Retail Merchandising Philosophy

A merchandising philosophy sets the guiding principles for all the merchandise decisions that a retailer makes. This encompasses every product decision, from what product lines to carry, to the shelf space allotted, to different products, to inventory turnover, to pricing. A retail merchandising philosophy can be product-based (using SKU proliferation data to find the most profitable prod­ucts) and/or consumer-focused (tailoring assortments and merchandising plans to cater to the most profitable customers). Product-focused merchandising involves analyzing SKU-level sales per­formance and profitability metrics to find and invest in the most profitable products based on store size, volume, and sell-through for each category. Consumer-focused merchandising involves creat­ing product assortments based on customer insights, their preferences, and their path to purchase based on an analysis of loyalty data, social network signals, shopping patterns, and other potential “big data” sources.

Astute retailers use customer segmentation data to identify the segments that are more profit­able and have a higher lifetime value than others, and to invest in product assortments that reflect target market desires, the retailer’s institutional type, marketplace positioning, the defined value chain, supplier capabilities, costs, competitors, product trends, and other factors. A merchandise plan must specify desired objectives in terms of revenue, gross profit, and inventory turnover in percentages and dollars by product groups.⁴ See Figure 14-1.

Costco, the membership club giant, flourishes with its individualistic merchandising phi-losophy, whereby it offers members very low prices on a limited selection, but broad assortment, of national and private brands. Costco’s approach yields high sales revenue through quick inven­tory turnover. Furthermore, volume purchasing and efficient distribution through depots or ware­houses (which reduces the handling of merchandise in no-frills, self-service warehouse facilities) stimulate profitable operations at significantly lower gross margins than most other traditional wholesalers, mass merchandisers, supermarkets, and supercenters. Costco carries an average of approximately 3,700 active stock-keeping units (SKUs) per warehouse, significantly less than other retailers. It limits specific items in each product line to fast-selling models, sizes, and colors and sells many consumable products in case, carton, and multiple-pack quantities only.⁵

In forming a merchandising philosophy, the scope of responsibility for merchandise personnel must be stated. Are these personnel involved with the full array of merchandising functions, both buying and selling goods and services (including selection, pricing, display, and customer transactions)? Or do they focus on the buying function, with others responsible for displays, personal selling, and so on? Many firms consider merchandising as the founda­tion for their success, and buyers (or merchandise managers) engage in both buying and selling tasks. Other retailers consider buyers to be skilled specialists who should not be active in the selling function, which is done by other skilled specialists. Store managers at full-line discount stores often have great influence on product displays but have little impact on whether to stock or promote particular brands.

With a merchandising-oriented philosophy, the buyer’s expertise is used in selling, and his or her responsibility and authority are clear. The buyer ensures that items are properly displayed and that costs are reduced (fewer specialists). He or she is close to consumers due to selling involvement. When buying and selling are separate, specialized skills are applied to each task, the morale of store personnel goes up as they get more authority, selling is not viewed as a secondary task, salesperson-customer interaction is better, and buying and selling personnel are distinctly supervised. Each firm must see which format is best for it.

To capitalize on opportunities, more retailers now use micromerchandising and cross-mer­chandising. With micromerchandising, a retailer adjusts shelf-space allocations to respond to customer and other differences among local markets. Dominick’s supermarkets assign shelf space to children’s and adult’s cereals to reflect demand patterns at different stores. Walmart allots space to product lines at various stores to reflect differences in demographics, weather, and shop­ping. Micromerchandising is easier today due to the data generated. Tilly’s, a California-based specialty retailer of West Coast-inspired lifestyle apparel and accessories, enhances its micromer­chandising strategy by leveraging customer data from stores, Web site browsing, and transactions, mobile apps, catalogs, and third-party data. This enables the retailer to monitor, identify, and address customer trends. Individual store profiles for every store in the portfolio are compiled to highlight the differences in brand performance, gender, and customer interests. By selecting relevant third-party and proprietary brands, styles, colors, sizes, and price points based on profiles, and then shipping products to its stores multiple times per week, Tilly’s is able to dynamically adapt its merchandise allocation strategies to capitalize on individual store differences.⁶

In cross-merchandising, a retailer carries complementary goods and services to encourage shoppers to buy more. That is why apparel stores stock accessories and auto dealers offer extended warranties. Cross-merchandising, like scrambled merchandising, can be ineffective if taken too far. Yet, it has tremendous potential. Consider this from the perspective of pharmacies, which use cross-merchandising to increase revenues by making it easy for consumers to buy complementary items during the cold and flu season. Placing items such as cough drops, tissues, and medications close together in an aisle not only helps consumers easily find these items if they come in for one of them but it also generates in-store (impulse) purchases. Similarly, customers coming to a liquor store to buy spirits are more apt to also buy crackers, cheese, and/or glassware if placed together.⁷ Cross-merchandising leverages customer preferences for one-stop shopping and the tendency to make impulse purchases—and increases the retailer’s overall revenues. The impact of seasonality and competition on revenues is reduced.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.