Merchandising Management

Anindo
 Merchandising
• Merchandising consists of the activities involved in
acquiring particular goods and/or services and making
them available at the places, times, and prices and in
the quantity that enable a retailer to reach its goals.
 Merchandising Philosophy
• A merchandising philosophy sets the guiding principles for all the
merchandise decisions that a retailer makes. This encompasses every
product decision, from what product lines to carry, to the shelf space
allotted, to different products, to inventory turnover, to pricing.
• Product-focused merchandising involves analyzing SKU-level sales
performance and profitability metrics to find and invest in the most profitable
products based on store size, volume, and sell-through for each category.
• Consumer-focused merchandising involves creating product assortments
based on customer insights, their preferences, and their path to purchase
based on an analysis of loyalty data, social network signals, shopping
patterns, and other potential “big data” sources.
 Micro-merchandising
• With micro-merchandising, a retailer adjusts shelf-space
allocations to respond to customer and other differences
among local markets.
• Walmart allots space to product lines at various stores to
reflect differences in demographics, weather, and shopping.
Micro-merchandising is easier today due to the data
generated.
The Attributes and
Functions of Buying
Organizations
Retail Assortment Strategies
Buying Organization

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Buying Organization
Each merchandise group is managed by a general
Merchandise Group
merchandise manager (GMM), senior VP

Departments are managed by a divisional merchandise

Department
manager (DMM),

A group of items targeting the same customer type, such as

Classification
girls’ sizes 4-6

Each buyer manages several merchandise categories (e.g.,

Category sportswear, dresses, swimwear, outerwear categories for girls’
sizes 4-6

The smallest unit available for inventory control

SKU
Size, color, style

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 Merchandise Category – The Planning Unit
• Merchandise category is a distinct manageable group of products/services
that consumers perceive to be interrelated and/ or substitutable in meeting a
consumer need

• The merchandise category is the basic unit of analysis for making

merchandising management decisions.

• Retailers and their vendors may have different definitions of a category.

• Some retailers may define categories in terms of brands.

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CATEGORY MANAGEMENT
What is Category Management?
Nielson’s Customer-Centric Approach
What is Category Management?
• Category management is a technique for managing a retail business that focuses
on product category results rather than the performance of individual brands.
• A merchandise category is an assortment of items that customers see as
substitutes for one another.
• It arranges product groups into strategic business units to better address consumer
needs and meet financial goals. Category management helps retail personnel make
the merchandising decisions that maximize the total return on the assets.
• Managing merchandise within a category by brand can lead to inefficiencies
because it fails to consider the interdependencies between SKUs in the category.
CATEGORY MANAGEMENT
PROCESS
&
TOOLS
 Step One
Define the Category Based on the Needs of Your Target Market

• Market Structure identifies the product attributes that define the

category structure. It defines the product attribute hierarchy that
drives household purchases and explains the competitive
relationships between products.
• Preference Segmentation divides the market into distinct groups of
households that share similar purchase patterns.
 Step Two
Assign a Role to the Category That Best Supports the Retailer’s
Strategy
• Assign category role (purpose) based
on a cross-category quantitative
analysis that considers the consumer,
distributor (retailer), supplier, and
marketplace.
 Step Three
Assess the Category to Find Opportunities for Improvement

• Analyze the category as well as its subcategories, brands, and items

based on consumer, market, retailer (distributor), and supplier
perspectives.
• Analytical Tools Used
• Point-of-Sale Scan Data
• Household Panel Data
• Space Management Software Data
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Category Captain
• Some retailers turn to one favored vendor to help them manage a particular
category. Known as the category captain, this supplier forms an alliance with
a retailer to help gain consumer insight, satisfy consumer needs, and improve
the performance and profit potential across the entire category.
• The category captain works with the category manager/buyer/planner to
make decisions about product placement on shelves, promotions, and
pricing for all brands in the category.
• A potential problem with establishing a category captain, however, is that
vendors could take advantage of their position.
• Vendor category captain may have different goals than retailer
• REFACT: The best Category Captains in convenience stores:-
• Red Bull (energy drinks),
• Hershey (confectionary),
• Frito-Lay (salty snacks/cookies/crackers), and
• Pepsi-Cola (soft drinks)
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Merchandise Planning Process

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 Merchandise Planning Process
• First, buyers forecast category sales, develop an assortment plan for merchandise in the
category, and determine the amount of inventory needed to support the forecasted sales and
assortment plan.
• Second, buyers develop a plan outlining the sales expected for each month, the inventory
needed to support the sales, and the money that can be spent on replenishing sold
merchandise and buying new merchandise. Along with the plan, buyers or planners/assorters
decide what type and how much merchandise should be allocated to each store.
• Third, having developed a plan, the buyer negotiates with vendors and buys the
merchandise.
• Buyers continually monitor the sales of merchandise in the category and make adjustments.
• These decisions are not necessarily made sequentially. Some decisions may be made at the
same time or in a different order than described above.

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 Types of Merchandise Management
Planning Processes
Retailers use two distinct types of merchandise management planning
systems for managing
(1) staple (basic) merchandise and

(2) fashion merchandise categories

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Types of Merchandise Management Planning
Processes
Staple (Basic) Merchandise Categories
• Continuous demand over an extended time period
• Limited number of new product introductions
• Hosiery, basic casual apparel
• Easy to forecast demand
• Continuous replenishment

• Fashion Merchandise Categories

• In demand for a relatively short period of time
• Continuous introductions of new products, making existing products obsolete
• Athletic shoes, laptop computers, women’s apparel

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Types of Merchandise Management Planning
Processes
• Seasonal merchandise categories consist of items whose sales
fluctuate dramatically depending on the time of year. Both staple and
fashion merchandise can be seasonal categories.
• Retailers buy seasonal merchandise in much the same way that they
buy fashion merchandise

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Merchandise Management Planning Processes
• Developing a Sales Forecast
• The first step in merchandise management planning is to develop a forecast for
category sales.
• Understanding the nature of the product life cycle
• Collecting data on sales of product and comparable products
• Using statistical techniques to project sales
• Work with vendors to coordinate manufacturing and merchandise delivery with
forecasted demand (CPFR)

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Factors Affecting Sales Projections
Controllable Uncontrollable
• Seasonality
• Promotions
• Weather
• Store Locations • Competitive Activity
• Merchandise Placement • Product Availability
• Cannibalization • Economic Conditions
• REFACT: The “Lipstick Index,” a term coined after an
observation made by Estée Lauder chairman Leonard
Lauder, suggests that lipstick sales increase as
perceptions of economic conditions decline

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Refacts: Retail management – M. Levy, Weitz & Pandit
1. The “Lipstick Index,” a term coined after an observation made by
Estée Lauder chairman Leonard Lauder, suggests that lipstick sales
increase as perceptions of economic conditions decline
2. A temperature increase of 18 degrees generally triples sales of
barbecue meat and increases demand for lettuce by 50 percent.
3. A typical Target store has 88 kinds of Pantene shampoo, conditioner,
and styling products.
4. Supermarkets typically stock 30,000 to 40,000 SKUs in a store, with
less than 5 percent accounting for more than half the store’s sales.
However, the typical household buys only about 400 SKUs in an
entire year. Month after month, customers buy the same items.
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 Types of Merchandise
Staple Merchandise Fashion Merchandise
Predictable Demand Unpredictable Demand
History of Past Sales Limited Sales History
Relatively Accurate Forecasts Difficult to Forecast Sales

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1. Forecasting Sales
Forecasting Staple Merchandise:

• Use of Historical Sales

• Adjustments for Controllable & Uncontrollable factors

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Forecasting Fashion Merchandise Categories
• Forecasting sales for fashion merchandise categories is challenging
because some or all of the items in the category are new and different
than units offered in previous years.

• Buyers utilize a variety of sources for information to help in

forecasting decisions for fashion merchandise categories, including
examining previous sales data, personal awareness, fashion and trend
services, vendors and market research.

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Forecasting Fashion Merchandise Categories
• Previous Sales Data
• Market Research:
• The depth interview is an unstructured personal interview in which the
interviewer uses extensive probing to get individual respondents to talk in
detail about a subject.
• A focus group is a small group of respondents interviewed by a moderator
using a loosely structured format
• Fashion & Trend Services
• Vendors
• https://www.youtube.com/watch?v=I8
• https://www.youtube.com/watch?v=whFsziS3x18

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Sales Forecasting for Service Retailers
• Due to the perishable nature of services, service retailers face a more
extreme problem than fashion retailers. Their offering perishes at the
end of the day.
• Some service retailers attempt to match supply and demand by taking
reservations or making appointments.

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2. Developing an Assortment Plan

• After forecasting sales for the category, the next step in the merchandise
management planning process is to develop an assortment plan.
• An assortment plan is a list of the SKUs that a retailer will offer in a
merchandise category.
• The assortment plan thus reflects:
• Category Variety and Assortment
• Determining Variety and Assortment:
• Retail strategy,
• GMROI,
• Physical characteristics of the store,
• Complementary merchandise,
• Effects of Assortment size on Buying Behavior

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3. Setting Inventory and Product Availability
Levels

• After developing the assortment plan, the third step in the

merchandise planning process is to determine
• the model stock plan for the category.
• Product Availability
• Model Stock Plan

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Model Stock Plan

• The model stock plan, is the number of each SKU in the assortment
plan that the buyer wants to have available for purchase in each store.

The model stock plan, illustrated in following slide, is the number of each SKU in the assortment plan that
the buyer wants to have available for purchase in each store. For example, the model stock plan includes nine
units of size 1, short, which represent 2 percent of the 429 total units for girls’ traditional $20 denim jeans in
light blue. Note that there are more units for more popular sizes.
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Product Availability
• Product availability is the percentage of demand for a particular SKU
that is satisfied
• Level of support or service level
• The backup (buffer) stock in the model stock plan determines product
availability
• Choosing an appropriate amount of backup stock is critical to successful
assortment planning.
• If the backup stock is too low, the retailer will lose sales and possibly customers
too when they find that the products they want are not available from the retailer.
• If the level is too high, scarce financial resources will be wasted on needless
inventory rather than being more profitably invested in increasing variety or
assortment.

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Product Availability
Factors considered to determine the appropriate level of buffer stock
and thus the product availability for each SKU
• ABC Classification of merchandise (inventory)
• A – higher product availability
• B – medium product availability
• C – lower product availability is acceptable
• Fluctuations in demand
• Lead time for delivery from the vendor
• Frequency of store deliveries

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4.Establishing A Control System For Managing Inventory

• The fourth step in the merchandise management process is to establish a

control system for how the orders, deliveries, inventory levels, and
merchandise sales will evolve over time.
• The objective of this control system is to manage the flow of merchandise
into the stores so that the amount of inventory in a category is minimized
but the merchandise will still be available when customers want to buy it.
• The differences between the control systems for staple and fashion
merchandise are discussed in the following slides

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Control System for Managing
Staple InventoryPlanning
Merchandise of Staple Merchandise

• Buyer Determines:
• Basic Stock or Assortment Plan
• Level of Backup Inventory

• System:
• Monitors Inventory levels
• Automatically reorders when inventory gets below a
specified level

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Inventory Levels for Staple Merchandise

• Cycle (base) stock:

• Inventory that goes up
and down due to the
replenishment process

• Backup (buffer, safety)

stock
• Inventory needed to
avoid stockout

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 Basic Stock
• Indicates the Desired Inventory Level for Each SKU

Lost Sale Due

to Stockout

Cost of Carrying
Inventory

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Determining the Level of Backup Stock

• Higher product availability (service

More level) retailer wishes to provide to
Backup customers
Stocks • Greater the fluctuation in demand
• Longer lead time from the vendor
Needed
• More fluctuations in lead time
• Lower vendor’s Fill rate (% of
complete orders received from a
vendor)
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• Staple merchandise planning systems provide the information needed
to determine how much to order and when to place orders for SKUs.
• These systems assist buyers by performing three functions:
(1) monitoring and measuring current SKU sales,
(2) forecasting future SKU demand, and
(3) developing ordering decision rules for optimum restocking.

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A. Automated Continuous Replenishment

• Buyer sets the desired product availability and determines the

variation in demand and the vendor’s lead time and fill rate, the
continuous replenishment systems for staple SKUs can operate
automatically.
• Retailer’s information system determines the inventory level at each
point in time, the perpetual inventory, by comparing the sales made
through the POS terminals with the shipments received by the store

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B. The Inventory Management Report

• The inventory management report provides information about the

current sales rate or velocity, sales forecasts, inventory availability, the
amount on order, decisions variables such as product availability, the
backup stock needed to provide the product availability desired,
performance measures such as planned and actual inventory turnover,
and the appropriate ordering decisions for each SKU.
• The combination of having a prespecified schedule based on the trade-
off between inventory carrying and ordering costs, and the flexibility
to react to demand fluctuations, helps to ensure a profitable ordering
strategy

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 Order Point

The point at which inventory available should not go below or else we will run out
of stock before the next order arrives

Order point = sales/day or week (lead time + review time) + buffer stock

• Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week

Order point = 100 (3+1) = 400

• Assume Buffer stock = 50 units, then

Order point = 100 (3+1) + 50 = 450

We will order when the inventory reaches 450 units.
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Order Quantity

• When inventory reaches the order point, the buyer needs to order
enough units so the stock isn’t depleted and sales dip into backup
stock before the next order arrives. This order quantity is the
difference between the quantity available and the order point.
• Using this system to calculate order points and order quantities for
staple merchandise SKUs, orders can be transmitted directly to
vendors using EDI without needing to involve the buyer.

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Inventory Management Report for Rubbermaid Merchandise

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Control System for Managing Fashion
Merchandise

• The system for managing fashion merchandise

categories is typically called a Merchandise Budget
Plan

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 Merchandise Budget Plan

Plan for the financial aspects

of a merchandise category

• Specifies how much money can be

spent each month to achieve the
sales, margin, inventory turnover,
and GMROI objectives
• Not a complete buying plan--
doesn’t indicate what specific SKUs
to buy or in what quantities

Royalty-Free/CORBIS

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Six Month Merchandise Plan for Men’s Tailored Suits
for Men’s Casual Slacks

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Evaluating the Merchandise Budget Plan

• Inventory turnover GMROI, sales forecast are used

for both planning and control
• After the selling season, the actual performance is
compared with the plan
• Why did performance exceed or fall short of the plan?
• Was the deviation from the plan due to something under
the buyer’s control?
• Did the buyer react quickly to changes in demand by
either purchasing more or having a sale?

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 Open-to-Buy System
The OTB system is used after the merchandise is purchased

Monitors Merchandise Flow

Determines How Much Was Spent and How Much is Left to Spend

PhotoLink/Getty Images PhotoLink/Getty Images 55

5. Allocating Merchandise to Stores

Allocating merchandise to stores involves three

decisions:

• How much merchandise to allocate to each store

• What type of merchandise to allocate

• When to allocate the merchandise to different stores

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Type of Merchandise Allocated
Retailers classify stores according to the
characteristics of the stores’ trading area

The assortment offered in a ready-to-eat cereal aisle should match

the demands of the demographics of shoppers in a local area
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 Timing of Merchandise Allocation to
Stores
Seasonality differences and consumer demand fluctuations in different regions of US

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6. Buying Merchandise
• Options:
• National Brands/Manufacturers’ Brand
• Private Labelling
• International Sourcing Decisions

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7. Analyzing Merchandise Management Performance

Three types of analyses related to the monitoring

and adjustment step are:
• Sell through analysis
• ABC analysis of assortments
• Multi-attribute analysis of vendors

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 Sell Through Analysis
Evaluating Merchandise Plan
• A Sell-Through Analysis compares actual and
planned sales to determine whether more
merchandise is needed to satisfy demand or
whether price reductions are required.
 ABC Analysis
• An ABC analysis identifies the performance of individual
SKUs in the assortment plan.
• Rank - orders merchandise by some performance
measure determine which items:
• should never be out of stock
• should be allowed to be out of stock occasionally
• should be deleted from the stock selection
• A items: 5% of SKUs, represent 70% of sales
• B items: 10% of SKUs, represent 20% of sales
• C items: 65% of SKUs, represent 10% of sales
• D items: 20% of SKUs, represent 0% of sales
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Multi-attribute Method for Evaluating
Vendors

The multi-attribute method

for evaluating vendors
uses a weighted average
score for each vendor. The
score is based on the
importance of various
issues and the vendor’s
performance on those
issues.
C Squared Studios/Getty Images

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Multi-attribute Method
for Evaluating Vendors

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 Evaluating Vendors
• A buyer can evaluate vendors by using the following
five steps:
1. Develop a list of issues to consider in the evaluation (column 1)
2. Importance weights for each issue in column 1 are determined
by the buyer/planner in conjunction with the GMM (column 2)
3. Make judgments about each individual brand’s performance on
each issue (the remaining columns)
4. Develop an overall score by multiplying the importance of each
issue by the performance of each brand or its vendor
5. Determine a vendor’s overall rating, add the products for each
brand for all issues
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Evaluating Merchandise Management
Performance
• A good measure for evaluating a retail firm is ROI.

• However, ROI is not a good measure for evaluating the performance

of merchandise managers because they do not have control over all
the retailer’s assets or all the expenses the retailer incurs.

• Merchandise managers only have control over the merchandise they

buy, the price at which the merchandise is sold, and the cost of the
merchandise.

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Evaluating Merchandise Management
Performance
• Merchandise managers have control over
• The merchandise they buy
• The price at which the merchandise is sold
• The cost of the merchandise
• Merchandise managers do not have control over
• Operating expenses
• Human resources
• Real estate
• Supply chain management
• Information systems
• SO HOW ARE MERCHANTS EVALUATED?
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Financial aspects in Retailing
GMROI, Ratios, Performance of Merchandise Managers
Example: From the products given below which product is
profitable and why?

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Example: From the products given below which product is profitable and why?

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GROSS MARGIN RETURN ON
INVENTORY INVESTMENT (GMROI)
• The financial ratio that is important to plan and measure
merchandising performance is a return on investment measure called
GROSS MARGIN RETURN ON INVENTORY INVESTMENT (GMROI).
• It measures how many gross margin dollars are earned on every
dollar of inventory investment.
• GMROI is a similar concept to return on assets, only its components
are under the control of the buyer rather than other managers.
• GMROI = Gross margin percentage X Sales-to-stock ratio

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GMROI
Gross Margin Return on Investment
GMROI = Gross Margin Percent x Sales-to-stock ratio

= gross margin x net sales

net sales avg. inventory at cost

= gross margin
avg. inventory at cost
Inventory Turnover
= (1 – Gross Margin Percent) x sales-to-stock ratio

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ROI and GMROI
Asset Productivity Measures

Strategic Corporate Level

• Return on Assets = Net Profit
Total Assets

Merchandise Management Level

• GMROI = Gross Margin
Avg. Inventory at Cost

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Example: Calculate GMROI for the following products

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Example

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 The Strategic Profit Model
The relationship among net profit margin, asset turnover, and financial leverage is expressed by the strategic profit
model, which reflects a performance measure known as return on net worth (RONW).

A retailer could learn the major cause of its poor return on net worth is weak asset turnover or financial leverage
that is too low.

A firm can raise its return on net worth by lifting the net profit margin, asset turnover, or financial leverage.
Because these measures are multiplied to determine return on net worth, doubling any of them would double the
return on net worth.
 Retail Budgeting Process

Budgeting outlines a retailer’s planned expenditures for a given time based on expected
performance.

Costs are linked to satisfying target market, employee, and management goals. What
should labor costs be to attain a certain level of customer service? What compensation
will motivate salespeople? What operating expenses will reach intended revenue and
profit goals?
Private Labels
Definition, Types of Private Labels
Definition
• Private-label brands, also called store brands, house brands, or own
brands, are products developed by retailers.
• In many cases, retailers develop the design and specifications for their
private-label products and then contract with manufacturers to
produce those products.
• In other cases, national-brand vendors work with a retailer to develop
a special version of its standard merchandise offering to be sold
exclusively by the retailer. In these cases, the national-brand vendor
or manufacturer is responsible for the design and specification as well
as the production of the merchandise.
 Types of Private Labels

• Premium private-label brands offer the consumer a private label that is comparable to a manufacturer’s brand
quality, sometimes with modest price savings. Examples of premium private labels include Kroger’s Private
Selection, Tesco Finest (U.K.), “The Men’s Collection” at Saks Fifth Avenue, and Bloomingdale’s Aqua.
• Copycat brands imitate the manufacturer’s brand in appearance and packaging, generally are perceived as
lower-quality, and are offered at lower prices. Copycat brands abound in drugstores and grocery stores. Many
retailers monitor the introduction of new national brands and then modify them to meet the needs of their target
customers. For instance, CVS or Walgreens brands are placed next to the manufacturer’s brands and often look
like them.
• An exclusive brand is a brand that is developed by a national-brand vendor, often in conjunction with a
retailer, and is sold exclusively by the retailer. The simplest form of an exclusive brand occurs when a
national-brand manufacturer assigns different model numbers and has different exterior features for the same
basic product sold by different retailers but it is still marketed under the manufacturer’s brand. For example, a
Canon digital camera sold at Best Buy might have a different model number than a Canon digital camera with
similar features available at Walmart. These exclusive models make it difficult for consumers to compare prices
for virtually the same camera sold by different retailers.
• Generic brands target a price-sensitive segment by offering a no-frills product at a discount price. These
products are used typically for commodities like milk or eggs in grocery stores and underwear in discount
stores. Once the mainstay of private-label brands, the sales of generics have been declining. These products are
labeled with the name of the commodity and thus actually have no brand name distinguishing them.
Benefits of Private Labels
Pricing strategies:
• Skimming pricing
• Penetration pricing
• Leader pricing
• Pre-Emptive Pricing
• Promotional pricing
• Special event pricing
• Rebates/ Coupons/Markdowns/Price bundling
• Multiple unit pricing/ variable pricing
• Low/No-interest Financing
• Buy one get one free
• No charge or low Cost Warranties

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 Retail Communication Mix
• Methods of Communicating with Customers:
• 1. Direct Marketing: Direct Mail, Email, Mobile Marketing
• 2. Online Marketing: Website, Blogs, Social Media, You tube, Face book, Twitter
• 3. Sales Promotion: Coupons, Rebates, Premiums, Samples, POP Displays, Special events, Pop-Up stores
• 4. Personal Selling, Advertising, Newspapers, Magazines, Television, Radio
• 5. Public relations
Planning a Retail Communication Program:
1. Establish objectives
2. Communicate Objectives
3. Determine Communication Budget
4. Allocate Promotional Budget
5. Plan, Implement and Evaluate Communication Programs

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