Retail Management Unit 5

Unit 5 Merchandising Management

Structure:
5.1 Introduction
Objectives
5.2 Merchandising
Components of merchandising system
Merchandise mix
5.3 Factors Influencing Merchandising
Criteria of merchandise classification
5.4 Functions of Merchandising Manager
5.5 Merchandise Planning
Stages of merchandise planning
5.6 Merchandise Buying
Steps in merchandise buying
5.7 Analysing Merchandise Performance
ABC analysis
Sell-through analysis
5.8 Summary
5.9 Glossary
5.10 Terminal Questions
5.11 Answers

5.1 Introduction
The efficiency of a retail store is based on the retailer’s ability to provide the
right goods to the consumer, in the right quality, in the right quantity, at the
right place and in right time. Merchandise management as a function
concerns itself with the selection of merchandise and ensuring its availability
in the right quantity at the right place in the retail store. Merchandise
management is a key activity in the management of retail business. It drives
the retailer and has immense cost and profit implications. The entire process
of retailing depends on efficient merchandise management.
Objectives:
After studying this unit, you should be able to:
 analyse how a buying process is organised and the dimensions a
retailer considers while planning merchandise assortment plan

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 explain factors that a retailer needs to take into consideration while

planning his merchandise
 explain how financial objectives are set for the merchandise plan
 discuss the functions of a merchandise manager.

5.2 Merchandising
It consists of the activities involved in acquiring particular goods and/or
services and making them available at the right places, times and prices and
in the quantity that enables a retailer to reach his objectives.
In the retail industry, with the emergence of large players, like Big Bazar,
Spencers, Shoppers Stop, Reliance Fresh, Subhiksha, Big Apple, and
Globus more recently, the battle has been to retain customer base. Thus
loyalty programmes for store members were started. To keep up the
enticement, new value additions are sought and implemented from time to
time. The result is that the traditional Indian ‘kirana stores’ are facing
problems to survive. The large players benefit from economies of scale
(benefits associated with bulk buying) and thereby are able to spread their
costs per unit. The ‘kirana stores are unable to do it due to inadequate
capital and resources. Their resources are limited and cannot use these
costly sales promotion techniques. In the race of moving ahead and
increasing their client base, stores present lucrative offers to the customers.
The primary function of retailing is to sell merchandise. One of the most
strategic aspects of the retail business is to decide the merchandise mix and
quantity to be purchased. Merchandise management is the analysis,
planning, procurement, handling and control of the merchandise
investments of a retail operation.
5.2.1 Components of merchandising management
 Merchandise analysis: The retailer needs to be aware of the target
segment of the consumers before he makes the decision to buy the
merchandise. Planning merchandise buying should be aligned with the
taste and preferences of the consumer.
 Merchandise planning: It is a well devised thought to say that ‘well
bought is half sold’. Buying objectives should be well designed and
structured and a well thought plan is required to buy merchandise before
the busy business season.
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 Merchandise control: Control mechanism of merchandise decides the

effectiveness of the laid out policies and procedures and its alignment or
deviation from the set standards. Standards would basically mean
objectives and goals for accomplishment.
 Merchandise acquisition: Distributors or manufacturers of products
generally take care of the supply part of the merchandise. Merchandise
to be sold in retail store is purchased from suppliers after making a
careful study on pricing and scale economies. Forecasting and trend
analysis help in ascertaining the right quality and quantity of
merchandise to be sold. Merchandising acquisition depends to a large
extent on such analysis and careful selection of suppliers.
 Merchandise handling: Merchandise handling involves the careful
treatment and usage of merchandise in a retail operation. The key to
successful sale of merchandise is the effective use of available apace in
the retail store. The concept of store rationalisation deals with the
efficient use of all resources required for selling with profit. Management
of store space is also important, considering the fact that the cost of
buying space in the urban cities, defines the difference between good
and average business. It is therefore necessary to determine, when the
merchandise is necessary and also the right location it needs to be
placed so that it is easily available for selection to the consumer.
5.2.2 Merchandise mix
The merchandise mix represents the full range of mixture of products a
retailer offers to its target consumers. Merchandise mix covers decisions on
key parameters such as merchandise variety, assortment and support.
Merchandise variety is the number of different product lines that a retailer
stocks in the store. Merchandise assortment refers to the number of
different product items the retailer stocks within a particular product line.
Merchandise support deals with the planning and control of the number of
units the retailer should have on hand to meet the expected sales for a
particular product.

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5.3 Factors Influencing Merchandising

Merchandising as a function is affected by various other factors. It cannot
function in isolation. The factors that influence merchandising are the size
of the organisation, the type of the retail store, the organisation culture and
the merchandise mix.
 Organisation size: In an independent business, the owner or the
manager of the retail store does all the purchases with the assistance of
the sales person. The needs of the small business vary from that of a
large organisation. Retailing function depends upon the size of the
business. Small businesses try to grow in size, whereas large
organisations try to achieve economies of scale. The size of business
determines the size of merchandise.
Large scale organisations generally follow centralised buying pattern.
But decentralisation happens if there is functional departmentalisation.
In any case, the basic logic that needs to be followed in the purchase of
merchandise is to match it with the present taste and fashions prevalent
in the market. Geographic dispersion of retail store necessitates for
larger orders from suppliers. As chain stores are spread across regions
and also across borders on some occasions, regional preferences
should also be taken into consideration.
 The type of store: Another factor which determines the function of
merchandising is the nature of the organisation. An organisation
engaged in store selling needs to provide a choice of products to the
consumers. Making products available in the right quantity and quality is
a must for such stores. New products are introduced in the market very
often and with more number of stock keeping units (SKUs) available in
the store, space management is of high priority.
For organisations engaged is direct marketing and e-tail ventures, the
uniqueness of the product and its competitive price makes the
difference.
 The merchandise mix: The key elements of merchandise mix are
assortment, variety and support. The right merchandise mix would
ensure appropriate combination of product items, product lines and
product units. The number of different product lines that a retailer stocks
in the store is called merchandise variety. Within a particular product

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line, there will be different product items. This is merchandise

assortment. For example, if a retailer sells biscuits, it would imply both
product line and variety. Butter biscuits, chocolate biscuits, milk biscuits,
etc., would mean product item within the same product line and hence
termed as assortment. The problem arises when there are brand loyal
customers. Customers are loyal to some product brands which make
them purchase the same item repeatedly. If the retailer fails in
maintaining adequate stock of a particular product item, he will lose sale.
Therefore, the right merchandise mix should be made available at retail
points, so that the product is made available at all times.
The link between merchandise variety and merchandise assortment
leads to successful merchandise support system. In other words,
merchandise support deals with the planning and control of the product
units in such a way that the retailer has sufficient stock in order to meet
the expected sales of a particular product.
 The organisation structure: An organisational structure consists of
activities such as task allocation, coordination and supervision, which
are directed towards the achievement of organisational goals. The type
of organisation structure would determine the effective and efficient
purchase and sale of merchandise. The best suited structure for
effective purchase and sale of merchandise is a matrix of product and
functional structure.
A functional organisation is best suited as a producer of standardised
goods and services at large volume and low cost. The functional
structure classifies each group into a division. Each division contains all
the necessary resources and functions within it.
 Target market: The various consumer characteristics that influence the
shopping behaviour are geographical, demographic, environmental and
psychographic aspects. These influences on shopping behaviour in turn
determine the nature of merchandise plan. Retailers analyse information
related to their target segments on the following basic aspects:
1. Who is the shopper and consumer of their products, services and
brands – national or private labels?
2. Segments of shoppers/consumers based on the patterns of
shopping and consumption behaviour.

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3. Characteristics of various consumer groups and differences between

segments.
4. Consumers’ preference or opinion on products, services and brands
offered by the retailer.
5. Consumers’ complaints and suggestions.
6. Characteristics of non-patronising consumer segments.
7. The number of non-patronising buyers.
8. Reasons for not patronising the store.
9. To what extent can merchandise mix influence their patronising
behaviour?
 Competition analysis: A retailer may attempt to enter a shopping
centre where a wide variety of product categories are already available.
In such a case, he needs to identify the major competitors and their
respective advantages drawn on the basis of the merchandise mix. This
will help him to plan competitive merchandise and to meet any unmet
demand. For instance, Time Zone retail chain operating throughout India
offers all the leading brands of watches with comprehensive ranges
available in each brand. They have positioned their retail chain against
the big retailers in the unorganised sector on the basis of a
comprehensive merchandise mix, including authorised service centres
of the respective brands which the consumer expects to be located
under one roof.
The merchandise plan is also determined by competitive factors like
number, types and positioning of the stores and size and nature of the
market area in which the particular retailer is operating his/her business.
5.3.1 Criteria of merchandise classification
Merchandise can be classified according to the following characteristics:
1. Unit value.
2. Significance of each individual purchase to the consumer.
3. Time and effort spent in purchasing by consumer.
4. Rate of technological change (including fashion changes).
5. Technical complexity.
6. Consumer need for services (before, during or after sale).
7. Frequency of purchase.
8. Rapidity of consumption.

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5.4 Functions of Merchandising Manager

In order to understand the functions of the merchandising manager, it is
important to know the basic structure of the retail store. If the retail store has
separate departments for each product line, each product line will have a
manager. The appointed manager is responsible for all tasks associated
with the department. For example, there will be separate managers for
electronic goods, home appliances, apparels, etc. The duty of the
merchandising manager is divided into four areas:
 Planning: Merchandise managers are required to plan and formulate
policies for the tasks delegated to them or the area for which they are
held responsible. Merchandise planning can be done on the basis of the
forecasting results. Forecasting of sales and trend analysis gives the
manager a fair idea on the stock that needs to be maintained or ordered.
Forecasts are then translated into monetary values in the form of
budgets. Planning is therefore an important function of merchandise
management which helps in the careful selection and order of
merchandise for the forthcoming business cycle.
 Directing: Directing would mean, telling subordinates what to do and
ensuring that they do it to the best of their abilities. The merchandising
manager has to play a dual role before he directs. The first role is to be
aware of the needs of the buyer. Often, buyers need to be guided in their
purchases, especially when the product offering are sold with the mark
down price or on those products which are not doing too well in the
store. Also, the merchandising manager needs to take a commitment
from the buyer on his purchases. But, this commitment can be given
only if the buyer is confident about offerings that have been explained by
the manager. The second role is to also train the workforce on the
requirement that is actually sought by the buyer, so that the employees
perform their tasks in the most efficient way.
 Coordinating: Employees in an organisation work under different
capacities. Work should be coordinated for the attainment of
departmental objectives. Coordination is the synchronisation of all
actions, for the attainment of organisational objectives. Managers
observe and supervise the buying pattern of more than one buyer at a
time. In terms of merchandise handling, merchandise purchase and
sale, all actions should be synchronised to arrive at a concrete decision.
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The time and effort put in the effort of supervision and observation leads
to increased sales and profit.
 Controlling: In an organisational set up, the departmental manager
takes the up lead role in the execution of tasks. The top management is
concerned with the planning function of management. Therefore, the
function of controlling is assessing the performance against already the
established standards. Performance does not only imply the
performance of the workforce, but also the buying pattern of the
purchaser. Buying performance may be assessed by yardsticks like
stock turnover, sales, mark down percentages, etc. Controlling as a
function is necessary to maintain high standards of performance.

5.5 Merchandise Planning

The merchandising manager has to analyse the purchase and sales record
as a starting point of merchandise planning. The data for planning can be
taken from external as well as internal sources. Feedback can be taken from
sales staffs, which are direct contact points with the consumer. Data can
also be collected from external sources like newspapers, periodicals,
surveys, magazines, etc. This effort would give a fair idea on the needs and
wants of the customer for the particular time period under study. The data
so collected would also provide information on what products are currently
selling in the market. The information thus gathered needs to be analysed.
The purpose of analysis of data is to form a base for sales forecasting.
Sales forecasting is the first step in merchandise planning.
5.5.1 Stages of Merchandise planning:
Stage 1: Developing sales forecast
Sales forecasting is made based on the targets and inputs given by the top
management. Sales forecasting enables to determine the inventory needs
for a particular product or category. A good model of sales forecasting
answers the following questions:
1. How much of each product needs to be purchased?
2. Should new products be added to the merchandise assortment?
3. What price should be charged for the product?
A sales forecast is usually made for a specific period of time – it may be
weeks or a season or a year. The person who makes forecasts for the

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product group or category needs to be aware of the changes in tastes and

attitudes of consumers, the size of the target market and the changes in
their spending pattern.
Process of developing sales forecast
1. Reviewing past sales: Review of past sales helps in understanding the
pattern or trend in sales and helps in the projection of sales figures for
the future period. Sales in the past year give an indication of the sales
that is going to happen in the current year and also tentatively for the
next year.
2. Analysing the changes in economic conditions: It is necessary to
consider the changes happening in the economic front. It has a direct
link to consumer spending patterns, economic slowdowns, increase in
employment levels, etc. All these factors affect business.
3. Analysing the changes in the sales potential: It is necessary to relate
the demographic changes in the market to that of the store and the
products to be sold.
4. Analysing the changes in the marketing strategies of the retail
organisation and the competition: The key factor that needs to be
considered while forecasting sales is the market strategy to be adopted
and whether the same strategy has been adopted by the competitor.
Competitive analysis is of utmost importance as the forecasting figures
thus arrived at results in the ultimate sales numbers. The following
factors needs to be considered before forecasting:
a) Is there any line of merchandise to be introduced?
b) Is there any new store to be opened?
c) Is there an existing store that needs to be renovated?
All these factors need to be taken into consideration.
5. Creating the sales forecast: After considering the above mentioned
points, an estimate of the projected increase in the sales is arrived at.
This is then applied to the various products/categories to arrive at the
projected sales figures.

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Stage 2: Determining merchandise requirement:

The levels of planning merchandise:
1. Creation of merchandise budget: Merchandise budget is referred to
as a financial plan that indicates how much to invest in product
inventories, usually stated in rupees per month. Earmarking of
merchandise budgets is considered to be a vital component of the
planning phase. Usually a budget states the amount allocated for each
product, based on the pre-set profitability or other performance
measures.
2. Assortment plan: An assortment plan is a description of items a retailer
would like to have in his store in a particular merchandise category.
Planning merchandise assortment is a significant part of a retailer’s
financial success. To begin with, a retailer first decides the firm’s
financial objectives. Once the financial objectives are framed, the retailer
begins the task of selecting ‘what to buy’, which is the biggest challenge
a retailer faces in his day to day life.
Stage 3: Merchandise inventory planning:
Planning of inventory can be made by using any one of the following four
methods:
1. Basic stock method: Basic stock method is the minimum amount of
stock that needs to be maintained in the store for a particular product or
category. Minimum amount of stock should be maintained in the retail
store at all times. This should be followed even in the time of low sales.
2. The percentage variation method: Here, inventory in the store should
be aligned with the actual sales. This method is used when the stock
turnover rate is more than six times in a year. When the inventory level
maintained in the store moves in line with the actual sales, the store is
believed to have maintained a reasonably good system of stock
valuation.
3. Stock to sales ratio method: 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.
4. Stock turnover rate: The stock turnover rate measures the speed at
which the stock moves in and out of the retail store for a given period.

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The time period for such a calculation is usually six months or a year.
Stock turnover rate is a tool which measures the efficiency of the
management of stocks

5.6 Merchandise Buying

Retailers should have thorough knowledge of the merchandise buying
systems. Not only the past history of merchandise but also the customer’s
feedback, suggestion complaints and assistance of category manager
should be sought. The sources of buying merchandise can be spread
across the globe.
5.6.1 Steps in a typical buying process:
The following are the steps in merchandise buying (Fig. 5.1).

Figure 5.1: Steps in Merchandise buying

Let us now see each of these steps in detail.

Step 1: Gathering product information
Before the retailer proceeds with the buying process, he needs to gather
product information. The information to be gathered includes the quantity of
merchandise needed to be ordered, the price at which they are available,
the quality of merchandise, and most importantly the supplier from whom it
has to be purchased.

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Step 2: Searching merchandise suppliers

The critical aspect of buying merchandise is selecting the right supplier. The
retailer needs to ensure continuous supply of merchandise throughout the
buying cycle. The cost of purchases should also be considered while
selecting the supplier. It is a known fact that purchases are at the lowest
cost with the highest quality.
Step 3: Negotiating with the selected suppliers
As discussed, negotiation with the supplier relates to matters concerning the
cost of purchases for the ordered merchandise. The factors that determine
successful buying is the availability of continuous supply of merchandise in
the right quantity, quality and time, besides the cost of purchases.
Step 4: Placing the order
Considering the above determinants that affect a buying process, the
retailer moves ahead in the final step of placing the order.
5.6.2 Systems of merchandise buying
Retailers throughout the globe usually employ two types of buying systems:
I. Staple merchandise buying systems.
II. Fashion merchandise buying systems.
Buying systems significantly influence the following factors:
 Sales volume: Providing the right merchandise in the right quality in the
right price at the right place.
 Gross margins: Buying systems not only influence the price (cost) of
merchandise but also the pricing policy and the extent of the mark up.
 Mark downs: Buying systems influence the mark downs as they
regulate the quantity, lead time, price and type of merchandise ordered.
 Stock levels: Buying systems have an impact on the balance of
inventory. Further, buying systems balance the inventory levels to
achieve high sales targets with low level of inventory.
Buying system for staple merchandise
Staple merchandise consists of the items that are regularly purchased,
displayed and sold by the retailers. For a grocery store, staple merchandise
will be bread, butter, milk, salt, eggs, tissues and so on. For a departmental
store, staple merchandise is a camera, stapler pins, pens, notebooks,
briefcase, gift items and housewares.

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Buying systems for fashion merchandise

Fashion merchandise consists of items those usually have unpredictable
demand and limited sales record. The following are the features of fashion
merchandise:
 Unpredictable demand.
 No/limited sales history (record).
 Relatively difficult to forecast sales.
Seasonal merchandise
It consists of items which change from season to season, but have a
relatively good demand over non-consecutive time periods. Items such as
room coolers, air conditioners, sweaters, umbrellas, etc., have excellent
seasonal demand.

5.7 Analysing Merchandise Performance

Whatever source is chosen, retailer must decide a procedure to analyse the
merchandise performance with regard to addition or deletion of SKUs,
vendors and departments as an on-going process. These decisions become
necessary because in fashion merchandise, consumer preferences, tastes,
liking and disliking change rapidly. Therefore, it becomes necessary for a
merchandise buyer to add/delete merchandise, search for new vendors or
add/delete some categories. Further, poor performance of merchandise, in
terms of quality and after use dissatisfaction, forces a merchandise buyer to
change the vendor in question to avoid further complaints and reduce
profits.
Two methods are commonly used to analyse merchandise performance:
1. ABC analysis.
2. Sell-through analysis.
5.7.1 ABC analysis
The ABC analysis, also known as Always Better Control, is an inventory
classification process where total inventory is classified into three
categories:
A – Outstandingly important.
B – Of average importance.
C – Relatively unimportant as a basis for a control scheme.

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Each firm, whether big or small, has to maintain several types of inventories.
Some are small in size but are costly ones, some large in size but have less
cost. It is never advisable to keep the same degree of control on all the
items. The firm should pay maximum attention to those items which are
costly and less attention to those which are cheaper. Therefore, the firm
should be selective in its approach to control investment in various types of
inventories. The logical approach is known as ABC analysis and tends to
measure the importance of each item of inventories in terms of its value.
5.7.2 Sell-through analysis
This method describes the comparison between the actual and forecasted
sales volume to determine whether early markdowns should be applied or
fresh order for additional merchandise should be given to satisfy current
demand.
There is no universal rule to indicate when a markdown should be
introduced or additional stock of merchandise be ordered. It simply depends
on the experience a buyer has with the merchandise in the past year.
Table 5.1: Sell Through Analysis for ladies jeans

Week 1 Week 2
Particulars ( Actual to Plan) ( Actual to Plan)
Stock Particular Variation Plan Actual Variation %
No Size Plan Plan Actual %
IDM- Low waist
2101 32'' black 30 40 33.33 20 15 -25
IDM- Normal
2102 32'' black 40 50 25 30 25 -16.67
IDM- Medium
2103 34'' waist white 50 30 -40 40 30 -25
IDM- Normal waist
2104 36'' white 30 25 -16.67 10 25 150
IDM- Stretchable
2105 34'' blue 20 15 -25 20 15 -25
IDM- Denim
2106 30'' normal grey 40 50 -25 35 38 8.57
IDM- Denim low
2107 28'' grey 20 30 50 25 29 16
IDM- Low normal
2108 32'' grey 40 25 -37.5 35 28 -20

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Table 1 shows a sell through analysis for ladies’ jeans for the first two weeks
of a particular season. Since the ladies jeans belong to fashion
merchandise, demand is not easy to predict, but necessary amendments
may be made to the merchandise plan any day after two weeks. The
variation between actual and forecasted sales guides the retailer about
possible changes with regard to addition/deletion of SKU’s vendors and
departments. Further, the significance of sell-through analysis is employed
in evaluating the performance of fashion and new arrivals. After carefully
analysing the performance of the various items in ladies jeans category, the
retailer can plan for whether to buy fresh stock of merchandise (in case of
good customer’s response) or go for markdowns (if the items have no good
response from customers).
Self Assessment Questions
1. The three components of the merchandise mix are merchandise variety,
merchandise assortment and merchandise _______________.
2. Planning, controlling, coordinating and directing are the ____________
of a merchandising manager.
3. The factors that influence merchandising are organisation structure, size
of the organisation, competition analysis, merchandising mix and
____________________.
4. The four steps in the buying process are gathering product information,
searching merchandise suppliers, negotiating with selected suppliers
and _______________________.
5. The three stages of merchandise planning are developing sales
forecast, determining merchandise requirement and _______________.
6. The components of merchandising management are merchandise
planning, merchandise analysis, merchandise control ______________
and merchandise handling.
7. The two types of buying systems are staple merchandise buying
systems and _____________ merchandise buying systems.
8. Buying systems influence sales volume, gross margins, mark downs
and ___________________.
9. The two commonly used methods to analyse merchandise performance
are sell-through analysis and ______________.
10. Basic stock method, percentage variation method, stock to sales ratio
method and stock turnover rate are the four methods of ____________.

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11. The levels of planning merchandise are creating merchandise budget

and ______________ plan.

5.8 Summary
Let us recall the important concepts discussed in this unit.
 Merchandise management concerns itself with the selection of the right
quantity of the product and ensuring its availability at the right place and
time.
 The components of merchandising management are merchandise
planning, merchandise analysis, merchandise control, merchandise
acquisition and merchandise handling.
 The factors influencing merchandise management are size of the retail
organisation, type of the retail store, merchandise mix, the organisation
structure, and the target market and competition analysis.
 The functions of the merchandising manager are: planning, directing,
controlling and coordinating.
 The stages of planning merchandise are: a) Developing sales forecast
b) Determining merchandise requirement c) Merchandise inventory
planning.
 Steps in a typical merchandising buying process: a) Gathering product
information b) Searching merchandise suppliers c) Negotiating with
selected suppliers d) Placing the order.
 The methods of analysing merchandise performance are a) ABC
analysis b) Sell-through analysis.

5.9 Glossary
Process: Steps or procedures to convert something from one form to
another.
Efficiency: Extent to which, time or effort is well used for the purpose of
accomplishing the intended task
Acquisition: The act of acquiring the possession of something.
Assortment: A collection of variety of sorts of things.
Performance: An important ingredient
Components: Accomplishment of given task against the set standards
which are known in advance.

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5.10 Terminal Questions

1. What do you understand by the term merchandising management?
2. Discuss briefly the components of merchandising management.
3. What are the factors that influence merchandise management?
4. Planning, directing, coordinating and controlling are the main functions
of a merchandising manager. Explain.
5. What are the stages involved in merchandise planning?
6. Describe in detail the steps involved in the merchandising buying
process.
7. Discuss the two important methods of analysing merchandise
performance.

5.11 Answers
Self Assessment Questions
1. Merchandise support
2. Functions
3. Target market
4. Placing the order
5. Merchandise inventory planning
6. Merchandise acquisition
7. Fashion merchandise buying systems
8. Stock levels
9. ABC analysis
10. Merchandise inventory planning
11. Assortment Plan
Terminal Questions
1. Rrefer section 5.2
2. Refer 5.2.1
3. Refer section 5.3 for more details
4. Refer section 5.5 for details
5. Refer section 5.5.1 for more detailed information
6. Refer section 5.6.1 for details
7. Refer section 5.7.1 and 5.7.2

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References:
 Berman, B., & Evans, J. R. (n.d.). Retailing Management. Pearson
Education.
 Levy, M., & Weitz, B. A. (n.d.). Retailing Management. Tata McGraw Hill.
 Pradhan, S. (n.d.). Retailing Management - Text and Cases. Tata
McGraw Hill.

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