Category Management and Merchandise Planning: Nptel

Category
Management and
Merchandise Planning
EL
PT
Dr. Swagato Chatterjee
N
VGSOM, IITKGP
3/4/2022 Retail Marketing: Prof Swagato Chatterjee 1
Category Management
• Category management is a merchandising technique
used to improve productivity.
• It is a way to manage a retail business that focuses on
EL
the performance of product category results rather
than individual brands.
PT
• It arranges product groupings into strategic business
N
units to better meet consumer needs and to achieve
sales and profit goals.
• Retail managers make merchandising decisions that
maximize the total return on the assets assigned to
them.
EL
PT
N
EL
PT
Implementing Merchandise Plans
N
Implementing Merchandise Plans
EL
PT
N
Checklist in Choosing Vendors
EL
PT
N
Negotiating the Purchase
• Special considerations
• Opportunistic buying— due to closeouts,
EL
bankruptcies, overstocks, cancelled orders, lack of a
PT
N
well balanced assorted lot sizes and colors
• Slotting allowances—common for new products in
supermarkets in Northeast and in freezer sections
Thank You
EL
PT
N
Retail Promotions
EL
PT
N
VGSOM, IITKGP
Elements of the Promotional Mix
• Advertising
• Public Relations
EL
• Personal Selling
PT
• Sales Promotion
N
Advertising
• Paid, non personal
communication transmitted
through out‐of‐store mass
media by an identified
EL
sponsor
PT
• Key aspects
• Paid form N
• Non‐personal presentation
• Out‐of‐store mass media
• Identified sponsor
• Lift short‐term sales
• Increase customer traffic
• Develop and/or reinforce a retail
EL
image
PT
• Inform customers about goods and
services and/or company attributes
N
• Ease the job for sales personnel
• Develop demand for private brands
Advertising Characteristics
Advantages
• Attracts a large audience
• Gains pass along readership (for
print)
EL
• Low cost per contact
PT
• Many alternatives available
• Control over message content;
message can be standardized N
• Message study possible
• Editorial content surrounds ad
• Self‐service operations possible
Disadvantages
• Standardized messages lack flexibility
• Some media require large
investments
• Geographic flexibility limited
EL
• Some media require long lead time
PT
• Some media have high throwaway
rate
• Some media limit the ability to
N
provide detailed information
Advertising Media Comparison Chart
Medium Market Coverage Particular Suitability
Daily Papers Single community or entire All larger retailers
metro area; local editions may
be available
EL
Weekly Papers Typically a single community; Retailers with a strictly local
may be a metro area market
PT
Shopper Papers Most households in one Neighborhood retailers and
N
community; chain shoppers can service businesses
cover a metro area
Phone Directories Geographic area or All types of goods and
occupational field served by the service‐oriented retailers
directory
Direct Mail Controlled by the retailer New and expanding firms,
those using coupons or
special offers, mail order
Radio Definable market area Retailers focusing on
surrounding the station identifiable segments
EL
TV Definable market area Retailers of goods and
surrounding the station services with wide appeal
PT
World Wide Broad, even global All types of goods and
Web
Transit Urban or metro community
N service‐oriented retailers
Retailers near transit
served by transit system routes, especially those
appealing to commuters
Outdoor Entire metro area or single Amusement and tourist‐
neighborhood oriented retailers, well‐
known firms
Local Magazines Entire metro area or region; Restaurants,
zoned editions sometimes entertainment‐oriented
EL
available firms, specialty shops,
mail‐order firms
PT
Flyers/ Circulars Single neighborhood Restaurants, dry cleaners,
service stations, and
N other neighborhood firms
Social Media Broad, even global All types of goods and

service‐oriented retailers
Mobile in‐app Local and geo‐targeted areas All types of goods and
advertising service‐oriented retailers
Types of Advertising
EL
PT
N
Planning a Cooperative Strategy
• What ads qualify in terms of merchandise and special
requirements?
• What percentage of advertising is paid by each party?
EL
• When can ads be run? In what media?
PT
• Are there special provisions regarding message
content? N
• What documentation is required for reimbursement?
• How does each party benefit?
• Do cooperative ads obscure the image of individual
retailers?
N
PT
EL
Public Relations
• Public Relations – Communication that fosters a
favorable image for the retailer
• Non personal or personal
EL
• Paid or nonpaid
PT
• Sponsor‐controlled or not
N
• Publicity – Nonpersonal form of public relations
whereby messages are transmitted by mass media.
The time or space provided by the media is not paid
for, and there is no identified commercial sponsor
Public Relations Objectives for Retailers
• Increase awareness of the retailer and its strategy
mix
• Maintain or improve the company image
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• Show the retailer as a contributor to the public’s
PT
quality of life
• Demonstrate innovativeness
N
• Present a favorable message in a highly believable
manner
• Minimize total promotion costs
Public Relations Characteristics
Advantages Disadvantages
• No costs for message’s time or • Some retailers do not believe
space in spending on image‐related
communication
• Mass audience addressed
• Little control over publicity
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• Carryover effects possible
message
PT
• More credible source
• More suitable for short run
• Image can be presented or
enhanced
N
• Costs for PR staff, planning
activities and events
• People pay more attention
than to clearly identified ads
Personal Selling
Oral communication with one or more prospective customers for the
purpose of making a sale
EL
PT
N
Personal Selling Objectives for Retailers
• Persuade customers to buy
• Stimulate sales of impulse items or products
related to customers’ basic purchases
EL
• Complete customer transactions
PT
• Feed information back to company decision
makers N
• Provide proper levels of customer service
• Improve and maintain customer satisfaction
• Create awareness of items also marketed through
the Web, mail, and telemarketing
Personal Selling Characteristics
• Message can be adapted • High costs
• Many ways to meet • Doesn’t get customer in
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customer needs store
PT
• High attention span • Self‐service discouraged
• Less waste N
• Limited number of
customers at one time
• Better response
• Immediate feedback • Negative attitudes toward
salespeople
Sales Promotion
• Encompasses the paid communication activities other
than advertising, public relations, and personal selling
that stimulate consumer purchases and dealer
effectiveness
EL
PT
N
Types of Sales Promotions
• Displays • Prizes
• Contests • Samples
• Sweepstakes • Demonstrations
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• Coupons • Referral gifts
PT
• Frequent shopper • Other limited‐time selling
programs efforts
N
Sales Promotions Objectives for Retailers
• Increasing short‐term sales volume
• Maintaining customer loyalty
• Emphasizing novelty
EL
PT
• Complementing other promotion tools
N
Sales Promotion Characteristics
• Eye‐catching appeal • Difficult to terminate
• Distinctive themes • Possible damage to
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• Added customer value retailer’s image
PT
• Draws customer traffic • More stress on frivolous
• Maintains loyalty N selling points
• Increases impulse • Short‐term effects only
purchases
• Fun for customers
• Used as a supplement
EL
PT
N
Advantages of Coupons
• Manufacturers may pay to advertise and redeem them
• Over 80% of consumers redeem coupons at least once during the
year
EL
• They contribute to the consumer’s perception of getting a good value
PT
• Coupon redemption can serve as a measure of advertising
effectiveness N
Planning a Retail Promotional Strategy
EL
PT
N
Promotional Objectives
• Increase sales
• Stimulate impulse and reminder buying
• Raise customer traffic
• Get leads for sales personnel
EL
• Present and reinforce the retailer image
PT
• Inform customers about goods and services
• N
Popularize new stores and Web sites
• Capitalize on manufacturer support
• Enhance customer relations
• Maintain customer loyalty
• Have consumers pass on positive comments
Procedures for Setting a Promotional Budget
• All‐you‐can‐afford method
• Incremental method
• Competitive parity method
EL
PT
• Percentage‐of‐sales method
• Objective‐and‐task methodN
Selecting Promotion Mix and The
Hierarchy of Effects
EL
PT
N
Implementation Decisions
• Media
• Timing
• Content
EL
PT
• Makeup of Sales Force
• Sales Promotion Tools N
• Responsibility for Coordination
Media Rates (CPM) and Costs
Cost per page  1,000
Cost per thousand 
Circulation
EL
PT
Cost per page  1,000
Cost per thousand (target market) 
N Target market
Thank You
EL
PT
N
HR Issues in Retail
EL
PT
N
VGSOM, IITKGP
Factors in Planning and Assessing a Retail
Organization
• Target market needs
• Employee needs
• Management needs
EL
PT
N
Planning and Assessing a Retail Organization
• Target Market Needs
• Are there sucient personnel to provide appropriate customer service?
• Are personnel knowledgeable and courteous?
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• Are store facilities well maintained?
PT
• Are the specific needs of branch store customers met?
• Are changing needs promptly addressed?
N
Planning and Assessing a Retail Organization
• Employee Needs
• Are positions challenging and satisfying enough?
• Is there an orderly promotion program from within?
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• Is the employee able to participate in the decision making?
PT
• Are the channels of communication clear and open?
• Is the authority‐responsibility relationship clear?
•
N
Is each employee treated fairly?
• Is good performance rewarded?
Planning and Assessing a Retail Organization – Management
Needs
• Management Needs
• Is it relatively easy to obtain and retain competent personnel?
• Are personnel procedures clearly defined?
• Does each worker report to only one supervisor?
• Can each manager properly supervise all the workers reporting to him or her?
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• Do operating departments have adequate staff support (e.g., marketing
PT
research)?
• Are the levels of organization properly developed?
N
• Are the organization’s plans well integrated?
• Are employees motivated?
• Is absenteeism low?
• Is there a system to replace personnel in an orderly manner?
• Is there enough flexibility to adapt to changes in customers or the
environment?
The Process of Organizing a Retail Firm
EL
PT
N
Division of Tasks in a Distribution Channel
Performer Tasks
Retailer Can perform all or some of the tasks in the distribution channel,
from buying merchandise to coordination.
Manufacturer or Can take care of few or many functions, such as shipping,
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Wholesaler marking merchandise, inventory storage, displays, research, etc.
PT
Specialist(s) Can undertake a particular task: buying oce, delivery firm,
warehouse, marketing research firm, ad agency, accountant,
Consumer
N
credit bureau, computer service firm.
Can be responsible for delivery, credit (cash purchases), sales
effort (self‐service), product alterations (do‐it‐yourselfers), etc.
Grouping Tasks into Jobs
Tasks Jobs
Displaying merchandise, customer contact, gift wrapping, Sales personnel
customer follow‐up
Entering transaction data, handling cash and credit purchases, Cashier(s)
gift wrapping
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Receiving merchandise, checking incoming shipments, marking Inventory personnel
PT
merchandise, inventory storage and control, returning
merchandise to vendors
N
Window dressing, interior display setups, use of mobile displays
Billing customers, credit operations, customer research
Display personnel
Credit personnel
Merchandise repairs and alterations, resolution of complaints, Customer service personnel
customer research
Cleaning store, replacing old fixtures Janitorial personnel
Employee management, sales forecasting, budgeting, pricing, Management personnel
coordinating tasks
A Job Description for a Store Manager
EL
PT
N
Principles for Organizing a Retail Firm
• Show interest in employees
• Monitor employee turnover, lateness, and absenteeism
• Trace line of authority from top to bottom
EL
PT
• Limit span of control
• Empower employees N
• Delegate authority while maintaining responsibility
• Acknowledge need for coordination and communication
• Recognize the power of informal relationships
Organization Structures Used by Small
Independents
EL
PT
N
Mazur Plan
• Merchandising—buying/selling, stock planning,
• Publicity—displays, event planning, advertising research
• Store management—customer service, merchandise protection,
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receiving
PT
• Accounting and control—credit, expense budgeting, inventory
management N
The Basic Mazur Organization Plan for Department Stores
EL
PT
N
Chain Retailer Organizations
• Centralized functional divisions– real estate, distribution, human
resources (top management)
• Elaborate information system and management controls
EL
• Centralization of much of buying with room to adapt to local markets
PT
N
Department Store Organization Formats
• Main store control– flagship executives oversee store units. Extreme
centralization
• Separate store organization—each store buys for itself and maintains
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sales responsibility
PT
• Equal store organization– buying is centralized; branch stores are
sales units N
Equal‐Store Organizational Format Used by Chain Stores
EL
PT
N
The Organizational Structure of Kroger
EL
PT
N
Thank You
EL
PT
N
HR Issues in Retail
EL
PT
N
VGSOM, IITKGP
Human Resource Management in Retailing
• Recruiting
• Selecting
• Training
EL
PT
• Compensating
• Supervising N
Direct and Indirect Costs of Employee
Turnover
• Direct Costs include: separation costs, exit interviews, replacement
costs (advertising, screening, new employee orientation) and training
costs
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• Indirect costs include: customer dissatisfaction, reduced suggestion
PT
selling, pricing errors, reduced morale among co‐workers
N
True Cost of Employee Turnover
• Costs of using fill‐in employees
• Severance pay for exiting employees
• Costs of hiring new employees
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• Training costs
PT
• Costs of mistakes and lower productivity while new
employees gain experienceN
• Customer dissatisfaction due to the loss of prior
employees and the use of inexperienced workers.
• Lower continuity among co‐workers.
• Poor employee morale when turnover is high.
Women in Retailing
• Issues to address with regard to female workers
• Meaningful training programs
• Advancement opportunities
EL
• Flex time: the ability of employees to adapt their hours
PT
• Job sharing among two or more employees who each work less than full time
• Child care
N
• Retailing empires
• Mary Kay
• Avon
Minorities in Retailing
• Issues to address with regard to minority workers
• Clear policy statements from top management as to the value of employee
diversity
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• Active recruitment programs to stimulate minority applications
• Meaningful training programs
PT
• Advancement opportunities
N
• Zero tolerance for insensitive workplace behavior
Diversity
Two premises:
1. That employees be hired and promoted in a fair and open way, without regard
to gender, ethnic background, and other related factors
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2. That in a diverse society, the workplace should be representative of such
diversity
PT
N
Labor Law Considerations
• Retailers must not
• Hire underage workers
• Pay workers “off the books”
EL
• Require workers to engage in illegal acts
PT
• Discriminate in hiring or promoting workers
• Violate worker safety regulations
•
N
Disobey the Americans with Disabilities Act
• Deal with suppliers that disobey labor laws
Other Aspects
• Training
• Motivation
• Compensation
EL
PT
N
Thank You
EL
PT
N
Vendor Negotiations
EL
PT
N
VGSOM, IITKGP
What do Buyers do at Market?
• Meet with vendors
• Discuss performance of vendor’s merchandise during
the previous season
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• Review the vendor’s offering for the coming season
PT
• May place orders for the coming season
N
• Sometimes they do not buy at market, but review
merchandise, return to their offices to discuss with
the buying team before negotiating with vendors
Negotiating with Vendors
Two‐way communication
designed to reach an
agreement when two
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parties have both shared
and conflicting interests.
PT
N
Planning Negotiations
• Consider prior history
• Assess current situation
• General market conditions
• Vendor’s position
EL
• Power of vendor
PT
• Set goals
• Be aware of vendor’s goal’s N
• Number of people involved
• Select an advantageous place
• Be aware of deadlines
Issues to Negotiation
Price and gross margin
Additional markup opportunities
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Purchase terms
PT
Delivery times and exclusivity
Advertising allowances N
Transportation
Types of Negotiations
Vendor
Win Lose
EL
Win
PT
Buyer
N
Lose
Guidelines for Negotiations
• Separate people from problem
• Insist on objective criteria to evaluate performance
• Invent options for mutual gain
EL
• Let the other party do the talking
PT
• Know how far to go N
Negotiating Tips
• Be aware of time
• Location ‐‐ comfortable
• Keep negotiating participants even
EL
• Be patient
PT
N
• Let him/her mention a figure
• Don’t be afraid to say “no”
Negotiating Tips
• Don’t over negotiate
• Don’t assume
• Visualize the negotiation
EL
• Timing is everything
PT
N
• Always leave the door open
• Maintain self‐esteem
14‐9
Negotiation SUMMARY
Planning is critical
Knowledge is power
A person will only do what is right for him/her
EL
PT
N
Thank You
EL
PT
N
Special Merchandising
Contexts‐1
EL
PT
N
VGSOM, IITKGP
Functions Provided by Internet Exchanges
• Product Directories
• Use of Reverse Auctions
• Collaboration in Planning – CPRF
EL
PT
Software
N
• General Information about Trends
Online Reverse Auctions
• Why reverse?
• Vendors bid for buyer’s business
• Price falls
EL
• One buyer, multiple vendors
PT
N
B Reverse Auctions
S B
Reverse Auction
EL
B
PT
Traditional Auction
N S
S B
S
Reverse Auction Process
• Develop specification
• Select potential sources and invite them to auction
• Bidding for several hours
EL
• Select supplier
PT
N
Price Path on Open‐Bid Auction
EL
PT
N
Strategic (Partnering) Relationships
Retailer and vendor committed to maintaining
relationships over the long‐term and investing in mutually
beneficial opportunities
EL
PT
N
Strategic Relationships
Win – Win ‐‐Concerned about expanding the pie, not
how to divide the pie
EL
PT
N
Retailer vs. Vendor

Building Partnering Relationship
Discrete Partnering
• One Purchase at a Time • Anticipate Future
• Short‐Term • Long-Term
• Focuses on Price
EL
• Considers all Elements
PT
• Win‐Lose Negotiations • Win-Win Collaboration
N
• Governed by Contracts • Governed by Trust
Building Blocks for
Strategic Partnerships
Mutual Trust
EL
Open Communications
PT
Common Goals
N
Credible Commitments
•Stockbyte/Punchstock Images
Developing Trust:
Capability or Competence
Competence
Salespeople demonstrate
competence when they
can show that they know
EL
what they are talking
PT
about.
Requires knowledge of:

N
The customer
The product
The industry
The competition
(c) Digital Vision/PunchStock
Stages in Building Strategic Relationships
Awareness
EL
Exploration
PT
Expansion N
Commitment
Vendor Managed Inventory
• Manufacturer access to POS information
• Replenishment automatically triggered
• Enables demand‐based view of replenishment &
EL
production planning – reduce bull whip effect
PT
N
VMI—What it Lacked
• Focused on replenishment activity only
• Static‐model based (assumed fixed reorder points to
trigger replenishment)
• Often only moved inventory ownership rather than
EL
removing it
PT
• Incomplete information for decision making
N
• Vendor and retailers use different systems and data
bases
Collaborative Partnering Relationship ‐ CPFR
• Common goals
• A single demand forecast developed collaboratively
• Collaborative Promotional planning & execution
• A single, shared data source
EL
• Improved inventory management across entire
PT
Supply Chain
N
• Optimized replenishment strategies with joint
ownership
• Process simplicity creates optimal framework for
success
Legal and Ethical Issues
• Contractual Disputes • Gray Markets and
• Resale Price Maintenance Diverted
• Chargebacks Merchandise
• Commercial Bribery
EL
• Exclusive
PT
• Slotting Allowances Territories
• Buybacks N • Exclusive Dealing
• Counterfeit Merchandise
Commercial Bribery
• A vendor or its agent offers to give or pay a retail
buyer “something of value” to influence purchasing
decisions.
• A fine line between the social courtesy of a free
EL
lunch and an elaborate free vacation.
PT
• Rule of thumb ‐ accept only limited entertainment or
token gifts. N
Thank You
EL
PT
N
Special Merchandising
Contexts‐2
EL
PT
N
VGSOM, IITKGP
Chargebacks
• A practice used by retailers in which they deduct
money from the amount they owe a vendor.
• Two Reasons:
• merchandise isn’t selling
EL
• vendor mistakes
PT
• Can be a profit center
N
• one senior executive at a large department store chain was
told to collect $50 million on chargebacks
Slotting Allowances
• Fees paid by a vendor for space in a retail store.
• Currently aren’t legal.
• Retailers argue that they are a reasonable method
for ensuring that their valuable space is used
EL
efficiently.
PT
• Manufacturers view them as extortion.
N
• $9 billion or 16% of all new product introduction
costs in grocery industry.
Slotting Allowances
• Harvard School of Economics
• Give big suppliers competitive advantage over small
suppliers
• Drive small suppliers out of business, then raise prices
EL
• Anti‐competitive – adverse effect of social welfare
PT
• Chicago School of Economics – Free Market
• Improves market efficiency
N
• Resolve information asymmetry
Buybacks
• Used to get products into retail stores.
• Two scenarios:
• Retailer allows a vendor to create space for its goods by
EL
“buying back” a competitors inventory and removing it
from a retailer’s system.
PT
• Retailer forces a vendor to buyback slow‐moving
merchandise. N
Counterfeit Merchandise
• Goods made and sold without the permission of the
owner of a trademark, a copyright, or a patented
invention that is legally protected in the country where
it is marketed.
EL
• Major problem is counterfeiting intellectual property.
PT
N
What to do About Counterfeiters
• Trademark,copyright, and/or patent products in the
countries in which they’re sold.
• US government is engaged in bilateral and
EL
multicultural negotiations and education to limit
counterfeiting. (WTO)
PT
• Take steps to protect yourself.
N
Gray‐Market and
Diverted Merchandise
• Gray‐ Market Merchandise possesses a valid U.S.
registered trademark and is made by a foreign
manufacturer but is imported into the United States
without permission of the U.S. trademark owner.
EL
• Not Counterfeit.
PT
• Is legal.
N
• Diverted Merchandise is similar to gray‐market
merchandise except there need not be distribution
across international boundaries.
Gray‐market and Diverted
Merchandise: Taking Sides
• Discount stores argue customers benefit because it
lowers prices.
• Traditional retailers claim important service after
EL
sale will be unavailable
PT
• May hurt the trademark’s image.
N
Avoiding the
Gray‐Market Problem
• Require customers to sign
a contract stipulating that
they will not engage in
EL
gray marketing.
PT
• Produce different versions
of products for different
markets.
N
Exclusive Territories
• Granted to retailers so no other retailer in the
territory can sell a particular brand.
• Benefits vendors by assuring them that “quality”
retailers represent their products.
EL
• Assure retailers adequate supply.
PT
• Grants retailers a monopoly.
N
• Illegal when they restrict competition.
Exclusive Dealing Agreements
• Occur when a manufacturer or wholesaler restricts
a retailer into carrying only its products and
nothing from competing vendors.
• Illegal when they restrict competition.
EL
PT
N
Tying Contracts
• An agreement that requires the retailer to take a
product it doesn’t necessarily desire to ensure that
it can buy a product it does desire.
• Illegal when they lessen competition.
EL
• Ok to protect goodwill and quality reputation of
PT
vendor.
N
Ethical Issues
• Should a retailer sell merchandise that it suspect was made
using child labor?
• Should a retailer advertise its prices are the lowest available
in the market even though some items are not?
• Should a retail buyer accept an expensive gift from a vendor?
EL
• Should retail salespeople to use a high‐pressure sales
PT
approach when they know the product is the best for the
customer’s needs? N
• Should a retailer give preference to minorities when making
promotion decisions?
• Should a retailer treat some customers better than other
customers?
Guidelines
1. Would I be embarrassed if a customer found out about this
behavior?
2. Would my supervisor disapprove of this behavior?
3. Would most co‐workers feel that this behavior is unusual?
4. Am I about to do this because I think I can get away with it?
EL
5. Would I be upset if a company did this to me?
PT
6. Would my family or friends think less of me if I told them about
engaging in this activity? N
7. Am I concerned about the possible consequences of this behavior?
8. Would I be upset if this behavior or activity were publicized in a
newspaper article?
9. Would society be worse off if everyone engaged in this behavior or
activity?
Thank You
EL
PT
N
Store Layout in Retail
EL
PT
N
VGSOM, IITKGP
Store Layout: Allocation of Floor Space
• Selling space
• Merchandise space
• Personnel space
EL
PT
• Customer space
N
Product Grouping Types
• Functional product groupings
• Purchase motivation product groupings
• Market segment product groupings
EL
PT
• Storability product groupings
N
Straight Traffic Pattern
• An efficient atmosphere is • Impersonal atmosphere
created
• More limited browsing by
• More floor space is devoted to customers
EL
product displays
• Rushed shopping behavior
PT
• People can shop quickly
• Inventory control and security
are simplified N
• Self‐service is easy, thereby
reducing labor costs
How a Supermarket Uses a Straight (Gridiron)
Traffic Pattern
EL
PT
N
Curving Traffic Pattern
• A friendly atmosphere • Possible customer
• Shoppers do not feel confusion
rushed
• Wasted floor space
EL
• People are encouraged to
• Difficulties in inventory
PT
walk through in any
direction control
• Impulse or unplanned
N
• Higher labor intensity
purchases are increased
• Potential loitering
• Displays may cost more
Interior (Point‐of‐Purchase) Displays
• Assortment display
• Theme‐setting display
• Ensemble display
EL
PT
• Rack display
• Case display N
• Cut case
• Dump bin
Online Store Considerations
• Unlimited space to present • Can be slow for dialup
assortments, displays, and shoppers
information • Can be too complex
EL
• Can be customized to the • Cannot adequately display
PT
individual customer three‐dimensional aspects
• Can be modified frequently of products
• Can promote cross‐
N • Requires constant updating
merchandising and impulse • More likely to be exited
purchasing without purchase
• Enables a consumer to shop in
quickly
Increasing Shopping Time In‐Store
• Increasing amount of time a shopper spends in a store (excluding
waiting in a line)
• Experiential merchandising
EL
• Solutions selling
PT
• Co‐branding
• Enhanced shopping experience
N
• Wish list program
Community‐Oriented Actions
• Make stores barrier‐free for disabled shoppers
• Show a concern for the environment
• Support charities
• Participate in anti‐drug programs
EL
• Employ area residents
PT
• Run sales for senior citizens and other groups
N
• Sponsor Little League and other youth activities
• Cooperate with neighborhood planning groups
• Donate money/equipment to schools
• Check IDs for purchases with age minimums
Thank You
EL
PT
N
Retail Operations: Financial
Aspects
EL
PT
N
VGSOM, IITKGP
Operations Management
Operations management involves the efficient and
effective implementation of the policies and tasks
necessary to satisfy the firm’s customers, employees,
EL
and management (and stockholders, if a public
company).
PT
This has a major impacon both sales and profits.
N
Profit Planning
• Profit‐and‐loss (income) statement
• Summary of a retailer’s revenues and expenses over a
given period of time
• Review of overall and specific revenues and costs for
EL
similar periods and profitability
PT
N
EL
Balance Sheet vs PNL Statement
PT
N
The Strategic Profit Model
EL
PT
N
Increasing Profit Margins
• Increase sales of private label brands
• Centralize buying to increase bargaining power
• Reduce SKUs in each category to increase bargaining
EL
power
PT
• Reduce operating expenses via self‐service
N
operations, and through “buy on line, pick up in‐
store” to reduce delivery costs
• Increase Web sales
• Reduce labor expenses through increased use of part‐
time help, better scheduling
Increasing Asset Turnover
• 24/7 operations
• Outsource delivery and credit operations
• Lease instead of own assets (virtual corporation owns
EL
few assets)
PT
• Reduce inventory levels through quick response,
N
through reducing product proliferation, and through
drop shipping
• Utilize second‐use locations to reduce store renovation
expenses
• Utilize inexpensive fixtures—pipe rack, cut case displays
Other Key Business Ratios
• Quick ratio—cash plus accounts receivable divided by
total current liabilities (due within one year).
• Current ratio—total current assets (including inventory)
EL
divided by total current liabilities.
• Collection period—accounts receivable divided by net
PT
sales and then multiplied by 365. (Aging accounts
receivable). N
• Accounts payable to net sales—accounts payable divided
by annual net sales.
• Overall gross profit—net sales minus the cost of goods
sold and then divided by net sales.
Thank You
EL
PT
N
Budgeting and Costing
EL
PT
N
VGSOM, IITKGP
Funding Sources
• Mortgage refinance (due to low interest rates)
• REIT (retail‐estate investment trust) to fund construction
• Company dedicated to owning and operating income‐producing real estate
EL
• Initial public offering (IPO)
PT
N
Budgeting
• Budgeting outlines a retailer’s planned
expenditures for a given time based on expected
performance.
EL
• Costs are linked to satisfying target market,
PT
employee, and management goals.
N
The Retail Budgeting Process
EL
PT
N
Benefits of Budgeting
• Expenditures are related to expected performance.
• Costs can be adjusted as goals are revised.
• Resources are allocated to the right areas.
EL
• Spending is coordinated.
PT
• Planning is structured and integrated.
• Cost standards are set. N
• Expenditures are monitored during a budget cycle.
• Planned budgets versus actual budgets can be compared.
• Costs/performance can be compared with industry
averages.
Preliminary Budgeting Decisions
1. Specify budgeting authority
2. Define time frame
3. Determine budgeting frequency
EL
PT
4. Establish cost categories
5. Set level of detail N
6. Prescribe budget flexibility
Cost Classifications
• Capital expenditures—long • Operating expenses—
term investments (can be short run expenses
leased, often depreciated • Variable costs‐based on
• Fixed costs– constant over sales levels
EL
range of sales • Indirect expenses‐general
• Direct costs—can be traced overhead that can be
PT
to departments, stores, allocated to cost centers
products N
• Functional account
• Natural account expenses— expenses‐classified by
classified by name such as purpose or activity, such
salaries as cashiers, customer
service personnel;
Bad Costs
• Bad costs are costs incurred for customer services that:
• Customers do not value (will pay not additional prices for)
• Are not required by customers
EL
PT
N
Causes and Examples of Bad Costs (1
of 2)
Cause Example
Over‐centralizing stores Common hours of operation and
EL
operations services regardless of location needs
PT
Reducing all expenses on a Some services are more highly valued
proportionate basis N
like low waiting lines or custom‐made
sandwiches
Trading‐up to capture more Alienating existing customers and not
affluent customers attracting more affluent ones
Causes and Examples of Bad Costs (2
of 2)
Cause Example
EL
Not responding to changes in Ignoring Web– order on‐line and pick
consumer behavior due to up in‐store; using catalogs versus Web
PT
technology
N
Not responding to competition Not understanding low‐cost
competition, unbundled pricing
opportunities
Ongoing Budgeting Process
• Set goals
• Specify performance standards
• Plan expenditures in terms of performance goals
EL
PT
• Make actual expenditures
• Monitor results N
• Adjust budget
Cash Flow
• Cash flow relates the amount and timing of
revenues received to the amount and timing of
expenditures for a specific time.
EL
• In cash flow management, the usual intention is to
make sure revenues are received before
PT
expenditures are made.
N
• If cash flow is weak, short‐term loans may be
needed or profits may be tied up in inventory and
other expenses.
• For seasonal retailers, erratic cash flow may be
unavoidable.
Resource Allocation
Capital Expenditures Operating Expenditures
• Long‐term investments • Short‐term selling and
in fixed assets administrative costs in running
a business
EL
PT
N
Enhancing Productivity
• A firm can improve employee performance, sales
per foot of space, and other factors by better
matching employee workloads to store traffic
EL
patters, upgrading training programs, increasing
advertising, evaluating item profitability and
PT
turnover, etc.
N
• It can reduce costs by automating, having suppliers
perform certain tasks, etc.
Bankruptcy and Liquidations
• Bankruptcies allow retailers to safeguard themselves against
mounting debts, as well as to continue in business.
• With this protection, retailers can renegotiate bills, get out of leases,
EL
and work with creditors to plan for the future. Declaring bankruptcy
PT
has major ramifications. Sports Authority bankruptcy video
N
• Liquidations firms ultimately go out of business
Thank You
EL
PT
N
Financial Merchandise
Management
EL
PT
NVGSOM, IITKGP
1
Financial Merchandise Management
• A retailer specifies which products are purchased,
when products are purchased, and how many
products are purchased
EL
• Dollar control involves planning and monitoring a
PT
retailer’s investment in merchandise over a stated
period.
N
• Unit control relates to the quantities of goods a
retailer handles during a stated period.
2
Financial Merchandise Management
(2 of 2)
• Four aspects covered:
• Methods of accounting (inventory valuation)
• Merchandise forecasting and budgeting
EL
• Unit control systems
PT
• Financial inventory control
N
3
Benefits of Financial Merchandise Plans (1 of 2)
• The value and amount of inventory in each department and/or store
unit during a given period are delineated.
• Open to buy, the amount of merchandise a buyer can purchase during
EL
a given period can be calculated.
PT
• The inventory investment in relation to planned and actual revenues
is studied. N
• The retailer’s space requirements are partly determined by estimating
beginning‐of‐month and end‐of‐month inventory levels.
4
Benefits of Financial Merchandise Plans (2 of 2)
• A buyer’s performance is rated. Measures may be
used to set standards.
• Stock shortages are determined and bookkeeping
EL
errors and pilferage are uncovered.
PT
• Slow‐moving items are classified, leading to
N
increased sales efforts or markdowns.
• A proper balance between inventory and out‐of‐
stock conditions is maintained.
5
Inventory Accounting Systems
• The cost accounting system values merchandise at
cost plus inbound transportation charges
• The retail accounting system values merchandise
EL
at current retail prices
PT
N
6
ABC Hardware Store Profit‐and‐Loss Statement,
January 1, 2016‐June 30, 2016
Sales Blank $ 417,460
Less cost of goods sold: Blank Blank
Beginning inventory (at cost) $ 44,620 Blank
Purchase (at cost) 289,400 Blank
Transportation charges 2,600 Blank
EL
Merchandise available for sale $ 336,620 Blank
Ending inventory (at cost) 90,500 Blank
PT
Cost of goods sold Blank 246,120
Gross profit Blank $ 171,340
Less operating expenses: N Blank Blank
Salaries $ 70,000 Blank
Advertising 25,000 Blank
Rental 16,000 Blank
Other 26,000 Blank
Total operating expenses Blank 137,000
Net profit before taxes Blank $34,340
7
Physical Inventory System
• Ending inventory – recorded at cost. Is measured by counting the
merchandise in stock at the close of a selling period.
• Gross profit is not computed until ending inventory is valued.
EL
• Gross profit is derived during full merchandise count.
PT
N
8
Cost Method of Accounting
• The cost to the retailer of each item is recorded
on an accounting sheet and/or is coded on a
price tag or merchandise container.
EL
• Can be used with physical or book inventories:
PT
• Physical inventory – actual merchandise count
• Book inventory – recordkeeping
N
9
Applying FIFO and LIFO Inventory Methods to ABC
Hardware, January 1, 2016–December 31, 2016
EL
PT
N
10
Advantages of Cost‐Based Inventory Systems
• Keeps a running total of the value of all inventory
on hand and at cost at any given time.
• End‐of‐month inventory values can be more easily
EL
computed without the need for a physical
inventory.
PT
• Frequent financial statements can be prepared.
N
11
Disadvantages of Cost‐Based Inventory
Systems
• They require that a cost be assigned to each item in stock
• Do not adjust inventory values to reflect style changes,
EL
end‐of‐season markdowns, or sudden surges of demand
PT
N
12
ABC Hardware Store Perpetual Inventory System,
July 1, 2016‐December 31, 2016*
Net Monthly Monthly End‐of‐Month

Beginning‐of‐Month Purchases (at Sales (at inventory (at
Date Inventory (at cost) + cost) − cost) = cost)
EL
7/1/16 $ 90,500 + $ 40,000 − $ 62,400 = $ 68,100
8/1/16 68,100 + 28,000 − 38,400 = 57,700
PT
9/1/16 57,700 + 27,600 − 28,800 = 56,500
10/1/16
11/1/16
56,500
71,700
+
+
N
44,000
50,400
−
−
28,800
40,800
=
=
71,700
81,300
12/1/16 81,300 + 15,900 − 61,200 = 36,000
Blan Blan
Blank Blank Total $ 205,900 k $260,400 k (as of 12/31/16)
* Transportation charges are not included in computing inventory value in this table
13
The Retail Method
• Closing inventory is determined by calculating the
average relationship between the cost and retail
values of merchandise available for sale during a
EL
period. This is called the cost complement.
PT
• The cost complement is also used in open‐to‐buy
calculations N
14
Advantages of the Retail Method (1 of 2)
• Costs do not have to be decoded when conducting a
physical inventory
• Profit and loss statements can be prepared based on
EL
retail inventory values which are then converted into
costs
PT
• The retail method is acceptable for insurance claims
N
15
Determining Ending Inventory Value
• Calculating the cost complement
• Calculating deductions from retail value
• Converting retail inventory value to cost
EL
PT
N
16
ABC Hardware Store, Calculating Merchandise Available for
Sale at Cost and at Retail, July 1, 2016‐December 31, 2016
Blank At Cost At Retail

Beginning inventory $ 90,500 $ 139,200
EL
Net purchases 205,900 340,526
PT
Additional markups ― 16,400
Transportation charges 3,492 ―
Total merchandise available for sale N
$ 299,892 $ 496,126
17
Calculation of Cost Complement
Total Cost Valuation
Cost Complement 
Total Retail Valuation
EL
$299,286

PT
$496,126
N
 0.6045
On average, 60.45 cents of every sales dollar was used to pay
for merchandise
18
ABC Hardware Store, Computing Ending Retail Book
Value, as of December 31, 2016
Merchandise available for sale (at retail) Blank $ 496,126

Less deductions: Blank Blank
EL
Sales $ 422,540 Blank
Markdowns 11,634 Blank
PT
Employee discounts 2,400 Blank
Total deductions N Blank 436,574
Ending retail book value of inventory Blank $ 59,552
19
ABC Hardware Store, Computing Stock Shortages and
Adjusting Retail Book Value, as of December 31, 2016
Ending retail book value of inventory $ 59,552
EL
Physical inventory (at retail) 56,470
PT
Stock shortages (at retail) 3,082
N
Adjusted ending retail book value of inventory $ 56,470
20
Convert Retail Inventory Value to Cost Basis
Ending Inventory value at retail (net of stock shortages
at retail value based on physical inventory) × Cost
Complement
EL
($59,552 − stock shortages of $3,083) × 0.6045 =
PT
$34,136
N
21
Shortage Calculation
Shortages can be due to:
• Employee theft
• Customer theft
EL
• Accounting errors
PT
• Not reducing inventory valuations due to markdowns, employee discounts,
etc. N
22
ABC Hardware Store Profit‐and‐Loss Statement, July 1, 2016‐December
31, 2016
Sales blank $ 422,540
Less cost of goods sold: blank blank
Total merchandise available for sale (at cost) $ 299,892 blank
Adjusted ending inventory (at cost)* 34,136 blank
EL
Cost of goods sold blank 265,756
PT
Gross profit blank $ 156,784
Less operating expenses:
Salaries
N blank
$ 70,000
blank
blank
Advertising 25,000 blank
Rental 16,000 blank
Other 28,000 blank
Total operating expenses blank 139,000
Net profit before taxes blank $ 17,784
23
Advantages of the Retail Method (2 of 2)
• Valuation errors are reduced when conducting a
physical inventory since merchandise value is
recorded at retail and costs do not have to be
EL
decoded.
PT
• Because the process is simpler, a physical inventory
can be completed more often.
N
• Profit‐and‐loss statement can be based on book
inventory.
• Method gives an estimate of inventory throughout
the year and is accepted in insurance claims.
24
Limitations of the Retail Method
• Bookkeeping burden
• Ending book inventory is correctly computed only if the following are accurate:
• Value of beginning inventory
• Purchases
EL
• Shipping charges
• Markups
PT
• Markdowns
• Employee discounts
• Merchandise transfers to other stores
N
• Merchandise returns
• Sales
‐‐Cost complement is an average based on the total cost of merchandise available for
sale and total retail value.
25
Thank You
EL
PT
N
26
Merchandise Forecasting,
Dollar Control
EL
PT
NVGSOM, IITKGP
1
Merchandise Forecasting and Budgeting:
Dollar Control
• Dollar control entails planning and monitoring a
firm’s inventory investment over time.
EL
• There is a six‐step dollar control process, which
PT
should be followed sequentially.
• If a sales forecast is too low, a firm may run out of
N
items because it does not plan to have enough
merchandise during a selling season. Planned
purchases will also be too low.
2
Merchandise Forecasting and Budgeting
Process: Dollar Control
EL
PT
N
3
Inventory‐Level Planning (1 of 2)
• Four techniques:
• Basic stock method
Basic stock (at retail) = Average monthly stock at retail − Average monthly sales
EL
Beginning‐of‐month planned inventory level (at retail) = Planned monthly sales + Basic stock
PT
• Percentage variation method
N
Beginning-of-month planned inventory level (at retail)
 Planned average monthly stock at retail
1 Estimated monthly sales 
 1 
2  Estimated average monthly sales 
4
Inventory‐Level Planning (2 of 2)
• Weeks’ supply method
Beginning‐of‐month weekly sales planned inventory level (at retail)
= Average estimated weekly sales × Number of weeks to be
stocked
EL
• Stock‐to‐sales method
PT
N
5
Planning Purchases: Open to Buy
• Planned purchases (at retail) = Planned sales for the
month + Planned reductions for the month +
Planned end of month inventory − Beginning of
month stock
EL
• Open to buy (at retail) = Planned purchases for
PT
month less purchase commitments for that month
N
• Open to buy (at cost) = Open to buy at retail times
cost complement
6
When to Reorder (How Stock outs
May Occur)
EL
PT
N
7
How Much to Reorder (EOQ)
EL
PT
N
8
Thank You
EL
PT
N

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