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Free Book: Guide to Effective Retail Merchandise Management


Guide to Effective Retail Merchandise Management

A Step by Step Guide to Merchandising in a Retail Store

Guide to Effective Retail Merchandise ManagementThis guide concerns itself with retail merchandise management which involves:
what merchandise to carry in stock
how much to buy and stock of each item
how much selling space to give each item
what price to charge for each item
how to display, advertise and promote each item
Merchandise management is sometimes mistaken with merchandising.

Merchandising refers to good in-store display and promotion of merchandise. Merchandise management, as described above, is much more, as will be seen in the discussion to follow in this guide.

Table of Contents

1. Introduction
2. Selection Of Merchandise
3. Gross Profit
4. Profit Per Square Foot
5. Allocation of Space Based on Profit Per Square Foot
6. Gross Profit On Investment
8. Stockturn
9. Using Profit/Investment, Profit/Sq. Ft. and Stockturns
10. Implementing A Merchandise Improvement Program
11. Gradual Replacement of Undesirable Merchandise
12. Checklist For Improving The Merchandise Mix In Your Store

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Sample Content:

Selection Of Merchandise

What merchandise should be carried in stock is basic to good merchandise management. For this reason, much thought and research must be given to selecting merchandise appropriate for your store. In initiating a new store, as well as during periodic merchandise reviews in an established store, you need to think about your market. What are the people like, who shop in your area? Are they young married with children, or elderly couples, blue or white collar, high or low income? What are their leisure activities, and wants and needs, etc.? Each of these factors has impact upon the type of merchandise you would select.
Other ways for obtaining ideas for merchandise selection include:
Studying other stores in the area, watching closely the merchandise they do and do not offer. Determining whether merchandise not offered may have potential.
Obtaining suggestions from salespeople in similar stores.
Carefully listening and speaking to customers in general about what they like about other stores.
Reading the trade literature.

Following advertisements of chains and department stores.
In general, knowing your customers and their needs is crucial in merchandise selection.
In a more specific way you select merchandise with the use of the tools for merchandise management discussed later in this section.
Generally, if a store is to be successful, sales and inventory should be reviewed periodically to:

See how many units of an item should be stocked and how much space should be given to them
Determine what should be done about slow moving items in inventory, and
Lay plans for sales, promotions and selection of new merchandise.
Two basic tools of merchandise management, which can help to determine how much of an item should be carried in stock, use gross profit as a basis for the calculations. They are:
Gross profit per square foot (or, profit/sq. ft.), and
Gross profit on investment (or, profit/investment)
Both of these tools help determine the average inventory which will bring the highest profit for each item. Once you understand them thoroughly, you can use a simpler tool, called stockturn. When applied properly, it can often replace the more cumbersome calculations.

Gross Profit
Since the two basic tools are built on gross profit, you need a clear view of the meaning of gross profit.
In a retail store, gross profit is the difference between what you pay for merchandise and what you sell it for.
There are two ways of calculating gross profit.
1. The simplest way is to take the selling price and subtract the cost.
Selling Price (-) Cost (=)  Gross Profit
2. In a retail store, customers often return merchandise, some of which then has to be sold at less than full price. There are also frequent sales. Accountants and many retailers therefore prefer to calculate gross profit by subtracting the cost of merchandise from net sales. Net sales means total sales (as rung up on the register) less returns. Cost of merchandise, again, is what the store paid for the units which were sold but not returned.
Gross profit can be calculated as shown:
Total Sales (-) Return  (-) Cost of Merchandise (=) Gross Profit

Example: Gross Profit
A retailer buys merchandise for $10 and sells that merchandise for $20. If the retailer sells 1,000 units but accepts 100 units in returns, what is her or his gross profit?
Using the formula above, gross profit can be calculated as follows:
$20,000 Total Sales (-) $ 2,000 For 100 Returns (-) $ 9,000 Cost of Net Merchandise Sold
(=) $ 9,000 Gross Profit
The same answer can also be obtained using the simpler formula: Since the gross profit on each unit is $10 ($20 selling price­$10 cost), and 900 units were sold (and not returned), the gross profit on the merchandise is ($10 x 900 units) or $9,000 - the same as above. In reality, this second calculation may not be as simple because there may have been a special price sale and therefore a different selling price for some of the units.
Please note that expenses such as rent on your store, utilities, cost of labor, and other operating costs are paid out of gross profit. The amount remaining after such expenses are paid is your net profit. Obviously, the higher your gross profit the higher your net profit will be. This is because most of a retail store's operating expenses are fixed and do not increase significantly with greater sales.
Also note that gross profit is arrived at by using the cost of the specific merchandise which was actually sold - not your purchases for the same period.

Profit Per Square Foot
Profit per square foot provides an indication of how much profit an item of merchandise brings from each square foot of selling space it occupies. It therefore helps to determine how much space should be allocated to each item. Since floor and shelf space in a store is limited, profit/sq. ft. can be used to help you make the best use of your space.
As the term suggests, profit/sq. ft. is calculated by dividing the gross profit of an item by the area of selling space for that item. The formula is shown below:
Profit per Square Foot =
Gross Profit
Sq. ft. of selling space
Example: Profit per Square Foot
Assume a retailer's business made $4,000 in gross profit last year on a particular line “x”. The selling area for the line was 200 square feet of shelf and floor space. What is the profit per square foot on line 'x'?
Using the formula above, the profit per square foot on line “x” can be figured as follows:
Profit per Sq. Ft. =
$4,000 gross profit on line “x”
_______________________________ = $20
200 sq. ft. of selling area for item “x”

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