Chapter 12

Managing Merchandise
Assortments

McGraw-Hill/Irwin
Retailing Management, Copyright © 2007 by The McGraw-Hill Companies, Inc. All
6/e rights reserved.
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Merchandise Management

Retail Buying
Communication Systems
Mix
Planning
Merchandise
Assortments

Buying Pricing
Merchandise
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Merchandise Management

Process by which a retailer offers the right

quantity of the right merchandise in the
right place at the right time and meets the
company’s financial goals.

Sense market trends

Analyze sales data
Make appropriate adjustments c) image100/PunchStock
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Merchandise Management and

Investment Portfolio Management

• Dollars to invest in inventory

• Invest in “hot” merchandise
• Save a little for opportunities (open to
buy)
• Monitor portfolio
• Sell losers (markdowns)
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Standard Merchandise Classification

Scheme and Organizational Chart
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Merchandise Management Issues

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The Category
A merchandise category is an assortment of
items that customers see as substitutes for each
other.

Vendors might assign products to different

categories based on differences in product
attributes

Retailers might assign two products to same

category based on common consumers and
buying behavior
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Category Management
Category management is the process
of managing a retail business with the
objective of maximizing the sales
and profits of a category.

Department stores manage at category

level, but grocery stores manage
merchandise around brands and vendors

Objective is to maximize the sales and

profits of the entire category, not just a The McGraw-Hill Companies, Inc./Andrew

particular brand. Resek, photographer

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Category Captain
Selected vendor responsible for managing a category
Vendors frequently have more information and analytical skills
about the category in which they compete than retailers
• Helps retailer understand consumer behavior
• Creates assortments that satisfy the customer
• Improves profitability of category

Problems
• Vendor category captain may have different goals than
retailer
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Antitrust Consideration
The vendor category captain
could collude with retailer to
fix prices

It could block brands from

access to shelf space

Category captains need to

temper zeal for control over
retailers Stockbyte/Punchstock Images
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The Buying Organization

Merchandise Group…………Men’s wear
Department………….……….Young Men’s wear
Classification………….……..Pants
Category……………………..Jeans
Sock Keeping Unit (SKU)…..Levi, 501, size 26
waist, 32 inseam

Ryan McVay/Getty Images

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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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GMROI
Gross Margin Return on Investment

A measurement of how many gross margin

dollars are earned on every dollar of
inventory investment made by the buyer
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GMROI
Inventory Productivity Measures

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
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ROI and GMROI

Asset Productivity Measures
Strategic Corporate Level
• Return on Assets = Net Profit
Total Assets

Merchandise Management Level

• GROI = Gross Margin
Avg Inventory
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Illustration of GMROI
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GMROI for Selected Department in Discount Stores

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Calculating Inventory Turnover

– Inventory turnover = Net Sales

Average inventory at retail
– Inventory turnover = Cost of goods sold
Average inventory at cost

– Average inventory = Month1 + Month2 + Month 3 +…

Number of months
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Inventory Turnover

Month Retail Value of Inventory

• EOM January $22,000
• EOM February 33,000
• EOM March 38,000
• Total Inventory $93,000

• Average inventory = $93,000 ÷ 3 = $31,000

 Inventory Turnover and
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Stock-to-Sale Ratio
Inventory turnover = Net Sales
Average inventory at retail

Inventory turnover = Cost of goods sold

Average inventory at cost

Sock-to-Sales Ratio = Net Sales

Average cost of inventory
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Advantages of Rapid Turnover

• Increased sales volume

• Less risk of obsolescence and
markdowns
• Improved salesperson morale
• More resources to take advantage of new
buying opportunities
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Approaches for Improving Inventory Turnover

• Reduce number of categories

• Reduce number of SKUs within a category
• Reduce number of items in a SKU

BUT if a customer can’t find their size or

color or brand, patronage and sales
decrease!

another
approach…
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…another approach
To improve inventory turnover
• Buy merchandise more often
• Buy in smaller quantities which should reduce average
inventory without reducing sales

BUT by buying smaller quantities

• Buyers can’t take advantage of quantity discounts so
• Gross margin decreases
• Operating expenses increase
• Buyers need to spend more time placing orders and
monitoring deliveries
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Merchandise Planning Process

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- 5

Developing a Sales Forecast

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)

Royalty-Free/CORBIS
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The Category Product Life Cycle

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Variations in the Category Life Cycle

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Factors Affecting Sales Projections

• Controllable Uncontrollable
• Promotions • Seasonality
• Store Locations • Weather
• Merchandise • Competitive Activity
Placement • Product Availability
• Cannabalization • Economic Conditions
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Fad vs. Fashion

How do buyers tell the difference?

• Is it compatible with changes in

consumer lifestyles?
• Does the innovation provide real
benefits?
• Is the innovation compatible with
other changes in the marketplace?
• Who is adopting the trend? Ryan McVay/Getty Images
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Forecasting Fashion Merchandise Categories

Retailers develop fashion forecasts by relying on:

• Previous sales data

• Personal awareness
• Fashion and trend services
• Vendors
• Traditional market research

The McGraw-Hill Companies, Inc./Lars A. Niki, photographer

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Personal Awareness

How do fashion buyers know the trends?

• Internet chat rooms

• Look in closets
• Go to the movies
• Go to rock concerts
• Go to nightclubs
Ryan McVay/Getty Images
Collaboration, Planning, Forecasting,
12-32

and Replenishment Systems (CPFR)

Systems used by retailers and vendors to

work together to insure that the right
merchandise is at the right place at the
right time.
– Benefits both retailers and vendors
– Increases fill rate, reduces stockouts,
increases inventory turns

www.cpfr.org
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Assortment Planning

Variety is the number of different

merchandising categories within a store or
department
Assortment is the number of SKUs within a
category.
Product availability defines the percentage of
demand for a particular SKU that is satisfied.
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Assortment Plan for Girls’ Jeans

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Is This Store Heavy on Variety?

On Assortment?

PhotoLink/Getty Images
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Determining Variety and Assortment

• Profitability of Merchandise Mix

• Corporate Philosophy Toward
Assortment
• Physical Characteristics of Store
• Complementary Merchandise
• Retail strategy can determine this

PhotoLink/Getty Images