Merchandise Budgeting and Planning

How to make sense of the complex process

This article is the first of a series.



As a retailer, planning your stock levels and assortments is one of the most complex and vital functions of your job. My goal is not to make you an expert on this complex function, but to provide you with an understanding of the process of merchandise budgeting and planning one step at a time and help you embrace this task with more confidence and better results.

Merchandise Budgeting and Planning Defined

Merchandise Budgeting and Planning is about planning and profitably managing what your store will carry for the next season. Your goal is to get what are known as the “Five Rights of Retail” right. The Five Rights of Retail are:

1. The right product
2. In the right place
3. At the right time
4. In the right quantity
5. At the right price

A Merchandise Plan concerns itself with product (inventory and assortment), place (where to display it or if you have multiple stores, what stores to distribute the product to), time (the delivery time required to have it when the Customer wants to buy, i.e., having some of the newest styles of running shoes after the beginning of marathon season is too late!), in the right quantity (good Merchandise Plans identify the proper amount that the store needs to have to make its Sales Plan. No more and no less than required) and at the right price (the Merchandise Plan assists you in setting a price that will sell the article and return a fair profit to your store or company). While this list is over 80 years old, it has been the standard of success in the retail business for all this time. Today retailers have also added “with the right service” to this list, because no matter how good is your product unless you have the right people with the right training to effectively sell it to Customers, it won’t sell.

For most retailers the value of the retail inventory is greater than any other investment the retailer has. That is why, once you manage to plan the right merchandise for your store, the next crucial step is its profitable management, which involves constant monitoring of performance and actions to maximize the sales.

What does Merchandise Management Entail?

The planning process encompasses more than just forecasting and planning sales and inventory. There are at eight additional tasks that you will need to fulfill to ensure profitable sales. They are:

1. Market Analysis
2. Store Positioning Analysis
3. Promotions Planning
4. Sales And Stock Planning
5. Sourcing
6. Shoeline Building
7. Assortment Planning
8. In Season Stock Analysis And Actions
9. Season End Stock Analysis

Today, I will focus on the first three tasks: Market Analysis, Store Positioning Analysis and Promotions Planning.

Market Analysis

Good Merchandise Budgeting and Planning begins with a look at the market. The market consists of your Customers and your Competition.

The questions that you will need to answer about your Customers are:
〉 Who are they?
Your goal is to identify and clearly define their profile. This includes knowing their age group, occupation, sex, ethnicity, profession, income level, leisure-time interests, where they live, fashion and utility needs and wants. Knowing your Customer’s profile will guide you in your buying and merchandising decisions (as well as marketing, human resources and customer service decisions). If you know that your Customers are low to mid-income, you might want to avoid carrying high price shoes. Or, if you are located in a community with a high concentration of Hispanics who shop in your store, you might want to consider carrying more product in sizes and styles that match their preferences and needs. Also, you might want to bear in mind that of all ethnic groups, they are the group with the highest loyalty to a brand and a product (64.4% according to a recent study by McDonald Marketing, vs. 19.7% of Non-Hispanic Whites and 35.2% nationally). So, you will most likely need to analyze your sales from the previous season and carry the brands that received the most votes (sales) and in general you need to know what are the brands that are most popular in that season. Or, if you are in a university town, you might want to think of carrying more styles that cater to younger customers.
〉 What are their buying criteria?
Is it price, utility, quality, durability, fashion or impulse? So, for instance, if you established yourself as “the place” for the latest and most advanced shoe construction and fashion styles for serious athletes, your merchandise plan will need to take that into account. You will need to make sure that you budget for those usually higher price shoes and make sure that you are never out of them. When you are a destination for your Customer because of a unique product offering you have, whether it is price, the latest or assortment, or product and running knowledge, you need to make sure you do everything you can to never weaken or lose that reputation. They will never forgive you and you will lose them to somebody else.
〉 How do they choose a store?
Based on the store image, atmosphere, staff, service, location, convenience, opening hours, choice, variety of assortment, promotions, advertising, or impulse? This requires a review of your Customers’ shopping habits which includes, among the other things, learning about where else they shop. I am not talking about other shoe stores. I am referring to all other stores that they shop at in a day, week or month. Customers shop horizontally not vertically. This means that they do not compare you to other shoe stores, or at least not just that. They compare you to all the other stores that they went in before coming to your store and even restaurants or bars. They compare you to the Gap, Whole Foods, Lowe’s, Victoria Secret, Cineplex and so on. If your store’s image, assortment, pricing, displays, service and so on do not match or exceed what they find at these other establishments, they are not going to shop with you.
〉 What products are they looking for?
Traditional or the latest and most technologically advanced shoe construction and design? Are they looking for international or local brands, price only, or price and value? Again, a good analysis on your Customer’s preferences and lifestyle will help you determine what products you should carry that cater to their specific needs and make you stand out from the competition.
〉 What are their buying habits?
Do they buy different products from different stores, full service, self service, or assisted service stores? This again refers to your Customer’s expectations when they shop with you which you will need to match.

The questions that you will need to answer about your Competition are:
〉 Who are they?
Make a list of your competitors whether they are an independent store like yours, a large big box store or the shoe department in a department store.
〉 How to they attract Customers?
Is it price? Convenience? Assortment? Quality? Promotions? Ambience? Service? Windows? Identify for each of your competitors their strategy or, in other words, how they do business with their Customers.
〉 What are their strengths? What are their weaknesses?
When analyzing your competitors, make a list of all the strengths and all the weaknesses as it relates to their product selection and pricing strategy, but also service and ambience. Your goal is not try to compete with them on their strengths but focus on their weaknesses and fill any gap that you see. So, for instance, if one of your competitors down the street carries an extensive assortment of shoes and they are never out of stock but their associates have very limited product knowledge and can’t really service their Customers, there’s a gap there for you to fill. Particularly, with shoes that have advanced features, it is paramount to fit them to the right Customer and for the right reasons. Selecting and training competent staff then becomes crucial and a key factor in your unique identity and competitive position.

2. Store Positioning Analysis

Store positioning analysis is about determining for your store:
〉 What do you want to be?
What image do you want to project or, in other words, how do you want to be perceived by your Customer? Do you want your store to be known for the lowest prices, the widest assortment, the latest styles, the most technologically advanced styles for professional athletes, the highest level of product knowledge of your staff, etc.? Whatever it is, make sure you do not try to be everything to everyone. Pick one strategy, excel at it without forgetting the others but don’t make them the focus of your attention.
〉 Who is your Customer?
We saw that earlier.
〉 What do you sell?
And what should you sell and shouldn’t sell.
〉 Who are your competitors?
We talked about it already.
〉 What services do you provide?
This is very important particularly if your strategy is not to be the lowest price store in town (a very smart one, by the way – big box retailers will kill you every time). What else can you offer besides well-trained and passionate associates? Regular notifications via e-mail on the latest styles? Invitations to demos by vendors of their products and product test-run opportunities? What else can you offer that others don’t? What can you learn from the Gap or the gourmet shop down the street (remember Customers shop horizontally and you can too for ideas how to amaze your Customers!).

3. Promotion Planning

As part of your Strategic Business Plan, you need to develop a Promotional Plan – also called Marketing Plan – which identifies the various events and sale actions necessary to achieve your sales and profit objectives. Your plan must have innovative ideas each season and not repeat the same actions unless they are annual events that the Customer is waiting for. It is also important to create activities that will differentiate you from the competition.

The Promotional Plan includes details on the various sub-categories and themes of merchandise that you will need to develop to create the excitement necessary to attract the Customer's interest and satisfy a specific need or want for a particular event. The Promotional Plan is created for a season by month and week and provides details on:

〉 Windows
What themes of products to display in the windows and feature inside the store in your hot spots. It could be Breast Cancer Run, or a Triathlon. When planning for these themed displays, make sure to not just put product out and a sign. Along with product you will want to tell a story to your Customer about what these events stand for or their history with photos and everything that catches the Customer’s imagination and interest and make them want to be part of that story.
〉 Promotions
What products to promote with special pricing and point of purchase material such as posters or ‘test-drive’ events or demonstrations.
〉 Tactical actions
How are you going to accomplish all of this, who will be responsible in your store for making it happen?
〉 Communication media
It includes newspaper, web, radio or TV ads. It also includes direct mail postcards or newsletters. It also includes determining what theme, what products or what events to feature in each media. Is it styles of the month, best-sellers list, best values, just in, and more.
Stay tuned for our next issue where we are going to talk about Sales and Stock Planning.

Comments: