Principles and Techniques

of Merchandising

Fashion Merchandising

Fashion Merchandising in simple terms is the planning, buying and selling of goods for the purpose of profit.

It refers to the total process of stock planning, management and control.

Definition

It refers to the planning, buying and selling activities required to have the right fashion oriented merchandise at the right time, in the right place, in the right quantities, at the right prices, and with the right sales promotion.

Misconceptions about Fashion

Designers and retailers dictate what the fashion will be and then force it upon helpless consumers.

Fashion acts as an influence on women only. Fashion is a mysterious and unpredictable

force.

Terminology of Fashion

FashionA style that is accepted and used by majority of a group at any one time, no matter how small the size of the group.High fashion refers to those styles or designs accepted by a limited group of fashion leaders – the elite among consumers-who are first to accept fashion change.Mass fashion refers to those styles or designs that are widely accepted.

Style

A style is a characteristic or a distinctive mode of presentation or conceptualization in a particular field.

In apparel, style is the characteristic or distinctive appearance of a garment – the combination of features that makes it different from other garments.

eg. Blazer jackets are different from all other types of jackets.

Design

A Design is a specific version of a style.

eg. Many variations of a skirt.

Taste

Taste refers to an individual’s opinion of what is and what is not attractive and appropriate for a given occasion.

A Classic.

A Classic is a style or design that satisfies a basic need and remains in general fashion acceptance for an extended period of time.

A Classic is characterized by simplicity of design as well as length of time in fashion.

A Fad.

A fashion that suddenly sweeps into popularity, affecting relatively few of the total population, and then quickly disappears is called Fad.

COMPONENTS OF FASHION

Fashion design involves the combination of four basic elements or components:

Silhouette. Detail. Texture. Color.

Silhouette.

A Silhouette of a costume is its overall outline or contour. It is often referred to as shape or form.

Details.

The individual elements that give a silhouette its form or shape are called details. These include trimmings, length and width of a particular garment, and shoulder, waist and sleeve treatment.

Texture.

Texture is the look and feel of material; woven or non-woven.

PRINCIPLES OF FASHION

1. Consumers establish fashion by accepting or rejecting the styles offered.

2. Fashions are not based on price.

3. Fashions are evolutionary in nature; they are rarely revolutionary.

4. No amount of sales promotion can change the direction in which fashions are moving.

5. All fashions end in excess.

STEPS IN MERCHANDISING

FIRST STEP

THE PLAN

SECOND STEP

BUYING (PROCUREMENT)

SOME MAJOR FACTORS AFFECTING FASHION MERCHANDISING

FACTOR OF OBSOLESCENCE. HIGHER MARKDOWNS. FASTER TURNOVER. SEASONAL FACTORS.

MAIN AREAS OF MERCHANDISE MANAGEMENT ACTIVITY

PLANNING THE STOCK TO BE DELIVERED INTO THE BUSINESS.

Analyzing historic sales patterns and trends. Recommending forward fabric buying levels. Recommending forward garment buying

levels. Monitoring and managing delivery of new

stock into the distribution centre. Ensuring that overall stock levels and buying

are in line with the organizational sales plans.

MOVING DELIVERED STOCK AROUND THE BUSINESS.

Initial allocations of new stock to shops – what quantity to each?

Store replenishment – as sales begin – how much more stock and how quickly do we send to individual branches?

Recommending the level of repeat buys of best selling lines.

Transfers and recalls of faulty or non-seasonal stock.

THE ROLE AND RESPONSIBILITIES OF A MERCHANDISER

To estimate sales and plan stock levels to achieve the planned sales and margin for a specific garment type.

To provide regular analysis and progress reports referring to stock levels, sales performance and stock purchases to senior management.

To work with buyer on range planning to maximize commercial opportunities for products.

To manage intake and commitment to accommodate the stock requirements of the business at any given time and the open to buy requirements of the garment type.

To manage stock distributions to stores optimizing customer demand, available selling space and seasonal selling opportunities.

To effectively manage and develop the merchandising/distribution team.

KEY MERCHANDISING COMPETENCIES

PERSONAL CHARACTERISTICS Logical, rational. Multi-tasking flexibility. IT-oriented. Numerate. Analytical. Gives attention to DETAIL – but is aware

of the bigger picture. Assertive. Retentive memory.

Competencies w.r.t. Data Awareness

Balances interpretation of data with commercial common sense.

Looks for ways to improve range, collection and use of data.

Understands the procedures for calculating figures.

Can spot and interpret trends. Can cope with multiple tasks and remain

accurate. Can produce accurate forecasts based on

all available data.

Competencies w. r. t. Commercial Awareness

Remembers sales histories and can judge optimum selling prices.

Builds up knowledge of the style, design and color characteristics of best and worst sellers.

Makes commercial recommendations about supplier’s performance to buyers.

Understands how the garment type’s budget and performance affects the company.

Monitors and influences the progress of products in the garment type’s critical path.

Manages the balance of mark-downs and repeated (full-price stock) to maximise profits.

Competencies w.r.t. Planning

Collects all relevant information to contribute to range planning.

Develops a commercially balanced range plan with the buyer.

Monitors sales performance against stock levels.

Monitors progress of orders against forward commitment and stock needs.

Develops and maintains efficient administrative systems for self and team.

Manages self and team through prioritizing work load effectively.

Competencies w.r.t. Action

Combines analysis of information with experience in the management of risk.

Adjusts forward stock commitment according to sales performance.

Times new deliveries and repeat orders to optimize sales opportunities and profits.

Negotiates appropriate discounts (from cost price) in response to late or incorrect deliveries.

MERCHANDISING VOCABULARY

Basic fashion terminology: Fashion Style Fad Silhouette Detail Good taste Classic Haute couture

Couture

Couture or Haute Couture literally means “fine sewing” but is also synonymous to “high fashion”. It includes original styles or designs accepted by a limited group of fashion leaders. The term “haute couture” is generally used in connection with those design houses that combine luxury fabric and fine handiwork to create original and trend setting styles.

Pret

Pret-a-porter means “ready to wear” and is similar to our domestic ready to wear.

Range

A range is an assortment of products, most commonly garments and accessories, which is developed under different categories to sell to customers.

Scope of a Range:

Width

Depth

“Range Width” refers to how wide a choice of products is to be offered to customers.

The “Depth” of a Range refers to the choice of styles, colors, sizes and price points available to customers in significant number of units within product categories.

CONSUMER BUYING

Human characteristics that influence fashion: Desire to be alike. To act in common. To have same or similar tastes. To have similar instincts or desires. To respond in similar way to same impulses.

Major factors that affect consumer buying motives: Psychological consumer behavior.

Emotional Buying Motives.1. Courtship and marriage.

2. Care for one’s offspring.

3. Fear and anxiety.

4. Rest and recreation.

5. Curiosity. Rational Buying Motives.

1. Economy.

2. Efficiency and durability.

3. Dependability and reliability.

4. Financial security.

5. Property enhancement.

CONSUMER BUYING

Sociological consumer behavior.Family interactions.

Knowledge of Social class.

Membership groups.

Population characteristics.Gross National Product.

National Income.

Personal Income.

Disposable Personal Income.

Personal characteristics. Physiological needs (hunger, thirst etc). Safety needs (security, protection, etc). Love needs (affection / belonging). Esteem needs (self-respect, prestige,success, etc). Self-actualization needs (self-fulfillment).

Patronage motives. Price. Convenience. Integrity. Quality and Assortment of goods. Services offered. Courteous personnel.

Fashion LifeCycle A Fashion trend is the direction in which

a style or fashion is moving. Fashions move continuously through their life cycles at varying, individual speeds.

The art of predicting what the current fashions are, estimating how popular they are, and estimating future demands requires careful recognition of fashion trends.

FASHION LIFE CYCLE

Every fashion goes through a series of six stages to complete a “life cycle”.

The stages are:1. The rise of a fashion.

2. Acceptance or rejection.

3. Style becomes popular.

4. Mass production.

5. Decline in popularity.

6. Fashion abandonment.

Factors influencing fashion cycle

Globalization

Greater media communication

Health and well being

Technology

Ecology

Pressured life-styles

Androgyny

Democratization of Fashion

Elements of Merchandising Mix PRODUCT PRICE PLACE OF DISTRIBUTION PROMOTION PEOPLE PROCESS PHYSICAL EVIDENCE

Additional 3 elements are extremely important to fashion retailers as any retail business is dependant upon its service provision for its success.

Product refers to the complete package of benefits offered to the customers.

Price refers to the retail selling price consumers have to pay.

Promotion refers to a wide range of activity from product label ticketing/packaging to advertising/PR and in-store merchandising.

Place refers to the channels through which the products are sold. (location, accessibility, available selling space etc)

People refers to all individuals, including customers, suppliers and the retailer’s staff, who are involved in the buying and selling activities.

Process refers to the intended customer experience of the retail facility, ranging from store layout and function to more specialist personal shopping or home delivery features.

Physical evidence refers to the presentation of the store, its fascia, windows, stock and staff. It can also include in-store posters, point-of-sale leaflets and brochures, all of which reflect the brand image of the retailer.

Retailer function in the Merchandising Mix

Product design, buying & merchandising, technology

Price buying, merchandising

Promotion marketing, PR

Place merchandising, distribution, retail operations

People human resources

Process merchandising, retail operations, supply chain

Physical retail operations incl. VM & marketing

evidence

4Rs of Merchandising

Right fashion oriented merchandise (product). at the Right prices (price). in the Right place (place). Right sales promotion (promotion).

Fashion Forecast The fashion department is one that sells feminine and masculine apparel and

accessories. The fashion co-ordinator is the individual responsible for promoting the sale of

fashion merchandise throughout the entire store. The fashion co-ordinator, whether a buyer, merchandise manager, or owner-

manager, must plan the fashion season for the store or department. To accomplish this task, the fashion co-ordinator must plan a consumer or retail

calendar as well as be aware of the trade calendar of events that will affect the planning of the store’s seasonal fashion theme.

The basic consumer calendar is important to a retail operation because it provides information regarding the time period when fashion merchandise must be in the store.

The trade calendar is important because it informs the buyer of trade activities that occur throughout the fashion season.

When fashion co-ordinators are aware of what is happening at both the retail and trade levels, they can plan their work accordingly.

Fashion co-ordinators must work with top store excecutives, as well as with buyers of various departments, and continuously supply up-to-date fashion information.

Merchandising Plan

MERCHANDISE MANAGEMENT is the process by which a retailer attempts to offer the right quantity of the right merchandise in the right place at the right time while meeting the company’s financial goals.

PLANNING MERCHANDISE ASSORTMENTS Organizing the buying process by categories Setting objectives for the merchandise plan Develop an Assortment Plan

Assortment planning is the process of trading off variety, assortment, and back up stock.

An Assortment Plan is a list of merchandise that indicates in general terms what the retailer wants to carry in a particular merchandise category.

Eg. An assortment plan for girls’ jeans would include the average number and percentage of each style/ fabric/ color/ size combination that the retailer would have in inventory.

ORGANIZING THE BUYING PROCESS BY CATEGORIES Category management is the process of managing a retail

business with the objective of maximizing the sales and profits of a category.

The buyer / merchandiser is responsible for developing the assortment plan for the entire category, working with vendors, selecting merchandise, pricing merchandise, and co-ordinating promotions with the advertising department and stores.

STOCK KEEPING UNIT (SKU) A stock keeping unit (SKU) is the smallest unit available for

keeping inventory control. In soft goods merchandise, an SKU usually means size, color and style. Eg. A pair of girls’ size 5, stonewashed blue, straight fit Levis is one SKU.

SETTING OBJECTIVES FOR THE MERCHANDISE PLAN

The Top Management sets the merchandising direction for the company by –

Defining the target market. Establishing performance goals. Deciding, on the basis of general trends in the marketplace,

which merchandise classifications deserve more or less emphasis.

The buyers and merchandise planners, on the other hand, take a more micro approach. They study their categories’ past performance, look at trends in the market, and try to project the assortments for their merchandise categories for the coming seasons.

GMROI - Gross Margin Return on Inventory investment

Performance measure on which the merchandise plan is evaluated – GMROI - Gross Margin Return on Inventory investmentThis measure, GMROI, composes of 2 ratios: Inventory turnover and Gross Margin percentage.

Putting Margin, Sales and Turnover Together: GMROIAt the corporate level, return on assets is used to plan and evaluate

performance of overall retail operations.Return on assets = Net Profit Margin x Asset turnover

= Net Profit Net Sales------------ X -------------Net Sales Total Assets

= Net Profit----------------Total assets

Buyers generally have control over gross margin but not expenses involved with the operation of stores and the management of the retailer’s human resources, systems etc. As a result, the financial ratio that is useful for planning and measuring merchandising performance is a return on investment measure called Gross Margin Return on Inventory investment.

GMROI = Gross Margin Percentage X Sales-to-Stock ratio= Gross Margin Net Sales ------------------- X ---------------------- Net Sales Avg Inventory= Gross Margin ------------------------ Avg Inventory

GMROI is used as a return on investment profitability measure to evaluate departments, merchandise classifications, vendor lines and items. It is also useful for management in evaluating buyers’ performance since it can be related to the retailer’s overall return on investment.

Average inventory in GMROI is measured at cost, because a retailer’s investment in inventory is the cost of the inventory, not its retail value.

Eg.BREAD PREPARED

FOODSGross margin $2000 $150,000Sales $150,000 $300,000Average inventory$1000 $75,000

Gross Margin Net Sales Gross MarginGMROI = ------------------ X ------------------- = -------------------

Net Sales Avg Inventory Avg InventoryBREAD= $2000 $150,000 $2000(GMROI) ----------- X ------------ = ---------

$150,000 $1000 $1000

= 1.333% x 150 times = 200%

PREPARED= $150,000 X $300,000 $150000FOODS ------------ ------------ = -----------(GMROI) $300,000 $75000 $75000

= 50% X 4 times = 200%

MEASURING INVENTORY TURNOVERInventory Turnover is the measure of how many times, on average,

the product cycles through the store during a specific period of time, usually one year. It is a measure of the productivity of inventory – that is, how much sales revenue can be generated from revenue invested in a particular category.

Inventory Turnover is defined as follows:Inventory Turnover = Net Sales

------------Avg Inventory at retail

ORInventory turnover = Cost of Goods sold

------------------------Avg Inventory at cost

Both numerator and denominator must be at retail or at cost. For the Sales-to-Stock ratio, the inventory is always expressed at cost.Sales-to-Stock ratio = Net Sales

-------------------Avg Cost Inventory

So, if sales=$100,000 and Avg cost inventory=$33,333; then,Sales-to-Stock ratio = $100,000 = 3

--------------$33,333

CALCULATING AVERAGE INVENTORYAverage Inventory is calculated by dividing the sum of the inventory for each month by the number of months.Avg Inventory = month1+month2+month3+month4+…..

--------------------------------------------------number of months

Month Retail value of inventoryEOM Jan $22,000EOM Feb $33,000EOM Mar $38,000

-----------Total inventory $93,000Avg Inventory $93,000 / 3 = $31,000

MERCHANDISE PLANNING

Components of Merchandise Planning

OBJECTIVES – short term / long term POLICIES – frame of reference for decision

making. PROCEDURES – necessary steps that must

be followed.

Types of records used in Planning

Cash receipts and disbursements. Credit. Expenses. Sales. Purchases. Stocks and inventories. Profit and loss statements.

Cash disbursements and Receipts

Cash Disbursement refers to the amount of cash paid out by a business.

Cash receipt refers to the amount of money taken into the business.

Cash Budget is an estimate of the department or store’s cash receipts and cash disbursements over a specific period of time.

MERCHANDISE PLANNING

The two major tools of merchandise planning are the dollar merchandise plan and the open-to-buy.

The Dollar merchandise plan serves as a guide for achieving desired sales and profit goals and provides a means for comparing and evaluating merchandising results.

Merchandise Planning begins with Sales Planning. It is important that the planned sales figure be as realistic as possible because this figure is the basis on which all other figures are planned.

Stock turnover serves as a guide in determining the efficiency of money invested in a store’s inventory.

Stock T.O. = sales / avg.stock

The methods used to plan the inventory needed to achieve the planned sales include: The basic stock method. The weeks’ supply method. The stock – sales ratio.

Tools of Merchandise Planning

Dollar Merchandise Plan It is the dollar control budget for the store. It projects in dollars the amount of merchandise

needed to achieve planned sales.Open-to-Buy It is the amount of merchandise that a store may

order during the balance of a period. It is the amount of money remaining to be spent

from an existing budget after some purchases have been made.

OTB can be expressed in dollars and in units.

The Merchandise Plan

The essential elements of a merchandise plan include sales, stocks, markdowns/reductions, markup and purchases. A plan may also include stock turnover, cash discounts, alteration costs, selling costs, sales promotion expenses, and gross margin.

The Dollar Merchandise Plan is similar to a personal budget. It shows income expected and expenditures anticipated for the period of the plan.

Merchandise Planning

The figures for the plan are based on the following sources: Store sales figures, including last year’s figures

and the trend over several years. The changing picture of competition. Trade statistics. Economic forecasts from various sources,

including banks, govt. agencies, business schools and trade associations.

MERCHANDISING MATHEMATICS

MARKUPMarkup is the difference between the cost and the desired selling price of goods. It must be sufficient to cover the expense of operating the business plus a desired profit.RETAIL (selling) PRICE – COST = MARKUP

INDIVIDUAL INITIAL MARKUPIt is the markup on an individual item that the buyer hopes to achieve.

MARKUP PERCENTAGEMARKUP / RETAIL = MARKUP PERCENT ON RETAIL

MARKUP / COST = MARKUP PERCENT ON COST

CUMULATIVE MARKUP

Retail price of all goods on hand – Cost of all goods on hand = Markup on all goods on hand.

markup on all goods on hand cumulative

----------------------------------------- = markup

retail price of all goods on hand percentage

Methods used in planning inventory

Basic stock method

basic stock is defined as the minimum stock that should be maintained at all times.

BOM stock=sales for the month + basic stock

basic stock=avg stock – avg monthly sales

avg stock for season = sales for the season

---------------------------

stock T.O. for season

Week’s Supply methodweek’s supply=52 weeks / desired stock turnover

Stock-Sales ratioStock-sales ratio=BOM Retail stock / sales for the month

Markdown%=amt of markdown / net sales

Planned markdowns=planned sales x planned markdown%

Planned purchases.

Planned purchases are the amt of merchandise that is planned for delivery to the store or department during a given period without exceeding the planned closing stock for that period.

Planned purchases at retail= sales + EOM stock + markdowns - BOM stock

Pricing

Pricing Based on CostPricing Based on Cost

Markup on cost pricing a pricing approach that adds a percentage of the cost price to the producer’s cost in order to arrive at a selling price.

Markup on selling price a pricing approach that adds a percentage of the selling price to the producer’s cost in order to arrive at a selling price.

Cost-plus pricing a markup pricing approach that adds on a dollar amount to the producer’s cost in order to arrive at a selling price.

Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price.

Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.

Pricing Based on Customer ValuePricing Based on Customer Value

Reference Price the price that buyers use to compare the offered price of a product or service.

Demand-backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins.

Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.

Buyer-backward pricing

DEMAND-BACKWARD PRICING

Setting an acceptable final consumer price and working backward to what a producer can charge.

Buyer-backward pricing

Poly’Cotton skirt: Wholesale price $24.00

Retail price $50.00

Retailer’s Costs

$24.00 less discount for prompt payment 22.08

Markdowns 8.00

Expenses (salaries, sales promotion, rent, insurance etc.) 18.00

Taxes 0.67

Profit 1.25

________________________________________________________

SELLING PRICE 50.00

Cost-plus pricing

Cost-plus pricing is a pricing method commonly used by firms. It is used primarily because it is easy to calculate and requires little information.

There are several varieties, but the common thread in all of them is that you first calculate the cost of the product, then include an additional amount to represent profit.

Cost plus pricing

Poly’Cotton skirt: Wholesale price $24.00

Retail price $50.00

Manufacturer’s Costs (in $)

Material 4.85

Lining 0.65

Packing costs (tags, labels, hangers, pins, bags) 0.75

Zipper 0.50

Labor cost 7.43

Overheads (rent, insurance, utilities, salaries, cost of samples etc) 7.27

Taxes 0.80

Trade discount (8% off cost of prompt payment) 1.92

Profit 2.25

---------------------------------------------------------------------------------------------------------

WHOLESALE SELLING PRICE 24.00