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Course Code : BRL-10

1. Describe different types of merchandise and give the examples of each type.

Ans:- There are various types of merchandise or consumer goods used by end consumers. Understanding these
types will greatly help in determining the strategies that are suitable for selling each of these types. Consumer
goods/merchandise fall into four subgroups as explained here below:

Routine or Convenience Products

The features of routine or convenience products are:

● These are routine products like daily use items – which are bought and used in a routine manner. ● These
products are purchased with a little effort as possible, frequently, and in small quantities. ● These are not high
priced products but generally low priced ones. ● These products are purchased for their functional purpose. ●
These products are available at numerable locations in variety of outlets.

Convenience products can be further divided into staple goods, impulse goods, and emergency goods.

Staple goods/merchandise are purchased on a regular basis and will include most food and grocery items.

Impulse goods are purchased out of impulse without any prior plan before entering the store. The product itself,
its display, its packaging, and price are important elements in the sale of such merchandise.

Emergency goods are the items or merchandise that are needed due to certain emergency or unexpected need,
and needed immediately. These items may be purchased at a higher price or at whatever available price. For
example, a pain reliever or a headache relieving pill.

The features of shopping products are as follows:

● These are the products for which the consumer spends considerable time and effort to buy.

● Consumers are ready to shop around to compare features and prices of competing products before making a
purchase.

● These are bought less frequently.

● These products are more expensive and are available at few select stores.

● These products need more of personal selling on the part of the store sales representative.

● These merchandise include TV, cars, home appliances, homes, etc.

Specialty Products

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The features of specialty products are as follows:

● These products are very much important to consumers due to certain emotional associations with such
products, and hence, they make special effort to find them.

● The consumers are unwilling to accept a substitute for the preferred product.

● Retailers play very important role in the sales of these products as they need to have sales representatives
who have good product knowledge. They are ready to take certain extra efforts to understand the needs of its
consumers.

● Thus, the marketers of these goods limit their distribution in order to ensure strong sales support at the store
level.

● These include stereo equipments, large digital TV, musical instruments, some branded men’s clothing.
Unsought Goods

The features of unsought goods are as follows:

● These are the merchandise that consumers are not much aware of, and even if they are aware of have not
considered buying them.

● For example, certain medical services or accident insurances, which are known to many consumers but are not
sought for. Similar is the case with encyclopedias, which are known but not so much sought after.

● These goods need lot of publicity of convincing nature and good effort at personal selling level, as one
generally finds with insurance selling agents.

2. Describe the present scenario of the organized retail sector in India. What are its future prospects?

Ans:- It would be interesting to note some key observations, based on the study done in 2007 by FICCI, about
the organized retail industry.

● The organized retail sector is likely to increase its share from the current (2007) 4% to over 20% by 2010.

● The overall retail sector to grow from the present level of $328 billion to $430 billion, according to the study
by FICCI.

● Presently there are more than 15 million retail outlets of which 80% are run as small family businesses.

● Organized retail is likely to grow at a CAGR of 50% and set to be worth $90 billion by 2010.

● Organized retail has witnessed a CAGR of 35% over the past 5 years

● Organized retail accounts for 1.5% of the country’s GDP

The organized retail has miles to go in India. It captured only three per cent of the $330bn (£176bn) retail
market in 2005, which is highly fragmented and unorganized, comprising mostly family-owned businesses. This
is the unique selling point of being closer to people’s homes. Modern retail chains which sprang up five years

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ago foresee immense growth potential. Avast swathe of Indian retail is yet to be tapped into. Organized retail
accounts for 81% of total retail in Taiwan, whereas in Malaysia, Thailand and China, it makes up 55%, 40% and
20%, respectively.

With improving infrastructure facilities, especially in cities, and with government moving in the direction of
relaxing rules for foreign brands, the Indian organized retail sector is set to become the new star on the
commercial horizon. The entry of the largest domestic business conglomerates such as the Reliance Group,
Aditya Birla Group and Bharti Enterprises, has upped both the capital inflows as well as business confidence in
the sector.

The largely untapped organized retail arena is now viewed as a multibillion dollar proposition by Indian and
foreign players. It is backed by a strong economy where GDP has more than doubled in the last 10 years. There
has been a mushrooming middle class, and a young earning population with an appetite for spending that is
further spurred by a rapid rise in the proportion of working women in india

3. Define different types of mark-ups and explain differences between them. (10)

Ans:- Initial mark-up

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Maintained Mark-Up

Cumulative Mark-Up

The cumulative mark-up is the average mark-up earned on the merchandise sold during a given season or over a
period of time. Thus for calculating cumulative markup we have to start with the opening inventory value both
at retail price and cost price, Afterwards as the season proceeds we have to keep on adding gross new purchases
(i.e. purchases plus other expenses like freight etc.) made during the given period, and taking effect of the same
in the total retail merchandise. The retail merchandise value will also get affected if there is any change in mark-
up policy or markdowns effected during the season or given period. Hence, we can define cumulative mark-up.

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4. How do markdowns affect the profitability of the retail business? How is net markdown calculated?

Ans:- Markdown is one of the most important tools in the price changes that are required in a dynamic
marketing situation in a retail store. Retailers have to constantly come across situations of price changes based
on the demand and supply situations or requirement of promotions or due to special discount offers.
Markdowns can be very effective in increasing the sales when applied at the right time and duration in retail
business. Merchandisers must apply markdowns when he/she senses the slowdown in the sale movement of
merchandise due to varied reasons. Markdowns help in unlocking the investment in merchandise stock and
thereby using the cash inflow for the purchase of the new merchandise that can bring in newness and
excitement on the floor. Generally markdowns are applied to specific items and styles which are slow moving, so
that the correction is done where it is warranted rather than applying to the whole range of merchandise.

Markdowns serve the following purposes:

i. Help in stimulating sales of slow moving stocks or stocks, which have remained on the floor for a long time,
without much movement.

ii. Some time when the competitors’ prices are below the price of the items in the store, then the retailer or
merchandiser has to resort to markdowns to meet the same price point.

iii. Occasional markdowns help to generate more walk-ins and thereby sales.

iv. Sometimes due to broken size set or assortment, merchandiser resorts to markdowns for disposing off such
stocks or items.

v. Many a times, the retailer decides to stop certain line of merchandise either because he wants to introduce a
different product line or the said line of merchandise has lower sell-through. In such cases, the markdown is the
best way to dispose of such merchandise.

vi. Sometime due to damage or shop worn merchandise the markdowns become necessary to dispose of such
merchandise.

vii. Merchandisers sometime decide to markdown the existing merchandise to make up for inflow of new
merchandise or to dispose of out of season merchandise.

It must be understood that markdowns finally affect the mark-up achieved for an item or for that matter for the
retail store. Thus, while deciding on the mark-down, the merchandising team will have to carefully analyse what
will be the effect of the markdown on the retail store’s profitability. The markdowns affect the maintained
mark-up or the gross margin of the store as it eats into the net profitability.

In fact, the sole purpose of the category management, as part of the merchandising process, is to avoid all such
erroneous decisions and reduce the reduction percentage substantially in the initial mark-up. Markdowns are a
value-loss for the product category and, thus, make for a loss in net profitability of the retailer. Therefore, better
the category management, lower will be the reduction. Thus, lower will be the initial mark-up, which means
comparatively lower prices of the products. The lower prices of products lead to higher sales for the category
and therefore higher profits for the retailer.

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5. What is meant by stocks? Describe different methods that are commonly used for determining it.

Ans:- Once the sales figures for the season have been estimated then you need to immediately plan for the
stocks to be kept in the store. For a retailer investment in stocks is a ‘working capital’investment. Hence, he/she
has to work upon it very carefully, because finally the returns will be calculated over this investment. The buyer
or the merchandising team has to work out for every season for the beginning of the month (BOM) inventory
and the end of the month inventory (EOM). Both are worked out in terms of quantity and [Link] should note
that while preparing merchandise plan it is normally the value which is of most important consideration.

There are different methods for working out the stock value for keeping in the store, which necessarily have to
be in relation with the expected sales. An excess inventory will hamper the quick reaction from the
merchandising team, if there is slowdown in sales. Further, this may also result in markdowns for quicker
clearance of stocks that may ultimately affect the return on investment. Blocking investment in excess stocks
also results in blocking the inflow of new varieties that helps in generating excitement for consumers, and
thereby, improvement in sales. The methods for determining stocks on the floor are as follows:

Stock Turnover or Sales to Stock Ratio The Basic Stock Method Weeks Supply Method Stock to Sales Ratio
Method

Stock Turnover or Sales to Stock Ratio

This is an important parameter to assess the performance of a particular product or category. It clearly tells us if
the given stock of a particular product or category is doing its job well. High value of sales to stock figure
indicates that the stocks in the given category are doing well. They are giving a turnaround of stock faster as
compared to another category which is having a low sales to stock ratio. If the stock turnover or sales to stock
ratio figure is, say 6, for a given season of six months, then it means that the turnaround of the stock is
happening six times in six months’ time. This means on an average, the stock in a given product /category is
moving around or getting sold every month. Thus, we can define stock turnover as ‘the number of times the
average stock of a product or category is getting sold in a given period of time.

Basic Stock Method

Basic stock is the quantity that is maintained all the time in the store or department irrespective of the level of
sales for the given product or category. This quantity is like in reserve besides the required sales quantity as per
the expected sales target. Thus, we can define basic stock as the reserve quantity that needs to be maintained at
all times.

Week’s Supply Method

Week’s supply method is mainly used by departmental and super market formats as they want to ensure that
the supply position is in place for the given item. Weeks’ supply method gives a clear indication to the buying
and merchandising team about the stock coverage at a given point in time. The team may take needful action if
the situation demands any correction. In the Indian scenario, most of the large format stores maintain 12 weeks
coverage for apparels. Particularly for supermarkets where many of their items are of regular and day to day

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usage, they find keeping week’s coverage quite useful as they may be holding say about two weeks’ stock for a
single item. Hence, they can monitor the supply position in relation to sales very closely. The average stock to be
maintained in the store in terms of weeks coverage will be dependent on the sales to stock ratio. This may also
be the stock turnover ratio targeted for the season or the year.

Stock to Sales Ratio

This is another way of finding stock coverage for a given period, which is somewhat similar to weeks’ supply
method. It is a stock on hand at the beginning of the month with respect to sales for the month. This ratio gives
a clear indication on the number of times the sales for the month is being covered. Suppose the merchandising
team has decided on maintaining certain stock coverage for the expected sales for the month. In this case, it
becomes easier for the retail store team to organize their store’s stock position accordingly at the beginning of
the month.

6. What is the significance of maximum quantity in the reorder system? Explain its various elements.

Ans:- The buyers as a matter of precaution do not place orders for 100 per cent of the store’s requirement. It is
necessary, as the season may not turn up as expected. Thereby resulting into ordering excess inventory for the
months of the season. OTB can be defined as the amount of goods needed to be purchased during a given
period. This ensures that the stock on hand at the end of the period is as per the closing stock planned for the
given period. Thus, for calculating OTB we have to subtract the merchandise on hand at a given point in time
from the merchandise required at that point in time.

The merchandise available at a given point in time includes the merchandise on hand or in stock at a given point
in time. The merchandise to be received during the period against the orders placed in advance by the buyer is
also added. The merchandise to be received includes the merchandise that is in transit or expected during the
period under consideration. The merchandise required for the given period or month comprises sales expected
for the month plus the reductions expected plus the end of the period or month stock planned.

Unit planning is another way of placing orders for the requirement of the merchandise - different than the rupee
method. Unit planning is useful when we have to break a particular product category of the merchandise on the
basis of several factors or characteristics. In rupee planning method, since the buyer goes by the value of the
merchandise to be bought for a particular period, he/she may think that there is enough merchandise if the
closing stock matches with the plan. The type of products or items available within a particular category may not
be of the type that is selling more or are in demand during a particular period of time. Unit planning is very
helpful, particularly when it comes to planning the purchase of fashion goods. However, it can also be used for
other type of items which may fall under the staple or basic category. Fashion goods should necessarily be
broken into sub-groups depending on the dimensions which are important vis-à-vis the customers of such items
or categories. Such a break-up based on different dimensions may then be used while ordering new goods.

Reorder method is an essential part of the unit planning. Here, the company or retailer decides to take the
actual count of the inventory in a particular sub-category at the SKU level. This is done to receive the required
break-up of quantities at all dimensional levels.

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The basic formula for calculating reorder quantity is as follows: Order quantity (OQ) = Maximum quantity –
Quantity on-hand – Quantity on-order Maximum or provision quantity is the one that is to be made available –
on-hand plus on order – at any point of time (particularly at the time of re-order). M is never onhand at any
given point of time. There is always a continuous activity of receipt of goods as well as occurrence of daily sales.

Any format for replenishment of orders has to be necessarily a part of the overall feedback process. This
feedback has to come from the field i.e. from the staff in the field meant to collect information from various
stores in the channel. This may be taken directly from the store staff through the point of sales software
installed in the stores under the direct control of the buying and merchandising management at the head office.

7. Explain the concept of comparative analysis. How does it help in assessing the growth of a store?

Ans:- This is one of the basic sales analysis done by every store to understand its performance vis-à-vis last
year’s performance for the same period. The analysis can be done at the level of overall sales of the store for the
season or on each of the important product categories. The comparative analysis is done for a particular period
say weekly or monthly or quarterly as well as on cumulative basis that is from the start of the season till to-date.

which depicts the format used for doing a sales comparative analysis for a kids-wear retail chain. If all the stores
in the chain show a positive trend it means the strategy or tactics followed by the buying and merchandising
team is showing positive result. If the growth in value is not positive for all the stores in the chain and there are
stores with negative growth percentage, it means the tactics are not giving consistent result. Thus the buying
and merchandising team will have to further analyse their current selling tactics as well as look at other factors
that could be affecting the stores performance.

Similarly we need to look at the trend noticed with respect to current month’s sales quantity. From columns 3
and 5 we can get this [Link] the first thing the merchandising team or the store management team needs
to look at is if there is any noticeable trend with regard to comparative analysis. If the trend is positive it means
that the sales tactics adopted during the concerned month are giving positive result. If the trend is not
consistent then one needs to check on the factors affecting the positive trend or causing the negative trend in
such stores.

Some time it may be noticed that while on the value-wise analysis there is positive growth but on quantity-wise
analysis there is negative growth. The major reason for such a trend is that due to price increase the sales value
is showing positive trend but due to increase in price there is a reduction in quantity purchase. This is reflected
in lower sales quantity for the month, and thereby results in negative growth trend for the stores.

The above analysis is also used to check the performance of the main product categories of the retail chain or
store, again in terms of value as well as quantity. While comparative sales analysis for the month indicates the
performance of the tactics for the concerned month, we also need to analyse the same for a cumulative period
too.

(B) Essay Type Questions

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8. Explain direct and indirect expenses with suitable examples. When do direct expenses change to
indirect expenses?

Ans:- the operating expenses plays important role in reflecting operating profit of the Firm. Operating expenses
constitute all such expenses which are necessary for running the operation of the retail store other than the cost
of goods sold.

Direct Expenses

Direct expenses are those expenses which exist because the retail store or a particular department is in
existence. These expenses will cease to exist if the retail store or the department is not in existence. Thus,
expenses like salaries and wages to selling and non-selling (like helpers/house-keeping/maintenance employees)
employees, electricity and water charges bill for the store, packaging and supplies material, repair and
maintenance for the store, staff welfare expenses, rent and insurance for the store, Octroi for goods brought in
to the store and other municipal charges paid for the store, advertising and sales promotion expenses incurred
for the store; all these expenses will be termed as direct expenses. As soon as the store stops operating these
expenses will become non-existent. It will be noted that salaries paid to buying and merchandising staff are not
considered as part of the direct expenses. These expenses in many of the stores are not considered direct as the
staff related to this department are located at the head office and is not responsible for the operation of this
store only. Instead it operates other stores also in the chain. But if these staff are directly associated with the
store operation and located at the store then their salaries will be classified as direct. In fact, all the expenses
classified as operating will become direct expenses too, if the store is a single store at a single location.

Indirect Expenses

Indirect expenses as the term indicates are not dependent on the operation of the store or the department
concerned. These expenses occur even when the store stops its operation or the department closes down.
Examples of indirect expenses are the expenses which have not been classified as direct and as listed here
below:

• Salaries paid to merchandising and buying teams;

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Expenses such as advertising and sales promotion, rent, utility expenses which are incurred in general for the
head office as well as other stores are termed as indirect expenses for a store which is part of the chain.
Acompany may decide to assign a certain percentage of these indirect expenses to the concerned retail store
based on its sales turnover or store area. The concept will be understood better with the help of the following
example:

Example 3.9 Allocating Direct and Indirect Expenses A retailer having two stores storeA and store B, each with an
area of 400 sq ft and 600 sq ft respectively. The sales turnover of storeAis 5 lacs and that of store B is 8 lacs. The
direct expenses for store A is 1 lac and that for store B is 3 lacs. The indirect expenses are allocated on the basis
of area of each store. The total indirect expenses work out to be Rs 3 lacs. The gross margin per cent for store A
and B are 50% and 40% respectively. What is the profitability per cent for storeAand store B?

9. Explain the steps involved in the development of new products. Describe advantages and
disadvantages of the product development.

Ans:- Sales analysis: This is the most important step before one decides on the product to be developed. The
merchandising team will have to undertake both research and study of the data pertaining to a product. The
team can take the following steps to identify the products which need to be introduced by them in their store.

● Study of research data, from the trade associations and other sources to know the sales trend expected in the
product categories in terms of sales growth percentage and volume.

● Study the sales trend of brands in their stores, which sell the concerned products/items as part of their brand
collection. The study of sales trend will provide the team with growth of different products on yearly basis. The
trend will also provide the volume of different sub-products within each of the brands. These data are related
with different price-ranges under which the sub-products are sold. The data provide a clear indication to the
merchandising team on the products which can be taken up for product development. The study will also throw
up the trends for the new products that carry potential for growth in the future.

● Study of products sold by other competing retail stores or chains, that have good sales and growth potential.

● Visit to trade exhibitions, foreign markets and shows will also throw up ideas on new products for
development purpose.

Briefing Design Development Team: This is the next important step the merchandising team will have to take in
order to give effect to its identification of new products. For the designing team to come up with a meaningful
product design drawings, the team should provide following details to the design development team:

● The kind or type of product, in terms of its material, or other important constituents. For example in case of
apparel the merchandising team will have to specify whether made from cotton or blended material etc.

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● How many different products and sub-products required in terms of special features if any. For example in
Skirt whether it should be tight or regular and with what different features like with laces or embroidery or
prints etc.

● What are the price points at which each of the products required?

● In what size specifications the product is required. For example for Soaps or tooth paste in 100 grams or 200
grams or for apparels in small or medium or large sizes.

● How the product will fit into the existing range so as to give strategic advantage in selling and creating niche
for itself.

● What specific function the product should be able to meet or salient features it should have. Like whether the
soap should serve as a face-wash or beauty or skin toner function etc.

● The product’s co-ordination with the other products. For example skirt to coordinate with T-shirt or blouse; or
belt to co-ordinate with the trousers or shoes.

● How the product will be displayed in the store. The type of fixtures/browsers to be used for display purpose.

● The packaging requirement or any packaging conditions that the designer team should know. For example
toys needs to be packaged in non-plastic material and so on.

● Manufacturing conditions to be kept in mind like minimum quantities, or the produce-ability of the design at
the mass level of production. For example certain kind of print design may not suit for producing very small
quantities or the kind of print required may not suit to the price target need for the finished product.

● What types of drawings are required to be given to the manufacturer? Whether, technical drawings or
detailed sketches, showing different graphics separately. Briefing to manufacturer or Supplier: In case of briefing
it will depend if the briefing is to be done to the supplier’s designing team first or directly to its manufacturing
team. Many suppliers employ their own designing team for taking care of product development request from
their big clients. In such a case the points covered earlier will have to be conveyed to the supplier’s designing
team. As regards to briefing to the manufacturing team, the first stage for manufacturing team is to do a
feasibility study. The feasibility study will include the time required for completing manufacturing of the order;
the cost of development (production set-up and machinery requirement), the production processes and
material use; minimum quantities required as part of the batch size for achieving cost efficiency. After the initial
feasibility study, the design development team should explain to the manufacturing team about the core
elements of the product design. The team may also suggest any changes for making the product economical
without losing on the core elements of the product design.

Study of Supplier’s Capability: This is an important assessment study of the suppliers before deciding on who will
be the right one to produce the desired product. Knowing and assessing supplier’s capability with respect to
various aspects of the product design gives a clear idea to the buying and merchandising team about the
products to be supplied. The team has to be clear about the assessment factors as any wrong choice of supplier
will not only cause delay in the manufacturing but may finally compromise with the finished product quality.
Sometime if the product design is amenable for trial sample, the buying team can identify select suppliers for
making a trial sample before finalising on the supplier.

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Cost effectiveness: It is necessary to assess the product development cost vis-à-vis sales plan for the concerned
product. Does the product have a longer or shorter lifespan from the product life-cycle point? If the product
development cost is going to account for a substantial percentage of the overall sales of the product, then, it will
be better to source such products due to short life cycle of the product. But if the product has a longer life-cycle
and has potential to grow over a period of time then one can amortize the development cost over a period of
time. Thus, keeping the overall cost per piece lower, by dividing the development cost over the total expected
quantity to be sold during its life span. Look at Example 9.1 to understand the working.

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