Performance Analysis Tips from a Retail Fashion Buyer

How do you decide what to sell, or how much inventory you need for your online boutique? For many small business owners, inventory planning is a bit of a guessing game that is based on primarily gut-instinct and perhaps a few simple sales metrics.

If your inventory planning strategy looks more like sticking your thumb in the wind, you’re likely leaving money on the table – or worse, throwing it away. If you buy too much of an item, you’ll have a problem with costly markdowns that eat into your profit margins. Buy too little, and you’ll have a problem with missed sales and low customer satisfaction. But, there’s a more scientific approach to planning your inventory investments, that results in fewer headaches or missed sales! And that is the art of Merchandise Planning.

What is Merchandise Planning?

Merchandise Planning is the discipline of analyzing your past performance, competition, and market trends to make your product and inventory decisions more calculated; more strategic. During your Post-Season analysis phase, you’re (1) reviewing SKU and category-level sales results, inventory levels, KPI reports, etc, (2) doing some super secret spy-work to see what your competitors are up to, and (3) observing ongoing and emerging trends in the market. The result of this analysis is a strategic plan that when executed properly will achieve your sales and gross margin targets.

“Your Merchandise Plan is only as good as your analysis of performance, competition, and market trends.”

–Taylor Daniel, President & Co-Founder of FOMO agency

Most people don’t enjoy crunching numbers or sifting through endless rows of data, but someone has to do it. Retail industry giants like Gap, Macy’s, Target, and countless other behemoth brands have dozens, or even hundreds of employees dedicated to the merchandising function alone – starting with buyers and planners, rolling all the way up to the executive level. Merchandise planning is that important.

The majority of brand owners look at their numbers regularly, but a sizeable portion of new and emerging brands are barely looking beneath the surface when it comes to sales data analytics and revenue forecasting. Monitoring your key performance indicators (KPI’s) like Revenue, Gross Margin, and Inventory are important, but you need to dig deeper than that in order to model and predict desired outcomes. To get some insight about the merchandise planning process, I sat down with a ex-corporate retail buyer.

Getting Answers from an Experienced Merchandiser

Taylor Daniel, President of FOMO agency, observing a product display at a local candle boutique.

Merchandise planning consultant, Taylor Daniel, is the President and co-founder of FOMO agency, and a self-proclaimed “data-junkie.” She holds a Bachelor of Science in Fashion Merchandising, and is a former category buyer for global brands like Levi’s, Old Navy, and Johnston & Murphy.

With over 15 years of retail experience, Daniel has a knack for managing assortment planning, inventory management, and visual merchandising.

Using her skills in retail data interpretation, Daniel uses key performance metrics to gather important business insights, and ultimately, develop volume-driving assortment strategies. Throughout her fashion career, she has driven over 34 million units in sales across over 30 thousand SKUs and 570 stores throughout the world.

Today, her work focuses on helping small and medium-sized businesses develop better merchandising practices through her tried-and-tested retail KPI performance reporting and merchandise planning techniques.

What is Performance Analysis?

Merchandise Planning is the scientific approach of measuring results and market demthroughoutands to inform your seasonal purchasing decisions for your store. The Merchandise Planning cycle consists of 3 key phases:

Pre-Season Planning – Using the insights from your post-season hindsight recap, you’ll set financial targets (sales, profit margins, and inventory levels). Once COGS are finalized with vendors, your assortment selection is curated, markup prices are set, and then unit-buys are submitted to vendors as purchase orders (POs). Last, visual merchandising strategies are developed and coordinated with marketing efforts.

In-Season Management – Real-time results are routinely evaluated to allow inventory managers to make in-season product decisions to stimulate sales, traffic, or conversion rates. There are several in-season actions a buyer can take to drive results, like running promotions, getting more inventory of a hot-selling item, changing up a product display, or even reallocating goods dependent on market demands.

Post-Season Analysis – This is where data-interpretation comes in handy. At the end of a season, you’ll compile all the end-of-season data, calculate pertinent KPIs, and develop a hindsight recap that outlines areas of the business areas you intend to grow, maintain, or decline in a future season.

Each of the three phases of the Merchandise Planning Cycle is of equal importance. But, your Post-Season Analysis phase is the foundation upon which your strategies will be built. Without a thorough analysis of your results, your decisions will lack the proof-points necessary to ensure that all product-related actions support your financial targets.

Similarly, the In-season Management phase also involves shorter is a critical part of reacting to customer behavior and demand for your goods. Without this, your seasonal results may suffer, leading to big losses. These three phases, when used together, create a harmonious balance between supply and demand for your business.

Question: While so many businesses are looking to scale using automation and software solutions, a lot of your work takes place in spreadsheets. Where is the digital transformation in merchandising?

Answer: You hit the nail on the head; merchandising is an area that has evolved more slowly than other areas of retail operations. Google Sheets and Microsoft Excel certainly aren’t the most exciting business tools out there, but they are widely used, and Excel is often regarded as “old reliable” among retailers. Having spent years working at the HQ’s of some major retail brands, none of them had a software solution or program in place that was used to for demand forecasting, assortment planning, or buying. Instead, we had tools to help with product development, but largely, there were huge teams of human merchandisers or buyers who were tasked with routinely analyzing sales history, forecasting sales, and making product-management decisions, all based on the insights gathered in their spreadsheets.

A good merchandise planning spreadsheet template should help you to:

• Maintain a unified source-of-truth for your planned results versus your actual results.
• Calculate the financial targets you want to achieve (i.e. sales, margins, and Weeks-Of-Supply targets) based on past performance, market conditions, and competitive landscape.
• Determine the amount of new receipts needed to meet your desired inventory levels.
• Help you make decisions about how to tweak your marketing, staging, markdowns, and purchases based on your current performance.
• Measure your actual performance against last year and compare it to your current forecasts.

In my first-ever buying role, I was taught by my manager at the time to “always look under the covers” (aka: in the sales data) to find the insights that drive your decision-making. There are so many more valuable nuggets to consider than just which SKUs drove the most dollar or unit sales. Digging into the sales data from multiple angles is a super important part of your Pre-Season Planning Process. Without a solid understanding of what drove your past results, your decisions for future selling seasons are all but uninformed guesses.

Question: What are retailers getting right, and what should they focus on? We know merchants often make product decisions based on Revenue, Gross Margin, and Inventory — why isn’t that good enough?

Answer: While these KPI’s are good indicators of a lot of things, there are so many other data points that must be considered.

If you’re focused on revenue, you might rank all of your SKUs by total revenue ($) or unit sales (U) to see what products are driving the largest contribution of your volume. Consider the following scenarios:

Scenario A:

You have an assortment of “basic” styles that you carry all year, and an assortment of seasonal goods that you purchase to sell for a short time period.

You have assorted a new basic hoodie that includes a design detail suddenly made popular by a celebrity or influencer. Before you know it, you’ve sold out of this style!

Let’s say you originally bought 100 units of this item, but you also sell hundreds, or even thousands of other products in your online store.

If you only sort sales based on dollar or unit sales, this new style might not even show up on your radar, because the total sales were only 100 units. 

However, by calculating the ST% (Sell Thru Rate) of your styles, and using that as a benchmark, you’ll be more aware of products with high demand. In fact, styles that achieve above average ST% in your store are often worth even bigger investments in future seasons.

In our example above, the new hoodie style had a ST of 100%, which is a clear indicator for a boutique owner that they should invest more of their open-to-buy in that style.

A few different ways that a business might decide to grow a style or category could be that they expand their assortment to include additional color choices (also known as “increasing breadth“) of the same style, or just buy more units (also known as “increasing depth”) of the original colorway.

Scenario B:

You take pride in your profit margins, so you always ensure that you invest more depth into the items that drive the most profit per unit (also called “unit productivity”).

However, there are a few other things to consider here. There may be other items in your assortment that are driving more margin dollars.

As you can see, while the GM% on Product A is higher, it’s not the only factor that needs to be considered. The fact that Product B is driving more unit volume, in turn, is driving more total margin dollars, even though its GM% is lower.

Scenario C:

You are really on top of your inventory. You regularly monitor your sales, take your demand forecasting very seriously, and you always know when to re-order something if stocks are getting low. However:

• Are you carrying any products that drive unhealthy margins?
• Are there items in your assortment that have a negative trend in the industry you should consider declining, or dropping?
• Are you constantly re-ordering a product that continues to sell out?

Analyzing your sales and inventory is just not enough. You must consider trends internal to your brand, but also in the larger industry. Otherwise you’ll be spending precious dollars investing in products that are not helping your business.

While looking at on-hand inventory is great, there are several other inventory indicators that are important to consider. The Rate-of-Sale (ROS) tells you how quickly an item is going to sell out. BOP/EOP inventory help you understand the amount of inventory you’re selling through in a given period of time.

Question: Those are excellent points. What else should an ecommerce business look at?

Answer: Many data points must be considered during the hindsight phase at the end of each season, and mid-season to drive incremental volume. Check out this KPI cheat sheet to see if you’re on top of the best data points: 

Question: There’s more to merchandise planning than looking at numbers. What’s missing? 

Answer: There are many other KPIs to consider as a business grows more complex and has reliable sales history to look at, however, the above list includes many data-points that are not being considered by small-to-medium-sized retail businesses, so implementing these into your spreadsheets will be a great step in the right direction.

It’s very important to look at your business from multiple angles, sorting your data ascending and descending through the lens of multiple KPIs.

This will give some perspective on what your top and bottom performing products are, as success can be determined by a variety of factors.

It’s also critical to stay on top of market trends. These factors play a role in the potential success or failure of a product, and will affect your demand forecast.

• What are consumers talking about?

• What are consumers currently buying?

• What are couture designers showcasing for next year?

• What colors are trending?

VM techniques catch the eye of consumers and draw them across the lease-line. It’s no secret that a customer is considerably more likely to make a purchase if they are IN your store (or on your site).

Promotions can also help drive unit sales of a SKU, style, or department of goods that are otherwise struggling to move. This will help you drive sales without taking deep, permanent markdowns.

Question: Any last words of wisdom for a small business chasing success in retail?

Answer: Merchandise Planning is such a critical component of your business planning. While a “numbers gal or guy” might keep you afloat in the short term, you need a trained eye that knows how to look at data and manipulate it to uncover helpful insights and monitor the market. This will keep your assortment on-trend and poised for growth.

Why else do brands like Levi’s and Old Navy employ hundreds of merchandise planners?

It’s because their expertise is so vital to the success of trend-based industries like fashion, beauty, and home decor.

Conclusion

Monitoring performance, calculating KPI’s, and making product decisions is a lot of work! FOMO agency is on a mission to bring sophisticated retail merchandising techniques to small and medium businesses worldwide. Whether you’re just starting out, or you’ve been around a while, working with our team gets you access to talented retail industry experts who are dedicated to product and inventory management strategy.

We will help you:

• Improve NPS and loyalty

• Increase your profit margins

• Reduce excess inventory & markdowns

• Understand market trends

• Get the job done

ABOUT THE AUTHOR

Dustin Thede is Vice President and Co-Founder of FOMO agency, and a well-known problem solver. Before starting FOMO agency, he spent the better part of a decade in retail and ecommerce, including as an Account Executive in Silicon Valley selling complex ecommerce website development and task automation projects.

At FOMO agency, he is focused on all things growth: marketing, sales, and partnerships. When he’s not doing ecommerce-y stuff, you’ll find him in nature, around or on the water, or spending time with family and friends.

Connect with Dustin on LinkedIn!