous options regarding the level of detail at which
the information can be supplied. Very few manufacturers could make use of the daily sales of a store.
Weekly sales might be the maximum level of detail required and many would prefer information just be
region or store group. So far, we have discussed the issue of information sent from the retailer to the
supplier. But what about the other way round? An important piece of information for a retailer is news
of new products and updates. All too often, a retailer will place an order only to find, just after delivery,
that a replacement product has been announced. This does not help ease the tension in future
negotiations. Another area where the supplier can offer useful data is on market share. The supplier is in
a unique position to tell the retailer, what percentage of AcroPDF - A Quality PDF Writer and PDF
Converter to create PDF files. To remove the line, buy a license. marker share of specific products or
product groups the various players hold. Toy manufacturer Mattel, for example, employs more toy
specialists than Debenhams or House of Fraser and it can also spend more on researching their
respective niches. They can consolidate various retailers’ sales to check the trends. Their feedback can
be especially valuable to retail buyers by showing them which areas are performing best and how
strategies should adjusted. Thus, to maintain strategic partnership with vendors, the buyer needs to
build on: 1. Mutual Trust, 2. Open Communication, 3. Common Goals, and 4. Credible Commitments, 1V
Finalizing terms with supply sources In case a buyer is dealing with multiple vendors for a particular
product category, he can draw conclusions on a vendor’s performance by listing the following: § The
total orders placed on the vendor in a year § The total returns to the vendors, the quality of the
merchandise. § The initial markup on the products. § The markdown, if any, § Participation of the
vendor in various schemes and promotions. § Transportation expenses, if borne by the retailer. § Cash
discounts offered by the vendor, and lastly, § The sales performance of the merchandise. A factual
evaluation of the vendors helps the buyers in being unbiased and in taking the right decision for the
retail organization. Respect and co-operation between the buyers and the vendors is necessary to build
long-term relationships. In the fast changing world of retail, it is also necessary to share information with
the vendors on a timely basis, so as to avoid stock outs or situations requiring heavy markdowns.
CATEGORY MANAGEMENT Retail is often termed as a business of responding to change. Today’s
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retailer is faced with a rapidly changing and demanding consumer, intense competition, and pressures
on costs. The combinations of the business condition that exist today and the advances in technology
have created an opportunity for the development of new management approaches. One such approach
is that of category management. The need to reduce costs, control inventory levels and replenish stock
efficiently, led to the concept of Efficient Consumer Response (ECR) taking shape in the grocery retail
industry in Europe and America. By focussing on a superior understanding of consumer needs, category
management provides renewed opportunities for meeting consumer needs, and at the same time, for
achieving competitive advantage as well as lower costs through greater work process efficiencies.
Category Management can be defined as “the distributors’ / suppliers’ process of managing categories
as strategic business units, producing enhanced business results by focusing on delivering consumer
value. Thus, a category is a basic unit of analysis for making merchandising decision. In general, a
category is an assortment of items that the customer sees as reasonable substitutes for each other. The
fundamentals of category management revolve around managing categories as strategic business units.
At the core of the category management concept is a focus on a better understanding of consumer
needs as the basis for the retailers’ and suppliers’ strategies, goals and work processes. Technology plays
a key role, as information is a key enabler. The idea is to use this information to tailor the product
offering according to consumer needs. The offering is then measured in terms of its sales, cost and
returns per square foot. The whole process is aimed at providing customer satisfaction and at the some
time, maximizing the returns for the organization. This focus results in a re-evaluation of many prevalent
business practices, which may have obstructed a greater understanding of consumer needs and
opportunities. COMPONENTS OF CATEGORY MANAGEMENT There are six components, which are key to
the functioning of category management. Two of these are considered essential, without which category
management cannot be started and they are therefore, called the core components. The other four are
needed to enable to process, without these, category AcroPDF - A Quality PDF Writer and PDF Converter
to create PDF files. To remove the line, buy a license. management can be started but it cannot be
institutionalized on an on-going basis. The two core components are: the Strategy and the Business
processes. The enabling factors are performance measurement, information technology, organizational
Capabilities and co-operative Trading partner relationships. This is illustrated in the following fig.
Performance Strategy organizational Measurement Capabilities Trading Partner Business Information
Relationships Process Technology Fig. The components of category Management The core component
strategy is linked to the company’s overall mission and goals. The business process, which evolves, is a
result of these strategies. The business process focuses on how work has to be done within the
organization and with its trading partners, rather than focussing on what is to be done. Category
management business process, as defined by the partnering group is illustrated in the following fig.
Category Definition Category role AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files.
To remove the line, buy a license. Category Assessment Category Review Category Score card Category
Strategy Category Tactics Plan Implementation Fig. The Category Management Business process The
steps involved in this process are explained briefly, below: 1. Category Definition: Category Definition is
the first step in the process. The definition of the category has a significant impact on the subsequent
steps. A category definition should be based on how the customer buys, and not on how the retailer
buys. For example, for a grocery retailer, aerated drinks may be one category, ready to cook meals,
another and health drinks, a third category. Category definition AcroPDF - A Quality PDF Writer and PDF
Converter to create PDF files. To remove the line, buy a license. varies from retailer to retailer.
2.Defining the Category Role: The category role determines the priority and the importance of the
various categories in the overall business. These aids in resource allocation. Traditionally, four categories
have been identified. They are: Destination Category : This is the main product offering of the retail
store. Examples include fresh groceries at a supermarket and apparel in a department store. Routine
category: These are products that a customer buys from the retailer as a matter of routine or habit.
Examples include toothpaste, soaps, etc., Seasonal Category: This includes products, which are not
purchased very often or are purchased when available and needed. Examples would include mangoes
sold in summer, in a super market, and umbrellas and raincoats, in a department store. Convenience
Category: These are products that a consumer finds convenient to buy at a neighborhood retailer.
Examples include products like bread, eggs and even routine stationery. Category roles must be
developed with the customer in mind and must reflect the typical consumer shopping behavior. These
roles provide logical framework for the allocation of the retailer’s resources, based on its mission, goals,
and strategies. 3. Category Assessment: In this step, the current performance of the category is
evaluated with respect to the turnover, profits and return on asses in the category. It involves an
assessment of the consumers, the market, the retailer and the suppliers. 4. Category Performance
Measures: The development of category performance measures involves the setting of measurable
targets in terms of sales, margins and Gross Margin Returns on Investment (GMROI). 5. Category
strategies: At this point in the process, the retailers and the supplier know the category’s role; they have
assessed the current performance of the category and have set preliminary targets for the AcroPDF - A
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performance. The purpose of this step is to help the retailer and supplier to develop strategies that
capitalise on category opportunities through creative and efficient use of the resources that are
available to the category. Category strategies can be aimed at building traffic or transactions, generating
cash, generating profit, enhancing the image or creating excitement. 6. Category Tactics: At this stage,
category tactics are developed in the areas of assortment pricing, promotions and the presentation of
the merchandise in the store. 7. Category plan implementation: A Specific implementation schedule is
developed and responsibilities are assigned. Accurate implementation is the key to the success of the
Category Management. 8. Category Review: The final step in the business process is the review of the
progress and of the actual achievements as against the targets set for the category. Review aids in the
taking of decisions at the right point of time. Category management is considered to be a “scientific”
approach to relating in the mature markets, largely because it is date driven and fact based. The
successful adaptation of category management at pantaloon shows us how the returns on the particular
product/category can be maximized by keeping the focus on the customer and creating systems and
processes within the organization to aid such a focus. RETAIL PRICING AND MERCHANDISE
PERFORMANCE Price is an integral part of the retail marketing mix. It is the factor, which is the source of
revenue for the retailer. The price of the merchandise also communicates the image of the retail store
to the customers. Various factors like the target market; store policies, competition and the economic
conditions need to be taken into consideration while arriving at the price of a product. § The first factor
to be taken into consideration is the demand for the product and the target market. Who is this product
meant for and what is the value proposition for the consumer. In some cases, the price of the product is
linked to the quality. This is generally in the AcroPDF - A Quality PDF Writer and PDF Converter to create
PDF files. To remove the line, buy a license. case of products like electronics, where a high priced
product is perceived to be of good quality. On the other hand, for products like designer clothing, a
certain section of the population may be willing to pay a premium price. Hence, it is very essential that
the buyer is clear about the target market for the producer and the value proposition that they would
look for. § The stores policies and the images to be created also influence the pricing of a product.
Retailers who want create a prestige image may opt for a higher pricing policy, while the retailer who
wants to penetrate the market, may decide to offer a value for money proposition. § Competition for
the product and the competitor’s price for similar product in the market also need to be taken into
consideration. In case the product is unique and does not have any competition, it can command a
premium prices on the other hand, in case there after a fair number of similar products in the market,
the prices of such product need to be taken into consideration before fixing the price. § The economic
conditions prevalent at the times play a major role in the pricing Policy. For example, during an
economic slowdown, prices are generally lowered to generate more sales. The demand and supply
situation in the market also affects Prices. If the demand is more than the supply, prices can be
premium, however, when supply is mores than the demand, prices had to be economical. The various
factors affecting retail pricing are illustrated in the fig. shown below: AcroPDF - A Quality PDF Writer and
PDF Converter to create PDF files. To remove the line, buy a license. Brand image Customer Loyalty
Product Features Consumer Behaviour Fig. Factors Affecting Retail Price The pricing objectives should be
in agreement with the mission statement and merchandising policies of the retail organization.
ELEMENTS OF RETIL PRICE: In order to arrive at the retail price, one needs to first consider the elements
that go into the calculation of the price. The first element to be considered is the Cost of Goods, which is
the cost of the merchandise and various other AcroPDF - A Quality PDF Writer and PDF Converter to
create PDF files. To remove the line, buy a license. expenses that are involved in the movement of the
goods from the manufacturer to the actual store. These expenses may be fixed or Variable. Fixed
Expenses are those, which do not vary with the quantity of the sale or business done. Sop rents and
head office costs fall into this category. The level of sales directly affects the variable expenses.
Merchandise margins and the product mix, however, are variable, and their management can either
enhance or destroy Profitability. The profit to be earned from the merchandises must be planned before
fixing the retail price. The profit figure arrived at, can be expressed as a percentage of the retail price or
as a percentage of the cost price. Thus, the following formulae would apply: Make Up Per cent (Based
on Retail Price) = Mark Up in Rupees / Retail Price and, Mark Up Per cent (Based on Cost) = Mark up in
Rupees / Cost. Let us under strand this concept with the help of the following illustration. Assume that
the cost of the merchandise of an item I s Rs 200 and the mark up is Rs 150. The mark up percentage
based one the retail price would work out to 37.5%. The retail price has been calculated as 200+150 =
350. Mark Up percentage on retail = 150 / 350 = 42.86% Based on the cost price, the mark up
percentage can be calculated as under: Mark Up percentage on cost = 150 / 200 = 75 %. The mark up
thus fixed, is termed as the Initial Make Up. Rarely are all products sold completely at the fixed price.
Reductions in price are often AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To
remove the line, buy a license. made and could be due to markdowns, employee discounts, customer
discounts and / or shrinkage. Markdowns are reductions in the original retail price. Markdowns are
discussed in detail later in this chapter, in the section on adjustments to retail prices. Discounts offered
to customers and employees who buy the products, also reduce the mark up percentage. Shrinkage
includes loss of merchandise due to thefts, or damaged / soiled goods. All these costs reduce the profit
margin and hence must be accounted for. DEVELOPING A PRICING STRATEGY The pricing strategy
adopted by a retailer can be cost-oriented, demandoriented or competition-oriented. In Cost-oriented
pricing, a basic mark up is added to the cost of the merchandise, to arrive at the price. Here, retail price
is considered to be function of the cost and the mark up. Thus, Retail Price = Cost + mark up If this
formula is rearranged, we get Cost = Retail Price – Mark up and, Mark up = Retail Price– Cost. The
difference between the selling price and the cost is considered to be the mark up and should cover for
the operating expenses and the transportation, etc. Mark up percentages may be calculated on the
retail price or on the cost. They are calculated as under. Mark up % (at retail) = (Retail Selling Price –
Merchandise Cost) / Retail Selling Price Mark up % (at cost) = (Retail Selling Price – Merchandise Cost) /
merchandise Cost When the buyer is aware of the mark up percentages required and of the selling price,
he can also work out the price at which he actually needs to procure the product. Since it may not be
possible to adopt a policy of maintaining a single mark up for a product category, the concept of a
variable mark up policy can be followed. This allows the buyer to procures goods at varying price, but at
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the same time, maintain the margin that need to be earned, as some products may earn a higher margin
as compared to other. Demand-oriented pricing focuses on the quantities that the customers would buy
at various prices. It largely depends on the perceived value attached to the product by the customer.
Sometimes, a high priced product is perceived to be of a high quality and a low priced product is
perceived to be of a low quality. An understanding of the target market and the value proposition that
they would look for is the key to demandoriented pricing. When the prices adopted by the competitors
play a key role in determining the price of the product, then competition-oriented pricing is said to
follow. Here, the retailer may price the product on par with the competition, above the competitor’s
price or below that price. APPROACHES TO A PRICING STRATEGY Price lining do retailers use a term
when they sell their merchandise only at the given prices. A price zone or price range is a range of prices
for a particular merchandise line. A price point is a specific price in that price range. The pricing
strategies that can be followed include: § Market skimming The strategy here is to charge high prices
initially and then to reduce them gradually, if at all. A skimming price policy is a form of price
discrimination over time and for it to be effective, several conditions must be met. § Market Penetration
This strategy is the opposite of market skimming and aims at capturing a large market share by charging
low prices. The low prices charged stimulate purchases sand can discourage competitors from entering
the market, as the profit margins per time are low. To be effective, it needs economies of scale, either in
manufacturing, retail or both. It also depends upon potential customers being price sensitive about
particular item and perhaps, not perceiving much difference between brands. § Leader pricing Here, the
retailer bundles a few products together and offers them at a deep discount so as to increase traffic and
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sales on complementary items. The key to successful leader pricing strategy is that the product must
appeal to a Large number of people and should appear as a bargain. Items best suited for this type of
pricing are those frequently purchased by shoppers, e.g., bread, eggs, milk, etc. § Price Bundling Here,
the retailer bundles a few products together and offers them at a particular price. For example, a
company may sell a PC at a fixed price and the package may include a printer and a web camera.
Another example is that of the Value Meal offered by McDonald’s. Price bundling may increase the sales
of related items. § Multi-unit Pricing In multi-unit pricing, the retails offers discounts to customers who
buy in large quantities or who buy a product bundle. This involves value pricing for more than one of the
same item. For example, a retailer may offer one T-shirt for Rs 255.99 and two T- shirts for Rs 355.99.
Multi-unit pricing usually helps move products that are slow moving. § Discount pricing It is used as a
strategy by outlet stores who offer merchandise at the lowest market prices. § Every Day Low Pricing
Every Day Low Pricing or EDLP as it is popularly known, is a strategy adopted by retailers who continually
price their products lower than the other retailers in the area. Two famous examples of EDLP are Wal-
Mart and Toys “R” Us, who regularly follow this strategy. § Odd Pricing Retail prices are set in such a
manner that the prices end in odd numbers, such as Rs 99.99 or Rs 199, Rs 299,etc. The buyer may
adopt either the cost-oriented or a demand-oriented approach for setting prices. In the Cost-oriented
method, a fixed percentage is added to the cost price. This is determined by what mark up the retailer
works on. Alternately, the demand-oriented method bases prices on what price the customer expects to
pay for the product. The price fixed here is based on the perceived value of the product. Ultimately, it is
the planned gross margin, which needs to be achieved, AcroPDF - A Quality PDF Writer and PDF
Converter to create PDF files. To remove the line, buy a license. and which is a major consideration while
fixing the retail price. ADJUSTMENTS TO RETAIL PRICE Many a times, retail prices need to be adjusted to
meet the conditions prevailing in the market. Adjustments to retail prices can be done by way of
markdowns or by way of promotions. Markdowns are a permanent reduction in the price and this step
may be taken as a result of slow selling of the product or as a part of a systematic strategy. Markdowns
are usually done after a determined number of weeks in order to maintain a desired rate of sales. Timely
markdowns help improve the profitability, increase the turnover and increase the profit. Markdowns
may be necessitated due to wrong forecasting, overbuying, faulty selling practices or simply because the
product is shop soiled or the odds and ends of a range are left at the end of a season. The mark down
percentage is calculated as follows: Total mark down / total sales X 100 Promotions on the other hand,
are a temporary reduction in the price, used to generate additional sales during peak selling periods.
Prices may be reduced by a percentage (25 percent off) or to a lower sale price (Rs. 99). High volume
items, with a substantial initial markup, are usually selected for promotions. Promotions may also
include coupons, which may reduce the retail price by an amount or a percentage. With retail coupons,
the retailer absorbs the reductions in the price. A Comparison of Mark ups and Markdowns A mark up is
where profit is expressed as a percentage of the costs, as shown below: (price-Cost)/CostX100 Thus, a
selling price of Rs 30, with a cost of Rs 20, gives a mark up of 50 percent. A markdown is where profit is
expressed as a percentage of the sale price and is shown below: (price-Cost)/PriceX100 thus, a selling
price of Rs 60, with a cost of Rs 24, gives a markdown of AcroPDF - A Quality PDF Writer and PDF
Converter to create PDF files. To remove the line, buy a license. 60 percent. % Markdown on selling price
= %Mark Up on cost X 100 = 100% = Mark Up on cost % Mark Up on cost = % Markdown on selling price
X 100 = 100 % - % Markdown on selling price MERCHANDISE ALLOCATION Once the merchandise is
purchased and priced, it must be allocated to the stores. Most retailer classify their stores as A,B, or C,
based on their sales potential. Each chain’s allocation of merchandise to its stores is different, but it
should be based on the total number of stores in the chain and the distribution of sales among the
stores. Each store, regardless of its size, must carry a large proportion of the assortment offered;
otherwise, the customers will perceive the smaller stores as having an inferior assortment. The stores
which are larger, and amount for a larger percentage of the sales, can get merchandise more frequently.
The seasonally of demand, colors the amount of time that it takes for the merchandise to reach the
locations, specific colors, and sizes, all these factors must be taken into account while allocation the
merchandise. The stores, which are larger, and amount for a larger percentage of the sales, can get
merchandise more frequently. The seasonally of demand, colors the amount of time that it takes for the
merchandise to reach the locations, specific colors and sizes, all these factors must be taken into
account while allocating the merchandise. ANALYSING MERCHANDISE PERFORMANCE There are three
methods of analyzing merchandising performance: 1. The ABC analysis, 2. The sell through analysis and
3. The Multiple Attribute method. I. ABC Analysis ABC analysis ranks merchandise by a pre-determined
performance measure. This helps determine which items should never be out of stock, AcroPDF - A
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should occasionally be allowed to be out of stock and which items should be deleted from the stock
selection. An ABC analysis can be done at any level, for merchandise classification from stock keeping
unit (SKU) to department. ABC analysis utilizes the 80:20 principle, which implies that 80% of the sales
come from 20% of the products. The first step in the ABC analysis is to rank order SKUs, using one or
more criteria. The most important performance measure for this type of analysis is contribution margin,
where Contribution margin = Net Sales – Cost of Goods Sold – Other variable expenses Other variable
expenses can include sales commissions. Sales can be the sales per square foot, the gross margin or the
GMROI. Pareto Curve % Use by value 100 80 Class C Class B 60 40 Class A 20 20 40 60 80 100 % Total
Number of items AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the
line, buy a license. Fig . The Pareto Curve The next step is to determine how items with different levels
of profit or volume, should treated. The buyer may define as category A, those items that account for
5% of the total quantity of items but represent 70% of the sales. Category B items usually represent 10%
of the sales whereas category D consists of those items for which there were no sales in the past season.
2. Sell Through Analysis A sell through analysis is a comparison between the actual and the planned
sales, to determine as to whether early markdowns are required or whether more merchandise is
needed to satisfy demand. There is no reel, which can determine when a mark down is necessary. It
depends on factors like the past experience with the merchandise whether the merchandise is schedule
to feature in advertising, whether the vendor can reduce the buyer’s risk by providing markdown
money, etc. If actual sales stay significantly ahead of the planned sales, a reorder should be made. 3.
MULTIPLE ATTRIBUTE METHOD This method uses a weighted average score for each vendor. The
following steps are followed. 1 developed a list of issues to consider for decision – making – vendor
reputation, service, merchandise quality, selling history, etc. 2. Give importance weights to each
attribute. 3. Make judgement about each individual brand’s performance on each issue. 4. Combine the
importance and performance scores 5. Add all to arrive at the brand scores. GROSS MARGIN RETURN
ON INVESTMENT (GMROI) Many retailers use the performance indicator of gross margin percent
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(after markdown) and weeks cover to measure performance. While the gross margin percent is a
measure of the relative profitability, without taking into account the costs of stockholding investment,
week’s cover tells us how effectively the stock was turned, without in forming us about its relative
profitability. What is needed is a measure that combines these two indicators, into an indicator of real
profitability. GMROI is such an indicator. GMROI is calculated as Gross Margin/Average Inventory at Cost
GMROI is a merchandise planning and decision making tool that assists the buyer in identifying and in
evaluating whether an adequate gross margin is being earned by the products purchased, compared to
the investment in inventory required to generate the gross margin. It focuses the buyers’ attention on
the return on investment, rather than on department totals and it helps identify ‘produced winners’ and
‘core products’. Product winners are those products that perform well, which boost profitability and are
the best return – on – investment products. Core Products on the other hand, are the buyer’s list of
existing winners that should never be out of stock. They’re the most valuable products in terms of their
high profitability and their excellent return on investment. Another method of managing inventory
investments is to predetermine the stock levels at which merchandise should be reordered. This is
known as the reorder point. Various factors, like the lead-time required, the safety stock and the speed
at which the products sell, have to be taken into consideration. It may not always be possible for a retail
buyer to place orders for products in small quantities, hence, the Economic Order Quantity (EOQ) is
determined. For this purpose, it is necessary to first determine the sales for the product, then take into
consideration various factors like the cost, discounts offered and the cost of holding the inventory and
the Economic Order Quantity is determined. The EOQ is calculated by using the following formula EOQ =
2Ds / IC, where D= annual demand, S = Costs to place the order, I= Percentage of annual AcroPDF - A
Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a license. carrying
cost to unit cost and c= unit cost of an item. The EOQ model assumes that the unit cost of an item is
constant, irrespective of the quantity ordered. In practice, for large orders, quantity discounts in price
and transportation costs are usually offered. Such discounts cannot be accounted for in the EOQ model.
Summary The success of any retail operation is largely based on the retailer’s ability to prove the right
goods to the consumer, at the right place and at the right time. It is for this reason that the function of
merchandising plays a key role in retail. With the growth of organized retail I the world, this function has
gained in significance. The Size of the organization, the merchandise to be carried, they type of stores
and the organization structure, all affect the merchandising function. The two key players in this
function, are the buyer and the merchandiser. The starting point of the merchandising function is
analysis. Analysis forms the basis of the sales forecast. A sales forecast is usually made for a specific
period of time. It is an outline of what sales need to be achieved and what revenues are targeted.
Planning provides the direction and serves as the basis of control for any merchandise department. The
merchandise budget is first created and this helps in the formation of the Assortment Plan. Depending
on the method of inventory planning used, the six-month merchandise plan is created. This gives the
overall picture of how many inventories is needed every month. Once the inventory levels needed are
determined, the money available for buying has to finalize. Computing the Open-To-Buy tells the buyer
about the money available for buying has to be finalised. Computing the Open –To – Buy, tells the buyer
about the money available for buying. The Assortment Plan is then created and it gives the precise items
and quantities that need to be purchased for each merchandise line. Merchandise buying is a four-step
process, which involves identifying the sources of supply, contacting the sources of supply, evaluating
the sources of supply and negotiating with the sources of supply, AcroPDF - A Quality PDF Writer and
PDF Converter to create PDF files. To remove the line, buy a license. Sources of supply may be domestic
or international. Various aspects associated with international souring, like Foreign Currency
Fluctuations, Tariffs, Foreign Trade Zones, Cost of Carrying Inventory and the Transportation Costs have
to be taken into consideration. After having decided on the source of the merchandise, buyer then
needs to move on and establish a strategic partnership with the vendor. This requires Mutual Trust,
Open Communication, Common Goals and Credible Commitments. A decision needs to be taken on
whether to stock manufacturers’ brands, licensed brands or to create an own label. Information
technology now makes it possible for retailers and suppliers to share information and change collective
business practices in ways that would have been unrealistic in the recent past. The net impact of all
these and other changes has been to enable many within the industry, to do more with current
resources and to refocus on meeting consumer needs for value, variety and service, as the basis for
creating competitive differentiation. Given these challenges, retailers and suppliers need to intensify
their efforts to better understand consumer needs and to meet those needs more effectively. Category
management is the result of a set of business conditions that have increasingly challenged many
traditional management methods. By focusing on a superior understanding ;of consumer needs,
category management provides renewed opportunities for meeting consumer needs and, at the same
time, for achieving competitive advantage as well as lower costs through greater work process
efficiencies. Arriving at the right price for a product or service is one of the most difficult tasks of
marketing. In order to arrive at the retail price, one needs to first consider the elements that go into the
making of the price. The elements to be considered are the Cost of Goods and the Merchandise
Margins. Various other factors, like the target market, store policies; competition and the economic
conditions need to be taken into consideration while AcroPDF - A Quality PDF Writer and PDF Converter
to create PDF files. To remove the line, buy a license. arriving at the price of a product. The pricing
strategy adopted by a retailer may be cost-oriented pricing, demand-oriented pricing or competition
oriented pricing. The pricing strategies that may be followed include, market skimming, market
penetration, leader pricing, price bundling, Multi unit pricing, discount pricing, every day low pricing and
odd pricing. Adjustments to retail price are made by way of markdowns. Markdowns are a permanent
reduction in the price and may be done as a result of slow selling or as a part of a systematic strategy.
Merchandise performance can be evaluated by using the ABC analysis, the sell through Analysis or by
the Multiple Attribute Method. The Margin Return on Investment or GMROI, is a useful tool for
merchandise planning. It can help identify products, which are winners, and those that need attention.
Other methods of managing inventory investments include predetermining the Reorder Point and by
determining the Economic Order Quantity.