CHAPTER 12

PLANNING MERCHANDISE ASSORTMENTS

INSTRUCTOR NOTES
ANNOTATED OUTLINE

Merchandise management activities are

undertaken primarily by buyers and their See PPT12-3 and PPT 12-4
superiors, divisional merchandise managers
(DMMs) and general merchandise managers
(GMMs).

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 retailers information system
to monitor the performance of their
merchandise portfolio to see what is
selling and what is not.

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
companys financial goals.

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
I. Merchandise Management Process
in PPT 12-6.
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

The highest classification level is the

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 merchandise group. Each merchandise These levels within the Merchandise Group
group is managed by a general are illustrated on PPT 12-11.
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).

The third level in the merchandise

classification scheme is the
classification. A classification is a
group of items targeting the same
customer type.

The next lower level in the classification

scheme is the category. Each buyer
manages several merchandise
categories.

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 See PPT 12-7

The merchandise category is the basic

unit of analysis for making
merchandising management decisions.
A merchandise category is an
assortment of items that customers see
as substitutes for one another.
Ask students to name merchandise that they would
consider to be in the same category. Should
Tommy Hilfiger be a category? What about
luggage?

Retailers and their vendors may have

different definitions of a category.

Some retailers may define categories in

terms of brands.
See PPT 12-8
1. Category Management

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.

Managing by category can help ensure

that the stores 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. What should retailers be concerned about before
Known as the Category Captain, this appointing a category captain?
supplier forms an alliance with a retailer to
help gain consumer insight, satisfy
consumer needs, and improve the
performance and profit potential across the
entire category.

The category captain works with the

category manager/buyer 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.

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C. Evaluating Merchandise Management
Performance -- GMROI See PPT 12-12
Ask students how it is possible for two different
A good measure for evaluating a retail firm
types of food products, milk and caviar to have the
is ROI. Return on investment is composed
same GMROI. Walk through exhibit. Then ask
of two components, asset turnover and net
what would happen to GMROI if caviar went on
profit margin.
sale. (Answer: it would depend on how much of a
margin reduction was taken and how much
However, ROI is not a good measure for
turnover would increase.)
evaluating the performance of merchandise
managers because they do not have control
over all the retailers 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.

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

Also, GMROI = Gross Margin

Average Inventory

Average inventory in GMROI is measured See PPT 12-13

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

GMROI combines the effects of both profits

and turnover. It is important to use a See PPT 12-14 and PPT 12-16 for illustrations of
combined measure so departments with GMROI
different margin/turnover profiles can be
compared and evaluated.

GMROI is used as a return on investment

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 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

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 See PPT 12-18, 12-19, 12-20 for calculations of
equals 2.3, the annual ratio will be reported inventory turnover.
as four times that number, 9.2)

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

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

Retailers want to achieve a high

inventory turnover, but just focusing on
increasing inventory turnover can
actually decrease GMROI.

Buyers needs to consider the trade-offs

associated with managing their inventory
turnover.

1. Benefits of High Inventory Turnover

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.
See PPT 12-21
What are the consequent benefits and
disadvantages of a retailer's high inventory
turnover for the consumer?

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2. Potential Problems with Approaches
for Improving Inventory Turnover See PPT 12-22 and 12-23

Retailers need to strike a balance in their

rate of inventory turnover.

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.

However, if customers cant find the size or

color they seek, patronage and sales can
decrease. Customers who are disappointed
on a regular basis will shop elsewhere.

Another approach is to buy merchandise

more often and in smaller quantities, which
reduces average inventory without reducing
sales.

However, the gross margin decreases

because buyers cant take advantage of
quantity discounts and transportation
economies of scale.
PPT 12-24 summarizes the Merchandise
E. Merchandise Management Process 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.

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

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 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.

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.

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.

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.

Because the demand for basic

merchandise is predictable, merchandise
planning systems for staple categories
focus on continuous replenishment.

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.

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.

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.

II. Forecasting Sales

See PPT 12-25
The first step in merchandise management
planning is to develop a forecast for
category sales.

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

See PPT 12-26
Product categories typically follow a
predictable sales pattern--sales start off low,
increase, plateau and then ultimately Discuss the life cycle of snow boards. In which
decline. Yet the shape of that pattern varies stage are they currently? How has their price,
considerably from category to category. promotion, and target market changed over the
years?
The category life cycle describes a
merchandise category's sales pattern over
time, and is divided into four stages; Ask students to name other products whose target
introduction, growth, maturity, and decline. market has changed. What was the initial target
market for cellular telephones. Who buys them
Knowing where a category is in its life cycle today? Beepers?
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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 vendors.

1. Variations in Category Life Cycles

See PPT 12-27
Variations on the category life cycle include
Ask students to name some fads, fashions, and
fads, fashions, staples, and seasonal
seasonal products.
merchandise.
Ask them how they should manage their
A fad is a merchandise category that inventories differently.
generates a lot of sales for a relatively short
time--often less than a season.

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.

A fashion is a category of merchandise that

typically lasts several seasons, and sales can
vary dramatically from one season to the
next.

Items within the staple merchandise

category are in continuous demand over an
extended period of time.

B. Forecasting Staple Merchandise

Categories

The sales of staple merchandise are

relatively stable from year to year. Thus,
Ask students to consider uncontrollable factors
forecasts are typically based on
that might influence the sales of staple
extrapolating historical sales. Then,
merchandise. How many can be identified?
statistical techniques can be used to forecast
future sales.

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.

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

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

Buyers for fashion merchandise categories

need to be aware of trends that can affect See PPT 12-31
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

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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 4. Vendors
See PPT 12-32
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.

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.

Another excellent source of customer

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

Some retailers maintain a want book in

which salespeople record out-of-stock or
requested merchandise.

Customer information can be collected

through traditional forms of marketing
research like depth interviews, and focus
groups.

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 more informal method of interviewing

customers is to require buyers to spend some
time on the selling floor waiting on
customers.

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.

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

Ask students to name retailers with good
next step in the merchandise management
variety/good assortment/good product
planning process is to develop an assortment
availability. Explain that it is difficult to be a
plan.
master at all three.
An assortment plan is a list of the SKUs that
a retailer will offer in a merchandise
category. The assortment plan thus reflects A sample Assortment Plan for Girls Jeans is
the variety and assortment that the retailer shown in PPT 12-34
plans to offer in a merchandise category.

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

Some stores carry a large variety of

categories, while others carry a much more
limited number.

Assortment is the number of SKUs within a

category. Stores with large assortments are Ask students to give examples of stores with large
said to have good depth. assortments and those with narrow assortments.

Some stores carry a large assortment, while

others carry a narrower assortment.

Service retailers also make assortment

decisions.

In the context of merchandise planning, the

concepts of variety and assortment are

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 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.
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.

1. Retail Strategy

The number of SKUs to offer in a

merchandise category is a strategic decision.

The breadth and depth of the assortment in a

merchandise category can affect the
retailers brand image.

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.

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.

The more SKUs offered, the greater the

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 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.

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

A model stock plan is a summary of the

typical store inventory support for a
merchandise category.

The retailer might have a model stock

plan for each type in a merchandise
category and for different store sizes.

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

Why does inventory investment increase so fast as

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 of demand for a particular SKU that is product availability goes up? Because of safety
satisfied. The higher the product availability, stock-- a retailer must carry more and more safety
the higher the amount of back-up stock stock to satisfy increasing levels of demand..
necessary to ensure that the retailer won't be
out of stock on a particular SKU when the
customer demands it. When using a Quick Response inventory system,
product availability can increase and inventory
Although the actual inventory investment investment actually stays the same or decreases.
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.

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.

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.

Several factors need to be considered to

determine the appropriate level of buffer
stock and thus the product availability for
each SKU.

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.

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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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 timeoften 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 dont 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.

2. 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 dont 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.

3. Simply speaking, increasing inventory turnover is an important goal for a retail manager.
What are the consequences of turnover thats 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.

4. 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.

5. 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 categorys
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.

6. 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 dont want to be out
of any size of jeans or khakis. You can even special-order out-of-stock or hard to find sizes.

7. 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%.

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

9. 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 Nikes 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

Instructors 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 products 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 Presidents 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.

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Instructors 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 firms 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 categorys 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 mens 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 buyers 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 buyers 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 dont have the merchandise. Who caused the problem?
Was it because the buyer didnt 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 doesnt 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 firms
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 retailers 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 womens 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 retailers merchandising strategy quickly
and continuously. Many retailers can determine how a particular SKU, or category is doing minute-by-
minute, 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 Key Issues in the External Environment

France & High levels of regulations limiting store development
Germany
China Economy is growing at an amazing pace and rapid modernization in
the retail sector
Japan Banking crisis, deflation, access to capital is difficult for growth
Mega retailer chains are entering and this will transform Japanese
retailing
Latin America 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
United States 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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