Merchandise Management

Dr. Anupamaa S. Chavan

Merchandise Management
• Merchandise Management is a 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 in prices and inventory levels

Dr. Anupamaa S. Chavan [Link]@[Link] 2

Merchandise Management and Investment
Portfolio Management
• Traders on the stock exchange floor manage a portfolio of stocks, and
retail buyers manage a portfolio of merchandise inventory.

• Both continuously assess the risks associated with their purchase

decisions.

Dr. Anupamaa S. Chavan [Link]@[Link] 3

Buying Organization

Casuals

Dr. Anupamaa S. Chavan [Link]@[Link] 4

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

Dr. Anupamaa S. Chavan [Link]@[Link] 5

 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.

Dr. Anupamaa S. Chavan [Link]@[Link] 6

 Category Management:

• It is process of managing a retail business with the

objective of maximizing the sales and profits of a
category
• Objective is to maximize the sales and profits of the
entire category, not just a particular brand

Breakfast cereal category vs. Kellogg Corn Flakes

Men’s knitted shirts vs. Polo shirts
Diary product category vs. Carnation milk products

Dr. Anupamaa S. Chavan [Link]@[Link] 7

Category Management

• Retailer plans for managing his retail business with the objective of
maximizing profit and sales of a category rather than the performance
of individual brands or models

• Department stores, in general, manage merchandise at the category

level.

• Many supermarkets/general merchandise retailers organize their

merchandise management around brands or vendors.

Dr. Anupamaa S. Chavan [Link]@[Link] 8

Category Management
• Managing merchandise within a category by brand can lead to
inefficiencies because it fails to consider the interdependencies between
SKUs in the category.

• Managing by category can help ensure that the store’s assortment

includes the “best” combination of sizes and vendors – the one that will
get the most profit from the allocated space.

Dr. Anupamaa S. Chavan [Link]@[Link] 9

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 expertise and insight,
• satisfy consumer needs,
• 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.
• This may create conflict of interest
• Leading to loss of control
• 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)
Dr. Anupamaa S. Chavan [Link]@[Link] 10
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.

Dr. Anupamaa S. Chavan [Link]@[Link] 11

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?
Dr. Anupamaa S. Chavan [Link]@[Link] 12
Example: From the products given below which product is
profitable and why?

Dr. Anupamaa S. Chavan [Link]@[Link] 13

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

Dr. Anupamaa S. Chavan [Link]@[Link] 14

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

Dr. Anupamaa S. Chavan [Link]@[Link] 15

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

Dr. Anupamaa S. Chavan [Link]@[Link] 16

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

Dr. Anupamaa S. Chavan [Link]@[Link] 17

Example: Calculate GMROI for the following products

Dr. Anupamaa S. Chavan [Link]@[Link] 18

Example

1,00,000
50,000

Dr. Anupamaa S. Chavan [Link]@[Link] 19

 Merchandise Planning Process
Staple fashion, service

Category,car,assort
Retail strg,GMROI,phy
store,comp
merchandise,buying
Model stock plan
behavior
Product availability

Dr. Anupamaa S. Chavan [Link]@[Link] 20

 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.

Dr. Anupamaa S. Chavan [Link]@[Link] 21

 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

Dr. Anupamaa S. Chavan [Link]@[Link] 22

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

Dr. Anupamaa S. Chavan [Link]@[Link] 23

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

Dr. Anupamaa S. Chavan [Link]@[Link] 24

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)

Dr. Anupamaa S. Chavan [Link]@[Link] 25

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

Dr. Anupamaa S. Chavan [Link]@[Link] 26

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.

Dr. Anupamaa S. Chavan [Link]@[Link] 27

 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

Dr. Anupamaa S. Chavan [Link]@[Link] 28

1. Forecasting Sales
Forecasting Staple Merchandise:

• Use of Historical Sales

• Adjustments for Controllable & Uncontrollable factors

Dr. Anupamaa S. Chavan [Link]@[Link] 29

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.

Dr. Anupamaa S. Chavan [Link]@[Link] 30

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

Dr. Anupamaa S. Chavan [Link]@[Link] 31

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.

Dr. Anupamaa S. Chavan [Link]@[Link] 32

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

Dr. Anupamaa S. Chavan [Link]@[Link] 33

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

Dr. Anupamaa S. Chavan [Link]@[Link] 34

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.
Dr. Anupamaa S. Chavan [Link]@[Link] 35
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.

Dr. Anupamaa S. Chavan [Link]@[Link] 36

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

Dr. Anupamaa S. Chavan [Link]@[Link] 37

[Link] 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

Dr. Anupamaa S. Chavan [Link]@[Link] 38

Control System
Staplefor Managing 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

Dr. Anupamaa S. Chavan [Link]@[Link] 39

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

Dr. Anupamaa S. Chavan [Link]@[Link] 40

 Basic Stock
• Indicates the Desired Inventory Level for Each SKU

Lost Sale Due

to Stockout

Cost of Carrying
Inventory

Dr. Anupamaa S. Chavan [Link]@[Link] 41

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)
Dr. Anupamaa S. Chavan [Link]@[Link] 42
• 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.

Dr. Anupamaa S. Chavan [Link]@[Link] 43

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

Dr. Anupamaa S. Chavan [Link]@[Link] 44

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

Dr. Anupamaa S. Chavan [Link]@[Link] 45

 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.
Dr. Anupamaa S. Chavan [Link]@[Link] 46
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.

Dr. Anupamaa S. Chavan [Link]@[Link] 47

Inventory Management Report for Rubbermaid Merchandise

Dr. Anupamaa S. Chavan [Link]@[Link] 48

Control System for Managing Fashion
Merchandise

• The system for managing fashion merchandise

categories is typically called a Merchandise Budget
Plan

Dr. Anupamaa S. Chavan [Link]@[Link] 49

 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

Dr. Anupamaa S. Chavan [Link]@[Link] 50

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

Dr. Anupamaa S. Chavan [Link]@[Link] 51

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?

Dr. Anupamaa S. Chavan [Link]@[Link] 52

 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
Dr. Anupamaa S. Chavan PhotoLink/Getty Images
[Link]@[Link] 53
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

Dr. Anupamaa S. Chavan [Link]@[Link] 54

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
Dr. Anupamaa S. Chavan [Link]@[Link] 55
 Timing of Merchandise Allocation to Stores

Seasonality differences and consumer demand fluctuations in different regions of US

Dr. Anupamaa S. Chavan [Link]@[Link] 56

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

Dr. Anupamaa S. Chavan [Link]@[Link] 57

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

Dr. Anupamaa S. Chavan [Link]@[Link] 58

 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.

Dr. Anupamaa S. Chavan [Link]@[Link] 59

 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

Dr. Anupamaa S. Chavan [Link]@[Link] 60

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

Dr. Anupamaa S. Chavan [Link]@[Link] 61

Multi-attribute Method
for Evaluating Vendors

Dr. Anupamaa S. Chavan [Link]@[Link] 62

 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
Dr. Anupamaa S. Chavan [Link]@[Link] 63
THE CATEGORY MANAGEMENT - BUSINESS PROCESS
(TO BE STUDIED WITH MODULE 3)

oThe category management business process is a structured, measured set

of activities designed to produce a specified output for the suppliers,
retailers and the consumers.

oIt implies a strong emphasis on how work is done within and between
organizations, in contrast to a singular and exclusive focus on the specific
products or services delivered to the consumer.

Continued…
Dr. Anupamaa S. Chavan [Link]@[Link] 64
Dr. Anupamaa S. Chavan [Link]@[Link] 65
 STEP 1: CATEGORY DEFINITION

• Definition of a category given by the Partnering Group is “a distinct, manageable group

of products/ services that consumers perceive to be interrelated and/or substitutable in
meeting a consumer need.”
• Category Structure is a reflection of the Consumer Decision Tree, and is the
identification of the category’s key sub-categories, segments and sub-segment.

Dr. Anupamaa S. Chavan [Link]@[Link] 66

STEP 2: DEFINING THE CATEGORY ROLE
o The category role determines the priority and importance of various categories in the overall business;
and essentially serves as the basis for resource allocation.
o Within a category, products will be assigned sub-category roles. Some typical examples might include:
 Traffic builders – products with a high market share
 Transaction builders – products frequently purchased on impulse
 Cash generators – products with high stock turns and margins
 Image creators – products that are promoted with some feature that makes them unique
 Excitement creators – products with high impulse appeal

DESTINATION PREFERRED/ROUTINE
CATEGORIES CATEGORY
o CUSTOMER-BASED CATEGORY ROLES

OCCASIONAL/ CONVENIENCE
SEASONAL CATEGORY CATEGORY
Dr. Anupamaa S. Chavan [Link]@[Link] 67
STEP 3: CATEGORY ASSESSMENT
o In this step, the current performance of the category is evaluated with respect to turnover, profits,
and return on assets in the category.
o The basic purpose of the assessment of categories is to identify where the biggest turnover, profit,
and return on asset improvement opportunities exist in a category; that is, is there a gap between
the chosen category role and the current performance level of the category.

Dr. Anupamaa S. Chavan [Link]@[Link] 68

STEP 4: CATEGORY PERFORMANCE MEASURES

o Category performance measures involves setting measurable targets in terms of sales, margins, and
Gross Margin Return on Investment (GMROI).
o Category performance measures determine the target objectives that will be set by the retailer and
supplier for achievement from implementation of the Category Business Plan.
o Category performance measures include:
 Sales
 Profit
 Market Share
 Inventory Turnover
 Changes in the Assortment
 Consumer Transactions

Dr. Anupamaa S. Chavan [Link]@[Link] 69

STEP 5: CATEGORY STRATEGIES
Category strategy development is the step in the category business planning process when strategies are
developed to deliver the category role and the category performance targets.
The seven most typical category marketing strategies are as follows:
 Traffic building: This strategy focuses on drawing consumer traffic to the store.
 Transaction building: This strategy focuses on increasing the size of the average transaction in the
category.
 Turf defending: This strategy aggressively positions certain parts of a category to protect the
retailer’s business in the category from targeted competitors.
 Profit generating: This strategy focuses on using parts of the category to generate profits.
 Cash generating: This strategy focuses on using parts of the category to generate cash flow for
the retailer.
 Excitement creating: This strategy is used to communicate a sense of urgency or opportunity to
the consumer.
 Image enhancing: This strategy is used in a category to help the retailer communicate its desired
image to the consumer.

Continued…

Dr. Anupamaa S. Chavan [Link]@[Link] 70

STEP 6: CATEGORY TACTICS
o Category tactics work towards the determination of optimal category pricing, promotion,
assortment, and shelf management that are necessary to achieve the agreed-on-role,
scorecard, and strategies.

oSTEP 7: CATEGORY PLAN IMPLEMENTATION

o The implementation plan includes what specific tasks need to be done, when each task
should be completed, and who is to accomplish each task.
o The key components of plan implementation are:
 The Plan Approval Process
 Assigning Responsibilities
 Scheduling
Dr. Anupamaa S. Chavan [Link]@[Link] 71
STEP 8: CATEGORY REVIEW
oThe final step in the business process is the review of the progress
and the actual achievement of the targets set for the category.
Review aids the taking of decisions at the right point of time

Dr. Anupamaa S. Chavan [Link]@[Link] 72

Dr. Anupamaa S. Chavan [Link]@[Link] 73
 Brand Alternatives
• National (Manufacturer) Brands
• Designed, produced, and marketed by
a vendor and sold by many retailers
• Private-Label (Store) Brands
• Developed by a retailer and only sold
in the retailer’s outlets

Dr. Anupamaa S. Chavan [Link]@[Link] 74

 Retailers’ branding approach
• Similar to national brands, retailers use their name to create a private
label for merchandise
• The Gap, Victoria’s Secret use a family brand approach
• All of private label merchandise is associated with their name
• Macy’s uses a portfolio approach
• A portfolio of private label brands with different merchandise types (Charter
Club, First Impressions, Greendog, INC, The Cellar, Tools of the Trade)

Dr. Anupamaa S. Chavan [Link]@[Link] 75

Categories of Private Brands

• Comparable to, even superior to, manufacturer’s

Premium brand quality, with modest price savings

• Imitate the manufacturer’s brand in appearance and

Copycat packaging, perceived as lower quality, offered
at a lower price

• Developed by a national brand vendor and sold exclusively by the

Exclusive Brands retailer

• Target a price-sensitive segment by offering a no-frills product at a

Generic Brands discount price

Dr. Anupamaa S. Chavan [Link]@[Link] 76

Exclusive Brands

Dr. Anupamaa S. Chavan [Link]@[Link] 77

 National (Manufacturer) Labels
• Advantages • Disadvantages
• Help retailers build their image and • Lower margins
traffic flow • Vulnerable to competitive pressures
• Reduces selling and promotional • Limit retailer’s flexibility
expenses
• More desired by customers
• Customers patronize retailers selling
the branded merchandise
• Push some of the financial risk onto the
vendor

Dr. Anupamaa S. Chavan [Link]@[Link] 78

 Private Labels
• Advantages • Disadvantages
• Unique merchandise not • Require significant investments in
available at competitive outlets design, global manufacturing sourcing
• Exclusivity boosts store loyalty • Need to develop expertise in
• Difficult for customers to developing and promoting brand
compare price with competitors • Unable to sell excess merchandise
• Higher margins • Typically less desirable for customers

Dr. Anupamaa S. Chavan [Link]@[Link] 79

 Buying National Brand Merchandise

• Buying decision for fashion apparel/accessories:

• 5-6 times a year
• Many months before delivery
• Withhold open-to-buy (OTB) for new items with fashion change

• Buying decision for staple merchandise:

• Less frequent
• Continuous replenishment

Dr. Anupamaa S. Chavan [Link]@[Link] 80

 Meeting National Brand Vendors

• Wholesale Market Centers

• National Markets (new York), Regional Markets (Dollars, Atlanta, Miami),
London, Milan, Paris, Tokyo
• Trade Shows
• Frankfurt Book Fair, Las Vegas Consumer Electronics Show, Atlanta Super
Show for Sporting Goods
• Internet Exchanges
• Worldwide Retail Exchange
• Meeting Vendors at Your Company

Dr. Anupamaa S. Chavan [Link]@[Link] 81

 National Brand Buying Process

• Meet with vendors

• Discuss performance of vendor’s merchandise during the previous
season
• Review the vendor’s offering for the coming season
• May place orders for the coming season
• Sometimes they do not buy at market, but review merchandise, return
to their offices to discuss with the buying team before negotiating with
vendors
Dr. Anupamaa S. Chavan [Link]@[Link] 82
 Developing and Sourcing
Private Label Merchandise

• In-House: Large retailers (e.g., JCPenney, Macy’s, The Gap, American

Eagle Outfitters) have divisions specialized in:
• Identifying trends, designing, specifying products
• Selecting manufacturers
• Monitoring and managing manufacturing conditions and product quality

Dr. Anupamaa S. Chavan [Link]@[Link] 83

 Developing and Sourcing
Private Label Merchandise
• Acquisition: Limited Brands acquired MAST Industries
• MAST
 One of the world’s biggest contract manufacturers, importers, distributors of apparel
 Have manufacturing operations and join ventures in 12 countries
 Also provides private label merchandise for Abercrombie & Fitch, Lane Bryant, New
York & Company, Chico’s
• Outsource: ex. Li & Fung – partnered with many specialty retailers

Dr. Anupamaa S. Chavan [Link]@[Link] 84

 Sourcing Merchandise
After decisions are made on what and how much private label
merchandise will be acquired,

• Designers develop specifications

• Sourcing departments find a manufacturer, negotiate a contract, and
monitor the production process, or
• Use Reverse Auctions to get quality private label merchandise at low
prices

Dr. Anupamaa S. Chavan [Link]@[Link] 85

Reverse Auctions
Why reverse?
One buyer (the retailer), multiple sellers
Sellers bid for buyer’s business
Price falls
No strategic relationships with vendors

Dr. Anupamaa S. Chavan [Link]@[Link] 86

 Global Sourcing

• Costs Associated with Global Sourcing Decisions

Foreign currency fluctuations, tariffs, longer lead
Remote production facilities in
times, increased transportation costs
developing economies with low
Obsolete costs and inventory carrying costs from larger
labor costs
inventories

• Managerial Issues
– Quality control, time-to-market, social political factors
– Difficult for collaborative supply chain management (CPFR) based on short and consistent lead times
– Human rights and child labor

Dr. Anupamaa S. Chavan [Link]@[Link] 87

 Negotiating with Vendors

• Two-way communication
designed to reach an
agreement when two parties
have both shared and
conflicting interests.

Dr. Anupamaa S. Chavan [Link]@[Link] 88

 Negotiating with Vendors (Continued)
Negotiation Issues
• Price and gross margin
• Margin Guarantees
• Slotting Allowances
• Additional markup opportunities
• Purchase terms
• Exclusivity
• Advertising allowances
• Transportation

Dr. Anupamaa S. Chavan [Link]@[Link] 89

 Price and Gross Margin Issues

• Markdown money
• Funds from a vendor to a retailer to cover decreased gross margin from
markdowns

Dr. Anupamaa S. Chavan [Link]@[Link] 90

 Price and Gross Margin Issues

• Slotting Allowances
• A charge imposed by a retailer to stock a new item (in supermarkets)
• For Retailers
• To ensure efficient uses of their valuable space
• To determine which new products merit inclusion in their assortment
• Manufacturers view them as extortion

Dr. Anupamaa S. Chavan [Link]@[Link] 91

 Tips for Effective Negotiations
• Have at least many negotiators as the vendor
• Choose a good place to negotiate
• Be Aware of real deadlines
• Separate people from problem
• Insist on objective Information
• Invent options for mutual gain
• Let the other party do the talking
• Know how far to go
• Don’t burn bridges
• Don’t assume
Dr. Anupamaa S. Chavan [Link]@[Link] 92
Pricing strategies:
• High/Low pricing
• EDLP
• Markdowns
• Dynamic Pricing
• Coupons
• Price Bundling
• Quantity Discounts
• Zone Pricing
• Leader Pricing
• Price Lining
• Odd Pricing
• (Using Analytical Tools to Set Prices not included)

93
SETTING RETAIL PRICES
• Customer Price Sensitivity
• Price Elasticity
• Competition
• Pricing of Services

Dr. Anupamaa S. Chavan [Link]@[Link] 94

Retail Brand Management
• Building brand equity:
• Create high level of brand awareness
• Develop favorable associations with brand name
• Consistently reinforce the image of brand

95
 Retail Communication Mix
• Methods of Communicating with Customers:
• 1. Direct Marketing
• 2. Online Media: Website, Emails, Mobile Marketing, Blogs, Social Media: You tube, Face book, Twitter
• 3. Mass Media Advertising: Newspapers, Magazines, Direct mail, Television, Billboards, Radio
• 4. Sales Promotion: Coupons, Rebates, Premiums, Samples, POP Displays, Special events, Pop-Up
stores, Personal Selling
• 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

96
Dr. Anupamaa S. Chavan [Link]@[Link] 97