Wednesday, September 10, 2008

Factors that affect Merchandise Assortment

Contributed by Richa Kapoor

The retailer has to act as a surrogate buyer for its customer. While shopping at a store, the customer in effect should say, "I like what you have to offer to me" then if the customer continues to shop at a store and starts to echo that phrase again and again. At that point, the retailer becomes the surrogate, a substitute purchasing agent of sorts who represents the customer while planning his merchandise assortment.

Thus, it is very important for retailers to carefully consider what they buy for selling in their store, because through this a retailer is seeking to win the loyalty of a customer and not just his money.

The retailer should take great care in planning this merchandise plan, He should choose compatible products, so that there is some degree of consistency and predictability for the consumer.

Some of the factors that a retailer should bear in mind while planning his merchandise mix are:

Some important terms:

  1. Substitutes are those products which can be used as an alternative for as product, for eg: Tea and coffee.
  2. Complements, are the products which compliment each other and enhance another each other's salability… hot dogs and ketchup, or snack foods and beverages.
  3. Unrelated products, which are products that have nothing to do with one another. Sometimes, though, the products may appear to be unrelated when in fact they are shrewd product additions

The product line attributes:

  1. Bulk--weight and size. How big is the item? How much selling space will it require?
  2. Standardization--special needs of the product. Can the item be stocked alongside competing items, or does it need special shelving, etc.,
  3. Service levels--what is expected and needed. Does the store need to be prepared for returns, warranty work, repairs, etc.?
  4. Selling methods--how much personal selling is needed. Will the item "sell itself," or does it need a knowledgeable salesperson to assist in the process?

Product profitability:

This is a function of the gross margin on the item, as well as sales volume, selling costs, and inventory holding costs. Gross Margin Return on Inventory Investment (GMROI), inventory turnover and sales forecasting are some of the important tools used for ascertaining the product profitability and planning the merchandise mix. GMROI is a tool that helps the retailer plan and evaluates the performance of the merchandise. The GMROI for a specific category of merchandise is calculated on the basis of the overall financial objectives of the retailer, which are further assigned to specific categories. The gross margin percentage in combination with the inventory turnover evolves into a useful tool for managing merchandise.

Other Factors to Consider:

  1. Market Appropriateness. Is the product a good fit for the market?
  2. Product should be categorized as a Fad, Fashion, Staple or a seasonal item.
  3. Competitive Conditions: what is the competition doing? What type of strategy is he adopting are some of the important factors which a retailer should keep in mind.
  4. Supplier Considerations. If suppliers cannot be located easily, or they cannot serve certain markets, this may preclude setting up shop in a particular area.
  5. The ITO Rate. Items that turn quickly will need to be replenished quickly and vice-versa.

Determining a merchandise strategy is a crucial issue for a retailer. It involves establishing a trade-off among the varieties offered, assortment provided and the availability of the products. A thorough analysis of this trade-off helps the retailer answer the most significant question.
Thus, an assortment plan tends to be the amalgamation of the GMROI plan, the inventory turnover plan, sales forecasting, and assortment planning.



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