Merchandise planning in uncertain times

Back in more normal times the merchandising team played a very important role in managing risks but now, more than ever, we at First Friday believe their role has become critical.

There is an old joke that when asking someone for directions the response is “but if I wanted to get there I wouldn’t start from here”. Planning 2021 is going to feel very much like that, I suspect.

This year is going to be a heck of a place to plan from. We’ve always had to deal with unknowns – the British summer for one – but this is a season like no other. Whether retailers have seen big positives like those in food or significant reductions such as fashion, every retailer will be trying to work out what will happen next year.

Will demand return to normal? Will there continue to be lockdowns and closed shops? How many shops will my business need to close?  Will the economy revive? Was the uplift/downturn in my category a blip or the new normal?

Here are my thoughts on how merchandise planning will support retailers during these uncertain times…

The need for realistic aspirations

No one has a crystal ball and we simply cannot know what the next seasons will hold for retailers so they will need to think very carefully about their appetite for risk.

Every season, merchandisers are weighing the risk and opportunity within their category using historical analysis and lessons learnt to shape and size the sales, stock levels and intake phasing.

The management guardrails such as like-for-like sales guidance, cover and terminal stock targets, held Open-to-Buy (OTB) etc, that they are given to work within are broadly the same each season. But in the next season, some of these guardrails are going to need to change significantly.

This season Merchandise Directors and Heads of Merchandising will need be thinking very analytically about risk and the level of risk their organisation is prepared to take.

Every season is uncertain, but the stakes are much higher this year – the age-old question of “do I take the risk of not having enough or having too much” will be critical, to not just success, but survival.

The magnitude of the answer will be different for different retailers from the viewpoints of cashflow reality, customer target and product mix.

Those with commercial merchandising disciplines have the connection between stock and sales at the very core of their business and will be able to absorb the far higher number of moving parts into their thinking when building plans.

How much stock you have, what type of stock it is and where it is at any one time is always the key to a season but the stakes this year are so much higher that senior management will need to be crystal clear on the guardrails they set, the implications and the targeted exceptions.

We simply don’t know what will happen with the virus, government-imposed restrictions, and customer behaviour, so stock will need to be as tight and agile as retailers can make it.

They will need to estimate how many of their selling channels are likely to be operating at any one time – and the size of those channels – in order to work out how much stock they really need in the stores and warehouses at any one time, and share this direction and reasoning with their teams.

And all of this needs to be considered in the context of what could be a significant economic downturn. Retailers could well decide that a planned like-for-like fall which keeps them ticking over and maintains customer share is an acceptable position to be in.

Each business will need to translate that into cover and stock targets that work for its moving parts and customer type alongside rapid processes to respond as the situation develops.

The age-old question of “do I take the risk of not having enough or having too much” will be critical, to not just success, but survival

Predicting the future based on the past

Merchandising as a function brings with it structure and clarity. Businesses with strong merchandising capability will have clear and consistent product and channel hierarchies.

This means that they will have multiple years’ worth of sales and stock information organised in the same way and can easily spot the peaks and troughs this year vs a regular year. This ability to see what happened and when, means that they can identify the cause and build up to a future prediction.

It’s going to be a complex puzzle this year for sure… but merchandisers love a puzzle!

To risk it, or not…

Let’s say a retailer had a new buyer on ladies shorts this year, despite extensive store closures. The combination of good weather, much-improved product and a lot of women working from home has meant that ladies shorts in this retailer are significantly “up” on the previous year.

The merchandiser needs to pull apart the various elements of this by comparing against other categories which might have benefitted from some of the same drivers.

For example, they may ask themselves:

  • How did other categories which would benefit from a shift in working patterns perform vs the year?
  • When we’ve revived previous ranges what lift did we get?
  • How much of the customer spend moved from stores to the web overall?
  • What uplift did other weather-driven categories get?

This is the commercial skill of the merchandiser: to work out the potential.

They then have to factor in the agreed company aims for this season shared by their management teams to strip it back to a more careful projection.

In normal times you’d probably take the risk and you may still do it this year too; but make it considered, conscious and carefully selected because it’s going to be a very brave retailer who takes lots of risks.

Forecasting with AI

It is also worth considering the new AI tools that many retailers are implementing and at pace.

These tools help them to keep forecasts current with so many moving parts outside of the retailer’s control. The ability to take into account the effect of fluctuating numbers of shops open, changing customer numbers etc will leave the Merchandiser free to deal with the impacts swiftly.

Building a range for uncertain times

The next few seasons will combine economic uncertainty with lifestyle uncertainty – many customers are unlikely to have confidence in how much money they have and won’t be sure what activities they will be able to enjoy.

To tempt customers to spend, ranges are going to need to be excellent, well targeted (both in time and customer profile) and good value.

Combine this with the reality that, with shops shut for months, many retailers will have had no choice but to carry stock over from this year to next and we have a challenge. In a season that looks set to be like no other, a significant portion of the OTB has, in effect, already been spent.

Open-to-Buy Implications

The merchandising team will need to work through the implications for options and volume for the remaining OTB.

For some, it will be right to keep options fairly broad and tighten the volume – certainly if they have a supply base that can get them back into best sellers. For others, backing known winners and sprinkling newness on top will be the better formula.

What is certain though, is that using all your commercial merchandising knowledge to balance and quantify the range gives the retailer the best chance of staying both relevant and solvent.

Partnerships are key

Sourcing

In uncertain times retailers will have no choice but to source more product much closer to home than they have been. They will need to manage their Open-to-Buy carefully and leave as much as possible to as late as possible to avoid being left with too much stock again.

Certainly, the garment world has been chasing ever-cheaper prices for years – leading to vast amounts of production moving offshore. When the situation is developing as rapidly as it is at the moment at both ends of the supply chain, few retailers will want their stock sat on a ship for 5-weeks (or more!), so they will seek capacity closer to home.

The sooner they do this the better because so much capacity has been lost over the years.

Partnerships are key

Sourcing, Merchandising and Buying will need to work closely together to identify the products which will benefit from the flexibility of close sourcing without losing too much margin.

Supply Chain and Quality teams will also have a key role in ensuring that suppliers are run ethically and adhering to sustainable practices across the board. And though fabric may well still be produced and bought offshore, it’ll be held to make closer to home as the winning styles and shapes emerge.

Having full visibility of the real cost of the supply chain versus the cost of getting it wrong will be essential, as will being able to make decisions as late as possible and follow customer demand/access.

Managing risk in times of uncertainty

In normal times your Merchandising team are a very valuable resource. Balancing ranges across lines with a long life and hits of newness – ensuring that the underlying trading margin is strong and keeping stock fluid – is what enables retailers to manage the risks inherent in the retail trade.

In these uncertain times, merchandise planning’s structured and commercial disciplines will be critical.

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Victoria Ward

About the author: Victoria Ward

Strategic Consultant specialising in Merchandise Planning and Business Change. Commercial, results driven and people oriented, Victoria has been consulting for First Friday since 2013 and is focused on driving businesses forward to harness their potential with effective systems, processes and structures. Fun Fact: Victoria has a passion for renovation and is addicted to property programmes (as well as your WSSI!).

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  • Merchandise planning – online course

    Suitable for intermediate level merchandising or planning roles involved in pre-season planning, this course covers planning sales, stock, markdown and margin, sales phasing, managing intake and open to buy, and use of the WSSI. Find out more »

  • Assortment planning & range building

    This certificated course covers the range building process, planning space, planning options, width and depth, grouping stores, the assortment plan, and range sign-off. Find out more »

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