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MERCHANDISE MANAGEMENT
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UNIT 1: BASIC CONCEPTS
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WHAT IS MERCHANDISING?
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The AMA has defined merchandising as “ the planning involved in marketing the right merchandise at the right place at the right time in the right quantities at the right price”. Merchandise management can be termed as the analysis, planning, acquisition, handling, and control of the merchandise investments of retail operations.
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PRODUCT A physical good, service, idea, person, or place that is capable of offering tangible & intangible attributes that individuals & organizations regard as so necessary , worthwhile or satisfying that they are prepared to exchange money , patronage or some other unit of value in order to acquire it.
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The evolution of product management
BUYING LED BUYER / MERCHANDISER LED CONSUMER LED LIFESTYLE LED
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RETAIL PRODUCT SECTORS
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SCOPE OF RETAIL PRODUCT MANAGEMENT
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Strategic product management
Product opportunities & objectives Market opportunities & objectives Sales & profit objectives Resource deployment Business environment auditing Integrated information system planning Range planning Category management
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Operational product management
Product development & selection Sourcing Sales forecasting Supply chain management Pricing Space allocation Store profiling Visual merchandising Promotions
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Product management within the outlet
Allocate space to merchandise Display merchandise Receive & prepare stock Implement promotions Sell merchandise
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The strategic role of the product range
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DIFFERENT PRODUCT ASSORTMENT STRATEGIES
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GENERAL
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WIDE AND SHALLOW E.g. supermarkets , Variety stores Depth Of
assortment Number of categories
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NARRAOW AND SHALLOW E.g. Convenience stores Depth Of assortment
Number of categories
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WIDE AND SHALLOW with added depth in a number of key categories
E.g. Marks & Spencer’s Depth Of assortment Number of categories
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SPECIALIST
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SQUARE WIDE & DEEP product assortment
SQUARE WIDE & DEEP product assortment. Provides depth in a large number of categories E.g. hypermarkets like , B&Q Depth Of assortment Number of categories
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DEEP product range in some categories with a limited number of products in some related “add-on categories”. E.g. Amazon books moving into music & jewelry. Tie Rack : neckwear moving into accessories Depth Of assortment Number of categories
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NARROW & DEEP PRODUCT RANGE
E.g. specialty stores , category specialist E.g. PC World Depth Of assortment Number of categories
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RETAIL PRODUCT MANAGEMNT PROCESS : A TRADITIONAL VIEW
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Recognition of retail customer need
Write specification of product to satisfy need Search for a supplier that can produce a product which meets specifications Choose supplier that can produce a product which meets specifications Specify the order ( time, quantity , delivery) Evaluate performance of product & supplier
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Consumer led approaches to retail product management
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The functions of buying for different types of organization
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Buying for a single independent store
The role of the buyer: Coordinating the purchasing for various products Writing orders Handling special orders Making decisions regarding merchandise returns Remerchandising the store Taking decisions with respect to pricing of the product Customer contact & selling Planning & coordinating various promotional activities & events & in store presentation of merchandise
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Buying for a Chain Store or a Chain of Department Store
Buying for Non – Store Retailers – Catalogues, Direct Mail, Home shopping, Internet retailing ,etc
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Centralized retail buying organizations
Increased buying power allows buyers to negotiate better terms with suppliers. Specialist buyers can devote more time to product / market analysis Sales data can be aggregated to improve forecasting Economies of scales are achieved , resulting in lower sourcing selection costs per product. The quality level of the product offer is better controlled
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A more consistent product assortment is presented in order to reinforce the retail brand identity & support national promotions. The quality of buying & stock control decisions is consistent across outlets. Store personnel are freed from buying responsibilities.
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Decentralized buying Retailers, who have a product range that is dominated by products with a relatively stable demand , have more opportunity to allow the retail outlets to have an element of control. Store or departmental managers may place orders , according to the sales pattern. This allows outlets to respond to local variations. It is a way of improving customer service & productivity of the outlet.
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Buying organizational managerial roles
Buying director Merchandise managers Buying controllers Buyers Merchandisers Category mangers Assistant buyers Buying ( administration) assistants Allocator / stock distributor
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Additional buying decision makers
Technologists & quality controllers The product development team Corporate Logistics Buying committees The retail decision making unit Group dynamics
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FACTORS AFFECTING THE BUYING FUNCTION
Type of retail business General or specific Organizational structure Inter & intra organizational factors
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A theory of merchandising buying behavior , Jagdish N Seth
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The merchandiser : role & responsibilities
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Basic duties of a merchandiser
Planning Directing Coordinating Controlling
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The role of divisional merchandise managers would involve the following functions:
Forecasting sales Translating sales into inventory levels Inspiring commitment & performance on the part of the merchandisers & buyers Assessing merchandise and buyers performance
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The buyer : role & responsibilities
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Responsibilities : Developing merchandise strategies for the product line, store he /she is responsible for. Planning & selecting merchandise assortments Vendor selection, development & management Inventory management
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RETAIL BUYING ORGANISATIONS
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PRIVATE LABELS
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When the retailer decides to sell products or a line of merchandise which is owned, controlled, merchandised and sold by the retailer in his own store / chain of stores, he is said to be selling Own Label / brand or Private Label merchandise
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The concept of the private label
The Private Label Marketing Association defines store brand products as “all merchandise sold under a retail store’s private label. That label can be the store’s own name or a name created exclusively by that store.
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In some cases, a store may belong to a wholesale buying group that owns labels, which are available to the members of the group. These wholesaler – owned labels are referred to as controlled labels.
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They account for 40 per cent of Wal-Mart sales ($126 billion or Rs 5,16,600 crore), 50 per cent for Tesco ($36 billion or Rs 1,47,600) and are eating into a larger chunk of the organized retail sale in developed markets. And apart from the multibrand retailers, a category of private label-only retailers has also been created — Ikea, Toys ‘R’ Us, Zara — who sell only private label brands.
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Classification of a private label
Store brand An umbrella brand Individuals brands
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Some of the retail players having store brands in India are as follows:
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FOOD AND GROCERY Spencer's Daily Subhiksha Nilgris Nirma-Radhey
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FASHION Shoppers' Stop Westside Lifestyle Ebony Globus
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OTHERS Vivek's Planet M Music World Crossword Gautier Lifespring
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Why store brands? You have control over your pivotal product, and that means over your business. 2. It is the only way to be able to market high quality product, if you so choose. 3. You save substantially in product cost. You can spend these savings on anything you please, including higher product quality.
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Umbrella brand Amul Loreal Videocon Johnson Sony Heinz
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Benefits of Family branding
It is convenient to adopt a family brand for related products. Promotion of such products becomes easier and less expensive under a family brand . But the marketer in such cases has to ensure that all the products offered under the family brand maintain the same standards of quality. If one product in the group becomes a low quality product, it will affect the entire range of products under it.
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Individual branding
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The advantage of individual branding is that each product has an image and identity that is unique.
This facilitates the positioning of each product, by allowing a firm to position its brands differently.
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Family brand names: Heinz
Individual brand names: Examples include Farleys (baby food), Linda McCartney Foods (vegetarian meals) and Weight Watcher’s Foods (diet/slimming meals and supplements). Combination brand names: Heinz Tomato Ketchup and Heinz Pet Foods
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The need for a private label
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THE PROCESS OF PRIVATE LABEL CREATION
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Stage:1 – Defining the objectives
Stage:2 – Defining the gaps in the market Stage:3 – Decision on make or buy & sourcing Stage:4 – Determine the market & sales strategy Stage:5 – Determine the measure of performance
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CATEGORY MANAGEMENT
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The concept of category management
It is a retailer – supplier process of managing categories as strategic business units, producing enhanced results by focusing on delivering consumer value.
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Thus category is a basic unit of analysis for making merchandising decisions.
In general, a category is an assortment of items that the consumer sees as reasonable substitutes for each other. The fundamentals of category management revolve around managing categories as Strategic Business Units
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The reasons for the emergence of category management
Consumer changes Economic & efficiency considerations Competitive pressures Information technology advances
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The components of category management
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STRATEGY BUSINESS PROCESS ORGANISATIONALCAPABILITIES PERFORMANCEMEASUREMENT TRADING PARTNER RELATIONSHIP INFORMATION TECHNOLOGY
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The category management business process
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CATEGORY DEFINITION CATEGORY ROLE C A T E G O R Y V I W CATEGORY ASSESSMENT CATEGORY SCORECARD CATEGORY STRATEGY CATEGORY TACTICS PLAN IMPLEMENTATION
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Process Steps Analysis Objective I. Category Definition Consumer segmentation Determining what items (SKU’s) should be included in the category, and its structure according to the consumer’s purchasing behavior II. Category Role Cross category analysis Conducting a portfolio analysis of the categories to determine their relative importance III. Category Assessment Consumer, market, retailer and supplier evaluation Determine opportunities for improving the category’s business by identifying opportunity gaps in sales, profits, or turns IV. Category Balanced Scorecard Business performances measures Establishing specific performance targets for the category plan consistent with the category role V. Category Strategies Evaluation of strategic choices Assigning strategies to each category segment VI. Category Tactics Evaluation of tactical choices for the category Quantifying the tactical requirements to achieve the scorecard targets
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Step 1: category definition
A distinct , manageable group of products / services that consumers perceive to be interrelated and /or substitutable in meeting a consumer need. The category definition should be based on how the consumer buys, and not how on retailer buys. This help decides the products that represent a category , sub category and major segmentation.
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Example ..
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Examples from the categorization structure include:
Master Category Category Sub-category Micro-category Marketing Advertising Publications Newspapers & Comms Document Postal Courier Documented Post Management Services Travel Business Rail Travel <none> Travel Professional & Clerical Casual Typists Technical Services
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Step 2 defining the category role
It determines priority and importance of various categories. Within a category, products will be assigned sub category roles. Examples-
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Traffic builders- products with high market share
Transaction builders- frequently purchased products on impulse Cash generators- products with high stock turns and margins Image creators- products that are promoted with some feature that makes them unique Excitement creators- product with high impulse purchase
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4 consumer based category role-
Destination category- retailer is the customer first choice for specific products. Preferred/ routine category- retailer decides that he wishes to be the preferred provider of these products. Occasional / seasonal- that are purchased infrequently or follow cyclical patterns. Convenience category- helps the retailer reinforce the target consumers image of the retailer as the place for one stop shopping. They are those that the consumer finds convenient to pick up at a neighborhood retailer, rather than visiting another retailer who may offer a wide selection or better prices.
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Step 3- category assessment
In respect to turnover, profits and return on assets.
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Analyzing product categories
Sleepers – identify key products, de list slow movers, give quick movers more shelf space Winners – continue current policies , be alert in adopting new products, Market share Questionable –limit product mix to core assortment, look for price raises, minimize shelf space Opportunities – harmonize product mix with market trends, improve price image via low prices, maximize shelf space and support promotional program Market growth
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Aim of consumer assessment should be to understand-
Why consumers buy a particular product? What is it that influences them the most? The occasion when category is purchased. The relationship of categories in the buying process The location where purchases is made
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Factors which influence the assessment of market are-
Price as compared to competitors Sales and consumption trends of categories and sub categories. Retailers market share for categories and sub categories. Comparison of retailers assortment to competitors
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Factors which influence the assessment of retailer are-
Retailers sales trend Trend in profits and operating expenses Trends in product acquisition costs Levels of service Productivity of current category assortment
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Factors which influence the assessment of supplier are-
Sales and market share trends among suppliers Efficiency of suppliers information and physical flow Suppliers brand development at the retail outlet
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Step 4 – category performance measures
Includes- Sales Profits Market share Inventory turnover Changes in assortment
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Such a scorecard serves three purpose-
Provides discipline and structure to category business plan Influences organizational practices It facilitates cross business comparison
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Step 5- category strategies
It address the key question of how- working with its supplier’s – it will market its category and components.
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7 typical marketing strategies are-
Traffic building- drawing consumer traffic to store Transaction building- increasing the size of average transaction or total store transaction Turf defending- it aggressively positions certain parts of category to protect retailers business in the category from targeted competitors. Profit generating- products which generate higher margins and have a substantial amount of loyalty and which are not really influenced by price fluctuation come under this category
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Cash generating- it focuses on using parts of the category to generate cash flow for the retailer. They are fast turning products, with an efficient supply rate and low inventory turnover. Excitement creating- this strategy is used to communicate a sense of urgency or opportunity to the consumer. e.g.. New or seasonal products. Image enhancing- to help the retailer communicate its desired image to consumer in respect to- price, service, quality , variety
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Step 6- category tactics
It works towards determination of optimal category pricing, promotion, assortment and shelf management, which re necessary to achieve the agreed on role, scorecard and strategies
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Step 7- category plan implementation
Key components are- The plan approval process Assigning responsibilities Scheduling
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Step 8- category review Is the review of the progress and the actual achievement of the targets set for category
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The role of the category captain
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Category captain Is a supplier who forms an alliance with the retailer to enable the latter to develop consumer insight, satisfy consumers & improve performance and profit across the entire category. Most often he is the leading manufacturer in the category. He has to look beyond its own products & brands & look at promoting the entire category, even the product brands of the competitors.
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Category management & ECR
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Drawbacks of category management
Its adoption requires a considerable amount of reorganization. Inhibitions like: Skills shortage Difficulty in accepting suppliers as partners Reluctance to change inappropriate organizational structure Lack of clear strategic plans for product ranges Lack of variety offered to customers Risk that consumer preference given low priority Threat to small suppliers
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Risk of putting other suppliers at risk because of category captains.
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Unit 2: RETAIL PRODUCT MANAGEMENT PROCESS FROM CONCEPTION TO DELIVERY
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The process of merchandise management
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Store (format) strategy
Business strategy Store (format) strategy Merchandise strategy Merchandise Planning Product Price Range Assortment space Sourcing Make or buy Vendor Identification Negotiations Placing the order Allocation Of Merchandise To stores Performance Monitoring & evaluation Store operations planning
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The implications of merchandising planning
Finance Marketing Warehousing and logistics Store operations
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Finance : Payments to suppliers
Profitability measurements Merchandise planning Developing advertisements Developing sales promotions Marketing : New product introduction Warehouse & logistics : Details of purchase order Details of allocations Store operations: Space planning Communication about new products & their features
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The process of merchandise planning
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STAGE 1- developing the sales forecast
Forecast are typically developed to answer the following questions: How much of each product will need to be purchased? Should new products be added to the merchandise assortment? What price should be charged for the product?
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Process of developing the sales forecast
Reviewing the past sales Analyzing the changes in the economic conditions Analyzing the changes in sales potential Analyzing the changes in the marketing strategies of retail organization and the competition Creating the sales forecast
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STAGE 2- determining the merchandise requirements
Planning in merchandising is at two levels: The creation of merchandise budget The assortment plan
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The merchandise budget
It comprises of: The sales plan The stock support plan The planned reductions The gross margins
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Assortment plan Variables on the assortment plan: Price level
Styling design themes Colors Flavors Pack size Fabrication/ type
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The merchandise hierarchy
O M P A N Y D E P A R T M N Merchandise Sub category Merchandise category Merchandise classifications Style price Point SKU
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Types of merchandise Staple/ basic merchandise Fashion merchandise
Seasonal merchandise Fad merchandise
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Variety of merchandise
Width of assortment Depth of assortment Consistency
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STAGE 3- merchandise control- the open to buy
The purpose of the concept of open to buy is twofold. First, depending on the sales for the month and the reductions, the merchandise buying can be adjusted. Secondly, the planned relation between the stock and sales can be maintained.
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Open to buy ensures that:
Limits overbuying and under buying Prevents loss of sales due to unavailability of the required stock Maintains purchases within the budgeted limits Reduces markdown which may arise due to excess buying
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Calculating the open to buy
Open to buy= planned EOM stock – projected EOM stock This process of deciding upon and then arriving at the quantity of each product or category of merchandise is termed as Assortment planning
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STAGE IV- assortment planning
Merchandise assortment plan The model stock plan
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Merchandise assortment plan
SEASON DEPARTMENT-----
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ven dor styl e uni ts Cos t Retail price Planned purchases tot al Jan Feb . ma rch Ap ril ma y Ju ne
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The model stock plan Step1: identify which factors affect the customer’s buying decision and the number of levels under each attribute Step 2: identify the number of levels under each attribute Step 3: allocate the total units to the respective item categories
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Managing supply base
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Types of supplier Power Manufacturers Agents
Wholesalers and distributors “grey market” sourcing Alliances and concessions
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The supplier search Global sourcing Trade shows Literature
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Li & Fung is amongst the largest buying agencies in the world, a Hong Kong-based company with $14 billion in turnover, which sourced goods worth $700 million from India last year. Bharati sources merchandise from India for European retailers.
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RETAILERS WHO SOURCE BIG-TIME FROM INDIA
Gap International4,000 Wal-Mart2,500 JC Penney1,000 Target1,000 Tommy Hilfiger800 Nike700 Source: Suppliers’ estimates (in Rs cr)
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The choice of supplier Initial selection factors
Outsourcing supplier assessment
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Criteria Product range and technical quality Price Delivery Service
General qualitative supplier assessment
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Process of merchandising buying
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Step 1 : identifying the sources of supply
Costs associated with global sourcing include- Country of origin effects Foreign currency fluctuations Tariffs Foreign trade zones Cost of carrying inventory Transportation costs
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Step 2 : contacting and evaluating the sources of supply
Criteria to be kept in mind- The target market Image of retail organization The merchandise and price offered Terms and services offered by the vendor The vendor’s reputation and reliability
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Step 3 – negotiating with vendors
Types of discounts that could be available to buyer- Trade discounts Chain discounts Quantity discounts Seasonal discounts Cash discounts
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Step 4 – establishing vendor relations
The buyer needs to build on- Mutual trust Open communications Common goals Credible communications
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Step 5- analyzing vendor performance
Key criteria- Gross margin contribution Adherence to company policy Customer acceptance level Merchandise quality
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Other.. Total orders placed on the vendor in a year
Total returns to the vendor Initial markup on the products The markdown if any Participation of vendor in various schemes and promotions Transportation expenses if borne by the retailer Cash discounts offered by the vendor Sales performance of the merchandise
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Stages of development in retailer – supplier relationship
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Long Term Rshp Ongoing transactions Partnership Collaborative systems
Vertical Integration Owning suppliers One off transactions Alliances Franchises licenses Repeated transactions
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Product quantity decisions and stock management
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The economic order quantity ( EOQ)
Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. The single-item EOQ formula finds the minimum point of the following cost function: Total Cost = purchase cost + ordering cost + holding cost - Purchase cost: This is the variable cost of goods: purchase unit price × annual demand quantity. This is P×D - Ordering cost: This is the cost of placing orders: each order has a fixed cost C, and we need to order D/Q times per year. This is C × D/Q - Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so this cost is H × Q/2
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Cost involved in acquiring a product-
Administration cost of placing an order- labor, paper, telephone bills Cost involved with supplier search and selection- overseas sourcing trips, negotiations, day to day cost Cost in expediting the order- checking that the order is going to arrive on time and making alternative arrangements. Inspection of product on arrival
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Stock management systems
SMS issue reports which give the following information- a list of product lines Sales of the product line The turnover Amount of goods on sale , available to sell: The amount of goods on order The level of availability target The sales forecast Minimum stock level , reorder level and safety stock.
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Sales forecasting Factors like- Seasonality Fashion
Product endorsement Price fluctuations Likely product substitutions Complementary product sales Promotional activity
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Managing the response to sales
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Sales based ordering
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Automatic replenishment
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ECR and quick response
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ECR It is a managerial approach that starts with consumer demand, and then gears the whole of the supply chain to responding to that demand. It is a customer driven, demand – pull product management system; “ a seamless interface from consumer purchase to manufacturing schedules” It involves not only all the operational areas of retail management , but also involves the way in which retailers, suppliers and third party service suppliers work together to achieve two fundamental objectives simultaneously- maximizing customer satisfaction and minimizing total costs
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Nature of goods ECR systems generally concern food and fast moving consumer goods, which have relatively stable demand patterns and higher volumes.
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The demand management is normally performed at distribution centre level and in higher unitization than the single product item , for example the “ crate load”
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Quick response It deals with higher value , lower volume product ( typically clothing and home furnishings) . They also involve supply techniques that allow retailers to respond more effectively to fashion and seasonal variations. In quick response system sales information is sent electronically to the supplier without intervention from the buying office, so that supplier is as up to date as the retailer on what is selling.
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Supplier involvement in responsive replenishment systems
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Drawbacks of sales responsive replenishment system
Is the small, frequent delivery pattern Extra transportation and pre retailing function Store operations difficult
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Unit 3: RETAIL PRODUCT MANAGEMENT PROCESS IMPEMENTATION & EVALUATION
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Product range planning and selection
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Space management Objectives-
To optimize both short term and long term returns on the investment cost of retail space. The second is to provide a logical, convenient and inspiring interface between the product range and the customer. Another objective is to make sure that the right selection of products is available; that products fit into retail space and that stock –outs are avoided. Space allocation has an important role to play in communicating the retail brand.
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Space management process
Stage 1 – measuring retail space Stage 2 – dividing the space into selling areas Stage 3 – determining the layout and deciding on product adjacencies Stage 4 – allocating space to individual products
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Practical and customer considerations
Seasonality Product characteristics Customer characteristics Fixture limitations
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Space allocation systems
Qualitative and quantitative data as inputs are-
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Product information Direct product cost or activity based cost
Sales data Size of products Size variations Complementary products Bulk delivery restrictions
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Fixture information Specific display requirements Size of fixturing
Number of fixtures available
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Product manager’s knowledge
Space elasticity Stock holding objectives Category lifecycle stage Display and fixturing requirements Marketing objectives
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Retail design
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Formulating a store design
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1) materials The type of product being sold The cost involved
The store traffic Fashion Environmental and safety concerns
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Atmospherics Color Music Aroma Texture temperature
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3) lighting
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4) signage
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The exterior design
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Flagship stores and lifestyle retailing
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Visual merchandising
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1) Fixtures and fittings
Gondolas Round fixtures Four – ways Shelving Rails Bins baskets and tables
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2) Product presentation
Vertical stacking Horizontal stacking Hanging
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3) Store layout A grid layout Free form layout
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4) Displays On shelf displays Feature or off shelf displays
Window displays
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Window displays
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Visual merchandising in non store retailing
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Communicating the product offer
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Marketing communication objectives
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Strategic Long term ( examples)
Establishing a clear market position for a retailer Changing consumers’ attitude towards a retailer Improving a retailer’s image Portraying a retailer as a customer focused organization Enhancing a retailer’s reputation as a responsible corporation
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2) Operational & promotional Short term ( examples)
Increasing customer awareness of category X Increasing sales of brand Y Increasing transaction level per customer Informing customer that prices have been reduced Encouraging customers to buy product A with product B
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Retail communication channels
Advertising Sales promotion Point of purchase support Publicity Strategic product communications- cultural events, film releases , ethical issues Personal communications' communications through packaging
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Retailer – supplier related issues
Different promotional objectives Attitude to POS materials Conflicting images Non compliance at store levels
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Evaluating retail product management performance
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Factors to be kept in mind-
Target market and demand Store policies Competition Economic conditions Uniqueness of the product
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Elements of retail price
Fixed cost Variable cost
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Retail price Retail price = cost + mark up Cost = retail – mark up
Mark up = retail price - cost
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Determining the price
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Break even revenue Fixed costs 1 – ( vs. per unit / sp per unit
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Break even units FC Unit contribution margin Where unit contribution margin, = SP per unit – VC per unit
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Mark up pricing markup% at retail = (retail selling price – merchandise cost) / retail selling price Markup % at cost = ( retail selling price – merchandise cost) / merchandise cost
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Cumulative mark up Markup % at retail = retail value – cost value Retail value
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Initial mark up Initial mark up % = ( operating expenses+ net profit + mark downs+ stock shortages + employee & customer discounts+ alteration costs- cash discounts) / ( net sales + mark downs + stock shortages + employee & customer discounts)
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Retail pricing policies / strategies
Market skimming Market penetration Price bundling Leader pricing Multi unit pricing Every day low pricing Odd pricing Single pricing Multiple pricing
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Evaluating merchandise performance
ABC Analysis : pareto ( ABC) ( 80/20 rule) Sell through analysis Multiple attribute method
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The concept of gross margin return on investment
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UNIT: 4 RETAIL PRODUCT MANAGEMENT APPLICATIONS
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Product management in non store retailing
The general catalogue The specialist catalogue TV retailing Internet retailing
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Store and non store retailing: a comparison
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Store retailing Non store retailing PRODUCT PRESENTATION
Real , tangible Represented by image SELLING ENVIRONMENT Use of store environment to enhance experience Difficult to create atmosphere, although websites better than printed area PRICING Flexible & highly visible, but time consuming to make comparisons Easy to compare between competitive non store retail offers CUSTOMER SERVICE Direct, personal Detached, impersonal ; product information CONVENIENCE May be low, depending on individual circumstances High (in principle) Low for impulse purchase PRODUCT DELIVERY Usually immediate Not immediate
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