Retail Assortments

1. Retailing MKTG 3346 Retail Assortments Professor Edward Fox Cox School of Business/SMU

2. Variety and AssortmentWHY IS IT IMPORTANT? • Influences Willingness to Shop the Store • Does the retailer carry the consumer’s preferred products? • Does the consumer have many product alternatives? • Can the consumer buy all of the goods that she needs? • Influences Purchases in Store • Brand Choice • Unplanned Items

3. Variety and Assortment For Retailers of Merchandise, Variety and Assortment are Composed of: • Branded Products • Sold at competing retailers • Brands have value for consumers • Lower margin for retailers • Private Label Products • Exclusive to the retailer • Higher margins

4. Variety and AssortmentKEY FACTORS • Profitability of Merchandise Mix • Corporate Philosophy Toward Assortment • Physical Characteristics of Store • Complementary Merchandise Source: Levy/Weitz

5. Assortment Plan for Girls’ Jeans StylesT R A D I T I O N A L Price levels $20 $20 $35 $35 $45 $45 Fabric Reg denim Stone- Reg denim Stone- Reg denim Stone- composition washed washed washed Colors Light blue Light blue Light blue Light blue Light blue Light blue B O O T C U T Price levels $25 $25 $40 $40 Fabric Reg denim Stone- Reg denim Stone- composition washed washed Colors Light blue Light blue Light blue Light blue Indigo Indigo Indigo Indigo Black Black Black Black Source: Levy/Weitz

6. Size Distribution for Traditional $20 Denim Jeans in Light Blue for a Large Store SIZE Length 1 2 4 5 6 8 10 12 14 Short 2 4 7 6 8 5 7 4 2 % 9 17 30 26 34 21 30 17 9 units Medium 2 4 7 5 8 4 6 3 2 % 9 17 30 21 34 17 26 12 9 units Long 0 2 2 2 3 2 2 1 0 % 0 9 9 9 12 9 9 4 0 units Total 100% 429 units Source: Levy/Weitz

7. Variety and Assortment CATEGORY MANAGEMENT • CategoryManagement is the process of managing a retail business with the objective of maximizing the sales and profits of specific categories • Objective is to maximize the sales and profits of the category, not particular brand(s) • One person is totally responsible for the success or failure of a category • “Buyers” sometimes called “category managers” • Category Captain - supplier forms an alliance with a retailer • Potential problem – It’s like letting a fox into the chicken coop Adapted from Levy/Weitz

8. Variety and Assortment TYPES OF PRODUCTS SALES SALES SALES SALES TIME TIME TIME TIME Fad Fashion Staple Seasonal Sales over many seasonsNo Yes Yes Yes Sales of a specific style No No Yes Yesover many seasons Sales vary dramatically No Yes No Yesfrom one season to the next Illustration (Sales against Time) Source: Levy/Weitz

9. Variety and Assortment NEW PRODUCTS 1 Million SKUs 40,000 SKUs in Supermarket 180 SKUs per Avg. Family 1,000,000 NEW SKUS A YEAR! All Channels An average family gets 80 – 85% of their needs from 180 SKUs Source: Ad Age 11/27/99

10. Variety and AssortmentITEM SELECTION • Affects the profitability of the category through: • Utilization of shelf space • Meeting customer needs and preferences in • Brand • Size • Type • Access to supplier’s specialized distribution, deal and markdown funds

11. Item Selection and ProfitabilityREVENUES Revenues from adding items: • Ongoing • Item sales revenues • Sales in other categories due to customer traffic drawn in by the new items • On-going promotional funds from the manufacturer • One time • Slotting allowances • New item introductory promotional funds from the manufacturer

12. Item Selection and ProfitabilityCOSTS • As the number of SKUs in the category increases: Cannibalization Inventory carrying costs Shelf-space opportunity costs Cost of warehouse/back room space used Wholesaler/manufacturer shipment costs

13. Assortment Decision-Making

14. Assortment Decision-MakingNEW ITEMS Helps Establish Criteria for Acceptance Classification “New” or “Me-Too” Compare with Acceptance Criteria Accept or Reject Evaluation Factors Potential Negative Factors Overall Evaluation - = • Consumer Demand • Sales & Trend Analysis • Trade Money • Category Growth • Packaging • Appearance • Package Size Source: Center for Retail Management, Northwestern University

15. Assortment Decision-MakingCLASSIFICATION “New” or “Me-Too” • Is the item unique? Is it new to the world? Does it have some combination of attributes that no other product offers? • Is the item a line extension? Is it just like other products on the shelf? or “Me-too” products are evaluated more stringently than “new” products, and must offer other benefits in order to be accepted Source: Center for Retail Management, Northwestern University

16. Assortment Decision-MakingEVALUATION FACTORS Consumer Demand/Demand Generation Is there strong evidence of consumer demand? Sales and Market Analysis Does this product address category sales trends? How much money does the manufacturer offer up front? Vendor Money Contribution to Category Growth Will this product grow the category? Source: Center for Retail Management, Northwestern University

17. Assortment Decision-MakingEVALUATION FACTOR IMPORTANCE Percentage of Evaluation Consumer Demand/Demand Generation 45% Sales and Market Analysis 20% 15% Vendor Money Contribution to Category Growth 10% Other Considerations (Vary) 10% Source: Center for Retail Management, Northwestern University

18. Assortment Decision-MakingPOTENTIAL NEGATIVE FACTORS Does the product’s packaging look dull, unexciting or unprofessional? Packaging Appearance Item Size Does the item fit on the shelf? If the item does not fit on the shelf or in the set, it will not generally be accepted Source: Center for Retail Management, Northwestern University

19. Assortment Decision-MakingNEW ITEM SUMMARY • The key evaluation factors are consumer demand/demand generation and sales and market analysis. • Category managers want market-specific information • Category managers want long-term evidence of trends • Acceptance criteria for new products differ across categories depending upon: • Classification -- “new” or “me-too?” • Category characteristics (e.g. Is the category stable or new-product-driven?) Source: Center for Retail Management, Northwestern University

20. Assortment Decision-MakingPRODUCT DELETION PROCESS 1 PROCESS 2 Supplier Recommends Deletion Delete = Delete or Retain Sales Analysis Retention Factors Elimination Factors + - = • Uniqueness • Item profit • Private label • Logistical & Administrative Costs Source: Center for Retail Management, Northwestern University

21. Assortment Decision-MakingDELETION – VENDOR RECOMMENDATION • Category manager may require that the vendor delete one of its own items in order to have a new item accepted. or • The vendor (category captain?) may recommend one of its own items be deleted The category manager accepts the manufacturer’s recommended deletion of its own item without analysis Source: Center for Retail Management, Northwestern University

22. Assortment Decision-MakingDELETION – SALES ANALYSIS • How does the item rank in sales movement in the category/subcategory? • How does the item rank in sales dollars in the category/subcategory? • Is the category/subcategory growing or shrinking? Items that rank low in sales movement and sales dollars will be considered for deletion Source: Center for Retail Management, Northwestern University

23. Assortment Decision-MakingDELETION – RETENTION FACTORS • Are there other items of the same size, brand, type, or other attribute? • Does the item have a particularly high gross margin? Is it tied to some other product which is profitable? Is the item unique in the category? Uniqueness Is the item particularly profitable among items in the category? Item Profitability Source: Center for Retail Management, Northwestern University

24. Assortment Decision-MakingDELETION – RETENTION FACTORS • Buyers/category managers are predisposed to keep private label items as compared to branded items Is the item a private label? Private Label Source: Center for Retail Management, Northwestern University

25. Assortment Decision-MakingDELETION – ELIMINATION FACTORS • Can suppliers be consolidated? Are there any other efficiencies to be gained by deleting the item? • Does the item justify its space on the shelf? Its slot in the warehouse? • Is the item DSD? What is the item’s profit per square foot of space? • Are there extraordinary costs associated with the item? Logistical/Administrative Costs Source: Center for Retail Management, Northwestern University

26. Assortment Decision-MakingDELETION –FACTOR IMPORTANCE Percentage of Evaluation 55% Sales Analysis Logistical/ Administrative Costs 20% 20% Uniqueness & Private Label 5% Item Profitability Source: Center for Retail Management, Northwestern University

27. Assortment Decision-MakingPRODUCT DELETION SUMMARY • Some category managers consider only sales analysis. They always “cut the tail,” deleting the slowest moving items. • Uniqueness of the item is not a consideration for all category managers. • The amount of trade support to the retailer is of little importance in the deletion decision. Source: Center for Retail Management, Northwestern University