Retail Book Chap12

CHAPTER 12 PLANNING MERCHANDISE ASSORTMENTS INSTRUCTOR NOTES

ANNOTATED OUTLINE •

Merchandise management activities are undertaken primarily by buyers and their superiors, divisional merchandise managers (DMMs) and general merchandise managers (GMMs).

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Retail buyers manage a portfolio of merchandise inventory. They buy merchandise they think will be popular with their customers. Like investment bankers, they use their retailer’s information system to monitor the performance of their merchandise portfolio – to see what is selling and what is not.

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Merchandise management is the process by which a retailer attempts to offer the right quantity of the right merchandise in the right place at the right time while meeting the company’s financial goals.

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Buyers need to be in touch with and anticipate what customers will want to buy, but this ability to sense market trends is just one skill needed to manage merchandise inventory effectively. Perhaps an even more important skill is the ability to continually analyze sales data and make appropriate adjustments in prices and inventory levels. Merchandise Management issues are summarized in PPT 12-6.

I. Merchandise Management Process Overview A. The Buying Organization •

Every retailer has its own system for grouping categories of merchandise, but the basic structure of the buying organization is similar for most retailers.

1. Merchandise Group •

See PPT12-3 and PPT 12-4

The highest classification level is the

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merchandise group. Each merchandise group is managed by a general merchandise manager (GMM), who is often a senior vice president in the firm. Each of these GMMs is responsible for several departments. •

The second level in the merchandise classification scheme is the department. Departments are managed by divisional merchandise managers (DMMs).

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The third level in the merchandise classification scheme is the classification. A classification is a group of items targeting the same customer type.

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The next lower level in the classification scheme is the category. Each buyer manages several merchandise categories.

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A stock-keeping unit (SKU) is the smallest unit available for inventory control, usually indicating size, color and style for soft goods.

B. Merchandise Category – The Planning Unit •

The merchandise category is the basic unit of analysis for making merchandising management decisions.

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A merchandise category is an assortment of items that customers see as substitutes for one another.

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

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Some retailers may define categories in terms of brands.

See PPT 12-7 Ask students to name merchandise that they would consider to be in the same category. Should Tommy Hilfiger be a category? What about luggage?

See PPT 12-8

1. Category Management •

These levels within the Merchandise Group are illustrated on PPT 12-11.

Whereas department stores, in general, manage merchandise at the category

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level, supermarkets and other general merchandise retailers traditionally have organized their merchandise around brands or vendors. •

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

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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. See PPT 12-9 and 12-10

2. The 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.

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The category captain works with the category manager/buyer to make decisions about product placement on shelves, promotions, and pricing for all brands in the category.

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A potential problem with establishing a Category Captain, however, is that vendors could take advantage of their position.

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What should retailers be concerned about before appointing a category captain?

C. Evaluating Merchandise Management Performance -- GMROI

See PPT 12-12

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A good measure for evaluating a retail firm is ROI. Return on investment is composed of two components, asset turnover and net profit margin.

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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.

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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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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.

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GMROI is a similar concept to return on assets, only its components are under the control of the buyer rather than other managers.

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GMROI = Gross margin percentage X Sales-to-stock ratio

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Also, GMROI =

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Average inventory in GMROI is measured at cost, because a retailer's investment in inventory is the cost of the inventory, not its retail value.

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GMROI combines the effects of both profits and turnover. It is important to use a combined measure so departments with different margin/turnover profiles can be compared and evaluated.

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Ask students how it is possible for two different types of food products, milk and caviar to have the same GMROI. Walk through exhibit. Then ask what would happen to GMROI if caviar went on sale. (Answer: it would depend on how much of a margin reduction was taken and how much turnover would increase.)

Gross Margin Average Inventory

GMROI is used as a return on investment

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See PPT 12-13

See PPT 12-14 and PPT 12-16 for illustrations of GMROI

profitability measure to evaluate departments, merchandise classifications, vendor lines, and items. It's also useful for management in evaluating buyers' performance since it can be related to the retailer's overall return on investment. 1. Measuring Sales-to-Stock Ratio •

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Retailers normally express sales-to-stock ratios (and inventory turnover) on an annual basis rather than for part of a year. (If the sales-to-stock ratio for a three-month season equals 2.3, the annual ratio will be reported as four times that number, 9.2)

See PPT 12-18, 12-19, 12-20 for calculations of inventory turnover.

The most accurate measure of average inventory is to measure the inventory level at the end of each day and divide the sum by 365. Most retailers can use their information systems to get accurate average inventory estimates by averaging the inventory in stores and distribution centers at the end of each day.

D. Managing Inventory Turnover

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Inventory turnover and the sales-to-stock ratio help assess the buyer’s performance in managing this asset.

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Retailers want to achieve a high inventory turnover, but just focusing on increasing inventory turnover can actually decrease GMROI.

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Buyers needs to consider the trade-offs associated with managing their inventory turnover. 1. Benefits of High Inventory Turnover See PPT 12-21

Benefits of high turnover include: increased sales volume, improved salesperson morale, reduction in the risk of obsolescence and markdowns, and more resources available to take advantage of new buying opportunities.

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What are the consequent benefits and disadvantages of a retailer's high inventory turnover for the consumer?

2. Potential Problems with Approaches for Improving Inventory Turnover •

Retailers need to strike a balance in their rate of inventory turnover.

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One approach to increase inventory turnover is to reduce the number of merchandise categories, the number of SKUs within a category or the number of items within an SKU.

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However, if customers can’t find the size or color they seek, patronage and sales can decrease. Customers who are disappointed on a regular basis will shop elsewhere.

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Another approach is to buy merchandise more often and in smaller quantities, which reduces average inventory without reducing sales.

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However, the gross margin decreases because buyers can’t take advantage of quantity discounts and transportation economies of scale.

See PPT 12-22 and 12-23

PPT 12-24 summarizes the Merchandise Management Process.

E. Merchandise Management 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.

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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.

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Third, having developed a plan, the buyer negotiates with vendors and buys

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the merchandise. •

Buyers continually monitor the sales of merchandise in the category and make adjustments.

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These decisions are not necessarily made sequentially. Some decisions may be made at the same time or in a different order than described above.

F. Types of Merchandise Planning Processes •

Retailers use two distinct types of merchandise management planning systems for managing (1) staple merchandise and (2) fashion merchandise categories.

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Staple merchandise categories, also called basic merchandise categories, consist of items that are in continuous demand over an extended time period. The number of new product introductions in these categories is limited.

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Sales of staple merchandise are relatively stable from day-to-day so it is relatively easy to forecast demand, and the consequences of making mistakes in forecasting are not great.

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Because the demand for basic merchandise is predictable, merchandise planning systems for staple categories focus on continuous replenishment.

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Fashion merchandise consists of items that are only in demand for a relatively short period of time. New products are continually introduced into these categories, making the existing products obsolete.

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Forecasting the sales for fashion

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merchandise categories is much more challenging than for staple foods. Buyers for fashion merchandise categories have much less flexibility in correcting forecasting errors. •

Due to the short life cycle of fashion merchandise, buyers often do not have a chance to reorder additional merchandise after an initial order is placed.

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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.

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Retailers buy seasonal merchandise in much the same way that they buy fashion merchandise.

II. Forecasting Sales See PPT 12-25

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The first step in merchandise management planning is to develop a forecast for category sales.

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To develop a category forecast, one needs to understand the nature of category life cycles and the factors that might affect the shape of the life cycle in the future.

A. Category Life Cycles •

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See PPT 12-26 Product categories typically follow a predictable sales pattern--sales start off low, increase, plateau and then ultimately decline. Yet the shape of that pattern varies considerably from category to category. The category life cycle describes a merchandise category's sales pattern over time, and is divided into four stages; introduction, growth, maturity, and decline. Knowing where a category is in its life cycle is useful for predicting sales. However, the shape of the life cycle can be affected by the activities undertaken by retailers and

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Discuss the life cycle of snow boards. In which stage are they currently? How has their price, promotion, and target market changed over the years?

Ask students to name other products whose target market has changed. What was the initial target market for cellular telephones. Who buys them today? Beepers?

vendors. 1. Variations in Category Life Cycles •

See PPT 12-27 Variations on the category life cycle include fads, fashions, staples, and seasonal merchandise.

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A fad is a merchandise category that generates a lot of sales for a relatively short time--often less than a season.

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The art of managing a fad comes in recognizing the fad in its earliest stages and immediately locking up distribution rights for merchandise to stores nationwide before the competition does, and knowing when to bail out.

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A fashion is a category of merchandise that typically lasts several seasons, and sales can vary dramatically from one season to the next.

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Items within the staple merchandise category are in continuous demand over an extended period of time.

Ask students to name some fads, fashions, and seasonal products. Ask them how they should manage their inventories differently.

B. Forecasting Staple Merchandise Categories •

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The sales of staple merchandise are relatively stable from year to year. Thus, forecasts are typically based on extrapolating historical sales. Then, statistical techniques can be used to forecast future sales.

Ask students to consider uncontrollable factors that might influence the sales of staple merchandise. How many can be identified?

Even though sales for staple merchandise categories are relatively predictable, controllable (openings and closings of stores, promotions, and placement) and uncontrollable (weather, economic conditions, and new product introductions by vendors) factors can have significant impact on them.

C. Forecasting Fashion Merchandise Categories See PPT 12-29 and 12-30

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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.

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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. 1. Previous Sales Data

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Although some items in fashion merchandise categories might be new each season, the basic merchandise in many categories is the same, and thus, accurate forecasts might be simply projecting past sales data. 2. Personal Awareness

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Buyers for fashion merchandise categories need to be aware of trends that can affect their category sales. To find out what customers are going to want in the future, they immerse themselves in the customers’ world. 3. Fashion and Trend Services

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There are many services that buyers (especially buyers of apparel categories) can subscribe to that forecast the latest fashions, colors, and styles.

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See PPT 12-31

4. Vendors

See PPT 12-32

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Vendors have proprietary information about their marketing plans, such as new product launches and special promotions that can have a significant impact on retail sales for their products and the entire merchandise category.

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A systematic approach for incorporating vendor information in merchandise planning is the collaborative planning, replenishment and forecasting (CPFR) approach described in Chapter 10.

5. Market Research •

Information on how customers will react to new merchandise can be obtained by asking customers about the merchandise and measuring customer reactions to new merchandise through sales tests.

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Another excellent source of customer information is retail salespeople, since they have the direct contact with the customer to determine their attitudes in depth.

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Some retailers maintain a want book in which salespeople record out-of-stock or requested merchandise.

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Customer information can be collected through traditional forms of marketing research like depth interviews, and focus groups.

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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.

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A more informal method of interviewing customers is to require buyers to spend some time on the selling floor waiting on customers.

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A focus group is a small group of respondents interviewed by a moderator using a loosely structured format.

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Finally, many retailers have a program of conducting merchandise experiments.

D. 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.

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Some service retailers attempt to match supply and demand by taking reservations or making appointments. See PPT 12-33

III. 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.

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An assortment plan is a list of the SKUs that a retailer will offer in a merchandise category. The assortment plan thus reflects the variety and assortment that the retailer plans to offer in a merchandise category.

Ask students to name retailers with good variety/good assortment/good product availability. Explain that it is difficult to be a master at all three.

A sample Assortment Plan for Girls’ Jeans is shown in PPT 12-34

A. Category Variety and Assortment •

Variety is the number of different merchandising categories within a store or department. Stores with a large variety are said to have good breadth.

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Some stores carry a large variety of categories, while others carry a much more limited number.

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Assortment is the number of SKUs within a category. Stores with large assortments are said to have good depth.

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Some stores carry a large assortment, while others carry a narrower assortment.

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Service retailers also make assortment decisions.

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In the context of merchandise planning, the concepts of variety and assortment are

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Ask students to give examples of stores with large variety and those with lower variety. See PPT 12-35 and 12-36

Ask students to give examples of stores with large assortments and those with narrow assortments.

applied to a merchandise category rather than a retail firm. At the category level, variety reflects the number of different types of merchandise, and assortment in the number of SKUs per type. B. Determining Variety and Assortment •

In attempting to determine the variety and assortment for a category, the buyer considers a variety of factors including (1) retail strategy, (2) GMROI of merchandise assortment, (3) physical characteristics of the store, and (4) complementary merchandise.

1. Retail Strategy •

The number of SKUs to offer in a merchandise category is a strategic decision.

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The breadth and depth of the assortment in a merchandise category can affect the retailer’s brand image.

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In general, retailers need to offer enough SKUs to satisfy the customers’ needs and maintain their brand image with respect to the merchandise category but not too many so that their image is compromised.

2. GMROI of Merchandise Assortment •

Buyers are constrained by the amount of money they have to invest in a merchandise category and the store space available to display the merchandise.

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Buyers must deal with the trade-off of increasing sales by offering more breadth and depth but potentially reducing inventory turnover and GMROI by stocking more SKUs.

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The more SKUs offered, the greater the

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Retailer must decide what type of store it wants to be. They have a finite space and inventory budget. A store that offers good variety means one-stop shopping -- everything that the target market could want. Think of an old-time variety store. A store that offers good assortment can also mean one stop shopping -- if customer is hopping for a group of products, e.g., a knife store. You can get anything you want as long as it is a knife. As for product availability -- a retailer can strike a good balance between variety and assortment, but if they run out of a particular size, color or style (SKU) that a customer wants, a sale is lost.

chance of breaking sizes – stocking out of a specific size SKU. 3. Physical Characteristics of the Store •

Retailers must consider how much space to devote to the category even on an Internet site. In a store, if many styles and colors in the assortment, much space will be required to properly display and store the merchandise.

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Websites must be designed so that the customer can easily navigate through time.

4. Complementary Merchandise •

When retailers plan to alter their assortment, they must consider whether the merchandise under consideration complements other merchandise in the department.

IV. Setting Inventory and Product Availability Levels

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Assortment plans typically include the inventory levels of each SKU stocked in the store.

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A model stock plan is a summary of the typical store inventory support for a merchandise category.

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The retailer might have a model stock plan for each type in a merchandise category and for different store sizes.

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Retailers typically classify stores on the A, B and C system. The basic assortment in the category is stocked in C stores. The larger A and B stores have more space available and can accommodate more SKUs. These stores may have more brands, colors, styles and sizes in a category.

A. Product Availability •

Product availability defines the percentage

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Why does inventory investment increase so fast as

of demand for a particular SKU that is satisfied. The higher the product availability, the higher the amount of back-up stock necessary to ensure that the retailer won't be out of stock on a particular SKU when the customer demands it. •

Although the actual inventory investment varies in different situations, the general relationship is that a very high level of service results in a prohibitively high inventory investment. This relationship can be explained by the relationship between cycle stock and back-up stock.

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Cycle stock, also known as base stock, is inventory that results from the replenishment process and is required to meet demand when the retailer can predict demand and replenishment times (lead times) perfectly.

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Unfortunately, most retailers are unable to predict demand and replenishment times without error, so, they carry back-up stock, also known as safety stock or buffer stock, as a safety cushion for the cycle stock so they won't run out before the next order arrives.

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Several factors need to be considered to determine the appropriate level of buffer stock and thus the product availability for each SKU.

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Retailers often classify merchandise categories or individual SKUs as A, B or C items, reflecting the product availability the retailer wants to offer. For A items, the retailer rarely wants to stock out. Lower availability is acceptable for C items.

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Other factors to consider are fluctuations in demand, the lead time for delivery from the vendor, fluctuations in vendor lead time, and the frequency of store deliveries.

V. Summary

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product availability goes up? Because of safety stock-- a retailer must carry more and more safety stock to satisfy increasing levels of demand.. When using a Quick Response inventory system, product availability can increase and inventory investment actually stays the same or decreases.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

What are the differences among a fashion, a fad, and a staple? How should a merchandise planner manage these types of merchandise differently? A fashion is a category of merchandise that typically lasts several seasons, and sales can vary dramatically from one season to the next. A fad is a merchandise category that generates a lot of sales for a relatively short time—often less than a season. A staple has continuous demand over an extended period of time. When managing a fashion, a buyer must carefully monitor market trends by examining previous sales volume for the category, obtaining customer information, shopping competition, and getting information from vendors and buying offices about what is hot and what is not. Buyers use merchandise budget planning/open-to-buy systems to manage fashion merchandise. It is even more important to keep a pulse on fads. Customers of fad merchandise are very fickle. What is hot one day, may not be sellable the next. Buyers must be careful not to overbuy, so that they may get stuck with the merchandise. On the other hand, the life cycle of a fad is so short that buyers must try to keep in stock so they don’t miss sales. Managing staple merchandise is more straightforward than for fashions or fads. Inventory management systems are available for managing staple merchandise using standard statistical techniques.

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How and why would you expect variety and assortment to differ between a traditional bricks-and-mortar store and its Internet counterpart? A retailer must balance depth and breadth. Assortment planning is important because retailers want to have good depth of assortments (the number of SKUs within a class) so people will be able to have good selections and be able to find what they are looking for. If retailers have too much depth, their inventory will be too high and that is expensive to maintain. Further, consumers may suffer from over-choice and as a result be confused. A retailer must also have good breadth so a customer can buy all the items he/she wants in one store. Too much breadth however, can dilute the image of the store and cut down on depth, since there is limited space and money for inventory investment. Different retailers will choose different strategies based on the amount of money available to spend on inventory and the amount of space available in the store. The larger the store, the more variety and depth is possible. The store will then base the assortment plan on the their target market, the nature of the retail offering, and the bases upon which the retailer will attempt to build a sustainable competitive advantage. The Internet however, does not have the space constraint that bricks and mortar stores face when planning their assortment and variety. Also, E-retailers don’t have to physically carry every item that they sell. They can have arrangements with their vendors to ship directly to customers when they get an order. E retailers can therefore offer a much wider variety and assortment. E retailers, however, are similar to bricks and mortar stores in their need to follow a strategy that appeals to their target market. Specifically, if they carry too much assortment or variety, they may actually confuse their customers and dilute their image.

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Simply speaking, increasing inventory turnover is an important goal for a retail manager. What are the consequences of turnover that’s too slow? Too fast?

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With a rapid rate of turnover, sales volume increases. That is, a retailer is able to obtain fresh stock, improve salesperson morale, and create more open-to-buy opportunities. Also, there are fewer markdowns, meaning that if merchandise is selling, there is no inventory to mark down. There are fewer costs of goods sold, less operating expenses and asset turnover increases.

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Assume you are the grocery buyer for canned fruits and vegetables at a five-store supermarket chain. Del Monte has told you and your boss that it would be responsible for making all inventory decisions for those merchandise categories. It would determine how much to order and when shipments should be made. It promises a 10 percent increase in gross margin dollars in the coming year. Would you take Del Monte up on its offer? Justify your answer. In this case, Del Monte would act as a category captain for the fruits and vegetables category for the supermarket chain. Since the supermarket is a small five-store chain, one can presume that it may not have sufficient resources to have a sophisticated market research, forecasting or inventory management in place. Instead, it is possible that store managers or category managers may be making these decisions based simply on daily turnover and customer demand and traffic patterns. A partnership arrangement with Del Monte would provide this chain with tremendous benefits. It can the customer insights developed at Del Monte through its expertise in the field and experience in working with other supermarkets. These insights, in turn, would help the chain become more responsive to the customers and therefore, improve performance and profits across this category. The chain would also benefit from the category and brand awareness created by Del Monte through its national promotions and advertising. On the flip side, there could be several issues that must be settled before proceeding further on the arrangement. First, Del Monte may be able to take advantage of its position as the controller of information and inventory and make decisions that may profit it more than the supermarket chain. Second, if Del Monte stocks more of its own brands with no space devoted to competitive products, consumers may be deprived of a good assortment and brand choice. Third, there may be other attempts by Del Monte to control more store-level decisions, including shelf space utilizations, display, etc. Del Monte could offer a lot of advantages, but several risks and issues do remain. On one hand, the various benefits and the promise of a 10 percent increase in gross margin dollars is attractive. But, a cautious supermarket executive would try to negotiate a deal which safeguards the chain's interests. One option is to develop contract provisions, including trying out Del Monte for a short-term contract period first. Additional contract provisions should clearly specify the areas of cooperation, redress in case the promised 10 percent increase in margins are not realized, and cancellation of the agreement at any time for any reason with only a 90-days notice.

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A buyer has received a number of customer complaints that he has been out of stock on a certain category of merchandise. The buyer subsequently decides to increase this category’s product availability from 80 percent to 90 percent. What will be the impact on backup stock and inventory turnover? Will your answer be the same if the buyer is implementing an efficient supply chain inventory system?

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An increase in customer service by 10% will increase backup stock by much greater than 10% (see Exhibit 12-10). Inventory turnover will be adversely affected. Although net sales will increase by 10%, because service level increased by 10%, inventory investment will increase by more than 10%. In calculating inventory turnover, net sales and inventory investment both increased. But, since inventory investment increased at a higher rate, then inventory turnover must decrease. If, however, the retailer is utilizing an efficient supply chain inventory system, it is possible to increase product availability and decrease backup stock and increase inventory turnover.

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Variety, assortment, and product availability are the cornerstones of the merchandise planning process. Provide examples of retailers that have done an outstanding job of positioning their stores based on one or more of these issues. Students will have a variety of answers to this question. However, some possible responses are: * Costco has a wide variety of merchandise where you can find 4000 carefully chosen products. The assortment within each category, however, is narrow. *Amazon.com has a great assortment of books, music, video, and several other categories of merchandise. Although they have been adding categories, they are still far from a one-stop Internet shop. *The Gap is strong on product availability for their basic merchandise. They don’t want to be out of any size of jeans or khakis. You can even special-order out-of-stock or hard to find sizes.

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The fine jewelry department in a department store has the same GMROI as the small appliances department, even though characteristics of the merchandise are quite different. Explain this situation. The jewelry department has a low turnover, but a very high margin. Typically, a jewelry department can command a very high markup because they are selling merchandise that the customer perceives as being unique. It is also difficult to make price comparisons for jewelry. The jewelry store may also carry some brand names, such as Rolex watches, that are not available in many stores. Since the merchandise is high priced, and not generally purchased regularly, inventory turnover is often low. Inventory turnover is also generally low because jewelry departments must carry a large selection of high priced merchandise. The small appliance department, on the other hand, is often used as a “loss leader” department. That is, the department specializes in selling merchandise at low margins to bring customers into the store in the hope that they will buy other things. The relatively low price creates a high velocity of sales. In turn, the high velocity of sales keeps inventory relatively low. The combination of high sales and low inventory facilitates high inventory turnover.

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8.

Calculate GMROI and inventory turnover given annual sales of $20,000, average inventory (at cost) of $4,000 and a gross margin of 45%. • • • • • •

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GMROI = Gross margin % x Sales-to-stock ratio GMROI = 45% x (20,000 ÷ 4,000) .45 x 5 = 2.25 Inventory turnover (IT) =(1 – Gross margin percentage) x Sales-to-stock ratio IT = (1 - .45) x 5 IT = .55 x 5 = 2.75

How does Home Depot change its merchandise inventory on a seasonal basis? How has this retailer used its merchandise offerings to attract more female customers? Home Depot offers a variety of merchandise categories that include seasonal merchandise. Responding the shoppers’ needs for different indoor and outdoor tools, appliances, and decorating supplies across different seasons, Home Depot designates specific areas of its store to accommodate these seasonal types of items. The merchandise space displaying gardening tools, grills and lawn furniture in Spring and Summer is transformed into a display of holiday decorations, snow shovels and snow blowers in many parts of the country during late Fall and winter. In the appliance department, air conditioners and fans may be replaced by space heaters and humidifiers. Devoting specific floor space to seasonal merchandise allows central store aisles with year-round staple merchandise to remain relatively unchanged from one season to the next. By expanding into more home decorating related categories, with an increasing amount of home fashion merchandise, Home Depot is aiming for more female customers. These decorating categories including fixtures, lamps, and floor coverings follow the life cycles of fashion merchandise in contrast to Home Depot staples like tools, lumber, and other building supplies.

10.

Give examples of products that you have purchased that are fad, fashion, and staple items according to the category life cycle. How does each item fit the definitions given in Exhibit 12-6? Students should provide an interesting range of responses to this question. Evaluate the rationale given for each in light of the definitions given in Exhibit 12-6. Fads are merchandise categories that generate a lot of sales for a relatively short period of time, often less than a season. Fashion categories usually last several seasons, although sales of specific SKUs can vary dramatically from one season to the next. Staple merchandise categories experience relatively steady sales over an extended period of time (although even these categories will go into decline eventually).

11.

As the athletic shoe buyer for Sports Authority, how would you go about forecasting sales for a new Nike shoe? As the athletic shoe buyer for Sports Authority, you are dealing with a staple merchandise category. Sales of athletic shoes should prove to be relatively steady over time for Sports Authority. Because your sales are relatively constant from year to year, you can use historical sales figures to project likely sales to come from Nike’s new shoe as a starting point for further evaluation. As the athletic shoe buyer you must be careful to take into account factors such as

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openings and closings of stores, price for the shoes relative to the category, special promotions or placements of the shoes that will impact sales in the category or for this particular Nike shoe.

ANCILLARY LECTURES AND EXERCISES Ancillary Lecture 12-1 Predicting Fadsa Instructor’s Notes: The purpose of this lecture is to supplement the material on fads in the chapter. There are five questions that a buyer can explore to predict whether a new category or item will be a fad or a long-term fashion or staple?i First, does it fit with basic lifestyle and value changes? Consumers are time-poor and therefore seek products and services that make their lives more convenient. Thus, products that speed mundane tasks, like cleaning the house, are likely to be successful. The second question a buyer must ask is, how important are the product’s benefits to the consumer? For instance, private-label merchandise, which is often priced lower than national brands has become more popular as consumers seek better value. Private-label merchandise is a brand of products designed, produced, controlled by, and carrying the name of the store or a name owned by the store. Since consumers are not willing to forego quality for price, some retailers have successfully introduced “premium” private label merchandise such as President’s Choice cookies. Third, the buyer must determine whether the product is based on a basic trend or is a side effect of that trend. The side effects will be replaced, but the trend continues to grow. For instance, the popularity of spicy food is a trend that continues to grow in the U.S. However, the different types of ethnic restaurants that serve the food may change over time -- the side effect. For instance, some experts predict that Indian and Thai food will grow in popularity at the expense of Mexican and Italian. Fourth, is a new development supported by developments in other areas? If not, it will probably be a fad. For instance, if people are allowed to dress more casually at work, and more people are working at home, and people are searching for value in their clothing purchases, then we can expect retailers like The Gap to remain popular because they provide casual clothing at a good value. Fifth, the buyer should consider which groups of consumers have changed their behavior. If the product is supported by key market segments and from unexpected sources, it has a greater chance of becoming a fashion or a staple. Birkenstock sandals, for instance, have remained popular for several decades because they appeal to people who demand comfortable footwear (a key market segment,) and certain youth segments who find the generally unattractive sandals to be fashionable.

LECTURE 12-2 Category Management

a

This lecture is adapted from, Martin G. Letscher, “How to Tell Fads From Trends,” American Demographics, December 1994, pp. 38-45. 341

Instructor’s Note: This lecture is designed to supplement the discussion in Chapter 12 on Category Management. It's important to establish from the beginning that the category is the unit of analysis used for planning merchandising decisions. Since all SKUs (of the same size) within a category are reasonable substitutes for one another, they follow similar demand patterns. For instance, demand for jeans is heaviest during the back-to-school period in August. Jeans are heavily promoted and discounted at this time. Demand, inventory levels, promotions, and prices for girls' jeans behave similarly to each other throughout the year. Customers and (from an inventory management perspective) buyers think of items within a category as somewhat substitutable. Since the items within a category are related, and may even be substituted for one another, decisions about one brand or product usually impact other products in the category. Buyers can therefore best plan their merchandising strategies at the category level. Forecasting sales, setting inventory turnover and profit goals, making merchandise budget plans, and determining open-to-buy are all performed on a category-by-category basis. What is Category Management and Who Uses It? “Category management is a process that involves managing product categories as business units and customizing them on a store-by-store basis to satisfy customer needs.”i Category Management may sound like the most natural method of managing merchandise, but not all retailers operate using this system. National specialty store chains, department stores, and grocery stores view category management differently. National specialty store chains. Some national specialty store chains, like The Gap and The Limited, are natural Category Managers. Their “buyers” have always managed their categories from start to finish. They define their target customers. They design and develop merchandise to meet their customers’ needs, and that is consistent with the firm’s image. The merchandise in the category is coordinated with other categories. Packaging, pricing, space management, display, and promotional decisions are made by the buyer. Finally, the buyer and his/her staff forecast sales and is responsible for allocating merchandise to stores. In the end, the buyer is evaluated on the category’s performance. Department stores. Buyers in department stores used to be Category Managers. In the last ten to fifteen years, however, many categories and departments within these stores have turned many of the responsibilities normally associated with a Category Manager over to designers such as Ralph Lauren, Tommy Hilfiger, Liz Claiborne, and Donna Karan. Instead of buying men’s sport shirts, or ladies dresses, buyers are assigned to a designer. The buyers still choose specific SKUs, forecast sales, and allocate merchandise. They have less than total control, however, over pricing, display, and promotional decisions than they used to. Importantly, one of the most basic buyer’s functions -- determining the merchandise assortment -- is shared with the designer/vendor. Department stores see the powerful role of designers to be a double-edged sword. Certainly these designers bring an image and a ready-made market to the department stores. They also usurp control from the retail buyer. Recently, however, department stores are rediscovering the concept of the category manager. For example, they have strengthened their position in private label. Grocery stores. Prior to implementing a Category Management program, a grocery buyer’s responsibility would entail purchasing from one or more vendors. There would be, for example, one buyer for Proctor & Gamble, one for General Mills, one for Kraft Foods, and so on. The Kraft buyer would purchase the

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entire line of Kraft products -- everything from salad dressings to cheese. Other people within the grocery organization would be responsible for making sure the merchandise was delivered to the stores in the right quantities (logistics), promoting the merchandise (advertising), and allocating space on the shelves for the merchandise (store manager or Kraft sales representatives). Oftentimes, no one in the retail organization did consumer research to determine exactly what the customer wanted to buy. Grocery stores gauged customer needs by measuring what was selling. Prior to POS terminals they only knew what was sold after they took a physical inventory in the stores. The traditional buying system in grocery stores is fraught with problems. No one individual is totally responsible for the success or failure of a category. It is also more difficult to identify the source of a problem and solve it under the traditional system. Suppose, for instance, an ad is placed in the newspaper for a Memorial Day sale. However, the stores don’t have the merchandise. Who caused the problem? Was it because the buyer didn’t order the merchandise in time? Did the advertising manager fail to inform the buyer or the logistics manager that the ad was going to run? Did the distribution center fail to get the merchandise to the stores? Importantly, under the traditional system, the buyer doesn’t have the power to solve the problem. By using a Category Management system, all of the activities and responsibilities mentioned above become under the control of the Category Manager and her staff. Setting up a Category Management Program Setting up a Category Management program requires a strong commitment from the top. Given the scenario that we described above, you can see that a new CM program will require changes in responsibilities and in the organization structure. Setting up a CM program requires three major steps: Review and coordinate strategies, define the categories, and establish strategic partnerships with vendors. Review and coordinate strategies. The first step in setting up the CM program is to review the firm’s overall marketing and financial strategies. The retailer must know how it wants to be positioned in the marketplace -- high fashion versus traditional, high priced versus moderate. The merchandise categories must be consistent with that strategy and the image that the retailer wishes to maintain. Define the categories. The category structure must be consistent with the retailer’s overall strategy and organizational structure. The categories must conform with the way the customer perceives the products. For example, a manufacturer might view shampoos and conditioners as separate categories. Yet shoppers choose between purchasing a shampoo combined with a conditioner or buying the shampoo and conditioner separately. Although shampoo and conditioner are not substitutable products, the customer uses them in a similar way. Therefore, they should probably be grouped as one category. i Establish strategic partnerships with vendors. The importance of establishing strategic partnerships with vendors has been stressed throughout Retailing Management Since retailers and their vendors share the same goals -- to sell merchandise and make profits -- it is only natural for them to share the information that will help them achieve those goals. Since vendors can develop systems for collecting information for all of the areas that they service, they can provide Category Managers with valuable information. 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.i Levi Strauss, for example, works with key retailers by balancing stock selections. Their account executives work with buyers and sales associates in the stores. They provide merchandising advice and fixtures, as well as an electronic ordering system.i Another apparel manufacturer, Sassco which makes better women’s’ suits, has representatives go from store to store checking out what items are selling and

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whether proper markdowns are being taken. They also take physical counts of stock and work with the stores on presentation techniques.i A potential problem with establishing a Category Captain, however, is that vendors could take advantage of their position. It is somewhat like letting the fox watch the henhouse. Suppose, for example, that a large candy manufacturer like Mars has become the Category Captain for a grocery store chain like Safeway. Part of their responsibility is to provide Safeway with planograms. Will the planogram provide an assortment that maximizes the profitability for Safeway, or will there be a tendency for the plan to be biased in favor of Mars?i How to Implement a Category Management Program Category management is a circular, long-term process that involves five stages. Each stage is ongoing and flows naturally into the next. The stages, illustrated in Exhibit x-x, include: Reviewing the category, targeting customers, planning merchandising, implementing strategy, and evaluating results. Reviewing the category. The first step in the category management process is a thorough review of the category. The Category Manager should determine the market share that the category has maintained. Second, the CM must attempt to determine which activities have contributed to the success or failure of a category. For instance, has the product mix, pricing, promotion, and quality been appropriate for the merchandise? Finally, how is competition treating this category? Targeting customers. A category manager cannot determine what to buy (the third step) without knowing who their target customers are. Identifying their target customers goes beyond an understanding of their demographics. CMs should know what they purchase, where, how often, and how they respond to promotions. Armed with these data, the Category Manager groups stores with similar customer profiles so she can target each group with customized product assortments, pricing, promotions, and shelf-space allocations. Planning merchandising. By utilizing the information collected in the first two steps -- reviewing the category and targeting the consumer -- the CM is ready to make merchandising decisions. She must decide what to buy, how much, and when it should be delivered. She must also decide how to price the merchandise, how to promote the merchandise, and how much space should be allocated to the merchandise in the stores. Implementing strategy. Implementing strategy requires a close cooperative relationship between the Category Manager and employees at individual stores. A great strategic plan and superlative tactics will fail unless they are communicated clearly to store managers and employees. Systems for communicating programs and monitoring results must be in place. Importantly, the CM must establish strong relationships with store managers. There must be a team effort between the CM and the stores if strategies are to succeed. Evaluating results. It is critical to evaluate the results of the retailer’s merchandising strategy quickly and continuously. Many retailers can determine how a particular SKU, or category is doing minute-byminute, system-wide. Retailers can react to this information by taking markdowns, reordering, and reallocating space. It is equally important to determine why merchandise is exceeding or falling short of sales and profit goals. Examples of questions the CM must answer are: Were the plans implemented properly? Has competition hurt business? Is the merchandise available in the stores? Is the merchandise priced right? Were promotions coordinated with merchandise flow?

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ADDITIONAL ASSIGNMENTS AND EXERCISES Exercise 12-1 Balancing Variety and Assortment How do retailers balance Variety (breadth) and Assortment (depth) in their merchandising decisions? Complete the table below for a retailer with a large variety and large assortment merchandising strategy. Advantages

Disadvantages

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Exercise 12-1 with Answers

Balancing Variety and Assortment Read the following article. After answering the questions below, be prepared to discuss in class. “International retailing a work in progress.” MMR, May 26, 2003. (Business & Company Resource Center) 1. Characterize the key issues in the external environment that a would impact a global retailer in each of the following geographic locations: Location France & Germany China Japan

Latin America

United States

Key Issues in the External Environment High levels of regulations limiting store development Economy is growing at an amazing pace and rapid modernization in the retail sector Banking crisis, deflation, access to capital is difficult for growth Mega retailer chains are entering and this will transform Japanese retailing Argentine and Venezuelan economies are in a state of collapse and hurting global retailers in their borders Brazil rebound Mexico solid performance, but impacted by US economy Consumer uncertainty post war in Iraq Overall economic strength even with job losses Will Carrefour and Tesco take on Wal-Mart and other successful American retailers on their own turf?

2. Describe why a global retailing strategy requires thorough analysis and planning to effectively manage risk. Uncertainty is prevalent in this type of undertaking. Laws, regulations and politics; culture and language; infrastructure; resources; and the economy and strength of the currency vary from country to country. Even though a retailer was successful in their home country this does not necessarily mean that the same retail mix and format would be accepted in another location. The retailer must be adaptable and thoroughly consider the elements of the external environment to evaluate opportunities and threats facing the organization in each region/country. After completing a situational analysis the retailer can ask, is expansion possible in this location? Will the organization be able to reach its goals and objectives of growth, profit and market share considering the costs and benefits of global expansion?

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