Merchandise Mix, Product Assortment and Merchandise Planning
🔥 In the retail business, the
merchandise mix is an important factor for the success of any retail company. It is essentially the
product assortment that a retail store offers. Whereas some stores may carry a deep and wide assortment* (explanation at the bottom) in their merchandise mix, such as a large online retailer, other stores may have a shallow and narrow assortment*, such as a small chocolate store.
To provide the store's customers a highly desirable merchandise mix and in order to decide which products can bring in most profits and which products we should keep out from the merchandise mix, the
product roles matrix is a helpful tool. Here is how this product assortment matrix works:
This matrix has two variables which are Sales Value and Bill Penetration. Here BILL PENETRATION means the total number of customers buying that product and SALES VALUE means the price of the product. By confronting these 2 variables, we obtain 4 quadrants or 4 product categories:
- NICHES: The products which have a low bill penetration (few customers buy them (but have a high sales value (expensive products). These comprise the niche categories of products that only a few selected customers buy. Retailers tend to keep these products to satisfy the needs of these niche customers as they bring in high sales value in a single purchase and the margins are quite good with these products.
- DOGS: These products are the ones which few customers buy and are not expensive. It's normally better for retailers to get rid of these products as soon as they can. If a retailer offers many of these products, they occupy a lot of precious space in their shop.
- TRAFFIC BUILDERS: These products include the ones which are not expensive and many people buy them. These are typically the essentials such as toilet paper, rice, etc. Retailers keep these products even if they are low priced because the bill penetration is high, so the profits are still quite good for the retailer. These products also make people coming back to the stores and they may also buy other things while they make their visit.
- STARS: Many people buy these products and they have a high sales value. These are obviously the most profitable products for a retailer and a retailer should try to keep many varieties of these kinds of these products. These may include products such as liquor and well-known, international brands.
Of course, the optimal
product assortment strategy depends also on the type of store:
| Assortment* |
Type of Store |
| Deep and Narrow Assortment |
Specialty Stores |
| Deep and Wide Assortment |
General Merchandise Stores |
| Shallow and Narrow Assortment |
Convenience Stores |
| Shallow and Wide Assortment |
Discount Stores |
| Consistent Assortment |
Stores with a merchandise philosophy |
| Flexible Assortment |
Pop-up store, $1 store, Seasonal groceries stall |
* A
deep assortment means the store carries many variations of a particular product. A
shallow assortment means the store carries no / only a limited number of variations of a particular product. A
wide assortment means the store carries a large number of different products. A
narrow assortment means the store carries a small number of different products. A
consistent assortment means the customer perceives it as logical, so that he can be sure that he will find particular products and/or brands he is looking for at this store. A
flexible assortment means the store is selling whatever is discountable or available locally, at this time.
Compare also:
Product Mix. Don't mix up merchandise planning with
merchandising.
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Megha Bansal
Student (MBA), India
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Planning the Merchandise Mix at Retail Stores Once my professor asked me the simple question why so many people prefer Walmart or DMart for a monthly planned purchase. I replied "because of the low prices". But then I quickly realized this is not the only factor to be considered. I personally like such companies because of the huge variety of products they offer. In other words, it is their merchandise mix which makes them convenient for the people to visit a single store for electronics, food, stationary and so on.
Merchandise Mix is defined as "the product assortment a retailer offers to the customers". Decisions based on the width i.e. the number of product categories and the length i.e. the variety of items in each category have to be taken carefully.
How should Retailers Plan a Superb Merchandise Mix?
There are a number of tools a retailer can use to establish a winning merchandise mix:
- Catchment Analysis
Catchment is defined as the nearby area from where retailer expects most of its customers. Retailer has to decide on some number of kilometers around its establishment to be its catchment area. To analyze the area one needs to consider demographics like education, age, income of the consumers. Also look at the market basket analysis i.e. what do customers consume in that area.
- Market share of each brand for each category
Look at the market captured by brands in each category to make sure the star products (with high market share) are available at your store. Like for chocolates, look at the pie taken by Mars, Cadbury, Nestle, Ferrero, Hershey and decide which of these chocolates you must have on shelf.
- Competitor Analysis
Visit your competitor's stores and find out gaps in their assortment. Gain competitive advantage with insights like:
- The brands which consumers need, but are not offered by your competition. These can increase your footfall.
- The price points offered by competition that are not affordable for a large chunk of your catchment.
Deciding upon your merchandise mix needs constant analysis and improvement to achieve high returns.
The focus should be on two parameters:
- Targeted sales per square feet to see how much you sell per total area of your store.
- Targeted GMROI i.e. Gross Margin Return on Investment to check the retailer's capability to turn inventory into cash. This is calculated as Gross Profit / Average inventory cost.
Sources
Shari Waters (2020), "How Merchandise Mix impacts Retailers"
Brandscapesworldwide (2014), "Catchment Analysis for Retailers"
Will Kenton (2019), "Gross Margin Return on Investment".
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