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 Boot Classifications
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.
Classification Trends
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:
Robbing Peter to Pay Paul
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.
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.
Classification Merchandising: Keeping Up with Trends and Budgets
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.
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…
Brand and 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 Ritchie Sayner
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.
Summary of Classification Merchandising
Classification merchandising is a crucial process for retailers involving the organization and analysis of sales and inventory data through distinct groupings of merchandise known as classifications. This method which gained prominence in the mid-1960s with the advent of computer data processing is primarily a dollar control process that helps retailers manage inventory and sales trends effectively. Consistent classification strategies avoiding generic classifications and planning at the class level are essential for maintaining a useful and efficient system.
“A well-designed classification structure should separate the trees from the forest but not the leaves from the trees.”
Real-World Examples of Classification Merchandising
Classification merchandising is a crucial process in retail allowing businesses to organize and analyze sales data effectively. Here are some real-world examples of how classification merchandising is applied:
- A clothing retailer categorizes its merchandise into classifications such as ‘casual wear’ ‘formal wear’ and ‘activewear.’ Within the ‘activewear’ classification further subdivisions are made for ‘yoga pants’ ‘running shorts’ and ‘sports bras’ allowing for targeted marketing and inventory management.
- An electronics store uses classification merchandising to separate products into categories like ‘smartphones’ ‘laptops’ and ‘accessories.’ Within the ‘smartphones’ category they might have sub-classifications based on operating systems such as ‘iOS’ and ‘Android’ to better track sales trends and manage stock levels.
- A grocery store applies classification merchandising by organizing its inventory into departments such as ‘produce’ ‘dairy’ and ‘bakery.’ Within the ‘bakery’ department they further classify items into ‘bread’ ‘pastries’ and ‘cakes’ enabling them to analyze sales patterns and adjust their purchasing strategies accordingly.
