Holding too much of the wrong stock, a focus on lowest price positions and selling products at a loss just to maintain market share, are compounding the difficulties already faced by retailers.

Economic headwinds, increased competition on and offline, leasing costs, free delivery and returns – the list goes on and on. A recent Reserve Bank of Australia report on competition and profit margins in the retail sector, found that consumers are increasingly price sensitive, causing retailers to adjust their pricing behaviour by increasing the size or depth of discounts on their products.

In addition to contributing to low inflation outcomes in the Australian economy in recent years, the RBA notes this has also affected the profit margins of retailers.

Meanwhile, Nielsen research has found Australian food retailers are heavily investing in regular promotional activity – to the tune of $51 billion.

But what if retailers didn’t have too much stock, or incorrectly priced stock to begin with?

The fundamental art of retailing – that is, effective merchandising planning – impacts critical inventory activities right across a retail operation. But if this art is neglected, then retailers are forced into the ad hoc cycle of discounting products to clear stock.

A paper from PwC puts it bluntly: for retailers, inventory management should take a top spot at the executive table, and when it doesn’t, or is done incorrectly, it’s a sign of mismanagement.

Yet, a McKinsey survey of over 30 major retailers confirms that merchants spend approximately two-thirds of their time gathering data, managing exceptions, “firefighting,” and participating in meetings to syndicate with colleagues – and only one-third of their time working on critical strategy and analytics or insights.

Failing to plan is planning to fail

For many successful retailers, merchandise planning is considered a bread and butter component of the business – but a poorly devised merchandise plan can be the difference between growth, or failure. Let’s not forget, retail boils down to supply and demand.

“Merchandise planning is fundamental to a retail business, to plan and manage their inventory optimally,” says Susan Martin, CEO and Founder of SMART IN PLANNING, a firm that specialises in merchandise planning.

“And it’s also a precursor to a retailer’s profitability.”

Martin says while merchandise planning has developed in Australia since she moved here 20 years ago, there’s still a fair range of maturing to come. Having previously worked for one of South Africa’s largest retailers – The Foschini Group, which recently bought RAG, the operator of several apparel chains across Australia – Martin says merchandising planning has only more recently started being recognised and treated with the importance it deserves.

“If I think back to my days at The Foschini Group, and compare to the degree of promotional and markdown activity that I’ve seen here in Australia – that’s simply not how we did business back there, because we didn’t buy anything without knowing where it was going to end up and how it connected back to our strategy,” says Martin. “It was embedded in the merchandise planning process”.

“Whereas, because of the less mature environment here, impacting the whole flow of the planning cycle, retailers are often playing pass the parcel on accountability for stock. This hinders the execution of the strategy from an inventory, and therefore profit, perspective”.

Custodians of stock

Merchandise planning is one of the few parts of retailing, which intersects with every other aspect or department within a business. Its influence extends from buying and production to supply chain, into general retail operations, finance and ultimately customer experience.

Planners can be thought of as custodians of stock. Their contribution is crucial towards informing the strategies of category managers, through relevant, insightful analysis, and in the provision guidelines for stock investment – this is where retailers can get back to basics to avoid the reliance on discounting.

Effective merchandise planning enables retail organisations to build a framework for informed buying and production decisions – which includes location planning, ranging width and depth, buying margin targets and quantity forecasts for production planning.

“This not only leads to more optimal stock levels, but can also result in better supplier relationships that in turn lead to better terms, better DIFOT [delivered in full, on time], better MOQs [minimum order quantities], better cost insights and negotiation, and therefore margin outcomes,” says Martin.

When the planning process is successful, a retailer has less markdowns related to overbuying. And merchandise planning is not just about the number crunching, adds Martin.

“Merchandise planning is an art and a science, and I think the artistic aspect can be underplayed – there’s a real overlay of commercial acumen that needs to come throughout the planning process, and more senior and experienced planners will bring that elevation.”

So how can a retailer get back to basics, to thrive in this economic climate, and stop the cycle of discounting and margin erosion?

“Your brand has to be sharper than ever; your cost management has to be tighter than ever; and your strategic vision has to be stronger than ever,” answers Martin.

“Those are things that not everyone does well or gets right. But they are the zones where you can set yourself apart and merchandise planning is most certainly one of the few areas of opportunity to move the needle.”

This article was written by Inside Retail in collaboration with SMART IN PLANNING.