22 MAR-APR 09
Most retailers today use some sort of structure by which to assimilate organize and analyze sales and inventory data. The term used to refer to this process is classification merchandising. Although the importance of classification merchandising was recognized decades earlier it wasn’t until the mid-1960s that its usefulness came into vogue. Practical applications got jumpstarted when retailers began using computers to crunch raw data to create sales and inventory reports.
Definition of Classification
By definition a classification is a “natural separate and distinct grouping of merchandise within a department.” Items in a classification must be kindred meaning that they would all have the same end use similar markup and turnover goals as well as like selling patterns. Sometimes classifications and departments are referred to interchangeably although this is not actually correct.
Dollar Control
Classification merchandising is not to be confused with unit management or assortment planning. It is a dollar control process. Information needed to render a classification system usable includes sales receiving price changes transfers returns to vendor inventory and merchandise on order.
Examples of Classifications
Dress shoes casual shoes boots sandals and accessories are all examples of potential classifications. Let’s look at “boots” as a classification more closely. Certainly there are several types of boots. Western boots for example are completely different from winter boots which are altogether different from hiking boots which are not the same as work boots. Sales volume or percentage of sales in each area would most likely dictate if classifications require separate designation. In certain situations “boots” might actually be a department split typically by gender such as:
- Dept. 1—Boots-Women
- Class 1A Women’s western boots
- Class 1B Women’s winter boots
- Class 1C Women’s hiking boots
- Class 1D Women’s fashion boots
Avoid Generic Classifications
Combining All Boots into One Generic Classification
Combining all boots into one generic classification should be avoided as it would render the data useless due to the differing end uses of the products sales cycles and turnover rates. The only time this should be considered would be if store volume in this area didn’t warrant further breakdown.
Dollar Open-to-Buy Plans
Dollar open-to-buy plans are controlled at the class level. Fast-selling classes should always be awarded open-to-buy even if other classes are overbought. While sales gains in a given class justify expansion of the class or reordering hot selling styles a declining sales trend is cause for corrective action—which might include markdowns order revisions vendor returns spiffs or remerchandising of displays.
Classifications Over Time
Classifications over time become trendable and predictable. Winter boots typically sell from September to a fashion customer on into January and February to the sale customer. This cycle is repeated every year more or less depending on variables including weather merchandise assortment and economic factors.
Common Mistakes in Classification Merchandising
Common mistakes in classification merchandising include:
It must be human nature for buyers to want to rob Peter to pay Paul which means funding the overbuying of one classification with dollars from another classification. This is wrong on several levels. First classifications are individual revenue centers in a store; they are autonomous. A buyer who would attempt to justify overbuying a boot classification by taking money from say the casual class is similar to a grocery store buyer ordering too much bread and having no budget left for bananas. It just doesn’t work that way. If the boot class needs more open-to-buy based on expected sales trends anticipated “hot” items or new vendors then the boot classification plan should be revised to adequately compensate for the additional demand.
Business That Is Expected
Taking money from another class runs the risk of diluting the class and missing potential sales.
Consistency Is Key
A pitfall in classification merchandising is not remaining consistent with your categories. Avoid the temptation to call something a casual shoe one season and a similar item a dress shoe the next. Another problem occurs when a style is purchased in a particular classification and once received ends up in a totally different classification. To solve this dilemma a store should use its own purchase orders with class numbers clearly visible. This will eliminate any confusion when goods are received and ticketed.
Create clearly defined classifications and adhere to them. That is not to say that categories cannot be split combined or eliminated or new ones added as business trends warrant.
Classifications should typically be reviewed at least annually. I have seen several examples of stores having so many classifications that any reports generated are useless. Computers are a great help in gathering data but when setting up a classification system remember the adage need to know vs. nice to know. Computer systems today are so powerful that an over-classified store ends up with data that is never used. It becomes akin to drinking from a fire hose. A well-designed classification structure should separate the trees from the forest but not the leaves from the trees.
Avoid setting up a class structure by brand or vendor. Planning at the class level is initially done prior to buying for the season. Creating an open-to-buy plan by brand lends itself to all sorts of problems. One significant issue develops when a class is trending up and the brand is trending down. If an increase is planned for a given class it may not align with the brand’s performance.
Classification Merchandising: Keeping Up with Trends and Budgets
Ritchie Sayner
nsra.org
Brand and Vendor Planning
If it is later determined that the current season’s line didn’t warrant an increase the reality is you have no plan. Hot vendors can cool and weak vendors can become important. Class history however continues from year to year and readjusts based on your customers’ purchasing trends. Planning at the vendor level is a function of assortment planning not classification planning.
About the Author
Ritchie Sayner is vice president of business development at RMSA Retail Solutions which works with retailers to improve performance. RMSA will help any NSRA member set up or review their classification structure at no charge; for details email RSayner@RMSA.com.
Sources
- Albert Schott and Herbert Turetsky Retailer’s Guide to Merchandise Classification Control National Retail Federation Washington DC.
- James Powers Retail Inventory Method Made Practical National Retail Federation Washington DC.
Ritchie Sayner
Summary of Classification Merchandising
Classification merchandising is a crucial process for retailers that involves organizing merchandise into distinct groups to manage sales and inventory effectively. It focuses on dollar control rather than unit management requiring careful planning and consistent classification to avoid common pitfalls like over-classification and misallocation of funds. Consistently reviewing and adjusting classifications based on sales trends ensures that retailers can adapt to changing market demands.
“Classifications should typically be reviewed at least annually.”
Real-World Examples of Classification Merchandising
Classification merchandising is a crucial strategy in retail for organizing and analyzing sales and inventory data. Here are a few real-world examples illustrating its application:
- A large clothing retailer uses classification merchandising to separate their clothing into categories such as formal wear casual wear and sportswear. This allows them to manage inventory and sales data more effectively ensuring that each category is stocked according to customer demand and sales trends.
- A shoe store chains its inventory into classifications such as running shoes basketball shoes and casual sneakers. By doing so they can track which types of shoes are selling best and adjust their purchasing and marketing strategies accordingly.
- A department store classifies its home goods section into categories like kitchen appliances bedding and furniture. This classification helps them to monitor sales patterns and optimize their stock levels to meet customer needs while avoiding overstocking in less popular categories.
