Merchandise Management

MODULE 3

MARCHANDISE MANAGEMENT

The American Marketing Association has defined merchandising as “The planning involved in
marketing the right merchandise at the right place, at the right time and at the right quantities at
the right place.”

It is the sequence of various activities performed by the retailer such as planning, buying and
selling of products to the customers for their use. It aims at internal planning internal planning
relating to the products and services. It covers everything from the packaging of the product to
the way it is offered for sale. It involves the whole range of activities that can be used to increase
the sale of goods through retail outlet.

FACTORS AFFECTING BUYING FUCTION

1. Store display and presentation – it plays an important role in influencing the buying
decision of customers. It is the display of the stock that are attractive and passing
information in store. The store must have an attractive tendency to the consumer and the
creative display encourages one to buy a product.
2. Ambience – The store ambience pays important role in attracting the customers to buy a
product. The ambience should be clean having goods smell and light, music.
3. Customer treatment – Warm treatment is an effective way to pull the customer’s into the
store. The retailer need to treat the customer is like a king. The treatment may taken
different ways
• To identify the needs and wants if customers.
• Assist them in shopping
• Find out what they expect from the store
• Give correct feedback, product, services etc.
4. Store Design and layout – A customer would never prefer shopping from a store which g
are scattered so the retailer. So the retailer should provide enough space, put stickers and
labels, providing parking space, don’t stock unnecessary furniture and fixtures.
5. Other factors
• The level of satisfaction
• Services
• Discount and Rebates
• Promotional Schemes

Merchandise planning

Merchandise planning is defined as “Planning and control of merchandise inventory of the retail
firm, in a manner, which balances between the expectation of target customer and strategy of
firm”.

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PROCESS OR STEPS IN MERCHANDISNIG PANNING

1. Developing Sales forecast – Sales forecast is the projection of achievable sale revenue
based on historical sale data, analysis of market surveys and trends and sales estimate.
A sales forecast may be made by the merchandiser to fulfill the following questions
• How much of each product will need to be purchased.
• What price should be charged for the product
The process of developing sales forecast involves the following steps
a) Reviewing past sales – The review of past records will help to establish if there is any
pattern or trend in the sales figure.
b) Analyzing the changes of economic condition – It is necessary to take into account the
changes happening at the economy as this has a direct link in the consumer spending
patterns. Economic slowdown, increase in unemployment etc will affect the business.
c) Analyzing the changes in marketing strategies of the retail organization and competitors
– while creating the sales forecast it is necessary to consider the marketing strategy to be
adopted by the organization and the competitors.
d) Creating the sales forecast – An estimate of the projected increase in sales is arrived.
This is then applied to the various products or categories to arrive at the estimated sales
figure.
2. Determining the merchandise requirement – Planning is essential to provide direction
and serve as a basis of control of any merchandise department. In order to be able to
provide the right goods to the consumer at the right place and time one need to plan
a course of action
The retailer has to create a merchandise budget - It is a financial plan which gives an
indication of how much to invest in product expressed in monetary terms.
The merchandise budget usually comprises of 5 parts
• The sales plan – how much of ach product needs to be sold.
• The stock support plan – which tells us how much of inventory or stock is needed
to achieve these sales.
• The planned reduction – which may need to be made in case the product does not
sell
• The planned purchase level – the quantity of each product that needs to be
procured from the market
• Gross market – the difference between sales cost of goods sold that the
department or store contributes to the overall profitability of the company.
3. Merchandise control (the open to buy)- It is a retail inventory management tool that
help to find out how much inventory you need to buy on a monthly basis. It is a guide for
the amount of money you have to spend. It is for the purpose of
• Maximum and minimum level of buying
• Prevents loss of sale due to the unavailability of required stock

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• Maintains purchase within the budgeted limits.

4. Assortment planning – It has been defined by Van Herpen “ as the combination of all
product made available in a stock and a set of products offered within a product
category”
It involves determining the quantities of each product that will be purchased to fit into the
overall merchandise plan. Details of color, size, materials, brand etc have to be specified.
The main purpose of assortment plan is to create a balanced assortment of merchandise
for the customer.
5. The range Plan – the aim of the range plan is to create balanced range for each category
of products that the retailer chooses to offer. Good range plan should essentially take care
of the following
• The number of items / options available to the customer should be sufficient all
the times and should be such that it helps the customer to make a choice.
• Sufficient quantities of the product should be available.
6. The Model stock plan – After determining the money available for buying, a decision
need to be taken on what to buy and in what quantity. This result in the creation of model
stock plan. A model stock plan gives the precise item and quantities that needs to be
purchased for each merchandise.

Components of Merchandise Planning:

(1) Product:
Product or merchandise is the basic component of marketing mix. Retailer has to cater to the
products that are expected by his segments. He has to maintain adequate inventory of product
category expected by his customer.
Products may be broadly classified into:
• Staple- Like food and clothing that have regular demand. Adequate stock of that is to be
maintained.
• Seasonal products- that are in demand during the season. Adequate inventory of that is to
be augmented before the season and the stock is to be maintained to sustain the season.
• Fashions- Goods that are in demand until the fashion prevails. Retailer has to estimate the
quantum of demand to last the fashion trend.
• Fads- the kind of products that have limited period of demand. Retailer has to be careful
to estimate the demand and buy the fad products.
(2) Price:
This is another important component of marketing mix. Price is an important variable in a
country like India, where people are price sensitive. Retailer has to determine his segment and
the price range to which they belong. Broadly it can be classified as low, Medium and premium
range.
Retailer has to offer the product that meets price range of his target customers. Apart from this
retailer has to adopt different price strategies like Price Skimming, Mark up price, discounts

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price and offers like buy one and get one depending on demand for the goods and extent of
stock. The planning should be to offer an attractive price package that can result in regular sale,
stock clearance and assure adequate profits.
• Price Skimming − initially the product is charged at a high price that the customer is
willing to pay and then it decreases gradually with time.
• Discount Pricing − A product is priced at low cost if it is lacking some feature than the
competitor’s product
• Mark-up Pricing − The mark-ups are calculated as a percentage of the selling price and
not as a percentage of the cost price.
(3) Range:
Range refers to width, breadth and depth of products offered for sale. Customers should have
opportunity to make choice or selection depending on the type of retail store i.e.-
Specialty store specializes in limited width i.e., particular category (Bata, Raymond’s) But it
must have depth i.e., different designs, number, color, price-range etc., so that customer can
make choice. Departmental store which deals in long category of products must not only have
width, but also must have breadth (different brands) and depth.
A wide range of product demands more investment in merchandise. Retailer has to evaluate that
there is adequate return on investment made. Apart from this he has to ensure that merchandise is
acceptable and saleable. Buy and store that range of merchandise that can be sold.
(4) Assortment:
It refers to combination of products made available to customer at retail outlet. Merchandise is
assorted and presented category wise and department wise.
E.g. – Cosmetics, Toiletries, Electronics, Staples, Vegetable, Furniture etc., each category further
will have different products or different brands at different size and price level.
E.g. – Toothpaste, Shampoo, Soaps, etc., are presented in one category of different brands
companies and brands.
Retailer must make systematic assortment or classification. Goods of similar category must be
made available at one place. Items of electronics should not be placed along with vegetables.
Apart from this retailer must keep adequate SKU (Stock Keeping Unit) of each item of products.
He has to regularly monitor that enough number of merchandise is available for customer’s
choice. He has to ensure that such assortment of merchandise is convenient for customers to
select, and enough variety is available to choose from.
At the same time, he has to ensure that assortment stock is moving and there is better turnover.
He has to ensure that each line of product is contributing towards profit. The product line that is
not popular may be replaced with a new and more popular line.

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(5) Space:

Products should visible to visiting customer. Retailer have limited floor space, he should provide
adequate space for display of each product. Available space for display of each product is
utilized to showcase and presents goods, through different types of fixtures, hangers, gondolas,
mannequins, fridge depending on the nature, size, and dimension of goods.

Retailer will also decide merchandise hierarchy as to how space is to be created for various
categories of products. E.g. -Products may be classified as new arrivals, fads, fashions staples,
vegetable, electronics, furniture’s, kids etc.
Retailer has to priorities the place for different products:
i. He has to ensure that the products are visible.
ii. Customers have convenience and comfort in picking the products.

Merchandise sourcing

The term sourcing means finding or seeking out products from different places, manufacturers or
suppliers. The importance of sourcing in a retail environment can best be understood from the
fact that sourcing of merchandise is a key element of cost. In recent years, sourcing and supply
management has emerged as one of the greatest focus areas in the retail business, for suppliers as
well as for retailers. Sourcing is not without its risks, but at the same time, it holds the key to
improving service, product offer, and overall profitability. It enables the retailer to have winning
products. Negotiations and cost management play a key role and hence, it becomes necessary to
ensure that sourcing is well and truly integrated with the retailer’s overall business strategy, and
that sourcing activities closely follow the direction set by the overall business strategy.

PROCESS OF MERCHANDISE SOURCING (STEPS)

1) Identifying the sources of supply- The first decision that has to be faced is whether the
merchandise should be sourced from domestic or regional markets or from international
markets. This is largely related to the type of the retail organization, the product being
offered and the target consumer. Domestic source of supplying may be located by visiting
central market, trade shops etc. In addition to buying from domestic market an
organization may seek out foreign sources from where the merchandise can be purchased.
The prime reason for looking international sourcing could be uniqueness or unavailability
of merchandise in the domestic market.

2) Contacting and evaluating the sources of supply - Contacting source of supply may be
as simple as having a representative visit the office and met with the merchandise. This

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often termed as vendor initiative contact. The retailer initiate the contact as simple as
buyer visit the central market or manufacturing firm etc,. The prime factor which affects
these decisions is whether the merchandise offered by a vendor is compactable with the
needs and wants of customers. If the merchandise is not right the vendor should not be
considered.

Factors like ability to meet delivery schedules, adherence to quality procedure and the
terms offered, play an integral role in vendor selection services provided by the vendor
may be a deciding factor. These services include cooperative advertising, return or
exchange privileges, participation store promotion and willingness to use technology.

Once the source of supply is identified, the need to be evaluated. The evaluation criteria
would vary from retailers to retailers. Key factors which need to be kept in minds are;

*Suitability and quality of merchandise and the price that is going to be charged for the
merchandise.

*Delivery is an important factor in retail. The supplier’s ability to meet the requirements
of retailers in terms of supplying to the warehouse or distribution centers etc.

*Service that might to be provided by the supplies in terms of discount, promotions and
advertising.

3) Negotiating with vendors - The retail buyer they needs to negotiate the price ,delivery
dates, discounts, shipping terms and possibility of returns, while negotiating with the
vendors it is necessary to keeping minds the vendor history, his goals etc at the same time
the buyer needs to follow the conditions provided by the vendor. The buyer negotiates
with the vendor for different types of discount.

• Trade Discount – These are the reductions in the manufactures suggested reretail
price

• Quantity Discount – it is provided on the basis of quantity of purchase,

• Seasonal Discount – this is an additional discount offered as an incentive to

retailers in some special season

• Cash Discount – It is the reduction in the invoice cast, for paying the invoice
before the maturity date.

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Merchandise Management

4) Placing purchase order – After having complete negotiation and finalizing the rate , the
retailer now needs to formalize the order of purchase. This purchase order serves as a
contractual agreement between the buyer and seller > tye information contained in the
purchase order is :

a) Name of purchasing b) Delivery address c) Price of the product

d) Quantity ordered e) Delivery date f)Terms of payment

5) Establishing vendor relations – Retailers share information with their suppliers. They
both try to get the best deal. Now many retailers work with the suppliers as a team to
create a competitive advantage. When they work as a team, they share information which
is an important element. The right information collected from the people can be
communicated with the supplier.

6) Analyzing vendor performance – Each retailer will have his own criteria for selection
of vendors. A proper vendor analysis is necessary for evaluating vendor performance and
determining whether to continue with the same supplier or find out new one. Some key
criteria considered while analyzing vendor performance are right quality, quantity,
accurate delivery etc.

RETAIL PRICING

The price at which the product is sold to the end customer is called the retail price of the
product. Retail price is the summation of the manufacturing cost and all the costs that
retailers incur at the time of charging the customer.

FACTORS INFLUENCING RETAIL PRICES

Retail prices are affected by internal and external factors.
Internal Factors
Internal factors that influence retail prices include the following −
• Manufacturing Cost − The retail company considers both, fixed and variable costs of
manufacturing the product. The fixed costs does not vary depending upon the production
volume. For example, property tax. The variable costs include varying costs of raw
material and costs depending upon volume of production. For example, labor.
• The Predetermined Objectives − The objective of the retail company varies with time
and market situations. If the objective is to increase return on investment, then the

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company may charge a higher price. If the objective is to increase market share, then it
may charge a lower price.
• Image of the Firm − The retail company may consider its own image in the market. For
example, companies with large goodwill such as Procter & Gamble can demand a higher
price for their products.
External Factors
External prices that influence retail prices include the following −
• Competition − In case of high competition, the prices may be set low to face the
competition effectively, and if there is less competition, the prices may be kept high.
• Buying Power of Consumers − the sensitivity of the customer towards price variation
and purchasing power of the customer contribute to setting price.
• Government Policies − Government rules and regulation about manufacturing and
announcement of administered prices can increase the price of product.
• Market Conditions − If market is under recession, the consumers buying pattern changes.
To modify their buying behavior, the product prices are set less.
• Levels of Channels Involved − The retailer has to consider number of channels involved
from manufacturing to retail and their expectations. The deeper the level of channels, the
higher would be the product prices.

RETAIL PRICING OBJECTIVES

1. Profit-Objective

The retail store may price its product with the objective of maximizing profits in the short

Run or long run or both. The objective of profit maximisation must be studied carefully because

it may lead to unethical practices such as overcharging or deceiving the customers.

2. Market Share-Objective

The retailer or marketers may also price his product with the, intention of increasing his

market share, or stabilizing his market share. He can set the price of his product lower than that

of his competitors.

3. Competitor-Oriented Objective

The retailers or marketer may price his product to counter any existing or prospective

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move by his competitors. Retailer may deliberately price its merchandise low to discourage

potential retailer from entering the market, Advance the exit of the potential competitors and

marginal firms from entering the market, Spoil the market of retail competitors with the eye on

getting future benefits. With a low price, the marketer can prevent price-cutting by competitors.

At other times, the retailers may cooperate with his competitors by setting a common price

This practice is common among retailers of Beauty salons, Garment Retailers and Grocery etc.

4. Buyer-Oriented Objective

Another pricing objective adopted by retailer may be buyer-oriented The aim of such

pricing is to maintain socially acceptable prices and to be fair to customers Most of the five star

hotels stress on the kind of ambience and services extended by their hotel, as these are of prime

concern to their customers.

5. Government-oriented Objectives

The pricing of some products may be constrained by existing laws or may be influenced

by government action. The prices of petrol, grocery items, and vegetables in India are, to a large

extent, controlled and influenced by government action.

6. Product-Oriented Objectives

The retailers or marketers at times make their offerings more "visible" by means of

Pricing.Customers are usually attracted by the advertisements in newspapers highlighting special

offers and discounts .With a lower price, the retail store can therefore catch the attention o

buyers and this will help him to introduce new offerings, increase the sale of weak products etc.

Many of the retail stores in India such as Big Bazaar are using these pricing techniques.

RETAIL PRICING APPROACHES

There are three retail-pricing approaches based on the long-term objectives of the pricing

decision. They are-

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I. Discount Orientation

Here low prices are used as the major tool for competitive advantage wherein the store

portrays a low status image while profit margins are kept low to target price based customers.

The model works on high inventory turnover and lower operating costs. This is arguably the

most common model in India because of the low per capita income and price consciousness

2. At-the-market Orientation:

These kinds of stores normally set average prices. It offers solid service, a nice

atmosphere to the shoppers, margins are average to good, and it stocks moderate to above quality

products. Since this model caters to the middle class, it has a huge target market .Westside in

India focuses on providing value for money merchandise for the entire family along with an

international shopping experience. The private label of the company gives it the flexibility of a

wide range of merchandise and also has the advantage of generating better margins for the
company.

3. Upscale Orientation:

Here competitive advantage is derived from the prestigious image of the store. The profit

margins per unit are high, but coupled with higher operating costs and lower inventory turnover.

These stores usually stock distinctive product offerings and provide high quality service,

building up customer loyaty. The products stored generally go with the image of the store.

It may be appropriate in situations of inelastic demand in which an organisation decides to keep

its

prices high. E.g. Rolex watches

RETAIL PRICING STRATEGIES

The pricing strategies that can be followed include:

1. Every Day Low Pricing (EDLP)

EDLP has been popularized by large international retailers like Wal-Mart and Home Depot.

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This strategy demands stability of retail prices below MRP (maximum retail price)-mentioned

the goods i.e. at a level somewhere between the regular price at which the goods are sold and the

deep discount price offered when a sale is held In India . Any co-operative stores have adopted

this strategy. One store that uses EDLP is Big Bazaar. Here, goods are either sold below their

normal prices, or some sales promotion scheme is available.

2. High/Low Pricing

In High/Low pricing, retailers offer prices that are sometimes above their competitions

ELDP, but they use advertisements to promote frequent sales. Nowadays, retailers also use sales

to respond to increased competition and a more value-conscious customer.

3. Leader Pricing:

Retailers sometimes price particular fast moving products at a lower price to attract

customers to the store. For example: A grocery retailer can sell eggs cheaper than other

competing stores so that customers consider him while purchasing food stuff since the customer

is also likely to buy milk, bread, flour etc along with eggs, these products are priced slightly

higher. So, the profit foregone on eggs is more than recovered on other items of groceries

4. Skimming Pricing

Price skimming is a pricing strategy in which a retailer sets a relatively high price for a

product or service at first and then lowers the price over time. It allows the firm to recover its

sunk costs quickly before competition steps in and lowers the market price.

However there are some potential problems with this strategy such as the inventory turn rate

can be very low for skimmed products. Skimming encourages the entry of competitors. When

other retailers see the high margins available in the industry, they may decide to quickly enter.

The retailer could gain negative publicity if he lowers the price too fast and without significant

changes in product profile.

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5. Penetration Pricing:

Penetration pricing is the pricing technique of setting a relatively low initial entry price, a

price that is often lower than the eventual market price. The expectation is that the initial low

price will secure market acceptance by breaking down existing brand loyalties Penetration

pricing is most commonly associated with the marketing objective of increasing market share or

sales volume, rather than short term profit maximization.

6. Price Lining

Price lining refers to the offering of merchandise at a number of specific but,

predetermined prices. Once set, the prices may be held constant over a period of time, and

changes in market conditions are adapted to by changing the quality of the merchandise.

7. Psychological Pricing

Psychological pricing is a method of setting prices intended to have special appeal to

consumers. This can be conducted in several ways to name a

• Prestige Pricing
• Reference Pricing
• Traditional Pricing
• Odd-Even Pricing
8. Multiple Unit Pricings

Retailers use multiple unit pricing to encourage additional sales and to increase profits The

gross margin that is sacrificed in a multiple unit sale is more than off-set by its savings that

occur from reduced selling and handling expenses.

9. Bundle Pricing:

It is the practice of offering two or more different products or services at one price. Price

bundling is used to increase both unit and rupee sales by bringing traffic into the store .It can also

be used to sell less desirable-merchandise by including it in a package with a product of great

demand.

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10. Pre-emptive Pricing

Pre-emptive pricing is a strategy which involves setting low prices in order to discourage

or deter potential new entrants, to the retailers market, and is especially suited to markets in

which the retailer does not enjoy any market privilege and entry to the market is relatively

Straightforward

11. Extinction Pricing

Extinction pricing has the overall objective of eliminating competition, and involves setting

very low prices in the short term in order to under-cut competition, or alternatively keep away

potential new entrants. The extinction price may, in the short term, be set at a level lower even

than the suppliers own cost of production, but once competition has been extinguished prices are

raised to -profitable levels.

12. Perceived-value Pricing

A method of pricing in which the seller attempts to set price at the level that the intended

buyers value the product. It is also called value-in-use pricing or value-oricnted pricing. If the

perceived value is high the retailer can charge a premium price for the product.

13. Demand-Oriented Pricing

A method of pricing in which the seller attempts to set price at the level that the intended

buyers are willing to pay. It is also called value-in-use pricing or value-oriented pricing.

14. Fixed and variable Pricing:

Most firms use a fixed price policy i.e. they examine the situation, determine an appropriate

price, and leave the price fixed at that amount until the situation changes, at which point they go

through the process again. The alternative has been variable pricing, a form of first degree price

discrimination, characterized by individual bargaining and negotiation, and typically, used for

highly differentiated items, like real estate, unbranded garments, fresh vegetables and fruits etc.

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IMPLICATIONS OF MERCHANDISE PLANNING

The primary objective of merchandise planning is profit improvement. As the buyer plans the
buying for each department, a better overview is available of the profitability that the retail
organization is able to achieve. As the function of merchandising deals with the actual
procurement of products for retailers it has implications on other areas of business.

The entire process of merchandise panning helps the buyer to arrive at they quantities of the
product that need to be brought. It therefore has the following implications on otherdepartment.

1. Finance – At the end of merchandise planning process, when the purchase order (PO) is
raised on a particular supplier, the finance department neds to be informed about it as they
are finally the one who will be making the payments. Finance will also look into the
evaluation of the profitability of the merchandise purchased.
2. Marketing (Advertisement and sales promotion) – this dept needs to be aware of the
products that are being purchased as they may want to create campaigns for advertising the
products for sales promotion.
3. Warehousing and logistics (merchandise receiving and verification) -in many
organizations these functions may be handled by one department. When orders are placed
for new merchandise this dept need to know as this is the one that has actually receive and
do the physical verification .
The quantities mentioned in the purchase order need to be tallyed with the quantities actually
received. Any difference have to be informed to the respective depts . The departments also
need to know the dispatch details of all the products that are received (quality, quantity,
colour, size)
4. Store Operations (Space Planning and avoid duplication) – the information on the
merchandise being purchased need to be communicated to the retail store. In case of the new
product, the features also need to be communicated. Information on the merchandise to be
received in the stores also help in space planning in the retail store. In case the store has the
authority to make purchase at the local level, it would help by ensuring that duplication of
products does not happens.

EVALUATING MERCHANDISE PERFORMANCE

Measuring the performance of merchandise is necessary in order to gain an understanding of the

products which have performed well and which have not performed as per the target.
The performance can be as per plan, below the plan or above the plan.

Three methods are commonly employed to analyze the performance of merchandise.

These are:
(1) ABC Analysis:

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The ABC analysis sometimes known as Always Better Control is an inventory classification
process where total inventory is classified into three categories:
A – Outstandingly important;

B – Of average importance and

C – Relatively unimportant as a basis for a control scheme.

Each firm whether small or big has to maintain several types of inventories. Some are small in
size but are costly ones, some large in size but have less cost. It is never advisable to keep the
same degree of control on all the items. The firm should pay maximum attention to those items
which are costly and less attention to those which are cheaper. Therefore, firm should be
selective in its approach to control investment in various types of inventories. This logical
approach is known as ABC analysis and tends to measure the importance of each item of
inventories in terms of its value.

(2) Sell Through Analysis:

This method describes the comparison between the actual and forecasted sales volume to
determine whether early markdowns should be applied or fresh order for additional merchandise
should be given to satisfy current demand. There is no universal rule to indicate when a
markdown should be introduced or additional stock of merchandise be ordered. It simply
depends on the experience with the merchandise; a buyer has in the past year.

(3) Multi-Attribute Method:

This method is used to analyze the- various alternatives available with regard to vendors and
select one that best satisfies store needs. This method is based on the concept that customers look
a retailer or a product as a collection of features and attributes.

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