Part A: Product Category Structure and Management
1. How do you define a category?
According to the text “Retail Marketing” under the subheading “Merchandise Category – The Planning Units,” A category is an assortment of items that the customer views as being reasonable substitutes for one another. The text goes on to say a buyer is the manager of various merchandise categories. Categories are defined as one piece of merchandise being a reasonable substitute for the other; so when lowering the price of one item in a category, the buyer should consider that it could lower the sale of another item in that category, (320). A category could include, for example, someone shopping for hair products. One store might put only shampoo in a category, but another might put shampoo and conditioner in that category. The store likely to put just shampoo in one category would be a hair salon, while a grocery store would put the items into a single category, (320).
Provide an example of a minimum of four levels in a category structure for a consumer product.
An example of a minimum of four levels in a category structure for a consumer product would be the stringed instruments category in a music store. A music store could have guitars, violins, cellos and banjos in one category.
2. Discuss four factors retailers consider when they establish a category.
Retailers could determine the customer following of the particular brand. For example, a category captain (the vendor) could say that all Tommy Hilfiger clothes are to be in one category and all Ralph Lauren clothes are in another. This is because the retailer has determined that the brand power of these companies is so strong that customers shop for the product based on the name. This is the likely determinant of retailer The Bay, which divides its sections of clothing into the brand of which is being sold in that section.
Many retailers consider putting the product into price targets. This gives them the advantage of appealing to most income demographics. This is a widely accepted principle in many supermarkets, which often have several brands offering essentially the same product but at different prices. The price targets could be high, medium and low, (Weitz 320).
The retailer could consider the people they are serving. For example, the vendor would likely want to have different sections for various hair products if they were operating a salon. However, the category would be much wider at a grocery store because the customers wouldn’t expect there to be an entire category dedicated to conditioners, for example, (Legal, 1996).
Retailers might consider what products aren’t selling well and put them onto a sales rack, which becomes a category of its own. For example, The Bay often has a sales rack that has the items that aren’t selling well, particularly those that are out of season, (Legal, 1996).
3. How do you measure the success of category management, and why is GMROI an important performance measure for category structure management?
Gross margin return on investment (GMROI) is a sound way to evaluate category management. “It measures how many gross margin dollars are earned on every dollar of inventory investment made by the buyer,” (Weitz 321). While return on investment (ROI) is a sound way to evaluate a retail firm, it doesn’t take into considerations the costs of the operation, which the merchandise manager doesn’t have control over. GMROI can be calculated by combining the gross margin percentage and the sales-to-stock ratio – these are similar to inventory turnover, (Weitz 322). Use this. GMROI equals gross margin percentage, multiplied by sales-to-stock ratio. Gross margin is then divided by net sales and then multiplied by net sales divided by average inventory at cost. Then, gross margin is divided by the average inventory at cost.
Sales-to-stock ratio is usually recorded over the course of a year, rather than the quarter-annually that many other benchmarks are tallied. This will determine the average inventory. Retailers can take the inventory level at the end of the day and then divide it by 365, the number of days in the year, to find the average inventory. Another method is to take the inventory at the end of several months and then divide that by the number of months, (Weitz 323).
4. In the context of merchandise planning, the concept of variety and assortments are fundamental and applied to a merchandise category instead of a retail firm. Discuss the factors that the buyer should consider when determining the variety and assortment for a consumer product.
When determining the variety and assortment of the consumer product to have in the store, buyers consider items that people need on an everyday basis. This could include milk, eggs and bread, if the buyer is operating a supermarket. At a clothing retailer, the staples could include t-shirts, underwear and jeans, for example. This would depend on the type of clothing retailer. It is relatively easy to forecast demand of the staples, (Weitz 325).
These items are seasonal, as different brands and styles will be hot for a short period of time. They are much less reliable than staples. New products are constantly added to this category, which makes the old items irrelevant after a short period of time. Examples of these seasonal items include laptops, shoes, dresses and hats. Excess inventory in this category can’t be sold easily and could go to waste, or be sold at incredibly high discounts.
Seasonal merchandise can include both staples and fashion items. For example, a winter jacket won’t sell well in the summer. Similarly, eggnog, while a staple at Christmas, won’t sell well in July. This is why there are massive discounts at the end of each season. Take Boxing Day, for example.
Part B: Merchandise Planning Systems
Discuss the importance of planning and managing inventory at both the financial and assortment levels.
In order to manage inventory, retailers use information, computers and planning support systems in the execution of their inventory management. Using these systems allows buyers, assorters and planners to draw a clear line about when to buy and how much. They can also take from this financial and assortment information ideas about the pricing of the product and the allocation of merchandise to particular stores.
The sales of each product is of extreme importance to retailers. While the type of merchandise planning system varies from company to company, many use software called Marketmax, Retek, JDA or GERS. This software allows retailers to determine a general dollar value of what they should hold in inventory. After the preferred monetary amount of inventory is determined, retailers then figure out how much of the merchandise to carry. These specifically decide the quantity of each SKU, (Weitz 346). The staple merchandise planning systems determine when to place an order and how much of that particular product should be ordered by the retailer.
Keeping track of inventory is vital to the operation’s bottom line. If too much inventory is held, then the company stands the risk of the product either expiring or going out of fashion. Additionally, the company will have spent money to have a large inventory that has no promise of ever selling. This is a challenge because the store needs to have enough inventory to handle the weeks when there is a surge in sales, but when there are few sales, the inventory will be excessive. This means that while the company’s sales might be high, the expenses paid for by stocking the inventory to a high level means that the net profit is lower than what it could have been if the company hadn’t overstocked. However, the inventory would go into the assets column of the company’s balance sheet, though this doesn’t necessarily translate into money.
It is extremely important for retailers to keep track of what merchandise is selling well. Fashion merchandise needs to be monitored especially carefully to ensure that the inventory doesn’t go out of style. This is challenging because there is often no sales history with the hot fashion product to see if there needs to be a change to the way in which the inventory is handled. On the other hand, retailers don’t need to keep as close of tabs on staple merchandise because it can be sold over a number of years. Staple items that don’t really go out of fashion as much include underwear and socks. However, jackets, pants, dresses and shirt often go out of style in each season. When the retailer begins to notice that there is a decrease in sales of a particular item, they stop ordering more of that type of clothing. The time in between when the merchandise needs to be restocked and the time when the order is delivered is called “lead time.” This time needs to be understood by the person making the order. For example, if a popular jacket takes two weeks to arrive after the order is placed, then the retailer will need to determine the daily rate of sale, multiply that by two weeks, leave room for cushion inventory and time the order based on that number. Furthermore, if the vendor only provides the product that is ordered 80 per cent of the time, then additional backup stock needs to be factored in so that the retailer doesn’t run out of product that the customer may be demanding. The rate in which a vendor delivers the product is called the “fill rate,” (Weitz 348).
Grocery stores have a different problem with inventory because they deal mainly in units of food that can expire and that which takes years to expire. For example, while an overstock of canned soup isn’t a big deal because it is permissible to sell it after many years, milk and bread aren’t as excusable and need to be sold relatively promptly.
The retailer keeps a close eye on the amount of inventory that is available in the store. They also need to know how many units of each item is on its way via delivery. Before the inventory has a chance to get too low, it is important that the retailer order new merchandise so that it arrives before the store runs out. The movement of the inventory rising and decreasing is called “base stock,” or “cycle stock.” However, the retailer should also carry buffer stock, or safety stock, so that there is a cushion in case there is a surge in the sales of a particular item and the company doesn’t have enough time to order additional units, (Weitz 347).
Part C: Buying Merchandise
1. There is a growing trend towards private-label store brands. Discuss the conditions in the external environment that have encouraged this growth and demonstrate how retailers can capitalize on this trend.
According to research from the University of Pennsylvania, private labels trended up by about 86 per cent of the time out of 225 consumer packaged goods. “We argue that this can [grow] because unlike its national brand competitors, the retailer through its private label is the only brand that not only controls its own marketing spending but also exerts some influence over the ultimate marketplace spending of their national brand competitors,” (Hoch, et al.).
Private-Label brands are also referred to as house brands, own brands or store brands. These are developed by the retailer and managed by them. While it is noted above that private labels can be extremely lucrative, they can also be extremely difficult to market. “It was difficult for smaller local and regional retailers to gain the economies of scale in design, production, and promotion needed to develop well-known brands,” (Weitz 374).
The trend towards companies including private labels has picked up, however, because retail firms have increased their size from consolidation. The private labels have then come on board to provide distinctive identities to retailers. Now, private labels account for approximately 25 per cent of the purchases south of the border in the U.S., (Weitz 374). That number increases to 45 per cent in Europe. The amount of money earned by private labels is increasing by almost twice as fast as sales of national brands.
According to research at Yale University, private labels sell well because the prices are usually cheaper than the national brands. The products are nearly identical in many cases, and this provides consumers with a way to save money without sacrificing quality. But a cheaper sales price means less revenue for the company that is selling. However, it should be noted that the expense of the retailer to produce the item for sale is often lower when they make the product themselves. “… private label brands offer higher margins than national brands: Walmart makes more money selling ‘Great Value’ paper towels than Bounty,” (Why Retailers Love, 2004).
It is a wise choice by a retailer, if it is feasible, to add a private label to the shelves. As Yale University points out, the prices for wholesale of the competitor products on the shelves go down when a private label is introduced. The more competition, the lower the prices, in this case. The private labels provide the retailer with bargaining power. However, the same research points out that it makes sense for retailers to increase the prices on the national brands because the private labels carry a higher profit margin, (Why Retailers Love, 2004).
2. Select three retailers with different brand strategies. Compare their retail mixes and target audiences, and discuss any significant observations.
Levi Strauss & Co. – Sells only private label brands
The Levi store on Robson Street in Vancouver only sells Levi products. The target audience is very wide, as nearly every demographic wears Levi jeans. However, the store goes further than just selling jeans. It sells tops, jackets and shorts. The store’s advertisements target young adults. This is a safe demographic to which the company can market, because both young and old aspire to look like they are in their 20’s, in my opinion. The models are good-looking, are various ethnicities and are meant to represent the ideal customer.
The store is a bit of an anomaly. Not many brands can stake their claim on a market by selling their merchandise in other stores – and then, after seeing their product’s popularity increase, the retailer opens a store entirely dedicated to Levi products. This is an example of a brand that has created a cultural following, which has people clambering to their stores just for the trademark brand, rather than the product.
Safeway Inc. – Sells a mixture of store brands and national brands
After regularly shopping at Safeway, I have grown accustomed to the many products the store offers. The Safeway Select private label is usually cheaper than its counterparts. However, the product is inferior to most of the national brands it sells, such as Dairyland. Whenever shopping at the store, I am always confronted with the task of comparing quality to price. I ask myself “Is the price of this product worth the lack of quality it possesses over the national brands?” In most cases I buy the Safeway Select anyway, because the price is often much lower than the national brand.
Similar to Levi, there really isn’t a specific demographic that the store targets. Everyone has to eat, just as everyone has to wear pants (or something similar). Of course there is a variety of food at Safeway and I have noticed that it only offers its product on traditionally Canadian items. Foreign foods almost never have a private label at Safeway.
Future Shop – Sells only national brands
Future Shop is a store that caters mainly to people with relative means. I say this because the store only carries new product. I should also note that this product is never private label. Virtually every top national brand is sold here and anyone looking for a television, computer, sound system or gaming system, for example, can come here to make the purchase of a new product.
Other than the purchasers being of at least average financial means, there really isn’t another target customer the company aims for. The staff is generally young and savvy. This plays into the stereotype that young people are good with technology and often help older people who might have a problem.
Unlike people who shop at Safeway, many people who shop at Future Shop have an idea of the brand they are looking to purchase. They may have seen an advertisement or have heard from a friend that a particular brand is the best to buy.
Hoch, S.J, Montgomery, A.L., and Park, Y.P., (N.D). Long-Term Growth Trends in Private Label
Market Shares. University of Pennsylvania.
Legal Information Institute. (1996, Dec. 21). Cornell University Law School.
Weitz, L. (2009). Retail Marketing. McGraw-Hill. P. 321, 324, 325, 345, 347, 348, 374.
Why Retailers Love Their Private Labels, (2004, Dec. 10). Yale School of Management.