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Managing your stock on hand is often a challenge, but is crucial to maintain cash flow and profitability. Brian Walker takes us through some key steps to effective merchandise planning

Ask a few different retailers what they think merchandise planning is and, chances are, you’ll get a few different answers, and most will probably be right. But the role of merchandise in underpinning strong operating profitability is also not always entirely understood.

Did you know that, on average, anywhere up to 15 percent of lost sales and profit is through an inadequate merchandise planning approach?

There are two major areas of profit leakage through inadequate merchandise planning in retail. Firstly, lost sales resulting from lack of merchandise and, secondly, forced margin reductions due to excessive merchandise.

Profitable retailing is the result of effectively managing constraints such as space, and controlling variable elements such as the cost of goods sold. A key to achieving this, then, is planning.

Merchandise planning requires a systematic approach aimed at maximising return on investment through planning sales and inventory in order to increase profitability. It does this by maximising sales potential and minimising losses from markdowns and out-of-stocks.

The fact is having a well-managed merchandise system is every bit important to a retailer as having a good location, motivated staff and powerful displays. Effective merchandise planning delivers margin increases directly to the bottom line and allows retailers to build a broader range of higher margin sales.

Working capital, staff costs, declining profitability and brand resonance are tightly bundled into the merchandise planning package, and how retailers maximise the quality and productivity of their merchandise display to realise additional full profit sales is also worth a close look.

There are potential benefits to effective merchandise planning in your business, such as:

• Increased total sales. A well-merchandised display floor will enable customers to locate the merchandise they are looking for and make a purchasing decision. Good retailers plan their add-on sales targets through their merchandise planning and stock location supported by their sales team (not the other way around).

• Reduced out-of-stock merchandise. Planning will ensure you have the right merchandise at the right time and place. There are enough competitors around without handing them your sales. The cost of lost sales in both short-run profitability and long-term brand damage often goes unconsidered by many retailers.

• Reduced unplanned markdowns. Planning will ensure you have the right-priced merchandise at the right time and place. Depth in your best sellers with width in range will decrease the unplanned markdown rate. This in turn builds your weighted margin return and reduces the clearance ‘look’ of your store.

• Retail selling becomes more productive and rewarding. A proper merchandise assortment that is well signed and displayed will make retail selling much easier—customers are more easily able to self-select the merchandise and staff are more confident and familiar with merchandise placement and depth.

• Increased sales per customer. Having attractive, well-positioned displays will increase sales per customer by encouraging multiple sales transactions, and increased impulse sales. Having the merchandise arranged in a more methodical manner can also lead to a greater average value transaction by reducing customer confusion.

• Improved inventory control. It will greatly simplify the maintenance of a physical inventory control, thereby decreasing the rate of profit leakage through shrinkage and loss.

A key thing to remember, however, is maintenance. Too often after a store has been carefully merchandised, the original presentation of the goods begins to deteriorate. The concepts and philosophy that went into the original presentation are forgotten, and as new items are received, the only rule that is applied is simply ‘Where is there room?’ For merchandising to be effective, it must be maintained on a regular, ongoing basis.


Developing a Plan

The first element in any merchandise plan is the ‘strategic plan’. This is normally done at a high level with perhaps a two- to three-year timeframe. It is used to set the critical success factors for merchandising in terms of sales, margin and inventory levels. From this point a business’s sales budget is derived.

The strategic plan allows retailers to take into account the affect of new brands, new stores, closures and refits. Once complete, a ‘category level margin plan’ should be created. This is a weekly version of the strategic plan at category level for sales, margins and markdowns.

Next, you’ll need to plan your range of product, and this will begin with the ‘assortment plan’. In this, retailers need to break down the goals of the merchandise plan into specific lines, or sometimes SKUs (stock keeping units). The system should be capable of extending the results so you can see the affect on overall margin mix, for example, of a change in cost price of an item.

The relationship between available physical space (space planning) and range is a key determinant of merchandise performance.

Creating a ‘buying plan’ will aid with category and individual item sales and purchase planning, and can help to identify planned dollar purchases by month and by department. This plan is often broken down to make allowances for the purchase of ‘core’ items that you always need to carry, promotional items (in conjunction with a pre-planned advertising plan), seasonal placements, and opportunity buys.

The buying plan needs to be maintained on an ongoing basis and be adjusted, for example, based on sales results, merchandise levels, lead times and logistics.

Once the purchasing requirements have been established, they can now be worked into the basic cash flow planning process to determine requirements. To this point, this has been a bottom up process. It is conceivable that cash flow limitations, looking from the top down, can restrict or force a reconsideration of purchasing requirements. This would then have to be worked back down, and decisions made accordingly


Product Positioning

Effective merchandise planning also involves how your merchandise is displayed in store. When designing a store layout, it’s important to have a clear analysis of the yearly sales and gross margin dollars contributed by each merchandise grouping. Naturally, those with the highest return per square metre of selling space will have contributed the most to the business.

Every retailer should plan on allocating space to merchandise with the goal of maximising the productivity of the sales floor.

The sales potential of each square metre of the store depends on where the entrance is located and the customer flow. The most exposed area, and therefore the most valuable space, is generally located at the main entrance. And it pays to remember that this area creates the first impression of your store, so it must not only be highly profitable, but highly appealing as well.

Generally, about 25 to 30 percent of customers who enter a store will go more than half way into it, so using some techniques, such as locating the most wanted merchandise at the back to draw them into the store, can be effective.

Certainly, the performance of any merchandise group will improve if it is moved to a prime location. However, the trick is to not waste valuable selling space by assigning it to merchandise that will not provide adequate gross margin dollars.

Purchase only enough inventories to adequately merchandise the display floor with minimal backup merchandise. When calculating these coverage numbers, consider your previous sales in the line, any product promotional activity, seasonal activity (such as Christmas), planned stock-turn targ
ets, and supplier lead times.

When creating a merchandise display, remember the merchandise is always the dominant element. Selling aids are only intended to complement the merchandise. Displays should also be attractive and reflect your store's brand and image.

The ideal fixture should be invisible. The less your customer sees of the fixture the more they see of the merchandise. In principle, the fixtures should display the merchandise in a manner that makes it easier for the customer to recognise what the merchandise can do for them, so as to simplify and enhance the customer purchasing decision.

I also advise retailers to display merchandise in commodity groupings, and display related commodity groupings in adjacent areas (this could help facilitate add-on sales). Make a powerful statement that highlights the business you are in and makes it clear to customers.

Another useful technique is to display merchandise in vertical modules, whereby merchandise is featured in a vertical block from top to bottom, small to large, light to dark. The concept is to provide the customer with a complete visual presentation of the merchandise assortment in a particular category.

Displaying merchandise in colour blocks, or from left to right in ascending order are similar techniques to consider.


Number Crunching

At the Retail Doctor we use many tools in assessing retailer performance. One of these merchandise efficiency indicators is the GMROI (gross margin return on investment). This is calculated using both your ‘gross profit margin percentage’ and ‘weeks cover’ indicators.

Gross margin percentage gives a measure of relative profitability without considering the costs of stockholding investment, and weeks cover tells us how effectively stock turned over without indicating the relative profitability.

GMROI provides a measure that combines these two indicators into something more meaningful. GMROI tells us in simple terms how many times in a year we get every dollar we invest in merchandise (inventory) at cost, returned as profit. It is calculated as follows: gross margin percentage / (100% – gross margin percentage) x annual stock turn.

Overall, retail merchandise planning enables the retailer to maximise those sales dollars both in overall and in the individual sense. Often freeing up that working capital tied into excess inventory, recapturing that lost sale or getting that extra percentage in the sale transaction can be the difference between a good year and a great year.

* Brain Walker is a retail operations specialist and director of The Retail Doctor (www.retaildoctor.com.au).

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