What has Changed in Merchandise and Assortment Planning Because of Covid? ... Part 3

3rd December 2020

 

Introduction

This is part 3 of a lengthy article discussing the impact of Covid-19 on merchandise and assortment planning. Previously we covered sales and inventory planning and this week we turn to gross margin planning. The focus in this part is what needs to be different compared to “normal” gross margin planning due to the Covid pandemic and the various responses taking place.

 

The Impact of Covid-19 on Gross Margins

The gross margin achieved on sales is what pays expenses and leaves profit over to re-invest in the business or distribute to shareholders. So, in a sense, sales doesn’t matter. It’s the achieved gross margin on those sales that matters. The achieved gross margin is determined by:

  • Setting the right Intake or Initial Margin
  • Setting promotional margins and managing promotions effectively
  • Tracking sell through and managing clearance markdowns well.

In a Covid-19 environment, assuming that your historical intake margins were sensible, aiming for a slightly higher intake margin merits consideration.

You may have also experienced in previous lockdowns that you didn’t run promotions at the level you did in the past. Some promotion types were also deemed unacceptable during lockdown, such as buy one get one free promotions. These were often seen as socially unfriendly for encouraging consumers to stock their larders when product was in short supply with many shops closed.

The big risk is clearance markdowns. Store closures mean a high risk of finishing a season or a critical trading period like Christmas with severe overstocks. In this circumstance, clearance markdowns might have to be heavy to generate cash. Any margin gain from better intake margins and lower promotional markdowns (unless funded by suppliers), will help offset clearance markdowns to some degree, thereby improving profitability.

In the event of a lockdown hitting sales, preparing a rapid response plan for actions to take when the lockdown ends is critical.

 

In-Season Management

In season performance reviews, weekly and monthly, are more important than ever. Each week, season outturn needs to be re-forecast and variances against the latest forecast as well as plan need to be identified, reviewed and any possible corrective action identified and executed.

When reviewing sell through, examine sell through by option (style/colour) by store. The chart below shoes an example of how to view this. The purple line shows the planned sell through for the chain in percentage terms. The plan could be by option or by style depending on what you can manage. Ideally, in a normal 26 week season, 100% sell through will be achieved about 6 weeks into the next season. In this example, at a point in time Store 30 is selling well above the planned sell through. There is no point marking down stock in this store. They will sell out anyway and will sell out early. Store 1 is not achieving plan and a 10% to 20% markdown may well be all that is needed to bring this store back on track. In store 7 the product is selling badly. People in that area or market just don’t like it. Even a 50% markdown may have little impact. In this situation, the best answer will be to move the product to Store 30 where you will be able to sell all or a good proportion of it at full price. There is a cost to move it, but that will be a lot cheaper than the cost of a markdown where it is, which may well fail anyway.

 


 


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 4, the concluding part of this article.


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