What has Changed in Merchandise and Assortment Planning Because of Covid? ... Part 1

18th November 2020

Introduction

Everyone is familiar with the big shocks that have hit retailers and consumer goods manufacturers caused by the Covid-19 pandemic. What many people don’t realise is the extent to which the pandemic is causing many retail business processes to be changed in significant ways. This article explores just one key process – Merchandise and Assortment Planning.

Because of the size of the topic, it is being published in 4 parts. When you have read this segment, look out for the other three parts in the following three weeks.

The core factors driving the changes include:

  • The rapid rise in the volume of online sales
  • The impact of lockdowns and targeted local restrictions in changing the way that consumers shop, specifically with the increased focus on essentials.
  • The rapid response that public health authorities make to Covid-19 flare ups and how retailers need to offset the risk of being stuck with too much of the wrong inventory. For example, the UK went into its second lockdown on November 3rd, 2020. This is timed to last till December 2nd and assuming that it happens, non-essential retailers, who have been forced to close, have just three weeks to sell their Christmas stock, apart from the quantity they can sell online. Many will finish their financial year at the end of January with a significant Christmas carryover.

 

 

This article examines how merchandise and assortment planning needs to change to be more effective during the pandemic and its aftermath.

One cautionary note before we go into detail. All planning relies on history to help make better forward projections or forecasts. Some of the data will be less than helpful following the introduction of Covid-19 spread prevention measures as many historic patterns will be obsolete, potentially for a long time.


Impact of the Pandemic on Online Retail and Merchandise Sales Planning

The pandemic has caused online retail sales to grow dramatically because of lockdowns and local restrictions on movement. Online retail sales, especially when delivered direct to consumers’ homes are less profitable than store sales. As well as delivery costs, returns are a big driver of the reduction in profit. If you are new to online retail and it is a small percentage of your total sales, then returns from customers may not be a serious issue yet. If you are a fashion retailer with 25% of your sales online and experience a 30% returns rate, then it is a challenge. If (as one department store retailer predicts, online becomes 70% of your sales in the next three years), that is 21% of your chain’s fashion sales coming back. A recent survey showed that, on average, it takes 6 weeks elapsed time for a customer return to be back in stock ready to sell again. In a 26-week season, that’s a good percentage of your stock of no use sales-wise for nearly a quarter of your season. As online sales grow, this problem will get worse.

 

 

The first step in merchandise planning is sales planning. As the volume of online sales grows it is essential to plan gross sales before returns and net sales after returns. The time phasing of the returns also needs to be considered. If your company performance is the 6-week average mentioned above, you will see very few returns for the first 5 weeks, so you will need to reflect this in your net sales phasing by week.

Online sales can be shipped three ways:

  • Direct to a customer’s home
  • To a store (click and collect or BOPIS if you are American) or buy online pick up at kerbside
  • To a third-party pick-up location like a convenience store.

Each of these options may have a different average return rate, so you will need to monitor the numbers. It is made more complicated by where the customer returns the order to. It may be direct to the e-commerce warehouse or it may be to a local store when the store is not in lockdown. If an item is returned to a store and it is also sold in that store it can be back in stock very quickly if your store processes are good. Store returns may have a very different average to the 6 weeks mentioned.

Equally, you may be lucky enough to have a good order management system for your online operation. In this case, store returns not stocked in the store could be added to store stock quickly, sold online and fulfilled to the consumer direct from the store, thereby improving performance and profitability.

 

Channel Planning

The company sales plan needs to be broken out by channel, online verses stores and by individual store or store grade. When a country or a region goes into lockdown online sales shoot up rapidly. Having shot up, when lockdown ends, the demand may stay online or some of it may revert to stores. Your current history may not be much help with forecasting this, so you need to make the best estimates you can and start collecting data now to help you refine the estimates in future.

 

 

Equally, the percentage of sales taken by each store will also need major change. Many city centre workers working from home during lockdowns and outside of lockdowns, may work from home two or three days a week. Hence city centre stores suffer big drops in traffic and sales volumes, as people are not commuting like they used to, and some may face permanent closure. Locally based stores may experience increased traffic and sales, because of people working from home.

As things change, which can be at very short notice, sales plans need to be adjusted rapidly.

 

Conclusion

Merchandise planning is becoming more complex because of the impact of the Covid virus. This might be a good time to refresh the skills of your merchandise planners and to train those who will be joining the ranks of the planners in 2021. Martec provides a comprehensive merchandise and assortment planning e-learning class, which is described and can be ordered on this page:

https://www.martec-international.com/products/228/merchandise-and-assortment-planning

Finally, remember to re-visit this blog next week to read part 2 of the article.

 

Brian Hume
Martec International Ltd


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