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The Relationship Between Merchandising and Financial Performance

06.04.2009 · Posted in Internet Marketing

In today’s economy, retailers are looking for ways to improve financial performance without adding stores. With the increased pressures of competition, eroding margins, lack of differentiation, and having achieved many of the back-office and supply chain efficiencies available to reduce costs, the focus of retail executives has shifted to growing comparable store sales and increasing margin through more effective merchandising. rnrnrnBecause inventory is one of the most significant investments retailers make, it’s no surprise that they are beginning to reevaluate merchandising strategies. Traditionally, deciding how much merchandise to buy, which stores to put it in, and the best price for each item has been one of the least efficient processes in a retailer’s business. Based on a study by Accenture, it is estimated that the top-tier U.S. retailers could gain $20 billion in incremental gross margin dollars by employing Merchandise Optimization technology. rnrnrnMerchandise Optimization is an emerging category of solutions that help retailers make more profitable buying, allocating, and pricing decisions based on customer demand. As with any emerging market, there are various names for pieces of the merchandising puzzle: Pricing and Revenue Optimization, Demand Based Management, Retail Revenue Management, etc. Regardless of name, the concepts covered by Merchandise Optimization are important to the success of all major retailers. rnrnrnAs merchandising experts, retailers excel at making strategic merchandising decisions such as picking best-selling items for next season’s assortment. However, because they are responsible for thousands of items and hundreds of stores, a large portion of their time is spent on data analysis and number crunching. Merchandise Optimization technology acts like a merchant’s personal assistant by automating the tedious analysis of sales and demand information, generating a common forecast that incorporates store-level information about long- and short-lifecycle products, and providing them with the tools they need to make the more profitable buying, allocating and pricing decisions. rnrn”Merchandise Optimization is a power tool for the retail industry,” said Scott Friend, president of ProfitLogic. “Merchants without the right tools spend far too much time collecting information and manually analyzing spreadsheet data just to keep up with 1000s of decisions every day. Merchants empowered with Merchandise Optimization tools spend their time making decisions based on centralized, organized and pre-analyzed demand information. This frees up their time to do what they excel at — being merchants.” rnrnOne of the areas that cause retailers the greatest pain is markdowns. More than 60 percent of sales in department stores and specialty chains come from marked-down merchandise, according to Levy & Weitz in Retailing Management. Tremendous financial benefit is available if price changes are executed at the right time and deep enough to spur demand. If merchants markdown merchandise too early, they are stuck with inventory shortages, dissatisfied customers, and lost gross margin. If they markdown merchandise too late, which is typically the case, they are left with excess inventory at the end of the season, have difficulty finding room for new merchandise, and sacrifice gross margin dollars. Because Markdown Optimization is one of the quickest and easiest ways for retailers to drive productivity from their inventory investment, it’s an excellent place to get started on the road to using Merchandise Optimization across the entire merchandising process.

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