Chapter 2: Merchandise Planning

Case Study: Merchandise Planning

Now let's get back to the challenges at Jackson's Department Store. In this segment, you will focus on creating a seasonal merchandise plan.

Chapter 2: Merchandise Planning

Bill White has worked at Jackson's for over 30 years. He has held the title "Manager/ Buyer: Men's Wear" for the last 25. Just last year, Bill celebrated his 65th birthday and, as yet, has no plans to retire. Bill professes boldly, "If I stay home, I'll wither up and die."

Likewise, Steve Hollaren (Bill's right hand man) has a long-standing history with Jackson's. At age 42, Steve has worked there for 21 years. Steve has long hoped that Bill would throw in the towel so that he could get the chance to run the department.

According to Susan's strategic 12-month plan, Jackson's men's wear department was salvageable. She proposed to stop the store's bleeding and refocus her efforts. She would therefore concentrate on the strongest classes of merchandise and eliminate the weak ones. Susan hoped to attract younger to middle-aged customers from 30 to 50 years of age.

Susan's experience in the "majors" provided her with great insights in managing Jackson's. For example, she knew the importance of keeping merchandise selections "fresh" by way of strong "category management" discipline. In its simplest form, this meant getting greater efficiencies out of each "class" of merchandise. Not computerized, the men's wear department's "sales history" had only been maintained at the department level and the cash register had only five departments. This surely made it more difficult in determining how the sub-departments (classes) were performing.

Susan began to tackle this problem by first sitting down with her father, Bill & Steve. Based on the strategic planning sessions held earlier, the group fine-tuned their department plan. Following is the plan outline that they came up with:

• Target customer demographics:
  
  Presently, the group's "best" customer stands at 60-plus years old. They want to retain this customer's business, but to also attract men in the 30 to 50 age range. The ideal customer? Your textbook baby boomer -- very involved in saving for his kid's education while trying to pay down the mortgage. This ideal customer also hates shopping and only braves the major malls once or twice yearly to buy his clothes (with his wife's help!). Typically, the ideal customer plays old-timer hockey in the winter and golfs in the summer.
  
  
• Target fashion image:
  
  Susan has termed this merchandise type "dress casual" or "Friday wear". She hoped this category and "look" of clothing would appeal to a younger audience. And with more casual office attire, why wouldn't it? Since many baby-boomer men want something a little dressier for special weekends, Susan thought it important to carry the "right" labels. This, she thought, went a long way to both dispel the "old folks" image of the men's wear department and to differentiate Jackson's merchandise from that of department store house brands, which Susan and her colleagues saw as major competition.
  
  
• Merchandise quality levels:
  
  The group decided quality was of serious concern for their target customer. Brand names suggest good quality and a good investment. Since labels don't mean as much to the target customer as to, perhaps, a younger group of men, the "quality" that the label connotes will provoke the target customer to spend a little bit more for their clothing.
  
  
• Price point policy:
  
  As a general rule of thumb in men's wear, branded lines have a higher price point than house labels (because house brands have fewer middlemen). In comparison, there are low, mid and higher priced lines to choose from. Susan's group felt that Jackson's should focus on the lower to mid price points whenever possible.
  
  
• Desired profit margins:
  
  For the last five years, the overall department margins lay in the 38% to 39% range. As a goal, the company wanted to attain an overall 42% within the next 12 months. With this in mind, the group then decided to increase their starting markup to 55% (wherever possible), instead of the traditional keystone (50%).
  
  
• Marketing approach:
  
  An increased margin from higher markups would allow Jackson's more in-season markdowns without completely destroying its overall margin. Therefore, a 20% markdown on product with a 55% markup still gives Jackson's a 43.75 % ending margin. Through the strategic planning sessions, Susan's group also decided to increase the marketing budget, so as to be constantly in front of the public.
  
  
• Customer service levels:
  
  In all departments at Jackson's, customer service levels had to increase. Susan's group concluded this by way of the overall company strategic plan. Since men typically do not like to shop, staff must develop and work their own client lists. To make this goal more attainable, both Bill and Steve planned to start maintaining customer purchase history for future marketing programs. The group voted down the policy of charging for alterations.

1. Class Analysis:

Unable to come up with a breakdown of sales for five major departments, Jackson's accounting department provided the following summary of last year's sales:

Department	Sales	Percent	Margin
Tops	$109,800	36%	37.9
Pants	$39,600	13%	42.0
Suits	$64,000	21%	41.5
Outerwear	$79,300	26%	34.6
Accessories	$12,200	4%	49.7
Total	$305,000	100%	38.6%

Without subclass information, it would be difficult to make any meaningful merchandise decisions. So before doing the fall "buy," Susan asked for a volunteer to go over the previous fall/winter season's handbills. She also had the volunteer break each department down into smaller sub-categories, in order to provide the management team with some sales figures to work with. Jackson's largest department, "Tops", generated Steve with six months worth of sales bills to take home. After only a couple of evening's work, Steve presented the group with the following "Tops" breakdown:

Department /Class	Total Sales	Percent	Average Inventory	Sales to Inventory	Gross Margin	Sales Plan
1. Dress Shirts	$30,300	16%
2. Casual Shirts	$64,300	34%
3. Sweaters	$15,200	8%
4. Sweat shirts	$26,400	14%
5. Knits	$13,200	7%
6. T-shirts	$7,600	4%
7. Other Tops	$32,000	17%
Total Fall	$189,000	100%

Senior management discussed this information. They agreed (and they were right!), that they did not yet have enough detail to decide that Jackson's should eliminate or expand any of the above classes. Without a computerized merchandise system producing stock turn figures and gross margins, the group could not move forward on this issue.

The group did agree, however, that this was a worthwhile exercise, as you will soon see in developing your own six-month merchandise plan.

In order to get a feel for future class performance, you asked Bill and Steve to do a brief class analysis based on their personal feelings. After all, they do have over 50 years combined experience! The following outlines the recommendations Bill and Steve brought back for the rest of the team:

• Dress Shirts: Average inventory can be reduced. Eliminate the fringe colours, sizes and suppliers. Stick with the two main vendors that have a strong fill-in program.
• Casual Shirts: Too many suppliers. Pick three main brands and go deeper in each style, trying to coordinate with pant program.
• Sweaters: Missed the boat last year on sweaters because a major supplier did not ship. Must increase the buy in this area.
• Sweat Shirts: Like sweaters, a big Xmas item but lower priced. Must have matching bottoms.
• Knits: Long sleeve needed for fall/winter and must have higher quality short sleeve for Xmas season, as people are looking for gifts for the golfer.
• T-shirts: Mostly worn under a shirt since 60% of sales are in white. Must have in stock at all times as a staple item.
• Other Tops: This was a catchall group that must be broken down in more detail for future use. Part time staff tends to use this too often. If computerized, this would be virtually eliminated.

2. Gross Margin and Stock Turn Plans:

The team is really starting to click. Now, they realize that planning before you buy is as important as what you buy. Next, they must plan for markdowns, so they can both achieve Jackson's desired ending markup and know how much inventory they need to achieve their sales projections.

See page 13 in this chapter of "Winning Retail", for averages of inventory stock turns.

Markdowns or reductions come from three main areas: planned promotional markdowns, employee discounts and theft or shrinkage. The team could only produce department actuals for total season. But this is still extremely helpful because it will build into the six-month merchandise plan. Next, you'll see last year's fall/winter statistics for the entire men's wear department.

Fall Seasonal Statistics: Men's' Wear

	Sales	Planned Markdown %	Employee Disc. %	Shrink %	Avg. Inv. E.O.M.	Inv. Turns
Last Year	$305,000	8.9%	2.00%	2.5%	$150,000	2.03
Plan	$325,000	10.0%	2.00%	2.5%	$140,000	2.32
Actual

3. Developing The "Six Month Merchandise Plan"

With the subjective part of the "Tops" department planning process complete, the team can now begin putting numbers together for a six-month merchandising plan. The initial part of this analysis included forecasting trends, sales forecasts; stock turns and gross margin goals.

See page 5 in this chapter of "Winning Retail", for instructions on completing "The Six Month Merchandise Plan".

After spending considerable time with their favourite bookkeeper, the team constructed the following information, including last fall's actuals for the entire men's wear division. Now it's your turn! Using last year as a guide, fill in the remaining numbers for both purchases and stock ratios for the current year.

Six Month Merchandise Plan (Retail Method)

Date:      Division: Men's Wear    Department: All    Season: Fall 1999

		01/08/98	01/09/98	01/10/98	01/11/98	01/12/98	01/01/98	Total
B.O.M. Inv.
	Last Yr.	$100,000	$135,000	$150,000	$170,000	$200,000	$150,000
	Plan	$90,000	120000
	Actual
Sales
	Last Yr.	$24,000	$37,000	$30,000	$30,000	$122,000	$62,000	$305,000
	Plan	$26,000	$39,000	$33,000	$33,000	$130,000	$64,000	$325,000
	Actual
Purchases
	Last Yr.	$61,160	$55,330	$52,700	$62,700	$82,980	$17,580	$332,450
	Plan	$58,600	$52,900
	Actual
Markdowns
	Last Yr.	$2,160	$3,330	$2,700	$2,700	$10,980	$5,580	9%
	Plan	$2,600	$3,900	$3,300	$3,300	$13,000	$6,400	10%
	Actual
E.O.M. Inv.
	Last Yr.	$135,000	$150,000	$170,000	$200,000	$150,000	$100,000
	Plan	$120,000	$130,000	$150,000	$180,000	$130,000	$90,000
	Actual
Stock Ratio
	Last Yr.	5.6	4.1	5.7	6.7	1.2	1.6	2.3
	Plan	4.6	3.3
	Actual
Margin
	Last Yr.	39%	39%	39%	39%	39%	39%	39%
	Plan	49%	46%	45%	45%	42%	33%	42%
	Actual

Six Month Merchandise Plan (Retail Method)

Answer

Date:      Division: Men's Wear    Department: All    Season: Fall 1999

		01/08/98	01/09/98	01/10/98	01/11/98	01/12/98	01/01/98	Total
B.O.M. Inv.
	Last Yr.	$100,000	$135,000	$150,000	$170,000	$200,000	$150,000
	Plan	$90,000	120000	130,000	150,000	180,000	130,000
	Actual
Sales
	Last Yr.	$24,000	$37,000	$30,000	$30,000	$122,000	$62,000	$305,000
	Plan	$26,000	$39,000	$33,000	$33,000	$130,000	$64,000	$325,000
	Actual
Purchases
	Last Yr.	$61,160	$55,330	$52,700	$62,700	$82,980	$17,580	$332,450
	Plan	$58,600	$52,900	56,300	66,300	93,000	30,400	325,000
	Actual
Markdowns
	Last Yr.	$2,160	$3,330	$2,700	$2,700	$10,980	$5,580	9%
	Plan	$2,600	$3,900	$3,300	$3,300	$13,000	$6,400	10%
	Actual
E.O.M. Inv.
	Last Yr.	$135,000	$150,000	$170,000	$200,000	$150,000	$100,000
	Plan	$120,000	$130,000	$150,000	$180,000	$130,000	$90,000
	Actual
Stock Ratio
	Last Yr.	5.6	4.1	5.7	6.7	1.2	1.6	2.3
	Plan	4.6	3.3	4.5	5.5	1.0	1.4
	Actual
Margin
	Last Yr.	39%	39%	39%	39%	39%	39%	39%
	Plan	49%	46%	45%	45%	42%	33%	42%
	Actual