Avoiding the Common Mistakes of Classification Merchandising

Classification MerchandisingMost 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 jumpstarted when retailers began using computers to crunch raw data to create sales and inventory reports.

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.

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.

Classifications within a Department and Keeping in Mind Open to Buy Plans

Dress shoes, casual shoes, boots, sandals, 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 done 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 as shown in the example.

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

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 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 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 include “robbing Peter to pay Paul”, not remaining consistent, being over-classified, and treating brands as classifications. It must be human nature for buyers to want to rob Peter to pay Paul. By that I mean funding the overbuying of one classification with dollars from another classification.  This is wrong on several levels.  First off, 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 buying too much bread and having no budget left for bananas.  It 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 business that is expected.  Taking money from another class runs the risk of diluting the class and missing potential sales.

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.

Have clearly defined classifications set up in the organization and adhere to them.  That is not to say that categories can not be split, combined, 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 getting data that they never use. 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 forest.

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 happens when a class is trending up and the brand is trending down. If an increase is planned for a given brand and it is later determined that the current season’s line didn’t warrant an increase you have no plan. Hot vendors can cool and weak vendors can become important.  Class history 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.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com, or 816-505-7912.