Retail Formats and Classification

Retail Formats and Classification

The evolution of retail in India has led to the emergence of the various formats in the retail industry .

The first hypermarket that was developed was Carrefour in France in 1963.This new format gave the customer the choice of picking up a product , comparing it with others and then taking a decision to buy . The decision making of a customer has changed and there are three principles that have become fundamental to modern selling :

1) They fixed product prices before sale and that the customer bought at the set prices .

2) The prices were determined on the basis of stock turns and the amount of profit that was generated from the product .

3) They departmentalised the products .Accounting system were devised to determined the contribution of various dept and this enabled them to drop unprofitable goods .

The various formats can be classified on the basis of ownership and the merchandise offered .Classification based on ownership : -

1) Independent retailer : - An independent retailer is the one who owns and operates only one retail outlet .Such an outlet is managed by the owner & proprietor ans a few other local hands or family members working in the shop .

Stores like the local kirana store , independent retailers like Benzer ,Amarsons . The retail strategy depends on the location and the product mix .The retailer has the advantage to have a one on one rapport with the customer .

2) Corporate retail chain :- When two or more outlets re under a common ownership , it is called a retail chain . These stores have the similar merchandise to offer the customer , the ambience , advertising and promotion .Eg : - Wills Sports , Louis Phillippe .The biggest advantage of a chain retailer is that it has the bargaining power with the suppliers .

2) Franchising :- A franchise is contractual agreement between between the franchiser and the franchisee which allows the franchisee to conduct business under an established name in return of fee or compensation .Franchising can be :

- A product or trademark franchise - where the frnchisee sells the products of the franchiser operating under the franchisers name eg : Archies .

- A business format franchise – Mc donalds is one best example .3) Leased Departments :- These re also termed s Shop – in – shops. When section of

the department in a retail store is leased / rented to an outside party it is termed as a leased department .This helps the department to expand its offerings to the customers for eg : counters of perfumes and cosmetics . These stores display only a part of of merchandise sold in the anchor stores .

Classification based on the merchandise offered

The retailers are classified based on the merchandise mix offered . 1) Convenience stores :- These are relatively small stores located near residential

areas – they are open long hours , seven days a week and offer a limited but essential and convenient products like bread , milk , egg etc .stores like HP Speed mart and In & out stores are some examples .

2) Supermarkets :- They are large , low cost , low margin , high volume , self service , operations designed to meet the needs for food , groceries & other non – food items . This format was the grocery revolution in India and it rule 30 % of the grocery market in many countries .It sells 70 % food products and every day commodities . eg : Tesco , safeway , food bazaar , foodworld .

3) Hypermarket :- The word Hypermarket is derived from the French work Hypermarche , Which is a combination of a supermarket and a departmental store . It sells other non grocery products to about 35 % along with grocery products .High square feet area around 80,000 to 2,00,000 . Apart from food it also sells non food products like clothes , jewellery , sports equipments , accessories , CD s , electrical appliances etc .Hypermarkets today are like one stop shop . They are a typical destination location with low prices and other facilities like Chemist , ATM , etc .

- Large selling area .- Wide range of products including food and Non – food products .- Discounted prices .- Destination offers . Eg : Walmart , Target , Hypercity , Big Bazaar etc .

4) Speciality store :- A store specialising in a particular type of merchandise or a single product of durable goods ie :electronics , furniture, electrical appliances etc . They have a very clearly defined market and the success lies in serving the needs . They provide a very high level of information and service of the product . Eg :Ikea , croma , planet sports etc .

5) Department store :- It is a large scale retail outlet , offen multilevel whose merchandise offer spans a no of different catergory . They sell goods like clothing , accessories , cosmetics , house hold goods and a very broad ssortment with fixed prices . Eg : Shoppers stop . globus , Westside , pantaloon etc .

6) Off price Retailer : - Here the merchandise is sold lesser than the retail price . Off price retailers buy manufacturers seconds , over runs and off seasons at deep discounts . The merchandise may be in odd sizes , Unpopular colours or with minor defects .It may be manufacturer owned or by a speciality store . Eg factory

outlet of a brand , like Levis , etc . This format largely depends on volume sales to make money .

Non store Retailing

Recently in the past few years we have seen the advent of the non store retailing in India .1) Direct selling :- Direct selling involves making personal contact with the end

customer , at his home or place of work . Cosmetics , jewellery , food and nutritional products , home appliances etc are some product sold in this manner . An interesting aspect of direct selling in India is that women comprise up to 70 per cent of all sales people in India . Companies Modicare , Amway and Tupperware .Direct selling may follow the party plan or the multi level network . In multi level network , customers act like master distributor . They appoint other people tp work with them as distributors . The master distributor earns a commission on the basis of the product sold and distributed by the distributors under him .

2) Catalogue retailing : - This form of retailing eliminates personal selling and store operations . Appropriate for specialty products . the key is using customer database to develop targeted catalogs that appeal to narrow target markets its based on convenient shopping .

3) Television shopping :- Asian sky shop was among the first to introduce tele , shopping in India . In this form of retailing , the product is advertised on television and details about the product features , price and things like warranty / guarantee are explained . On just a call the product is delivered home .

4) Electronic shopping :- It allows the customer to evaluate and purchase the product from the comfort of his home .The success of this form of retailing largely depends on the product offered and ability to deliver the product on time .Internet is another medium use to have online shopping for which India is catching up .

5) Cash N Carry :- The term cash n carry means the customer do their own picking of order , pay in cash and carry the merchandise away .It is a wholesale format that aids small retailers and businessmen . some advantages of this format are :-

- It offers a wide assortment of goods , food and non food items , thus providing for one stop shop and allowing customers to save time .

- Permanent availability of the goods in the store , the customer can purchase goods when required hence save on storage and finance .

- Long business hours per week as provided , enabling the customer to do his shopping at a convenient time .

- Eg :- Merto cash n carry , shoprite of south Africa .

6) Airport retailing :- The past two decades have witnessed rapid change in the air travel industry . Retail is becoming increasingly important for airport operators . We are now in an era where airports are focusing on retail to convert airports into exciting , energized business and retail / entertainment centers are being developed .

7) Service retail :- Service retail involves the retail of various services to the end customer for eg :

- Retial banking containing functions like loan services , credit card services .

- Car rentals .- Providers of various services like electricity , gas , etc .- Service contracts such as consumer durable like maintenance of water

filters , computer systems , etc .

Retail Lifecycle

The Concept of Life Cycle in Retail

Every retail organization pass through identifiable stages of innovation , development , maturity and decline . Similarly in retail it passes through the same stages as stated above .

A ) Innovation :- When a new organization is born .This is the stage of innovation , where the organization has few competitors . Since its a new concept , the rate of growth is fairly rapid and the management fine tunes its strategy , through experimentation . Profits are also moderate .

B ) Accelerated Growth :- The retail organization faces rapid increase in sales . As the organization moves to the second level of development , a few competitors emerge . Since the company has been in the Market for a while , its now in a position to pre – empt the market by creating a leadership position . The growth is imperative , the investment level is also very high , as is the profitability . Investment is largely in systems and processes .

C ) Maturity : - The organization still grows , but competitive pressures are felt acutely from newer forms of retailing that tend to arise .The growth tends to decrease . As markets tend to become more competitive and direct competition increases , the rate of growth is slow and profits also start declining . This is the time when the retail organization needs to rethink its strategy and reposition itself in the market .

D )Decline :- The retail organization looses its competitive edge and there is a decline . In this stage the organization needs to decide if it is till going to continue in the market . The rate of growth is negative , profitability declines further overheads are high .

Role N Responsibility of a Buyer

Buyers play a very important role in the retail industry . They select and order merchandise to be sold .The buying skill affects the sales volume of their store .They may buy for a department , an entire store , or a chain of stores . The role of the buyer is to maintain balanced inventory and budgets agreed upon they also analyse customer purchasing preferences and trends .There are head buyers and assistant buyers depending on the organization structure the roles are defined for the buyers .

The responsibility of a buyer are listed below :-

- Developing the merchandising strategies for the product line , store or organization .

- Planning and selecting merchandise assortments – It requires understanding of the current market trends and economic development . It also requires an understanding the target customers and locating a product to suit these needs .

- Vendor selection , development and management – negotiations with the vendors for favorable terms and services are a delicate issue handled by the buyers .

- Pricing the merchandise to achieve the required targets in terms of gross margins .

- Inventory management – allocation of merchandise to the various retail stores is also an integral function of the buyer . The buyer controls the inventory , which includes not only procurement . There should never be situation when the product is not available in the retail store . The slow moving merchandise to be markdowns or movement of the merchandise to other location .

The softer skills of a good buyer includes the knowledge of the market , customer needs and the ability to make quick decisions .Buying can be centrally done or could be done at the local level ie regionally depending on the organizational needs .

Merchandise Sourcing

The process of merchandise sourcing starts with the identification of the source of supply .The term sourcing means finding or seeking out products from different places , manufacturers or suppliers . It is the key element in retail as it influences primarily , the availability of stocks , the margins earned by the retailer and the stock turns achieved .

Methods of Procuring Merchandise1)Identifying the sources of supply .2) Contacting and evaluating the source of supply .3) Negotiation with the source of supply .4) Establishing Vendor Relations .

5) Analysing Vendor performance .

1) Identifying the source of supply :- First it needs to be identified whether the product will be sourced from the domestic or international market .Domestic sources may be located by visiting Central markets , trade shows etc . This gives the buyer an understanding of the trend in the market and evaluate new resources and merchandise offerings .The prime reason to source from the international market would be the uniqueness of the merchandise or unavailability of the merchandise in the domestic market .Low cost and good quality are also factors which could affect the decision .

Cost associated with global sourcing are : - 1) Country of origin effects ie where is the merchandise manufactured makes a

difference in the sales .2) Foreign country fluctuation which affects the buying price of the products .

Product may be viable or unviable dur to price fluctuation .3) Tariffs ie the duties and taxes placed by the government on imports .4) Foreign trade zone these are special areas within the country that can be used for

warehousing , packaging , inspection etc without becoming subject to country tariffs . eg Economic zones .

5) Cost of carrying inventory purchase of goods at a price but when this merchandise is sold it makes a big difference on the carrying costs .

6) Transportation cost the import cost has to be considered as it will make a lot of difference to the price as this cost will be added .

Today it is all about creating a delight rather than merely satisfying the customer .Factors such as past relationships , past experiences of individual buyers , gut feel and immediate price comparison are the driving forces .

2) Contacting and evaluating the source of supply :- They are of two types one is the vendor initiated contact and the other is the retailer initiated contact . Either the vendors representative visits the office of the buyer or the buyer visits the vendor either in the central market or office .

The following factors needs to be considered while deciding on the potential source of supply . 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 the price offered . 4) Terms and services offered by the vendor .5) The vendor’s reputation and reliability .

The need and wants of the customer is the prime factor affecting this decision .Factors like ability to meet delivery schedule , adherence to quality procedures and the terms offered , play an intergral role in vendor selection .

Services provided by the vendor also affects the decision like co-operation in advertising , return or exchange privileges , participation in store promotions etc .

Once the source is identified then evaluation need to be done :- - The merchandise itself needs to be evaluated interms of the suitability of

the product to the retailer . The quality of the merchandise will determine the price of procurement of the product .

- The price that the merchandise will be made available to the retail chain - The adaptability of the supplier to the requirement of the retailer interms

of timely delivery and adjusting production . Other factors would be spacing of deliveries , quantity discounts , recycling and repacking of goods , participation in promotions .

- Delivery is an important factor in retail .

3) Negotiation with vendors : - The retail buyer then needs to negotiate price , delivery dates , the discounts , the shipping terms and possibility of returns .

The following types of discounts that can be made available to the buyer can be :- 1) Trade discounts – Reductions in the manufacturers suggested retail price . They

may be offered as a single trade discount or as a chain trade discount .Sometimes referred to as volume discounts or booking discounts .

2) Chain discounts – A number of discounts are taken from the suggested price .3) Quantity discounts – these can be cumulative or non cumulative , retailers earn

quantity discounts by purchasing a certain quantity over a period of time .4) Seasonal discounts – This is an additional discount offered as an incentive to

retailers to order merchandise in advance of the normal season .5) Cash discount – It is the reduction from the invoice cost , for paying the invoice

prior to the end of the discount period .

4) Establishing Vendor Relations :- Relations have for long been wary of sharing information with their suppliers . Considering their traditional competitive relationship , with both sides trying to get the best of every deal . The retailer had shared information on sales and stock with the manufacturer , the latter would then have had the opportunity to anticipate out – of – stock situations and to plan future activities and minimize delays in new production runs . More significant is the retailers forecasts . Thu to maintain strategic partnerships with vendors , the buyer needs to build on :

1) Mutual Trust .2) Open Communication .3) Common goals .4) Credible commitments .

5) Analysing Vendor Performance :-The starting point may be a vendor registration form , which provides details on address , preferred mode of payments , sales tax number , etc . The following are the criteria to consider the vendor performance : - - The total orders placed on the vendor in year .

- The total returns to the vendor , the quality of the merchandise .- The initial mark up on the products - The Markdowns if any ,- Participation of the vendor in various schemes and promotions .- Transportation expenses if borne by the retailer .- Cash discounts offered by the vendor .- The sales performance of the merchandise .

The various criteria for the evaluation for the vendors performance are :-1 ) Ability to refill orders .2) Markup is adequate .3) Customers ask for the line .4) Supplier’s line has significant changes from season to season .5) Suppliers line contributes to leadership 6) suppliers advertise line in local media .

What is Merchandising ?

Put simply , merchandising can be termed as the planning , buying and the selling of merchandise .The merchandising challenge of consistently having the right product in the right quantity , available at the right place , at the right time and at the right price becomes increasingly difficult as more selling and fulfilling locations are added to a distributed retail model .The main challenge for the merchandiser is to improve service levels and decrease stockouts , inventory has to be increased and profitability suffers due to excessive markdowns . To reduce markdowns , inventory needs to be reduced and profitability suffers due to opportunity loss . Many a times , both these situations occur simultaneously .

Merchandise management can be termed as the analysis , planning , acquisition , handling and control of the merchandise investments of a retail operations .

- Analysis because retailers must be able to correctly identify their customer before they can ascertain consumer desires and their needs / requirements for making a good buying decisions .

- Planning is important because merchandise to be sold in the future must be bought now !

- Acquisition because the merchandise needs to be procured from others – either distributors or manufacturers .

- Handling involves seeing that the merchandise is where it is needed and in the proper condition to be sold .

- Control is required since the function of merchandising involves spending money for acquiring products it is necessary to control the amount of money spent on buying .

The Merchandisers Role N Responsibilities

The main functions of a merchandiser are :- 1) Planning Though the merchandiser may not be involved in actual purchase of the goods , they Formulate the policies for the areas in which they are responsible . Forecasting of sales for the forth coming budget period is required and this involves estimating consumer demand nd the impact of changes in the retail environment . The sales forecast is then translated into budgets to help the buyers work within the financial guideline .

2) Directing Guiding and training of buyers for the buying of goods according to the budgets planned .Guiding the buyers for additional markdowns for products which may not be doing too well in the stores .Inspiring commitment and performance on the part of buyers .

3) Co – ordinating Co – ordinating the buyers efforts in terms of how well it fits in with the store image and with the store for the proper display and selling of the product . Taking consumer insights and then communicating the same to the buyers for effective buying .

4) Controlling Assessing and analyzing the merchandise performance on the basis of the net sales , maintained mark up percentages , markdown percentages , net margins and stock turns . This is necessary to provide control and maintain high performance results .

Apart from closely working with the buyers the merchandisers also work closely with the visual merchandiser , store staff n managers for the display of goods and also with the marketing department for the advertising and promotional campaign .Merchandiser is also required to travel to various stores and also needs to have good mathematical skills in order to be able to work on budgets and on analyzing the sales figures .

The concept of merchandise planningThe business mission dictates to merchandise planning , the starting point or merchandise planning is in analysis .Merchandise planning can therefore be defined as the planning and control of the merchandise inventory of the retail firm , which balances between the customers expectations and the strategy of the firm .Merchandise planning enhances the possibility of the right assortment of goods , with the adequate amount of depth in the store .Planning also helps enhancing the possibility of increased stock turns , thereby releasing important working capital .

The implications of Merchandise planning

The primary objective of merchandise planning is profit improvement .As the buyer plans the buying for each department and also for the profitability that the retail organization will be able to achieve .The entire process of merchandise planning helps the buyer arrive at the quantities of the products that need to be bought . It therefore , has the following implications on other departments :-

FINANCE – At the end of the merchandise planning process , when the purchase order ( PO ) is raised on a particular supplier , the finance department needs to be informed about it as they are finally the ones who will make the payments .Finance will also evaluate the profitability of the merchandise .

MARKETING – The marketing dept needs to be aware about the products that are being purchased , as they may want to create campaigns for advertising the products or sales promotions .

WAREHOUSING AND LOGISTICS – On placements of orders for new merchandise , this dept needs to know as it is the one that will receive the products and do the physical verification of the same .The quantity mentioned in the purchase order needs to be tallied with the quantities actually received . Any discrepancies have to be informed to the accounts dept and to the merchandiser who has placed the orders . This dept also needs to know the dispatch details along with the quantity , size , colour , etc . This is important also to plan the warehouse capacities .

STORE OPERATIONS – The information of the merchandise being purchased needs to be communicated to the retail stores . This helps in space planning in the retail stores . It also helps to store to display the merchandise correctly and also to highlight promotions if any .

THE PROCESS OF MERCHANDISE PLANNINGStage 1 – Developing the Sales forecast A sales forecast may be made by the merchandiser , based on the targets given by the top management , or it may be handed down by the top management itself , depending on the retail organization .The sales forecast is the step that determines the inventory needs of the category .

Forecasts are 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 .

The process of developing sales forecasts involves the following steps :

1) Reviewing past sales – The review of the past sales gives an idea of any particular pattern or trend in sales . Past sales data can also help review the sales for the same period last year and help give indication for this year .

2) Analysing the changes in the economic conditions – It is necessary to take into account the changes in the economic front as this will affect the consumer buying patterns . Economic slowdowns , increase in unemployment levels will affect the business .

3) Analysing the changes in the sales potential – It is now necessary to relate the demographic changes in the market to the store and also the retail life cycle will affect the sales potential .

4) Analysing the the changes in the marketing strategies of the retail organization and the competition – It is important to study the competitors marketing strategy . Based on this we can decide if a new line of merchandise hs to be introduced , a new store to be opened or an existing store to be remodeled ?

5) Creating the sales forecast – A sales forecast is thus , an outline of what sales needs to be achieved – it tells us what sales are targeted and what revenues ( profit ) are expected from those targets . However it does not indicate the inventory levels that would be required , which is the second stage of planning .

Stage 2 :- Determining the merchandise requirement Planning helps in providing the right goods to the customer , at the right place and time .Planning can be at 2 levels :-

1) The creation on the merchandise budget .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 works 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 .The financial planning which gives how much to invest in product inventories , stated in monetary terms .The Merchandise budget usually comprise of five parts :-

1) The sales plan , ie , 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 reductions which may need to be made in case the product does not sell .

4) The planned purchase levels ie the quantity of each product that needs to be procured from the market .

5) The gross margin ( the difference between sales and cost of goods sold ) that the department , division or store contributes to the overall profitability of the company .

The Assortment Plan on the other hand , details the merchandise that will be sold in each product category .

The Merchandise Hierarchy

Merchandise hierarchy is the indicator of the manner in which the product classification is done .It is the logical order depending on the manner in which the customer are likely to buy the products. After entering the store , the customer looks for a particular product – the first point of demarcation here is the category or the department . Eg :- In a supermarket merchandise is available as fresh groceries , Ready to eat , personal hygiene . Many retail organization refer to this classification as merchandise class . Now within chips and wafers , the product could include salted wafers , branded wafers , wafers in different flavours , etc . This is the next level , which is termed as the sub category . The next level of classification could be on the basis of style / pack size and / or price point The final level will be that of the end stock keeping unit or SKU . Product planning has to be done for the complete merchandise hierarchy .

Company - Department – Merchandise classification – Merchandise category – Merchandise Sub Category – Style price point – SKU .

Staple / Basic merchandise – They are those products which are always in demand . They are the basic necessities like dal , sugar , salt etc . In many cases , these products may also be termed as Classics . Depending on the type of the retail model , the retailer has to determine the staple products / for the store .

Fashion Merchandise –Merchandise which has high demand for a relatively short period of time .Buying the right quantities at the right time , is of great importance . Excess buying may result in heavy markdowns t the end of the season or when it goes out of style . Eg – various cuts of jeans .

Seasonal Merchandise – Seasonal products include products that sell well over nonconsecutive time periods .Eg – Rainwear , winter wear .

Fad Merchandise – Fads in contrast to fashion , enjoys popularity for a limited period of time and usually generate high level of sales for a short time .

Style - It refers to the unique feature of any product . It may refer to specialized types of expression , such as taste in music and food preferences .

Assortment – Assortment refers to the selection of merchandise carried by a retailer , It includes both the breadth of the product category and the variety within each category . The width of assortment – The width of merchandise may also be referred to as the breadth of merchandise and it refers to the number of merchandise brands in the merchandise line . eg – Various brands of men’s shirts in a retail house .

The depth of assortment – It is the variety in any one goods / service category with which a retailer is involved . Eg – 10 designs of shirt in 5 different sizes , in 4 colours this is the depth of the assortment .

Model Stock Plan

Planning the composition of goods , which reflect the mix of merchandise available , based on expected sales is required to create a Model stock plan .It indicates the product lines , colour and size distribution that are carried by the retailer .

The process of merchandise planning can be top down or Bottom up The growth and the merchandise strategies are then determined on this basis .It is nothing but the ideal stock required for achieving the targets .This planning is done at SKU level .

The Six Months merchandise PlanThe six – months merchandise plan is a tool that translates the profit objectives into a framework of merchandise planning and control .The following points need to be kept in mind while creating this plan :

1) The Merchandise budget should be prepared in advance of the selling season ( keep in mind the time taken for ordering and the time take by the supplier to supply goods ).

2) The language of the budget should be easy to understand .3) Since the economy is ever changing , the merchandise budget must be planned for

a relatively short period of time – six months is the normal norm . 4) The budget should be flexible enough so that change are not impossible .

The main objective of creating this plan is to prepare a month –by – month purchasing schedule for the retail organization .The first step is the sales information of last year to analyse the actual sales data , the data on returns , markdowns and any inventory carry – over .

Key components of the six – month merchandise plan :- Planned Sales – Planned sales are the projected sales for the period planned .We usually take the required growth on the last years sales . Planned purchases – Planned purchases represent the merchandise that is to be purchased during any given period . Planned purchases = Planned Sales +Planned Reductions + Planned EOM – Planned BOM .

Planned purchase at cost = Planned purchases at retail x (100 % - Initial mark up %).

Planned reduction – Markdowns , employee discounts and inventory shrinkage come under the heading of planned reduction . This affects the gross margin , and hence needs to be taken into consideration while calculating the profitability .

Planned Markdowns – Stated simply , markdowns are deductions in prices and may occur due to bad quality of merchandise , competitive products , changing trends etc .Employee Discounts – Discounts given to the employees for buying the company’s products .

Shrinkage – Shrinkage is the loss of merchandise due to theft or pilferage .This needs to be taken into account as it has an impact on the margins and hence the profitability .

Planned Mark up –The retailer needs to determine the initial markup for the products . Markup would vary depending on the type of the product , the audience that it is targeted at the and the market trends .

Markup in rupees = Selling price – Cost price .Markup percentage = Markup in rupees / retail price .

Gross Margin - Gross margin in the difference between the selling price and the cost of the product , less reductions for markdown , shrinkage and employee discounts . The amount left after reductions is enough to pay all, the operating expenses and leave the retailer with a profit .

B.O.M & E.O.M planned inventory levels – Planning End – of – Month (E.O.M) or beginning of month (B.O.M ) inventory levels ( one month’s ending is the next months beginning ) .

Two important methods of to calculated inventory are – a) Stock – to – sales method – The Stock – to – sales (S/S) is a ratio to the amount of inventory on hand at a particular date to the sales for the same period .

S/S Ratio – Stock on hand E.O.M ( at retail value ) / Sales for the same month . This selected ratio is then multiplied by the projected period sales to get the desired E.O.M inventory level .

Stock –sales ratio = Value of inventory / Actual sales .Planned BOM Inventory = Stock-sales ratio x Planned sales .

b) The Basic Stock Method - In this method , the buyer believes that he needs to carry a certain fixed amount of inventory in the store at all times .Basic Stock = Average Stock for the season – Average monthly sales for the season .

Average monthly sales for the season = Total planned sales for the season / Number of months in a seasons .

Average stock for the season = Total planned sales for the season / estimated inventory turnover rate for the season .

Beginning of the month (BOM) stock = Planned monthly sales + Basic stock .

STAGE 3 : Merchandise Control – The Open to buy

The purpose of the concept of Open to buy is two fold . First it depends on the sales for the month so that the merchandise buy can be adjusted . Secondly the Planned relation between the stock and the sales can be maintained .The open to buy ensures the buyer of 1) Limits the over buying and under buying . 2)Prevents loss of sales due to Unavailability of the required stock . 3) Maintain purchases within the budgeted limits . 4) Reduce mark downs which may arise due to excess buying . Due to some stocks in transit the buyer will not be able to buy the total planned quantity every month .Open to buy = Planned EOM Stock – Projected EOM Stock .Projected EOM stock = Actual BOM Stock + Actual additions to stock + Actual on order – Planned monthly sales – Planned reductions for the month .

Stage 4 – Assortment Planning This involves determining the quantity of each product that will be purchased to fit into the overall merchandise plan .The main purpose of creating an assortment plan is to create a balanced assortment of merchandise for the customer . The factors affecting assortment plan is the type of merchandise to be stocked in the retail store eg :- buying staple merchandise is relatively easier , decorative diyas in Diwali . The other is the retailers policies with respect to the type of brands and the level of exclusivity to be maintained in the store .Example :- Department – Mens wear .Product line – Shirts , trousers , accessories .Breadth - Zodiac , Van Heusen , Louis Phillippe .Depth – Styles , Colours .

A merchandiser tries to create a optimal merchandise mix . These would be the Budget available for buying , the merchandise turnover , the space available within the store .

A) Range Plan :- The aim of the range plan is to create a balanced range for each category of products . A good range plan should take care of the following :-

-The number of items / options available to the customer should be sufficient at all times and should be such that it helps the customer make a choice . - The range planning process should ensure that overbuying and under buying is limited .

- Sufficient quantity of the product are available , so that all the stores can be serviced and the product should be available at all stores across various locations . The price of the product also plays an important role in the entire process . Once the inventory level is determined and also the sales that needs to be achieved . We have to decide how many styles and options we should have to achieve the targets .The breadth of the range has much to de with customers perception and the constrains of the existing space . The lower limit of the range width is often described as the aesthetic minimum . The buyer needs to identify the winning styles and the styles that can be used for window dressing . The quantities will vary accordingly.

B) The Model Stock Plan :- After determining the money available for buying , a decision needs to be made on what to buy and in what quantity . This results in creation of the Model stock plan . The model stock plan gives the precise items and quantities that needs to be purchased foe each merchandise line . The attributes that a customer would consider while buying the merchandise needs to be kept in mind by the buyer and then decide on the levels under each attribute and finally allocate the total money available or units for the respective categories .

The Concept Of the Private Label

The retailer may decide to sell products which is owned , controlled , merchandised and sold by the retailer in his own store / chain of stores , he is said to be selling own label / brand or private label merchandise . The private Label Marketing Association defines store brand products as “ all merchandise sold under a retail store’s private label .

Thus , a private label can be classified as under :-- Store Brand – which carriers the retailers name , such as Westside , Food

World , Big Bazaar - An Umbrella brand – Where a common brand name is used across

multiple categories – example splash ( Life style ) , Bare ( Pantaloon ) . - Individual brands – Where specific brand names are created for the

specific market segments and / or category .

The private label serves as a tool for increasing business and winning customer loyalty. The private label has also been the innovators in many respects eg : Marks & Spencer .

The Evolution of Private Label

Private labels were traditionally defined as generic product offerings that competed with national brands on the basis of a value proposition . The private label or store brand carried the stigma of inferior quality .

Private labels started out of economic necessity , for providing a cheap alternative for low – emotion involvement goods such as Butter , eggs , flour and sugar . Generics , which were products distinguishable by their plain and basic packaging were the first type of private labels . The basic need for the private label is to earn a higher level of profitability and also the desire to service the gaps in consumer requirements .

The private labels also cater to a specific audience and rely largely on in store advertising . In order to compete with the national brands , private labels need to focus on quality .

Quality has two components : 1)The average quality of one product compared to another ; and 2)The consistency in quality over a period of time .

National brands have the advantage of having an image of providing consistent quality over a long period of time . Secondly private label goods tend to be more successful where the number of competing products is lower . Hence introducing a private label in this category may not be advisable . Offering a good value proposition to the customer in these categories would work to an advantage for the retailer .

The Advantages of a private labelThe advantage of a private label is to fill in the gaps that may exist in the market place . It also allows the retailer to offer a unique product or differentiated product in the market place . This can prove as the competitive advantage , as compaired to national brand the private label can respond to the customer needs faster .It allows the retailer to earn a level of margin which may be higher than what is offered on other brands that he chooses to retail . A private label basically involves the retailer doing the designing , merchandising , sourcing and distribution . Thus his cost of goods sold is much lower than the national brands . The creation of private labels requires the retailer to financially invest in private label .

The process of private label creation The process of private label creation are listed below :-

1) Defining the objective – The first step towards creating a private label I defining the reason for which the retailer wishes to create the private label . The reasons to create a label would be to create a competitive differentiation or offer a wide and unique product range to enhance the margin and to earn or built customer loyalty .

2) Defining the gaps in the market – The retailer needs to understand the customer segment which is to be tapped . The retailer also addresses issues with respect to the sensitivity to price of the target audience , the level of experimentation within the segment and the level of brand loyalty . But there is a financial implication of the private label and would also require a supply chain efficiency . Retailer also needs to define the strategy he is going to adopt . The gaps in the offering , brands and product in the store and competitors need to be identified .

3) Decision on make or buy and sourcing – The method in which the sourcing of the product is to be done has to be identified . In case of retailer sourcing the product , decision with respect to the vendor or supplier needs to be tackled . The merchandise timely delivery , the quality and price should all unable to earn a suitable margin .

4) Determine the marketing and sales strategy – This will involve communication within the store and at times , communication in vehicles of mass media . It is nessasary to define the strategy of the brand along with the corporate strategy which will define the product positioning . This helps in creating the image of the brand in the minds of the customer .

5) Determine the measures of performance – It is important to identify the measure of performance . It is necessary to develop a system to track and monitor private label program performance and identify recommendations for program refinement and improvement .

Identification of the need -- Make or buy – Placing the order & allocating the goods – Marketing – Performance measures .

The Concept of Retail Price

The price of the merchandise also communicates the image of the store . Various factors like the target market , store policies , competition and the economic conditions needs to be taken into consideration while arriving at the price of the product .

- The first factor to be taken into consideration is the demand for the product and the target market , which means the value proposition for the consumer . Some times the price is linked to the quality products like electronics where the high priced product is perceived value is of good quality. Also the example of designer clothing customers are willing to pay a premium .

- The store policies and the image to be created also influence the pricing of the product. Retailers who want to create a prestige image may opt for a higher pricing policy and on the other hand the retailer might want to penetrate the market may decide to offer value for money .

- Competition for the product also determines the pricing . In case the product is unique and does not have any competition , it can command a premium price in case of competition the pricing should be fixed carefully .

- The economic conditions eg the economic slowdown , price are generally lowered to generate more sales . The demand and supply situation in the market also affect price .If demand is more than the supply price can be premium . If the demand is low then the prices have to be economical .

The elements of retail pricing – The expenses may be Fixed or Variable .- Fixed Costs , sometimes refers to as overheads , are expenses that don’t

vary according to the production amount – such as rent , storage spaces etc.

- Variable costs , are expenses that do vary with the amount of service provided or goods produced . They include costs such as hourly pay , raw material cost , advertising and promotion .

The cost of a product is the total of the fixed and variable expenses to the manufacturer for producing and distributing the product or service. Price on the other hand , is the selling price per unit , customers pay for your product or services . Retail price = Cost + Mark up Cost = Retail price – Mark up Mark up = Retail price – Cost .

Mark up percentage ( Based on Retail price ) = Mark up in rupees / Retail Price .

Mark up percent ( Based on cost ) = Mark up in rupees / cost .

The mark up thus fixed is termed as the initial mark up . Reduction of price may be done due to markdowns , employee discounts , and shrinkage .

Determining The PriceThe break even point is the point at which the retailer neither makes profit nor loses money in producing a product or delivering a service .The break even analysis is the process used to uncover the break even – numbers . The first step towards arriving at the break even point is to determine the fixed and the variable costs at different levels of purchase or production .

To calculate the break – even point the formula is :-

Break – even revenue = Fixed costs / 1- ( Variable cost per unit / selling price per unit ) .

To Calculating Break even units the formula is :-

Number of units needed to break -even = Fixed costs / Unit contribution margin .

Unit contribution margin = Selling price per unit – Variable cost per unit .

Mark Up Pricing

The markup is the difference between the cost of the product and the final selling price . The mark up can be in rupee terms or can be in terms of a percentage .

Selling Price = Cost + Mark Up .Markup % ( at retail ) = ( Retail Selling Price – Merchandise cost ) / Retail Selling Price.

Markup % ( at cost ) = ( Retail Selling Price – Merchandise cost ) / Merchandise cost .

Cumulative Markup The cumulative markup is calculated for a group of products . The cost of inventory and Retail value of inventory are important to calculate the markup % at retail .

Markup % at retail = Retail value – cost value / retail value .

Retail Pricing Policies / StrategiesThe pricing strategy adopted by a retailer can be cost – Oriented , demand – oriented or competition oriented .

In Cost – oriented pricing , a basic markup is added to the cost of the merchandise to arrive at the price .

Retail price = Cost + markup .

The difference between the selling price and the cost is considered as the markup and should cover for the operating expenses and transportation etc . When the buyer is aware of the markup percentage required and the selling price , he can also work out the price at which he actually needs to procure the product .It is not always possible to maintain a single markup for all product category. The buyer can have varying prices and margins and balance the margins some product with higher margin and some with lower margin .

Demand oriented Pricing focuses on the quantities that the customer would buy at various prices .