Benjamin Franklin wisely said that “failing to plan is planning to fail.” While he wasn’t specifically referring to the retail industry, the adage could not ring more true — especially when it comes to merchandise planning for your retail store.
If the merchandise you order and so diligently display in your store and on your website doesn’t align with what consumers demand — you’re out of popular items or order the wrong merchandise — you’re essentially planning to fail.
Inventory distortion includes shrinkage, stockouts, and overstock. It costs retailers an estimated $1.1 trillion worldwide, and U.S. retailers sat on approximately $1.36 of inventory for every $1 in sales in 2019.
But there is good news. You can lower your overall inventory costs by 10 percent by simply reducing stock-outs and overstocks. The key is to order the right items, at the right time, in the right amounts, for the right price.
Enter retail merchandise planning.
What is merchandise planning?
Retail merchandise planning is exactly what it sounds like — a way to select, manage, purchase, display, and price merchandise in an efficient way that ensures you have the right products available at the right time. By doing so, you increase your potential for a maximum return on investment (ROI). You also cut down on excess inventory, and maintain — and build — goodwill and your reputation with customers who know you’ll have what they want when they want it.
The benefits of retail merchandise planning include:
- Fewer markdowns of excess/outdated/depreciated stock and increased revenue due to the right products being available
- Increased inventory turnover and decreased inventory carrying costs in the warehouse due to a reduction in unwanted inventory
- Fewer out-of-stock situations and unsatisfied customers
- Increased ROI due to strategically ordering the products that generate the most revenue
The components of merchandise planning
One of the biggest expenses a retailer makes is buying and marketing merchandise. This is why effective inventory management is so critical. The basic components of retail merchandise planning include:
First and foremost, the basic component of any merchandise mix is the product. You have to make sure you have enough merchandise to fill customer demand. That said, there are several types of products that you can include in your assortment, and you need to plan accordingly.
For example, there are staple items you carry year round that need to be routinely kept in stock. Then there are seasonal products you need to keep in inventory before the beginning of the season. You also need to maintain them adequately throughout the season to reduce stockouts and any excess product. Finally, there are “fad” items. These are hot ticket items for a shorter period of time. Which means they should be approached with caution from a buying standpoint.
If the merchandiser of clothing boutique is planning the store’s winter merchandising strategy, they would need to figure out the right balance between staple or classic products (like plain sweaters or pants), seasonal inventory (such as outerwear), and fad items (like items influenced by pop culture or current events).
This refers to the variety of merchandise that you sell. It’s important to invest in a wide range of products with breadth, width, and depth so that customers have adequate options.
However, one size doesn’t fit all with range. A store that specializes in children’s books, for example would have a narrow but deep merchandising mix. The store’s products would focus on books for kids, but it would offer a deep assortment of those books and would carry everything from classic Dr. Seuss books to ones that contain stickers, pop-up pages, and more. The store may even have hard-to-find children’s books.
Meanwhile, a big box store like Walmart would have a wide range of products but may lack in depth. Going back to the children’s books example, Walmart may have some popular titles, but if you’re looking for a rare or specific type of book, you’d have to look elsewhere.
If you don’t properly price your items, you’re not going to make the sale, and it’s a delicate balance. There’s no one-size-fits-all pricing strategy.
One approach that works for many companies is to create “high, medium, and low” ranges. This way you can appeal to the widest customer base possible, all while focusing on everything from regular sales and consistent profits to markdowns and stock clearance.
This includes the combination of products that you sell and how they are presented. For example, products of a similar category are available at one appropriate place. But toiletries shouldn’t be merchandised along with snack foods.
Make it convenient for customers to locate, select, and buy products due to the available assortment and placement.
The vintage Velour in Oregon, does a great job in presenting its assortment. In the photo below, you’ll see that Velour arranged different clothing pieces based on their category (i.e., T-shirts, jackets, polos). The store also implemented a bit of cross-merchandising by displaying footwear near the clothes.
If you’re a brick-and-mortar location, focus on ensuring the products are visible and accessible to the customer. Make best use of your space by showcasing items using different types of fixtures, mannequins, and window displays.
A good technique here is to place key items at your customers’ eye level. If you’re a kids store, for example, then you’d want to position notable toys or items lower on your shelves. This is where kids can easily reach them.
Steps involved in retail merchandise planning
While merchandise planning varies greatly based on things like industry and specialty, there are basic steps that are involved no matter the size or niche of the business.
1. Perform a post-season analysis
The first thing you need is an understanding of how things went during the previous sales season, and you’re going to get that with data. Look at basic things like total sales, but also include a look into specific results like revenue of a particular item or category.
Next, it’s time to analyze the results by comparing those numbers to the planned numbers from the same year to gain context. Where are things going? What was the marketing? How was the economy? Examining this data means you have not only accurate numbers, but also context around those numbers.
2. Forecast sales
With the data accrued from your post-season analysis, it’s time to move on to forecasting demand, which should include sales for each department, category of products, and the addition of new products/elimination of products that are no longer performing.
When looking at products that are part of your merchandise plan, be sure to review the sales potential, analyze the market demand, and research marketing channels and strategies.
Once you have past and present data and take into consideration the impact of trend/demand variations, you can settle on a final prediction for each product and decide if it’s worth ordering that item for your store (and how much you need to purchase).
3. Plan and implement the assortment
Once you know what merchandise to stock, it’s time to get a bit more specific and arrange the products based on their categories. For example, a food section, a wearables section, a cosmetics section, etc. and specifics like sizes, colors, and brands.
Ensure there’s a proper assortment, that related items are grouped together for easy access for customers, and that there’s adequate SKUs of each category without going overboard in any one section.
4. Control merchandise
There needs to be a balance between the merchandise that you buy and sales, and that can be achieved by creating daily or weekly sales reports for each item. This helps ensure that items are being reordered before reaching dangerously low stock levels, and that you’re not overbuying so much that you’re forced to offer clearance sales, discounts, or offers that eat into your bottom line.
Retail merchandising challenges and how to overcome them
Let’s be honest here and say that everything can look great on paper, but no retail merchandise plan is perfect. Who could have predicted a global pandemic, for example, and the impact it would have on retail? While that’s certainly a once-in-a-lifetime situation, there are also some other common challenges you might face. Fortunately, being aware means you can proactively work to avoid them.
One of the biggest issues is figuring out how much of a product is enough — or too much. Fortunately, you can rely on data to help you find a good balance. Many retailers also implement an open-to-buy (OTB) system, available through most inventory systems. It takes into account current inventory and planned sales, and then compares that data with data from your actual sales. Adjustments are made before future orders are placed. This ensures you don’t run out of what you need or overstock certain items.
Speaking of data, it can be tempting to solely rely on historical numbers when planning for the future. However, the numbers aren’t perfect and things happen. So take into account the current economic situation and any trends that are in the marketplace. Incorporate that information with your historical data to get a more accurate picture.
Finally, there’s adjusting your merchandise planning for both online and brick-and-mortar sales. Customers want the products they want, when they want them, whether that’s online or off. The key to success is to have an omnichannel approach to your planning.
According to one study, “businesses that adopt omnichannel strategies achieve 91 percent greater year-over-year customer retention rates compared to businesses that don’t.”
Using a centralized inventory management system can help you connect all sales channels and provide the right products at the right time.
Moving forward with merchandise planning
Whether you’re selling online, offline, or both, it’s critical that you implement retail merchandise planning into your operations. By preventing you from under- or overstocking, you’re able to garner the greatest possible revenue from your inventory and add value to your company. Customers know they can get what they need when they shop from your store.
It might be a little bit of work to get started, but it can help you manage your inventory with ease — and pay off big in the end for your bottom line.
And of course, seeing your plans through requires proper execution. When implementing your merchandising initiatives, make sure they follow your planogram and other guidelines, and they’re implemented on time.
Use Compliant IA’s retail audit solutions to evaluate your in-store merchandising. Compliant IA provides checklists, tasks, photos, and store communication tools to ensure that your programs are executed well. Click here to learn more.
Compliant IA also has numerous resources to help you launch or level up your merchandising audit program. Here are just a few:
- Retail Merchandising – The Definitive Guide
- Visual Merchandising Checklist
- CPG Merchandising Checklist
- 4 Ways Visual Merchandising
- 7 Visual Merchandising Techniques to Increase Sales
- 5 Retail Merchandising Mistakes that are Killing Your Sales
About the author:
Francesca Nicasio is retail expert, B2B content strategist, and LinkedIn TopVoice. She writes about trends, tips, and best practices that enable retailers to increase sales and serve customers better. She’s also the author of Retail Survival of the Fittest, a free eBook to help retailers future-proof their stores.