Chapter 5

AkU, MkgMgt Retail Mgt
CHAPTER FIVE
RETAILING STRATEGY
5.1 Target market and retail format
The term strategy is frequently used in retailing. For example, retailers talk about their merchandise
strategy, promotion strategy, location strategy, and private-brand strategy. Hence, it is a clear and definite
plan outlined by the retailer to tap the market. It is a plan to build a long-term relationship with the
consumers. Retail strategy isn’t just another expression for retail management.
Definition of Retail Market Strategy
A retail strategy is a statement identifying-
1) The retailer's target market
2) The format the retailer plans to use to satisfy the target market's needs, and
3) The bases upon which the retailer plans to build a sustainable competitive advantage.
The target market is the market segments(s) toward which the retailer plans to focus its resources and
retail mix.
A clear specification of the target market allows for a number of benefits, including improved levels of
understanding of: the characteristics and needs of the group targeted; the main competitors; and the
changing needs of targeted consumers.
Benefits of targeting
o A fuller understanding of the unique characteristics and needs of the group to be satisfied is reached.
o A better understanding of the main competitors is gained because it is possible to detect those retail
companies who have made a similar selection of target marks.
o Improvements are possible in the understanding of the changes and development in the needs of the
target market.
A retail format is the retailer's type of retail mix (nature of merchandise and services offered, pricing
policy, advertising and promotion programs, approach to store design and visual merchandising, and
typical location and customer services).
A sustainable competitive advantage is an advantage over competition that is not easily copied and thus
can be maintained over a long time. The strategic opportunities and competitive advantage, typically,
retailers have the greatest competitive advantage in opportunities that are similar to their present retail
strategy. Thus, retailers would be most successful engaging in market penetration opportunities that don't
involve entering new, unfamiliar markets or operating new, unfamiliar retail formats. When retailers pursue
market expansion opportunities, they build on their strengths in operating a retail format and apply this
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competitive advantage in a new market. Retailers have the least competitive advantage when they pursue
diversification opportunities. These opportunities are generally risky and often don't work.
The process of strategy formulation in retail is the same as that for any other industry. It starts with the
retailer defining or stating the mission for the organization. The mission is at the core of the existence of
the retailer. Other aspects of the strategy may change over a period of time or vary for different markets.
5.2 Building a Sustainable Competitive Advantage

Another element in a retail strategy is the retailer's approach to building sustainable competitive advantage.
Some advantages are sustainable over a long period of time while others can be duplicated by competitors
almost immediately. Establishing a competitive advantage means that a retailer builds a wall around its
position in the retail market. Over time, all advantages will be eroded due to these competitive forces.
Seven important opportunities for retailers to develop sustainable competitive advantages are-
(1) Customer loyalty
(2) Location
(3) Human resource management
(4) Distribution and information systems
(5) Unique merchandise
(6) Vendor relations
(7) Customer service
A. Customer Loyalty
Customer Loyalty means that customers are committed to shopping at retailer's locations. Loyalty is more
than simply liking one retailer over another. Loyalty means that customers will be reluctant to patronize
competitive retailers.
Some ways that retailers build customer loyalty are by-
(1) Developing branding strategies along with clear and precise positioning strategies, and
(2) Creating an emotional attachment with customers through loyalty programs.
1. Retail Brands and Positioning- A retail brand, whether it is the name of the retailer or a private label, can
create an emotional tie with customers that builds their trust and loyalty. Retail brands also facilitate store
loyalty because they stand for a predictable level of quality that customers feel comfortable with and often seek.
2. Positioning- A retailer builds customer loyalty by developing a clear and distinctive image of its retail
offering and consistently reinforcing that image through its merchandise and service. Positioning is the design
and implementation of a retail mix to create an image of the retailer in the customer's mind relative to its
competitors. A perceptual map is frequently used to represent the customer's image and preference for retailers.
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3. Loyalty Programs- Loyalty programs are part of an overall customer relationship management program
(CRM) program (detailed in Chapter 11). Members of loyalty programs use some type of loyalty card.
Purchase information is stored in a huge database known as a data warehouse.
B. Location
Location is the critical factor in consumer selection of a store. It is also a competitive advantage that is not
easily duplicated. The distance that the target consumer is willing to travel to buy a particular product is a
key factor that the retailer needs to take into consideration, to ensure that the eventual location that he
chooses for the store is successful.
C. Human Resource Management
Retailing is a labor-intensive business. Knowledgeable and skilled employees committed to the retailer's
objectives are critical assets that support the success of several companies.
D. Distribution and Information Systems
All retailers strive to reduce operating costs. They want to get their customers the merchandise they want,
when they want it, in the quantities that are required, at a lower delivered cost than their competitors.
Retailers can achieve these efficiencies by developing sophisticated distribution and information systems.
E. Unique Merchandise
While it is difficult for retailers to develop a competitive advantage through merchandise, many retailers
realize a sustainable competitive advantage by developing private-label brands (also called store brands),
which are products developed, marketed, and available only at that retailer.
F. Vendor Relations
By developing strong relations with vendors, retailers may gain exclusive rights-
(1) To sell merchandise in a specific region,
(2) To buy merchandise with better terms than competitors who lack such relations, or
(3) To receive merchandise in short supply.
Relationships with vendors, like relationships with customers, are developed over a long time and may not
be easily offset by a competitor.
G. Customer Service
Retailers also build a sustainable competitive advantage by offering excellent customer service. Offering
good service consistently is difficult. Customer service is provided by retail employees and humans are less
consistent than machines. It takes considerable time and effort to build a tradition and reputation for
customer service, but good service is a valuable strategic asset.
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5.3 Factors to be considered for retail planning

The following golden rule advice given to all would be retail entrepreneurs;
 A void business that are in danger of over saturation. Originality isn’t always necessary. In fact
further improving on well-established retail type of business is often the way to go.
 Concentrate your research on filling a need in retailing.
 Always start a business cautiously and with adequate capital. Don’t except to get rich overnight.
The following specific parameters must be considered at length:
 Evaluating financial capabilities
 Finalizing of store format
 Market research
 Competition analysis
5.4 Retail Mix Strategy (Location, Price, Communication and Merchandise)

PRICING STRATEGY
Price is an integral part of the retail marketing mix. It is the factor, which is the source of revenue for the
retailer. The price of the merchandise also communicates the image of the retail store to the customers.
Various factors like the target market; store policies, competition and the economic conditions need to be
taken into consideration while arriving at the price of a product.
The first factor to be taken into consideration is the demand for the product and the target market. Who is
this product meant for and what the value proposition for the consumer is. In some cases, the price of the
product is linked to the quality. This is generally in the case of products like electronics, where a high
priced product is perceived to be of good quality. On the other hand, for products like designer clothing, a
certain section of the population may be willing to pay a premium price. Hence, it is very essential that the
buyer is clear about the target market for the producer and the value proposition that they would look for.
The stores policies and the images to be created also influence the pricing of a product. Retailers who want
create a prestige image may opt for a higher pricing policy, while the retailer who wants to penetrate the
market, may decide to offer a value for money proposition.
Competition for the product and the competitor’s price for similar product in the market also need to be
taken into consideration. In case the product is unique and does not have any competition, it can command
a premium prices on the other hand, in case there after a fair number of similar products in the market, the
prices of such product need to be taken into consideration before fixing the price.
The economic conditions prevalent at the times play a major role in the pricing Policy. For example,
during an economic slowdown, prices are generally lowered to generate more sales. The demand and
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supply situation in the market also affects Prices. If the demand is more than the supply, prices can be
premium, however, when supply is mores than the demand, prices had to be economical. The various
factors affecting retail pricing are: Brand image, Customer Loyalty, Product Features, Consumer Behavior
The pricing objectives should be in agreement with the mission statement and merchandising policies of
the retail organization.
Elements of retail price
In order to arrive at the retail price, one needs to first consider the elements that go into the calculation of
the price. The first element to be considered is the Cost of Goods, which is the cost of the merchandise and
various other expenses that are involved in the movement of the goods from the manufacturer to the actual
store. These expenses may be fixed or Variable. Fixed Expenses are those, which do not vary with the
quantity of the sale or business done. Shop rents and head office costs fall into this category. The level of
sales directly affects the variable expenses. Merchandise margins and the product mix, however, are
variable, and their management can either enhance or destroy Profitability. The profit to be earned from the
merchandises must be planned before fixing the retail price. The profit figure arrived at, can be expressed
as a percentage of the retail price or as a percentage of the cost price.
Thus, the following formulae would apply: Mark Up Per cent (Based on Retail Price) = Mark Up / Retail
Price and, Mark Up Per cent (Based on Cost) = Mark up / Cost. Let us understand this concept with the
help of the following illustration. Assume that the cost of the merchandise of an item I is 200 birr and the
mark up is 150 birr. The mark up percentage based on the retail price would work out to 37.5%. The retail
price has been calculated as 200+150 = 350. Mark Up percentage on retail = 150 / 350 = 42.86% Based on
the cost price, the mark up percentage can be calculated as under: Mark Up percentage on cost = 150 / 200
= 75 %. The mark up thus fixed is termed as the Initial Mark Up. Rarely are all products sold completely at
the fixed price. Reductions in price are often made and could be due to markdowns, employee discounts,
customer discounts and / or shrinkage. Markdowns are reductions in the original retail price. Markdowns
are discussed in detail later in this chapter, in the section on adjustments to retail prices. Discounts offered
to customers and employees who buy the products, also reduce the mark up percentage. Shrinkage includes
loss of merchandise due to thefts, or damaged / soiled goods. All these costs reduce the profit margin and
hence must be accounted for.
Developing a Pricing Strategy
The pricing strategy adopted by a retailer can be cost-oriented, demand- oriented or competition-oriented.
In Cost-oriented pricing, a basic mark up is added to the cost of the merchandise, to arrive at the price.
Here, retail price is considered to be function of the cost and the mark up.
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Thus, Retail Price = Cost + mark up

If this formula is rearranged, we get Cost = Retail Price – Mark up and, Mark up = Retail Price– Cost. The
difference between the selling price and the cost is considered to be the mark up and should cover for the
operating expenses and the transportation, etc. Mark up percentages may be calculated on the retail price or
on the cost. They are calculated as under. Mark up % (at retail) = (Retail Selling Price – Merchandise Cost)
/ Retail Selling Price Mark up % (at cost) = (Retail Selling Price – Merchandise Cost) / merchandise Cost
When the buyer is aware of the mark up percentages required and of the selling price, he can also work out
the price at which he actually needs to procure the product. Since it may not be possible to adopt a policy
of maintaining a single mark up for a product category, the concept of a variable mark up policy can be
followed. This allows the buyer to procure goods at varying price, but at the same time, maintain the
margin that need to be earned, as some products may earn a higher margin as compared to other. Demand-
oriented pricing focuses on the quantities that the customers would buy at various prices. It largely depends
on the perceived value attached to the product by the customer. Sometimes, a high priced product is
perceived to be of a high quality and a low priced product is perceived to be of a low quality. An
understanding of the target market and the value proposition that they would look for is the key to demand-
oriented pricing. When the prices adopted by the competitors play a key role in determining the price of the
product, then competition-oriented pricing is said to follow. Here, the retailer may price the product on par
with the competition, above the competitor’s price or below that price.
Approaches to a Pricing Strategy
Price lining do retailers use a term when they sell their merchandise only at the given prices. A price zone
or price range is a range of prices for a particular merchandise line. A price point is a specific price in that
price range. The pricing strategies that can be followed include:
Market skimming: The strategy here is to charge high prices initially and then to reduce them gradually, if
at all. A skimming price policy is a form of price discrimination over time and for it to be effective, several
conditions must be met.
Market Penetration: This strategy is the opposite of market skimming and aims at capturing a large
market share by charging low prices. The low prices charged stimulate purchases sand can discourage
competitors from entering the market, as the profit margins per time are low. To be effective, it needs
economies of scale, either in manufacturing, retail or both. It also depends upon potential customers being
price sensitive about particular item and perhaps, not perceiving much difference between brands.
Leader pricing: Here, the retailer bundles a few products together and offers them at a deep discount so as
to increase traffic and sales on complementary items. The key to successful leader pricing strategy is that
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the product must appeal to a large number of people and should appear as a bargain. Items best suited for
this type of pricing are those frequently purchased by shoppers, e.g., bread, eggs, milk, etc.
Price Bundling: Here, the retailer bundles a few products together and offers them at a particular price.
For example, a company may sell a PC at a fixed price and the package may include a printer and a web
camera. Another example is that of the Value Meal offered by McDonald’s. Price bundling may increase
the sales of related items.
Multi-unit Pricing: In multi-unit pricing, the retails offer discounts to customers who buy in large
quantities or who buy a product bundle. This involves value pricing for more than one of the same item.
For example, a retailer may offer one T-shirt for 255.99 birr and two T- shirts for 355.99 birr. Multi-unit
pricing usually helps move products that are slow moving.
Discount pricing: It is used as a strategy by outlet stores who offer merchandise at the lowest market
prices.
Every Day Low Pricing or EDLP as it is popularly known is a strategy adopted by retailers who
continually price their products lower than the other retailers in the area. Two famous examples of EDLP
are Wal-Mart and Toys “R” Us, who regularly follow this strategy.
Odd Pricing: Retail prices are set in such a manner that the prices end in odd numbers, such as 99.99 birr
or 199 birr, 299 birr, etc. The buyer may adopt either the cost-oriented or a demand-oriented approach for
setting prices. In the Cost-oriented method, a fixed percentage is added to the cost price. This is determined
by what mark up the retailer works on. Alternately, the demand-oriented method bases prices on what price
the customer expects to pay for the product. The price fixed here is based on the perceived value of the
product. Ultimately, it is the planned gross margin, which needs to be achieved and which is a major
consideration while fixing the retail price.
Adjustments to Retail Price
Many a times, retail prices need to be adjusted to meet the conditions prevailing in the market. Adjustments
to retail prices can be done by way of markdowns or by way of promotions. Markdowns are a permanent
reduction in the price and this step may be taken as a result of slow selling of the product or as a part of a
systematic strategy. Markdowns are usually done after a determined number of weeks in order to maintain
a desired rate of sales. Timely markdowns help improve the profitability, increase the turnover and increase
the profit. Markdowns may be necessitated due to wrong forecasting, overbuying, and faulty selling
practices or simply because the product is shop soiled or the odds and ends of a range are left at the end of
a season. The mark down percentage is calculated as follows: Total mark down / total sales X 100
Promotions on the other hand, are a temporary reduction in the price, used to generate additional sales
during peak selling periods. Prices may be reduced by a percentage (25 percent off) or to a lower sale price
(99 birr). High volume items, with a substantial initial markup, are usually selected for promotions.
Promotions may also include coupons, which may reduce the retail price by an amount or a percentage.
With retail coupons, the retailer absorbs the reductions in the price.
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A Comparison of Mark ups and Markdowns: A mark up is where profit is expressed as a percentage of the
costs, as shown below: (price-Cost)/CostX100. Thus, a selling price of 30 birr, with a cost of 20 birr, gives
a markup of 50 percent. A markdown is where profit is expressed as a percentage of the sale price and is
shown below: (price-Cost)/PriceX100 thus, a selling price of 60 birr, with a cost of 24 birr, gives a
markdown of 60 percent. Markdown on selling price = Markdown on selling price X 100 = 100 % - %
Markdown on selling price.
COMMUNICATING WITH THE RETAIL CUSTOMER (Promotion)
Retail Promotion Mix – Advertising – Sales promotion – publicity – Retail Selling Process – Retail
database. Communicating with the Retail Customer Promotion is basically a communication process. This
has become necessary as the process of selling is more complex today because products are more technical,
buyers are more sophisticated, and the competition is more intense. Without proper flow of information
and effective communication from the producer to the consumer either along with the product or well in
advance of the introduction of product into the market, no sale is possible today. The various promotion
mix elements designed for this purpose are also referred to as “Communications Mix”. The process of
communication mix is as follows:
Marketing Communication Process
Need for Communication: When a company develops a new product, changes an old one, or simply wants
to increase sales of an existing product, it must transmit its selling message to potential customers. The
process of communication is generally divided into Explicit and Implicit communications. The former one
involves the use of language to establish common understanding among the people. Implicit
communication is an ‘intensive interpretation of symbols’ and is basically a form of non-verbal
communication. For example, when two foreigners meet, even though they are unable to communicate
through a common language, they will exchange, they will exchange their views through meaningful
symbols. Promotion is an “exercise in information, persuasion, and influence”. Accordingly, promotion has
come to mean the overall coordination of advertising, selling, publicity, and public relations. Promotion is
a helping function designed to make all other marketing activities more effective and efficient. But sales
promotion as such helps only the selling activity.
The marketing communications mix (also called the promotion mix) consists of five major tools:
Advertising: Any paid form of non personal presentation and promotion of ideas, goods, or services by an
identified sponsor.
Direct Marketing: Use of mail, telephone and other non personal contact tools to communicate with or
solicit a response from specific customers and prospects.
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Sales Promotion: Short-term incentives to encourage trial or purchase of a product or service. Public
Relations and Publicity: A variety of programs designed to promote and / or protect a company’s image
or its individual products.
Personal Selling: Face-to-face interaction with one or more prospective purchasers for the purpose of
making sales. The whole marketing mix, not just the promotional mix, must be orchestrated for maximum
communication impact.
The Communication Process: Marketers need to understand how communication works. A communication
model answers (1) who (2) says what (3) in what channel (4) to whom (5) with what effect. The following
shows a communication model with nine elements. Two elements represent the major parties in a
communication - sender and receiver. Two represent the major communication tools - message and
media. Four represent major communication functions - encoding, decoding, response, and feedback. The
last element is noise in the system.
Senders must know what audiences they want to reach and what responses they want. They encode their
messages in a way that takes into account how the target audience usually decodes messages. The sender
must transmit the message through efficient media that reach the target audience. Senders must develop
feedback channels so that they can know the receivers response to the message. For a message to be
effective, the senders encoding process must mesh with the receivers decoding process. Messages are
essentially signs that must be familiar to the receiver. The more the senders field of experience overlaps
with that of the receiver, the more effective the message is likely to be. "The source can encode, and the
destination can decode, only in terms of the experience each has had". This puts a burden on
communicators from one stratum (such as advertising people) who wants to communicate effectively with
another stratum (such as factory workers).The senders task is to get his or her message through to the
receiver. There is considerable noise in the environment - people are bombarded by several hundred
commercial messages a day. The target audience may not receive the intended message for any reasons.
The communicator must design the message to win attention in spite of surrounding distractions.
Communication: We will now examine the major steps in developing a total communication and
promotion program. The marketing communicator must (1) identify the target audience,(2) determine the
communication objectives, (3) design the message, (4) select the communication channels, (5) allocate the
total promotion budget, (6) decide on the promotion mix, (7) measure the promotions results, and (8)
manage and coordinate the total marketing communication process.
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1. Identifying the Target Audience: A marketing communicator must start with a clear target audience in
mind. The audience could be individuals, groups, particular publics, or the general public. The target
audience will critically influence the communicators decisions on what to say, how to say it, when to say it,
where to say it, and to whom to say it.
2. Determining the Communication Objectives: Once the target market and its characteristics are
identified, the marketing communicator must decide on the desired audience response. The ultimate
response, of course, is purchase and satisfaction. But purchase behavior is the end result of a long process
of consumer decision making. The marketing communicator needs to know how to move the target
audience to higher states of readiness to buy. The marketer can be seeking a cognitive, affective, or
behavioral response from the target audience. That is the marketer might want to put something into the
consumers mind, change the consumers attitude, or get the consumer to act. Even here, there are different
models of consumer-response stages.
All of these models assume that the buyer passes through a cognitive, affective, and behavioral stage_ in
that order. This sequence is the "learn-feel-do" sequence and is appropriate when the audience has high
involvement with a product category perceived to have high differentiation, as is the case in purchasing an
automobile. An alternative sequence is the "do-feel-learn" sequence, when the audience has high
involvement but perceives little or no differentiation within the product category, as in purchasing iron
rods. Still a third sequence is the "learn-do-feel" sequence, when the audience has low involvement and
perceives little differentiation within the product category; as is the case in purchasing salt. By
understanding the appropriate sequence, the marketer can do a better job of planning communications. If
most of the target audience is unaware of the object, -the communicators task is to build awareness,
perhaps just name recognition. This can be accomplished with simple messages repeating the name.
3. Designing the Message: Having defined the desired audience response, the communicator moves to
developing an effective message. Ideally, the message should gain attention, hold interest, arouse desire,
and elicit action (AIDA model). In practice, few messages take the consumer all the way from awareness
through purchase, but the AIDA model suggests the desirable qualities. Formulating the message will
require solving four problems: what to say (message content), how to say it logically (message structure),
how to say it symbolically (message format), and who should say it (message source).
4. Selecting the Communication Channels: The communicator must select efficient channels of
communication to carry the message. Communication channels are of two broad types, personal & non
personal. Within each are found many sub channels
(a) Personal Communication Channels: Personal communication channels involve two or more persons
communicating directly with each other. They might communicate face to face, person to audience, over
the telephone, or through the mail. Personal communication channels derive their effectiveness through the
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opportunities for individualizing the presentation and feedback. A further distinction can be drawn between
advocate, expert, and social channels of communication. Advocate channels consist of company
salespeople contacting buyers in the target market. Expert channels consist of independent experts making
statements to target buyers. Social channels consist of neighbors, friends, family members, and associates
talking to target buyers. Many companies are becoming acutely aware of the power of the "talk factor" or
"word-of-mouth" coming from expert and social channels in generating new business. They are seeking
ways to stimulate these.
(b) Non Personal Communication Channels: Non personal communication channels carry messages
without personal contact or interaction. They include media, atmospheres, and events. Media consist of
print media (newspapers, magazines, direct mail), broadcast media (radio, television), electronic media
(audiotape, videotape, videodisc), and display media (billboards, signs, posters). Most non personal
messages come through paid media. Events are occurrences designed to communicate particular messages
to target audiences. Public relations departments arrange news conferences, grand openings, and sport
sponsorships to achieve specific communication effects with a target audience. Although personal
communication is often more effective than mass communication, mass media might be the major means to
stimulate personal communication. Mass communications affect personal attitudes and behavior through a
two-step flow-of- communication process. "Ideas often flow from radio and print to opinion leaders and
from these to the less active sections of the population
5. Establishing the total promotion Budget: One of the most difficult marketing decisions facing
companies is how much to spend on promotion. This it is not surprising that industries and companies very
considerably in how much they spend on promotion. Promotional expenditures might amount to 30to50%
of sales in the cosmetics industry and only 10 to 20% in the industrial equipment industry. Within a given
industry, low-and high-spending companies can be found. How do companies decide on their promotion
budget? We will describe four common methods used to set a promotion budget. Many companies set the
promotion budget at what they think the company can afford. One executive explained this method as
follows: "why it’s simple. This method of setting budgets completely ignores the role of promotion as an
investment and the immediate impact of production on sales volume. It leads to an uncertain annual
promotion budget, which makes long-range market communication planning difficult.
6. Promotion mix: Demand of goods is to be created to sell the goods produced in the market be created.
Without demand creation, no sale can be affected. It is a continuous process throughout the product life
cycle. At introduction level utmost efforts are made to make a product recognized by the customers. The
demand once created, would have to be maintained and increased. Efforts for demand creation continue
even in the declining stage. For this purpose, promotional activities are undertaken. A promotional mix
involves three main activities: personal selling, advertising and sales promotion activities. Personal selling
is direct or personal method of selling the product through salesmen or retailer. Advertising and sales
promotion is impersonal methods of Promotion mix.
7. Measuring Promotion’s Results: After implementing the promotional plan, the communicator must
measure its impact on the target audience. This involves asking the target audience whether they recognize
or recall the message, how many times they saw it, what points they recall, how they felt about the
message, and their previous and current attitudes towards the product and company. The communicator
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would also want to collect behavioral measures of audience response, such as how many people bought the
product, liked it, and talked to others about it.
8. Total Marketing Communication Management: combines the four controllable into marketing
strategy market, distribution promotion and price strategies. It involves establishing and maintaining
communications with target markets and interview middlemen, through various marketing communications
media- advertising, personal selling, point of purchase materials, packing and other media like samples and
coupons. The messages sent involve various aspects of the overall marketing strategy that might contribute
to favorable buying response on the parts of middlemen and members of target market segment. Successful
promotion comes about only through effective communication. Communication gap may be very harmful
in the achievement of marketing goals.
LOCATION STRATEGIES (Place)

Shopping centers
The international council of shopping centers has defined eight basic types of shopping centers.
 Neighborhood shopping center
 Community shopping center
 Regional shopping center
 Super Regional center
 Fashion/ specialty center
 Power center
 Theme center
 Outlet center
Freestanding sites
A freestanding location is a store located along a major traffic artery, without any other competitive
retailers around. The biggest advantage of such a location is that there is no competition around. Discount
retailers in the west were the first ones to opt for such locations. The distance that the target consumer is
willing to travel to buy a particular product is a key factor that the retailer needs to take into consideration,
to ensure that the eventual location that he chooses for the store is successful.
Location and retail Strategy

Location: The selection of the store site can be a non-systematic process, which is based on ‘gut feeling’ or
‘environmental observation’ or an imitation of competitors. Steps involved in choosing a retail location:
Step 1: Market identification
The first step in arriving at a decision on retail location is to identify the markets attractive to a retailer.
This is important as he needs to understand the market well, especially in a country like Ethiopia, India,
where every region has its own peculiarities and needs.
Step 2: Determining the market potential
In order to determine the market potential, the retailer needs to take into consideration various elements.
The chief among them are: Demographic features of the population; the characteristics of the households in
the area; Competition and compatibility; Laws and regulations; and Trade area analysis.
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Demographic features of the population

Understanding the features of the population is integral to developing a retail marketing strategy. The
retailer also needs to understand the level of literacy and the level of education in the population.
The characteristics of the households in the area
The retailer needs to have a clear understanding of the average household income and the distribution of
this income in the area. This is very essential as the level of income largely determines the kind of retail
facilities required.
Competition and compatibility
While determining the market potential, it is necessary to check the compatibility of the retailer store with
the other retailer outlets in an area. It is necessary to try and evaluate their strengths and weaknesses, to
know the square foot area of the various stores in the area and the kind of returns that they are able to
obtain per employee per square foot.
Laws and regulations
Before opening a retail store in a region, it is essential to have a good understanding of the laws and
regulations for opening a retail shop in the area. Various permissions which are needed, the hours for
which the store can operate, the minimum wages to be offered to the persons working, the holidays
required, etc. can affect the profitability of the store.
Trade area analysis
An integral part of determining the market potential is the analysis of the trade areas. A trade area is the
geographic area that generates the majority of the customers for the stores. Types of trade areas include Retail
store Primary trading area, Secondary trading area and Tertiary trading area
Step 3&4: identify alternate sites and select the site
After having determined the market potential and taking a decision on the store, a retailer has to select the site
to locate the store. Though each retailer strives to find the 100% perfect location, there are various factors which
affect his decision. The chief among them are:
 Traffic
 Accessibility of the market is also a key factor
 Amenities available
 To buy or to lease
 The product mix offered
Traffic: This refers to both pedestrian and vehicular traffic. The traffic that passes the site is an important
determinant of the potential sales that can be generated from that store.
Accessibility of the market is also a key factor: Accessibility of the market is defined in terms of availability
of public transport and road/local transport train connections to reach the market.
Amenities available: Depending on the type of product to be retailed, facilities like free and ample parking
become important.
To buy or to lease: An important factor to be considered before taking the decision on the site the decision to
buy the store or to lease it. If the store is to be leased, then the terms of lease will have to be studied carefully.
The product mix offered: The kind of product mix to be offered by the retailer by the retailer also affects his
choice of location.
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MERCHANDIZE MANAGEMENT (Product)

A. Merchandise Management
Merchandise management can be termed as the analysis, planning, acquisition, handling and control of
the merchandise investments of a retail operation. The process of merchandise management includes the
developing of strategies to ensure that the right product is bought at the right price and available at the right
place, at the right time, in the right amount, in order to satisfy the needs of the target customer. No one in
retail can completely avoid any contact with merchandising activities.
Merchandising is the day-to-day business of all retailers. As inventory is sold, new stock needs to be
purchased, displayed and sold. Hence, merchandising is often said to be at the core of retail management.
Merchandising traces its growth to the rise of organized retail in the world. Initially, as the retailers
operated only one or two stores, the function of buying the merchandise, pricing it, etc., were much
simpler. In many cases, the retailer did it himself. However, as retailers started adding stores and
categories, the workload on the buyers increased significantly. Often, buyers had little information or time
and they ended up using approximations based on sales volumes, to allocate merchandise between stores.
This sometimes, resulted in stores exchanging merchandise among them! In order to overcome this
limitation, the function of a planner came into being. The planner’s job was to act as a link between the
stores and the buyer. The de-linking of the function of planning and buying allowed better interaction with
the stores. Planners were able to devote more time to collecting and studying store level data, the buyers on
the other hand, were able to spend more time with the vendors.
Factors Affecting the Merchandising Function
Merchandising does not function in isolation. It is affected by various factors, like the organization
structure, the size of the retail organization and the merchandise to be carried. As in every retailing
endeavor, the most fundamental activities are buying merchandise and re-selling it to its customers. The
owner or the manager, who may be assisted by the sales person, may perform the buying function in the
case of a single store. As the single store grows in terms of business, it may add departments. Functional
departmentalization may occur and the number of persons involved in the buying process may increase. In
the case of a chain store, the buying function may be centralized or decentralized geographically,
depending on the retail organization. Thus, the nature of the organizations is an important factor affecting
the function of merchandising. The merchandise to be carried by a retailer largely determines
responsibilities of the merchandiser. The buying for basic merchandise is fairly different from the buying
of fashion merchandise. Basic are those products or items, which their retailer will always keep in stock.
This primarily because these products are always in demand and the sales variance is minimal from year to
year. Example of basics would be times like white shirts in clothing or items or items like pulses, oil, etc.
Fashion products on the other hand, are products, which may sell very well in one season or year and may
not have any demand in the next season. A merchandiser, who is handling fashion products, will need to
spend more time in the market, looking for products, which will suit the needs of the store’s consumers. He
will also need to be aware of the fashion forecasts and the trends in the international markets. The
organization structure that the retail organization adopts also affects the merchandising function. Some
organizations may demarcate the role f the buyer and the role of a merchandiser as separate functions,
which in a smaller organization, one person may carry out the all the duties.
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Functions of Merchandise Manager
The merchandise manager is responsible for particular lines of merchandise. For example, in department
store, there may be separate merchandise managers for menswear, women’s wear, children’s wear, etc.
They would be in charge of a group of buyers and their basic duties could be divided into four areas;
planning, directing, coordinating and controlling.
1. Planning: Through the merchandise managers may not directly be involved in the actual purchase of the
merchandise, they formulate the policies for the areas for which they are responsible. Forecasting the sales
for the forthcoming budget period is required and this involves the estimating of the consumer demand and
the impact of the changes occurring in the retail environment. The sales forecasts are then translated into
budgets, to help the buyers work within the financial guidelines.
2. Organizing: It involves the establishment of an intentional structure of roles through determination and
enumeration of the activities required to achieve the goals of an enterprise and each part of it. The grouping
of these activities , the assignment of such groups of activities , the delegation of authority to carry them
out ,and provision for coordination of authority and informational relationship horizontally and vertically to
be carried out by the merchandise manager.
3. Directing: Guiding and training buyers as and when the need arises, is also a function of the
merchandise manager. Many a times, the buyers have to be guided to take additional markdowns for
products, which may not be doing too well in the stores. Inspiring commitment and performance on the
part of the buyers is necessary.
4. Controlling: Assessing not only the merchandise performance, but also the buyer’s performance, is a
part of the merchandise manager’s job. Buying performance may be evaluated on the basis of the net sales,
mark up percentage, the gross margin percentages and the stock turn. This is necessary to provide controls
and maintain high performance results.
5. Coordinating: Usually, merchandise managers supervise the work of more than one buyer, hence, they
need to co-ordinate the buying effort in terms of how well it fits in with the store’s image and with the
other products being bought by the other buyers. The structure of the merchandise department largely
depends on the organization structure adopted by the retail organization.
B. Merchandise Planning
Retail businesses, like all other businesses, exist with the aim of making a profit. The function revolves
around planning and control. Planning is of great importance, because it takes time to buy merchandise,
have it delivered, record the delivery in the company’s records and then, to send the merchandise to the
right stores. Analysis is the starting point of merchandising planning. The person, who is to take the buying
decisions for a retail organization, must be aware of the consumer needs and wants. An understanding of
the consumer buying process is necessary. A part from this, a clear understanding is also necessary of what
products are actually selling and where. Information on this can be obtained from sale records. An
interaction with the sales staff is also needed, as they can offer valuable insights into conducted, magazine
and trade publications and trade associations are other sources of information. The information thus
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gathered needs to be analyzed. This analysis forms the basis of the sales forecast. The first stage in
merchandise planning is developing the sales forecast.
Step I: Process of Planning Sales Forecast: Forecasting involves predicting as to what consumers may do
under a given set of conditions. A sales forecast may be made by the merchandiser, based on the targets
given by the top management or may be handed down by the top management itself, depending on the
retail organization. A sales forecast is the first step in determining the inventory needs of the product or
category. Forecasts 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? A sales forecast is usually made for a specific period of time, this may
be weeks or a season or a year. A forecast may be a short term—i.e., up to one year, or a long term—i.e.,
for a period of more than a year. The person, who is to make the forecast for the product group or category,
needs to be aware of the changes in the tastes and attitudes of the consumers, the size of the target market
and the changes in their spending patterns. The process of developing sales forecast involves the following:
1. Identifying Past Sales: A review of the past sales records is necessary to establish if there is any pattern
or trend in the sales figures. A look at the sales figures of the past year, for the same period, would give an
indication of the sales in the current year, given that the conditions are constant.
2. Reviewing the Changes in the Economic Conditions: It is necessary to take into account the changes
happening at the economic front, as this has a direct link to the consumer spending patterns. Economic
slowdowns, increase in unemployment levels, etc., all affect business.
3. Analyzing the changes in the sales potential: It is now necessary to relate the demographic changes in
the market to that of the store and the products to be sold.
4. Finding the changes in the marketing strategies of the retail organization and the completion while
creating the sales forecast, it is necessary to take into consideration, the marketing strategy to be adopted by
the organization and that of the competition.
Is there a new line of merchandise to be introduced, a new store to be opened or an existing store to be
remodeled? All these factors need to be taken into consideration.
5. Creating the Sales Forecast: After taking into consideration the above-mentioned points, and estimate
of the projected increase in the sales, is arrived at. This is then applied to various products/ categories, to
arrive at the projected sales figures. A sales forecast is thus, an outline of what amount of sales need to be
achieved, it tells us what amount of sales are targeted and what revenues are expected from those
targets. However, it does not give there merchandiser any idea of the inventory levels that are required.
This brings us to the second stage, which involves the planning of the quantities of merchandise that would
be required to achieve the sales forecasted in Stage
Step II: Identifying the Requirements: Planning is essential to provide direction and to serve as a basis of
control for any merchandise department. In order to be able to provide the right goods to the consumers, at
the right place and time, one needs to plan a course of action. Planning in merchandising is at two levels.
1. The creation of the Merchandise Budget, and

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2. The Assortment Plan
There are two methods of developing a merchandise plan. They are top down planning and bottom up
planning. In top down planning, the top management words on the sales plan and this is passed down to the
merchandising team. On the other hand, in bottom up planning, individual department managers work on
the estimated sales projections. These are then added up to arrive at the total sales figures. After the sales
forecasting exercise has been completed, inventory levels need to be planned. The merchandise budget is
the first stage in the planning of merchandise. It is a financial plan, which gives an indication of how much
to invest in product inventories, stated in monetary terms.
The merchandise budget usually comprises five parts:
1. The sales plan, i.e., how much of each product needs to be sold; this may be department wise, division
wise or store wise.
2. The stock support plan, which tells us how much inventory or stock, is needed to achieve those sales.
3. The planned reduction, which may need to be made in case the product, does not sell.
4. The planned purchase levels, i.e., the quantity of each product that needs to be procured from the market.
5. The gross margins (the difference between sales and cost of goods sold,) the department, division or
store contributes to the overall profitability of the company.
Methods of Inventory Planning
In order to be able to proceed with merchandise planning, the method of inventory plans needs to be
finalized. Any one of the four methods given below can be used for planning the inventory levels needed.
1. The Basic Stock Method

2. The percentage Variation Method
3. The week’s Supply Method, and
4. The Stock/ Sales Ratio Method.
The Basic Stock Method: This method of inventory planning is used when the retailer believes that it is
necessary to have a given level of inventory on hand, at all times. Basic stock is the minimum amount of
inventory that needs to be maintained for a product, category or store, even during times of low sales. It is
calculated as under:
Basic Stock = Average stock for the season – Average monthly sales for the season, where, Average
monthly sales for the season = Total planned sales for the season/Number of months in the season
Average Stock for the Season = Total Planned Sales for the season/Estimated Inventory Turnover Rate for
the Season.
Beginning of Month (BOM) Stock = Planned Monthly Sales + Basic Stock
Illustration: Using the basic stock method, calculate BOM inventory for the month of January, given the
following information:
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Planned sales for the month of January: 40,000

Average Monthly Sales: 50,000
Average monthly inventory: 60,000
Basic stock = 60,000-50,000 = 10,000
BOM stock = 40,000+10,000 = 50,000
The Percentage Variation Method: This method is normally used when the stock turnover rate is more
than six times a year. The basic premise behind this method of inventory planning is that the inventory
levels should reflect the actual sales. It is calculated as under:
BOM Stock = Average Stock for season X ½ (1+ (Planned sales for the month / Average Monthly sales)].
Illustration: Using the Percentage Variation Method, calculate the BOM inventory for the month of
January, given the following information.
Planned Sales for the month of January: 40,000

Average monthly Sales: 50,000
Average monthly inventory: 60,000
BOM Stock = Average Stock for season X ½ [1+ (Planned Sales for the month / Average Monthly Sales)
BOM Stock = 60,000 X ½ X (1+ 40,000/50,000)
= 60,000 X ½ X (1+0.8)
= 60,000 X 0.9 = 54,000
Week’s Supply Method: Retailers such as grocers, who plan inventories on a weekly, and not on a
monthly basis, and whose sales do not fluctuate substantially, largely follow the Week’s Supply Method. It
is calculated as under:
Number of Weeks to be Stocked = The Number in Weeks in the period/stock turnover Rate for the period
Average Weekly Sales = Estimated Total Sales for the Period/the Number of Weeks in the Period
BOM Stock = Average Weekly Sales X Number of Weeks to be Stocked
Stock to Sales Ratio Method: This is very easy to use, but it requires the retailer to have a beginning of
the month stock/sales ratio. It involves the maintaining of the inventory levels at a specific ratio to the
sales. This ratio tells the retailer how much inventory is needed at the beginning of the month, to support
the month’s estimated sales.
Stock-Sales Ratio = Value of inventory/Actual Sales
Planned BOM Inventory = Stock Sales Ratio X Planned Sales.
Illustration: Using the Stock to sales Ratio Method, Calculate the BOM inventory for the month of January,
given the following information.
Stock to sales Ratio = 1.4
Planned Sales for the month of January: 50,000
Planned BOM inventory = 1.4 X 50,000 = 70,000
The Stock Turnover Rate: An effective measure of the speed with which products or merchandise moves
in and out of a retail store for a given period, is the Stock Turnover Rate. It is a measure of efficiency and is
usually calculated for a period, of six months or a year. It is calculated using the following formula:
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Planned sales (for a period)/Planned Average Inventory (for the period) = Stock turnover.
The stock turnover rate is a measure of efficiently. Every department usually, has its own stock turnover
rate, as different merchandise need different speeds of selling. Typically, for grocery products, the stock
turnover rates needed would be much higher, as compared to those needed for products, the stock turnover
rates needed would be much higher, as compared to those needed for products like apparel or toys., From
the management’s perspective, the stock turnover indicates the level of capital usage, i.e., turning money to
inventory, inventory to money and then repeating the process again.
Step III: Merchandise Control: The purpose 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. When used effectively, open
to buy ensures that the buyer:
1. Limits overbuying and under buying,
2. Prevents loss of sale due to unavailability of the required stock,
3. Maintains purchases within the budgeted limits, and
4. Reduces markdowns, which may arise due to excess buying.
When planning for any given month, the buyer will not be able to purchase the amount equal to the planned
stocks for the month. This is because there may be some inventory already on hand or on order, but not yet
delivered.
Calculating the Open-to-buy
The open-to-buy amount available to a buyer is Calculated using the simple formula stated below: Open-
to-buy = Planned EOM Stock – Projected EOM Stock Open-to-buy is always calculated for the current and
future periods.
Step IV: Assortment Planning: Assortment Planning involves a determination of the quantities of each
product that will be purchased so as to fit into the overall merchandise plan. Details of color, Size, brand,
materials, etc., have to be specified. The main purpose of creating an assortment plan is to create a
balanced assortment of merchandise for the customer. Various factors affect the assortment planning
process. The first among these factors is the type; of merchandise that is to be stocked in the retail store.
Merchandise may be classified into basic or staple merchandise, fashion, convenience or specialty goods.
Fashion Merchandise: this type of merchandise has a high demand for a relatively short period of time.
Buying the right quantities at the right time is of great importance for this category of products, as the
demand for the product exists for a limited time. Excess buying may result in heavy markdowns at the end
of the season or when the product goes out of style. Examples of such products include various cuts in
jeans, which may be in style for a season, short lengths in kurtas, etc., Basic Merchandise these are
products which consumers buy year in and year out. The store would usually require these products, to be
in stock at all times. Example of products, which may be classified as staples are: men’s white shirts, socks,
handkerchiefs, stationery, etc, Buying staple merchandise is relatively easier; it can be easily done by
analyzing the past sales records. Seasonal staples are those products, which are in demand only at a
particular time of the year, every year.
C. Merchandise Buying
The basic role of a buyer is to find, evaluate and select merchandise for the retail store. In this process, he
needs cultivate sources for which suitable merchandise can be secured for the retail organization. To do this
effectively, he needs to answer the following questions: What to buy? When to buy? How much to buy?
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Where and from whom to buy? The methods that a buyer can use to determine the quantities to be
purchased have been covered in the previous chapter. This chapter focuses on the buying techniques, which
can be used by a buyer to determine his sources of supply.
An integral part of the buying decision is the decision to make or buy the product. The concept of the
private label and how it is useful to retailers is discussed in detail. Category Management, which is an
important part of retail in the developed markets, is discussed in the last section of this chapter. A buyer is
a representative of his retail organization, and he plays a key role in developing relationships with the
manufacturers and vendors. This process starts with the identification of the sources of supply. To start
with, it is necessary to decide as to whether the merchandise is to be sourced from domestic or regional
markets or from international markets. This is largely related to the type of the retail organization, the
product being offered and the target consumer. For example, products like high fashion garments,
exclusive watches, perfumes, cosmetics, etc., may be obtained from the international market. Merchandise
buying is a four – step process, which involves:
1. Finding Supply Sources,
2. Identifying Potential Supplier,
3. Merit rating the Supply Sources, and
4. Finalizing terms with the Supply Sources. We now examine the four steps in detail.
1. Finding supply sources: Domestic sources of supply may be located by visiting central markets, trade
shows or expositions may locate domestic sources of supply, usually, each city has its own central market,
where a large number of key suppliers are located. A visit to such a location enables the buyer to
understand the trends in the market and evaluate the new resources and merchandise offerings. Trade
shows and expositions are also good for finding new sources of supply. In addition to buying from the
domestic market, an organization may seek out foreign sources, from where merchandise can be purchased.
This is a common trend in the west where trade barriers are considerably lower. As retailers today operate
in a global marketplace, the sourcing of products from international markets is also a reality. The prime
reasons for looking at international sourcing could be the uniqueness of the merchandise, or the
unavailability of the merchandise in the domestic market. Low cost and good quality are also factors,
which could affect this decision. On the other hand, a retailer may also source from a foreign market
simply because the merchandise is unique and because certain customers are always looking for a unique
product. A decision that is closely associated with the branding decisions is to determine where the
merchandise is made. Although retailers buying manufacturer’s brands usually aren’t responsible for
determining where the merchandise is made, a product/s country of origin is often seen as a sign of quality.
Costs associated with global sourcing include:
1. Country or Origin: Many a times, where the merchandise has been manufactured makes a high
difference during the final sale of the product.
2. Foreign currency fluctuations: Fluctuations in the international currency rates will all affect the buying
price of the product. At times, due to violent fluctuations in the price, sourcing products internationally
may suddenly become viable or unlivable.
3. Tariffs: also known as duties, they are taxes placed by a government, on imports. Import tariffs shield
domestic manufacturers from foreign competition and raise money for the government. GATT & MFA
regulations affect such matters.
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4. Foreign Trade Zones: These are special area within a country that can be used for warehousing,
packaging, inspection, labeling, exhibition, assembly, fabrication, or Trans-shipment of imports, without
being subject to that country’s tariffs.
5. Cost of Carrying Inventory: Purchase of goods is always at a price. When the merchandise is finally
sold, it makes a very big difference on the carrying costs.
6. Transportation costs: while sourcing products internationally, it is essential to keep in mind the cost that
will be involved in transporting the goods to the various markets that the retailer operates in. this is a cost
which has to be added to the cost of goods and eventually, affects the margins that can be earned.
2. Identifying potential suppliers
A decision now needs to be taken on the potential vendors. The following criteria need to be kept in mind:
1. The target market for whom the merchandise is being purchased.
2. The image of the retail organization and the fit between the product and the image of the retail
organization.
3. The merchandise and prices offered.
4. Terms and services offered by the vendor.
5. The vendor’s reputation and reliability. The prime factor, which affects these decisions, is, whether the
merchandise offered by a vendor is compatible with the needs and wants of the customers. If the
merchandise is not right, the vendor should not be considered. Vendors also fall under different levels of
dependability, with respect to the way that they conduct their business. Factors like the ability to meet the
delivery schedules, adherence to quality procedures and the terms offered, play an integral role during
vendor selection. The services provided by a vendor may also be deciding factor. These services include
cooperative advertising, return or exchange privileges, participation in store promotions and the willingness
to use the relevant technology. The retail buyer then needs to negotiate on the price, the delivery dates, the
discounts, the shipping terms and the possibilities of returns. While negotiating with the vendors, it is
necessary to keep in mind their history, their goals and constraints. At the same time, the buyer needs to be
aware tot the real deadlines and work towards fulfilling them. The following are the types of discounts that
could be available to the buyer:
Trade Discounts: These are reductions in the manufacturer’s suggested retail price, granted to wholesalers
or retailers. Chain Discounts This is the traditional manner of discount8ing, where a number of different
discounts are taken sequentially, from the suggested retail price (e.g.: 50-10-5).
Quantity Discounts: These can be cumulative and non-cumulative. Retailers earn quantity discounts by
purchasing certain quantities over a spiced period of time.
Seasonal Discount: This is an additional discount; offered as an incentive to retailer to order merchandise
in advance of the normal buying season.
Cash Discount: It is the reduction in the invoice cost for paying the invoice, prior to the end of the
discount period.
3. Merit rating the supply sources
Retailers have for lone, been wary of sharing information with their suppliers. This hardly surprising –
considering their traditionally competitive relationship, with both sides trying to get the best of every deal.
However, times have changed, and many retail organizations work with their suppliers as a team, to create
a competitive advantage. Shared information is a vital component of this new approach, but only if the
right information is shared with the right people, for the right reasons. But how do we define their three
“rights”? The right people are those individuals or organizations who can use the information you give
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them, to help you. To do this, the retailer needs to understand the importance of the trading relationship, to
both the sides. If the retailer is a small customer of a big supplier, the latter may not be sufficiently
interested in the retailer’s business to bother using the information that he supplies however, if the
information can be shown to benefit the supplier tool he may use it to help the retailer. An example of this
is a retail group that received weekly deliveries from a confectionery company, but still found themselves
out of stock for some times. When details of their sales were given to the supplier, the latter was able to use
its market knowledge to project sale far more accurately than the retail group could. the supplier benefited
by now having to deliver at two – weekly intervals and the retailer benefited from lower stock holdings and
less out of stock problems However, not all suppliers will be capable of making good use of retail stock
data and this must be borne in mind while managing the supplier portfolio. The right information is that
information which right people can actually use, to give better service. Thus, to maintain strategic
partnership with vendors, the buyer needs to build on:
1. Mutual trust,
2. Open communication,
3. Common goals, and
4. Credible commitments.
4. Finalizing terms with supply sources

In case a buyer is dealing with multiple vendors for a particular product category, he can draw conclusions
on a vendor’s performance by listing the following:
 The total orders placed on the vendor in a year
 The total returns to the vendors, the quality of the merchandise.
 The initial markup on the products.
 The markdown, if any,
 Participation of the vendor in various schemes and promotions.
 Transportation expenses, if borne by the retailer.
 Cash discounts offered by the vendor, and lastly,
 The sales performance of the merchandise.
A factual evaluation of the vendors will help the buyers in being unbiased and in taking the right decision
for the retail organization. Respect and co-operation between the buyers and the vendors is necessary to
build long-term relationships. In the fast changing world of retail, it is also necessary to share information
with the vendors on a timely basis, so as to avoid stock outs or situations requiring heavy markdowns.
D. Category Management
Retail is often termed as a business of responding to change. Today’s retailer is faced with a rapidly
changing and demanding consumer, intense competition, and pressures on costs. The combinations of the
business condition that exist today and the advances in technology have created an opportunity for the
development of new management approaches. One such approach is that of category management. By
focusing on a superior understanding of consumer needs, category management provides renewed
opportunities for meeting consumer needs, and at the same time, for achieving competitive advantage as
well as lower costs through greater work process efficiencies.
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Category Management can be defined as “the distributors’ / suppliers’ process of managing categories as
strategic business units, producing enhanced business results by focusing on delivering consumer value.
Thus, a category is a basic unit of analysis for making merchandising decision.
In general, a category is an assortment of items that the customer sees as reasonable substitutes for each
other. The fundamentals of category management revolve around managing categories as strategic business
units. At the core of the category management concept is a focus on a better understanding of consumer
needs as the basis for the retailers’ and suppliers’ strategies, goals and work processes. Technology plays a
key role, as information is a key enabler. The idea is to use this information to tailor the product offering
according to consumer needs. The offering is then measured in terms of its sales, cost and returns per
square foot. The whole process is aimed at providing customer satisfaction and at the sometime,
maximizing the returns for the organization. This focus results in a re-evaluation of many prevalent
business practices, which may have obstructed a greater understanding of consumer needs and
opportunities.
Components of Category Management
There are six components, which are a key to the functioning of category management. Two of these are
considered essential, without which category management cannot be started and they are therefore, called
the core components. The other four are needed to enable to process, without these, category management
can be started but it cannot be institutionalized on an on-going basis. The two core components are: the
Strategy and the Business processes. The enabling factors are performance measurement, information
technology, organizational capabilities and co-operative trading partner relationships.
The core component strategy is linked to the company’s overall mission and goals. The business process,
which evolves, is a result of these strategies. The business process focuses on how work has to be done
within the organization and with its trading partners, rather than focusing on what is to be done.
The steps involved in category management business process are explained briefly, below:
1. Category Definition: Category definition is the first step in the process. The definition of the category
has a significant impact on the subsequent steps. A category definition should be based on how the
customer buys, and not on how the retailer buys. For example, for a grocery retailer, aerated drinks may be
one category, ready to cook meals, another and health drinks, a third category. Category definition varies
from retailer to retailer.
2. Defining the Category Role: The category role determines the priority and the importance of the
various categories in the overall business and aids in resource allocation. Traditionally, four categories
have been identified. They are:
Destination Category: This is the main product offering of the retail store. Examples include fresh
groceries at a supermarket and apparel in a department store.
Routine category: These are products that a customer buys from the retailer as a matter of routine or habit.
Examples include toothpaste, soaps, etc.
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Seasonal Category: This includes products, which are not purchased very often or are purchased when
available and needed. Examples would include mangoes sold in summer in a super market and umbrellas
and raincoats in a department store.
Convenience Category: These are products that a consumer finds convenient to buy at a neighborhood
retailer. Examples include products like bread, eggs and even routine stationery. Category roles must be
developed with the customer in mind and must reflect the typical consumer shopping behavior. These roles
provide logical framework for the allocation of the retailer’s resources, based on its mission, goals, and
strategies.
3. Category Assessment: In this step, the current performance of the category is evaluated with respect to
the turnover, profits and return on assets in the category. It involves an assessment of the consumers, the
market, the retailer and the suppliers.
4. Category Performance Measures: The development of category performance measures involves the
setting of measurable targets in terms of sales, margins and Gross Margin Returns on Investment
(GMROI).
5. Category strategies: At this point in the process, the retailers and the supplier know the category’s role;
they have assessed the current performance of the category and have set preliminary targets for the
category’s performance. The purpose of this step is to help the retailer and supplier to develop strategies
that capitalize on category opportunities through creative and efficient use of the resources that are
available to the category. Category strategies can be aimed at building traffic or transactions, generating
cash, generating profit, enhancing the image or creating excitement.
6. Category Tactics: At this stage, category tactics are developed in the areas of assortment pricing,
promotions and the presentation of the merchandise in the store.
7. Category plan implementation: A Specific implementation schedule is developed and responsibilities
are assigned. Accurate implementation is the key to the success of the Category Management.
8. Category Review: The final step in the business process is the review of the progress and of the actual
achievements as against the targets set for the category. Review aids in the taking of decisions at the right
point of time.
Category management is considered to be a “scientific” approach to relating in the mature markets, largely
because it is date driven and fact based. The successful adaptation of category management at pantaloon
shows us how the returns on the particular product/category can be maximized by keeping the focus on the
customer and creating systems and processes within the organization to aid such a focus.
E. Merchandise Allocation
Once the merchandise is purchased and priced, it must be allocated to the stores. Most retailers classify
their stores as A, B, or C, based on their sales potential. Each chain’s allocation of merchandise to its stores
is different, but it should be based on the total number of stores in the chain and the distribution of sales
among the stores. Each store, regardless of its size, must carry a large proportion of the assortment offered;
otherwise, the customers will perceive the smaller stores as having an inferior assortment. The stores which
are larger, and amount for a larger percentage of the sales can get merchandise more frequently. The
seasonally of demand, colors the amount of time that it takes for the merchandise to reach the locations,
specific colors, and sizes, all these factors must be taken into account while allocation the merchandise.
The stores, which are larger, and amount, for a larger percentage of the sales, can get merchandise more
frequently. The seasonally of demand, colors the amount of time that it takes for the merchandise to reach
24 | Page
the locations, specific colors and sizes, all these factors must be taken into account while allocating the
merchandise.
Analyzing Merchandise Performance: There are three methods of analyzing merchandising performance:
1. The ABC analysis,
2. The sell through analysis and
3. The Multiple Attribute method.
1. ABC Analysis: ABC analysis ranks merchandise by a pre-determined performance measure. This helps
determine which items should never be out of stock, which items should occasionally be allowed to be out
of stock and which items should be deleted from the stock selection. An ABC analysis can be done at any
level, for merchandise classification from stock keeping unit (SKU) to department. ABC analysis utilizes
the 80:20 principles, which implies that 80% of the sales come from 20% of the products. The first step in
the ABC analysis is to rank orders SKUs, using one or more criteria. The most important performance
measure for this type of analysis is contribution margin, where Contribution margin = Net Sales – Cost of
Goods Sold – Other variable expenses. Other variable expenses can include sales commissions. Sales can
be the sales per square foot, the gross margin or the GMROI.
The Pareto Curve: The next step is to determine how items with different levels of profit or volume, should
treated. The buyer may define as category A, those items that account for 5% of the total quantity of items
but represent 70% of the sales. Category B items usually represent 10% of the sales whereas category C
consists of those items for which there were no sales in the past season.
2. Sell through Analysis: A sell through analysis is a comparison between the actual and the planned
sales, to determine as to whether early markdowns are required or whether more merchandise is needed to
satisfy demand. There is no reel, which can determine when a mark down is necessary. It depends on
factors like the past experience with the merchandise whether the merchandise is schedule to feature in
advertising, whether the vendor can reduce the buyer’s risk by providing markdown money, etc. If actual
sales stay significantly ahead of the planned sales, a reorder should be made.
3. Multiple attribute method: This method uses a weighted average score for each vendor. The following
steps are followed.
1. Developed a list of issues to consider for decision – making – vendor reputation, service,
merchandise quality, selling history, etc.
2. Give importance weights to each attribute.
3. Make judgment about each individual brand’s performance on each issue.
4. Combine the importance and performance scores
5. Add all to arrive at the brand scores.
Gross margin return on investment (GMROI)
Many retailers use the performance indicator of gross margin percent (after markdown) and weeks cover to
measure performance. While the gross margin percent is a measure of the relative profitability, without
taking into account the costs of stockholding investment, week’s cover tells us how effectively the stock
was turned, without informing us about its relative profitability. What is needed is a measure that combines
these two indicators, into an indicator of real profitability. GMROI is such an indicator.
GMROI is calculated as Gross Margin/Average Inventory at Cost
GMROI is a merchandise planning and decision making tool that assists the buyer in identifying and in
evaluating whether an adequate gross margin is being earned by the products purchased, compared to the
investment in inventory required to generate the gross margin. It focuses the buyers’ attention on the return
on investment, rather than on department totals and it helps identify ‘produced winners’ and ‘core
25 | Page
products’. Product winners are those products that perform well, which boost profitability and are the best
return – on – investment products. Core Products on the other hand, are the buyer’s list of existing winners
that should never be out of stock. They’re the most valuable products in terms of their high profitability
and their excellent return on investment. Another method of managing inventory investments is to
predetermine the stock levels at which merchandise should be reordered. This is known as the reorder
point. Various factors, like the lead-time required, the safety stock and the speed at which the products sell,
have to be taken into consideration. It may not always be possible for a retail buyer to place orders for
products in small quantities; hence, the Economic Order Quantity (EOQ) is determined. For this purpose, it
is necessary to first determine the sales for the product, then take into consideration various factors like the
cost, discounts offered and the cost of holding the inventory and the Economic Order Quantity is
determined.
The EOQ is calculated by using the following formula EOQ = 2Ds / IC, where D= annual demand, S =
Costs to place the order, I= Percentage of annual carrying cost to unit cost and c= unit cost of an item. The
EOQ model assumes that the unit cost of an item is constant, irrespective of the quantity ordered. In
practice, for large orders, quantity discounts in price and transportation costs are usually offered. Such
discounts cannot be accounted for in the EOQ model.
26 | Page

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AkU, MkgMgt Retail Mgt

5.2 Building a Sustainable Competitive Advantage

5.3 Factors to be considered for retail planning

5.4 Retail Mix Strategy (Location, Price, Communication and Merchandise)

Thus, Retail Price = Cost + mark up

LOCATION STRATEGIES (Place)

Location and retail Strategy

Demographic features of the population

MERCHANDIZE MANAGEMENT (Product)

Factors Affecting the Merchandising Function

Functions of Merchandise Manager

1. The creation of the Merchandise Budget, and

2. The Assortment Plan

The merchandise budget usually comprises five parts:

1. The Basic Stock Method

Beginning of Month (BOM) Stock = Planned Monthly Sales + Basic Stock

Planned sales for the month of January: 40,000

Planned Sales for the month of January: 40,000

Step III: Merchandise Control: The purpose of Open-to-buy is twofold.

4. Finalizing terms with supply sources

Components of Category Management

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