Merchandise Planning explained
What is Merchandise Planning?
Merchandise Planning is crucial for retail success as it ensures that the right products are available at the right time and place, meeting consumer demand while optimising inventory levels. By aligning product assortments with market trends and customer preferences, merchandise planning maximises sales, reduces excess inventory costs, and enhances customer satisfaction. Effective merchandise planning directly impacts a retailer's financial performance, driving profitability through strategic product selection, pricing, and timely replenishment. This comprehensive approach enables retailers to stay competitive, respond swiftly to market changes, and provide a seamless shopping experience.
The Importance of Merchandise Planning
Effective Merchandise Planning helps retailers maintain optimal inventory levels and keep the company profitable. By accurately forecasting demand and planning stock accordingly, retailers can avoid overstocking, which ties up capital and leads to markdowns, as well as understocking, which can result in missed sales opportunities and dissatisfied customers. Merchandise Planning is a complex pre-season and in-season process that spreads across the Buying, Merchandising and Planning teams through shared responsibilities.
Merchandise planning is vital for several reasons:
Optimising Inventory: Ensures that inventory levels are balanced, minimising overstock and stockouts, and reducing holding costs.
Maximising Sales: Aligns product availability with consumer demand, boosting sales potential.
Enhancing Customer Satisfaction: Ensures that the right products are available when customers want them, leading to higher satisfaction and loyalty.
Financial Performance: Directly impacts the financial health of a retail business by optimizing stock turnover, margins, and profitability.
What are the Key Components of Merchandise Planning?
Merchandise Planning is a systematic approach. Through a merchandise plan, we attempt to offer the right quantity of the right product in the right place at the right time while meeting the company’s financial goals. The key components of Merchandise Planning are:
1. Setting Objectives and Goals
2. Market Research and Trend Analysis
3. Assortment Planning
4. Financial planning & Budgeting
5. Store grading and ranging
6. Inventory Management
7. Pricing & PRoMOTIONAL Strategy
8. REPORTING & Evaluation
The Merchandise Planning Process
The merchandise planning process involves several steps, and several teams, each crucial for ensuring that the Merchandise Plan is effective, aligns with the retailer’s overall strategy and drives sales.
1. Setting Objectives and Goals
The first step in merchandise planning is to set clear objectives and goals. These should align with the retailer’s overall business strategy, annual budget and profitability targets.
Sales Targets: Setting realistic sales targets based on market analysis and historical data. Setting targets is a critical aspect of any business planning that helps guide a company’s efforts toward achieving its revenue goals.
Profit Margins: Establishing target profit margins to ensure profitability.
Inventory Turnover: Setting goals for inventory turnover to maintain fresh stock and minimise holding costs.
2. Market Research and Trend Analysis
The next step is to analyse data and market trends to inform the Merchandise Plan. Market research provides insights into the cultural, societal, socioeconomic, geographic, and personal characteristics of your target customers. This understanding will allow you to gauge the demand for your product, determine its magnitude, and identify the key drivers of that demand. Additionally, it will help you understand the competitive landscape.
Analysing sales data: Analyzing past sales data to identify trends and patterns is a fundamental aspect of pre-season preparation. While this is a routine activity for any merchandising team, conducting a comprehensive analysis of sales data for an entire season to inform the next season’s merchandising plan is a complex and time-consuming process.
Understanding market trends: Understanding market trends in retail involves continuously monitoring and analysing various factors that influence consumer behaviour, industry shifts, and economic conditions. Keeping an eye on your competitors' activities, including product launches, pricing strategies, marketing campaigns, social media activities, and online customer reviews is a great way to understand the competitive landscape and identify product opportunities.
Spending quality time on the shopfloor: Your store teams and customers are invaluable assets for qualitative feedback. They provide insights into your customer base, preferences, product perceptions, and opportunities to optimize your assortment. Investing time with them on the shop floor, understanding the selling process and customer journey firsthand, can significantly influence your assortment planning.
Customer reviews: Analysing customer reviews can tell you what customers like and dislike the most about your product, and what they commonly complain about. This could serve as a good indicator for repeat buys, new colour injections, or carry over products.
Understanding the reasons for returned goods: E-commerce businesses possess extensive customer data, including reasons for returns. Regularly analysing these reasons provides insights into areas for development and product improvement, such as issues with sizing accuracy, quality concerns, or unusual fits.
Competitor Analysis: Competitor analysis in retail involves systematically evaluating your competitors to understand their strengths, weaknesses, strategies, and market positioning. This information is critical for identifying opportunities and threats in the market, improving your own business strategies, and gaining a competitive edge. You can gather information about them through public resources such as annual reports, press releases, company websites, and news articles; store visits and monitoring their website and social media activities regularly.
3. Assortment Planning
Based on the data analysis, the next step is to develop the Assortment Plan. This involves:
Product Selection: Curating the right assortment and mix of products for each sales channel and POS to meet consumer demand and maximise sales. A strategic product mix ensures that a retailer can attract and retain customers, maximise profitability, and stay competitive in the market.
Style and Option targets: The size and layout of the retail space influence the breadth and depth of product categories that can be effectively displayed and managed. You have to ensure an optimal number of stock-keeping units (SKUs) to avoid overstock and stockouts - this is typically supported by Visual Merchandising to align and understand your front-of-house capacity in stores.
Core and Seasonal Product Mix: Core products are staple items that define a retailer's brand and maintain consistent demand throughout the year, often generating the majority of the retailer's revenue. Seasonal products, on the other hand, are in high demand during particular times of the year, such as summer or winter collections, capsule collections, and items linked to specific events or trends. Establishing a target sales mix for core and seasonal products ensures that your business fundamentals are covered by your best sellers, while also providing enough novelty to engage and excite your customers each new season.
Category Mix: An optimal category mix may attract a broad customer base, increase shopping frequency, and maximise cross-selling opportunities. In fashion retail, maintaining a well-balanced category mix is essential for maximizing product opportunities each season. During the winter months, outerwear, boots, and knits should dominate the category share, whereas in warmer months, these items typically recede to the bottom in most geographical locations.
Balancing Breadth and Depth: Breadth refers to the number of different product lines or categories a retailer offers. A broader product mix can attract a wider range of customers but can also lead to complexity in inventory management. Dept then refers to the variety within each product line. Offering a deep selection within a category can satisfy different customer preferences and encourage repeat purchases.
Rank the assortment by projected revenue: Identify your key investments and essential purchases early, enabling you to structure your assortment around these product priorities. By ranking products based on projected revenue, you can gain insights into your expected best sellers and determine the length of the tail where products have minimal potential.
Tell product stories: The product assortment should facilitate cross-merchandising, allowing store teams to sell complete outfits. Product stories can revolve around material, print, pattern, or marketing narratives. Wherever possible the assortment should offer a 360-approach which includes complete outfits including apparel, footwear and accessories.
Align the assortment with marketing and brand activities: Collaboration with the marketing team during assortment planning is crucial. Ensuring open communication helps align product launches, promotions, and campaigns with strategic marketing initiatives, which is essential for a successful go-to-market process. It's vital to ensure that products reflect and reinforce the brand identity, values, and visual elements communicated through marketing materials. The assortment plan should highlight key products or themes central to marketing campaigns or seasonal promotions.
4. Financial Planning & Budgeting
Once the assortment plan is formulated, the next step involves financial planning and budgeting. Typically, this process begins before assortment planning to outline the budget, but it is finalised once the assortment and purchase units are confirmed.
Sales and Demand Forecasting: Forecasting involves predicting future sales by analyzing historical data, market trends, and promotional activities. This process utilizes statistical techniques such as time series analysis, regression analysis, and machine learning algorithms to anticipate future sales based on historical data and projected variables (such as store count and growth plans). Demand forecasting is essential for aligning production schedules to optimise manufacturing efficiency and for maintaining balanced inventory levels that meet projected demand while minimising surplus inventory and stockouts.
Budget Allocation: Budget allocations for various product categories, departments, or stores serve as the primary resource to support operational plans and achieve business goals. Budget is the amount of money Buyers and Merchandisers can spend on the Collection that should reflect revenue and inventory targets.
Margin Management: Establishing target margins and consistently monitoring actual margins are crucial for maintaining a profitable business. During pre-season margin management, we evaluate how sales and demand plans impact profitability, manage costs, and achieve revenue targets.
5. Store grading
Store grading is used by retailers to categorise their stores based on specific criteria, such as sales performance, location characteristics, customer demographics, and market potential. This categorisation helps retailers optimize their merchandising, marketing, and operational strategies to meet the unique local needs of each store. The most important steps of Store Grading are:
Data Collection: Gather comprehensive data on sales performance, customer demographics, location characteristics, and operational metrics for each store.
Criteria Weighting: Assign weights to different criteria based on their importance to the retailer’s overall strategy and goals.
Scoring: Score each store against the selected criteria to create a composite score that reflects the store’s overall performance and potential.
Categorisation: Categorize stores into different grades or tiers based on their composite scores. Common categories might include A, B, C, and D grades, or labels such as flagship, high-potential, average, and low-performing.
Analysis: Analyze the graded stores to identify patterns, strengths, and weaknesses across different categories.
Targeted Merchandise and Store Ranging: Customize product assortments to match the preferences and demands of customers at each store, improving sales and customer satisfaction.
6. Inventory Management
Effective inventory planning and management ensure that the right amount of stock is available at the right time. This includes:
Stock Levels: The ideal stock level, also known as optimal inventory level, is the quantity of inventory that a business should maintain to meet customer demand without experiencing stockouts or excessive carrying costs. Determining the ideal stock level involves balancing several factors specific to the business such as demand, service level, lead time, cost, sales forecasting. The ideal stock level is not a fixed number but rather a dynamic balance that requires continuous monitoring and adjustment based on changing market conditions, customer preferences, and operational efficiencies. It aims to optimise inventory management to maximise sales, minimise costs, and enhance customer satisfaction.
Demand Forecasting: Demand forecasting is essential for aligning production schedules to optimise manufacturing efficiency and for maintaining balanced inventory levels that meet projected demand while minimising surplus inventory and stockouts.
Initial Allocation: An initial allocation is the initial distribution or assignment of inventory to stores or locations within a retail network at the beginning of a selling season or promotional period. This allocation is based on sales forecasts, historical data, and planned promotional activities. The goal of initial allocation is to ensure that each store receives an appropriate amount of inventory to meet anticipated demand and sales targets.
Replenishment: Replenishment refers to the process of restocking inventory to maintain optimal levels in order to meet customer demand and avoid stockouts. It involves ordering or producing additional quantities of goods as they are consumed or sold. Replenishment is essential in retail and manufacturing to ensure that products are consistently available for customers without excessive overstocking or understocking. Effective replenishment strategies often involve forecasting demand, monitoring inventory levels, and managing supply chain logistics to ensure timely replenishment of goods.
Measuring Inventory Turnover: Inventory turnover is a financial metric used to measure how many times a company's inventory is sold and replaced over a specific period, usually a year. It is calculated by dividing the cost of goods sold (COGS) by the average inventory during the same period (Average inventory is often used in the calculation to smooth out fluctuations between periods. It's calculated as (BeginningInventory+EndingInventory)/2). Inventory turnover indicates how efficiently a company manages its inventory. A higher turnover generally suggests that inventory is sold quickly, reducing holding costs and potential obsolescence. Strategies to improve inventory turnover include better demand forecasting, efficient procurement and supply chain management, optimising product assortment, and reducing lead times.
Managing Retired Inventory: Retired inventory refers to merchandise that is offered for sale at significantly reduced prices to clear out excess stock, discontinued items, or products that have been slow-moving and are taking up space in retail stores or warehouses. This inventory is typically marked down to below its original retail price in order to sell quickly and make room for new merchandise. Managing retired inventory is crucial to clearing out space in retail locations or warehouses to accommodate new inventory and maintain efficient operations. It can also minimise financial losses associated with holding onto unsold inventory by liquidating items at reduced prices. Reasons for Clearance:
Excess Inventory: Products that were over-ordered or did not sell as expected during regular selling periods.
Discontinued Items: Items that are being phased out of the product line or no longer part of the retailer's assortment.
Seasonal Items: Products that are out of season and need to be sold before the next season's inventory arrives.
7. Pricing and Promotional Strategy
The next step is to develop the pricing and promotional strategy. This includes:
Competitive Pricing: Competitive pricing is a strategy used by businesses to set prices for their products or services based on prevailing market rates and competitor pricing strategies. The goal of competitive pricing is to attract customers and capture market share by offering prices that are comparable or competitive with those of other businesses selling similar products or services. This strategy often uses price benchmarking to compare prices of similar products offered by competitors. Competitive pricing is a dynamic strategy that requires ongoing monitoring of market dynamics, competitor activities, and customer preferences to effectively position products or services in the marketplace and achieve business objectives. It aims to strike a balance between attracting customers through competitive prices and achieving sustainable profitability.
Value-Based Pricing: Value-based pricing is a strategy where prices are set based on the perceived value of a product or service to the customer rather than on the cost of production or competitor pricing. This approach focuses on understanding the benefits and value that customers receive from a product or service and pricing accordingly to capture that value. Products are typically differentiated based on unique features, benefits, or customer outcomes, allowing for premium pricing compared to competitors. Effective communication of the value proposition and benefits to customers through marketing and sales efforts to justify the price premium is vitally important when using value-based pricing.
Promotional Pricing: Promotional pricing refers to temporary price reductions or special offers that businesses use to stimulate sales and attract customers. This pricing strategy is typically employed during specific promotional periods, events, or seasons to achieve short-term objectives such as increasing sales volume, clearing excess inventory, or generating excitement around a new product or service launch.
Discounts: Offering discounted prices on products or services compared to their regular prices. This can include percentage discounts (e.g., 10% off), fixed amount discounts (e.g., $20 off), or buy-one-get-one-free (BOGO) offers.
Limited-Time Offers: Establishing a time-limited promotional period during which the discounted prices or special offers are available. This creates urgency and encourages customers to make purchasing decisions quickly.
Seasonal Promotions: Tying promotional pricing to specific seasons, holidays, or events (e.g., Black Friday, Back-to-School sales) to capitalize on increased consumer spending and shopping behaviors during these periods.
Bundle Offers: Combining multiple products or services into a single package at a discounted price to incentivize customers to purchase more items or higher-value packages.
Coupon Codes and Rebates: Providing customers with coupon codes, mail-in rebates, or cashback offers that reduce the effective price of products or services.
Clearance Sales: Offering steep discounts on remaining inventory or discontinued products to clear out stock and make room for new merchandise.
8. REPORTING & Evaluation
The final step in the merchandise planning process is monitoring and evaluation. This includes:
Sales Performance: Monitoring sales performance against targets and making adjustments as needed. Sales performance is measured using various metrics and key performance indicators (KPIs) that assess the effectiveness and success of the merchandising strategy and merchandise plan. The most important sales performance metrics that can be analysed on a weekly basis compared to last year and targets are:
Sales Revenue: Total revenue generated from sales over a specific period.
Sales Growth: Percentage increase or decrease in sales revenue compared to a previous period.
Sales Volume: Number of units or products sold within a given timeframe.
Average Transaction Value: Average amount of sales revenue generated per transaction.
Customer Traffic: Number of customers visiting the store or website.
Conversion Rate: Percentage of visitors or leads that result in a purchase.
Gross Margin: Percentage of revenue retained after subtracting the cost of goods sold.
Profit Margin: Percentage of revenue retained after subtracting all expenses, including operating costs.
Inventory Levels: Regularly checking inventory levels to ensure optimal stock availability. We often use an ABC Classification to categorise inventory items into categories based on their value and contribution to overall sales. This helps prioritise inventory management efforts and allocation of resources.
Promotional Effectiveness: Evaluating the effectiveness of promotional activities and adjusting strategies as needed.
Key Strategies for Effective Merchandise Planning
To ensure the success of a merchandise plan, retailers need to adopt key strategies that align with their business goals and market conditions. Here are some strategies for effective merchandise planning:
1. Data-Driven Decision Making
Using data to inform decisions is crucial for effective merchandise planning. This includes:
Sales Data Analysis: Regularly analyzing sales data to identify trends and patterns.
Customer Insights: Gathering and analyzing customer data to understand preferences and behavior.
Market Research: Conducting market research to stay informed about industry trends and consumer demand.
2. Agile Inventory Management
Agile inventory management allows retailers to respond quickly to changes in demand and market conditions. This includes:
Flexible Replenishment: Implementing flexible replenishment systems that can quickly adjust to changes in demand.
Real-Time Inventory Tracking: Using technology to track inventory levels in real-time and make informed decisions.
Demand Forecasting: Using advanced forecasting techniques to predict demand and adjust inventory levels accordingly.
3. Collaborative Planning
Collaborative planning involves working closely with suppliers, vendors, and internal teams to ensure alignment and coordination. This includes:
Supplier Collaboration: Building strong relationships with suppliers and working together to ensure product availability and quality.
Cross-Functional Teams: Creating cross-functional teams that include members from merchandising, sales, marketing, and supply chain to ensure alignment and coordination.
Regular Communication: Maintaining regular communication with all stakeholders to ensure everyone is informed and aligned.
4. Technology Integration
Integrating technology into the merchandise planning process can improve efficiency and accuracy. This includes:
Merchandise Planning Software: Using specialized software to manage and optimize the merchandise planning process.
Inventory Management Systems: Implementing advanced inventory management systems to track stock levels and optimize replenishment.
Analytics Tools: Using analytics tools to gather and analyze data for informed decision-making.
5. Customer-Centric Approach
Putting the customer at the center of the merchandise planning process is crucial for success. This includes:
Customer Feedback: Regularly gathering and analyzing customer feedback to understand preferences and behavior.
Personalized Offerings: Creating personalized product offerings and promotions based on customer data and insights.
Customer Experience: Ensuring a seamless and positive customer experience through effective merchandising and store design.
In conclusion, merchandise planning is the cornerstone of successful retail operations, integrating strategic foresight, analytical skills, and customer-centricity to optimise product assortments and drive profitability. Throughout this exploration, I’ve delved into several crucial elements that underscore the importance and impact of effective merchandise planning.
Firstly, understanding the market and customer dynamics forms the bedrock of merchandise planning. By analysing market trends, consumer preferences, and competitive landscapes, retailers can align their product offerings with shifting demands and capitalise on emerging opportunities.
Secondly, forecasting and demand planning emerge as pivotal processes within merchandise planning. Through meticulous data analysis and forecasting techniques, retailers can predict future demand patterns, optimize inventory levels, and ensure sufficient stock availability without overcommitting resources.
Moreover, assortment planning stands as a linchpin in merchandise strategy, balancing core product offerings with seasonal variations and special promotions. This strategic mix not only caters to diverse customer needs but also enhances sales performance by maximizing product relevance and availability throughout the year.
Equally important is financial planning and budget management, which underpin sound decision-making in merchandise planning. Setting clear financial goals, monitoring performance against budgeted targets, and optimizing pricing and markdown strategies contribute significantly to maintaining profitability and minimizing risks.
Furthermore, collaboration across departments and stakeholders emerges as a critical success factor in merchandise planning. Close alignment between merchandising, buying, marketing, and operations ensures cohesive execution of strategies, fosters innovation, and enhances overall organizational agility.
Lastly, continuous evaluation and adaptation remain integral to effective merchandise planning. By leveraging real-time analytics, soliciting customer feedback, and staying responsive to market shifts, retailers can iterate on their strategies, seize opportunities for growth, and maintain a competitive edge in the dynamic retail landscape.
In essence, merchandise planning is not merely a process but a strategic imperative that empowers retailers to anticipate customer needs, optimise resource allocation, and drive sustainable business growth. By mastering these fundamental elements, retailers can navigate complexities, capitalise on opportunities, and deliver exceptional value to customers while achieving enduring success in the marketplace.
