Merchandising has a wide range of definitions, both academic and purely practical. At LEAFIO, we understand it as a set of activities aimed at promoting goods in retail outlets or, to put it simply, stimulating purchases in the stores. Also, for us, merchandising in terms of shelf space management takes place on the sales floor between a buyer and a seller.
Merchandising has its own "rules" known as the "5 rights of merchandising". The classic ones are: the right products, at the right place, at the right time, in the right quantity at the right price. The scope of tasks is quite broad and concerns many areas of the retailer's business. For this reason, the merchandising function can be performed both by a separate organizational unit and be subordinated to one of the business departments. The pros and cons of various approaches to organizing a merchandising department are discussed in this blog.
While performing their job, merchandisers:
- collaborate with category managers who communicate with suppliers, manufacturers, and distributors, ensuring that sales plans and merchandising strategies are properly executed;
- allocate product categories and promotional items on the sales floor and the shelves depending on their profitability and/or other current goals of the retailer;
- analyze the impact of the display on sales.
In general, a merchandiser has two main goals:
- Customers can find and buy the goods they are looking for in your store.
- Customers should buy more goods than they intended.
Since more than one department in the chain is working to achieve these goals, each has its KPIs, which may overlap and sometimes conflict.
When goods move from the supplier to the customer in the store, commercial and category managers search for products and form an assortment, buyers order them, logistics deliver them, merchandisers create planograms, and retail outlet employees put the goods on the shelves. It is difficult to determine who in this chain has performed better, and often someone "pulls the blanket over.”
While working with our clients, we have seen different ways of subordination of merchandising functions in companies. In some organizations, merchandisers were part of the commercial department, while in others, there were entire departments, or they were represented by a structural unit of a particular department (marketing, commercial, operational, etc.). Any of the options has its logic, its pros and cons. And in each of them, this managing department can influence merchandisers, putting its interests at the forefront. Let's take a closer look at each of the options.
- Merchandisers subordinated to category managers
Subordination of merchandisers to category managers is a widespread practice. The explanation is quite simple: it is the category manager who keeps a large amount of data that merchandisers use in their work.
The category manager is responsible for everything that happens to the category: filling, availability, and location on the shelves and within the store.
If we talk about small chains, this model is most suitable for them because, due to the volume, there is no need to hire a separate merchandiser. Therefore, the category manager performs the function of forming the layout and controls how the goods are placed on the shelves.
If you entrust merchandiser functionality to category managers, it is worth remembering that they often prioritize the financial performance of their categories. Among the advantages of this approach is that the layout can indeed be formed taking into account the financial performance of a particular SKU.
But at the same time, every manager prefers that their products take up as much space on the shelves as possible. For the sake of listing, they can add new items to the assortment; for retro bonuses, they will import more goods to achieve the turnover rate; for the sake of deferred payment, they will allocate more shelf space to a particular product and/or brand or supplier, taking over the merchandising functionality. If this product is a fast-moving one, and the sales floor employees do not have time to replenish the display, we will get empty shelves, which are the responsibility of the commercial department. There are also issues with monitoring the planogram implementation.
We are not stating that category specialists are not doing a good enough job laying out. We know they have a lot of work to do in a category. And the display itself takes a lot of time to make effective for the store as a whole.
That is why it is vital to have a separate person who controls how much space is allocated to the category and which price segments are represented within the equipment and brands. Of course, there is a large share of assortment management functionality here, but you can't do without merchandising.
In conclusion, we can say that it is very beneficial to have a category manager perform the functions of forming the layout:
- For small chains.
- If you know that the store will maintain a balance of an active profitable assortment, there will be no freezing of funds in inventory, and there will be a fair distribution of categories/brands according to agreements with suppliers.
- Merchandising as part of the operations department
The function of forming and controlling the layout is assigned to the operations department when the management sees planograms, in addition to their primary functionality, as a tool for minimizing labor hours. This means that employees will have fewer visits to the warehouse, less time to sort goods, etc.
The advantages of this model of shelf space management include a proper and very scrupulous level of control over planograms and, indeed, saving people's time and the company's money.
However, for the operational department, merchandising is a secondary task, so attention to other issues may be reduced. Also, in practice, this model of shelf space management can be less profitable due to limited communication with the commercial department.
- Influence on merchandising of the marketing department
There are cases when merchandisers are merged with the marketing department.
Theoretically and historically, merchandising and marketing can overlap. This is realized, for example, in the way that it is easier for marketing to form promotional zones. However, marketers, of course, have their own tasks and interests. In particular, they analyze customer behavior, increase demand for goods, decorate retail space, and work with vendors' marketing budgets.
We can see that arranging merchandising functions in different departments has its own internal motivation and can face different kinds of problems. If merchandisers are subordinated to category managers, they will, of course, do what they are told by their direct supervisors, pushing the issues and needs of the outlet into the background. The same situation will occur when subordinating to the marketing or operations department, which have their own interests that are not related to those of category managers.
Generally speaking, merchants sell shelf space and hunt for deferred payments, listings, and retro bonuses; the operations department is interested in gross sales, marketers – in promotions and marketing budgets. And each department can have a varying degree of influence on the planogram, i.e., on merchandisers, based on their priorities.
Conflicts of interest and contradictions between KPIs of different departments are present almost everywhere and always. And the retailer's goal is to find a balance to achieve the main common goal of the business.
Separating the merchandising function into a department is one of the guarantees of balance and efficiency
The interests of different retailer departments should be taken into account equally in the management of the layout because the merchandiser uses all categories of indicators in his work: quantitative, qualitative, financial, and behavioral. At the same time, they have their KPIs on the sales floor: compliance with planograms, displaying the full range of products, and display efficiency.
In our opinion, the best way to prevent conflicts of interest and distortions in large companies is to separate merchandising as a function into a separate independent department that would report directly to top management.
When the merchandising department is a separate, independent structural unit, all requests, and suggestions are equal. And merchandisers can do what they are responsible for: plan, organize, and control the display.
In this case, the merchandisers:
- manage the display both at the macro level (i.e., at the level of the floor plan, distribution of categories) and at the micro level (planogram of a particular showcase, shelving for a group of goods);
- find the best option for placing certain goods without pressure from categorizers or commerce;
- make decisions about the effectiveness of the assortment and the introduction/removal of goods from it not based on the wishes or instructions of specific departments but the analysis of the planogram and sales;
- control the implementation of the planogram, for which they are responsible as the main focus of their work.
To build a planogram, a merchandiser uses a large data array from different departments. And we believe that the most effective organizational solution is to have a separate department to collect, store, and analyze this information. Regulated communication between departments, minimizes chaos, human error, and conflicts of interest.
Regulation is essential when you have a large business. Ideally, you should definitely split merchandisers into a separate departments if you have a chain of 35 or more stores.
The correct implementation and control of the planogram is very important. Based on our experience, we can confidently say that the effectiveness of display control can be reduced when merchandisers are not allocated to a dedicated department with clear KPIs.
At the same time, there is no definitive answer to the question of which organizational structure is ideal from a merchandising perspective. Much depends on the specific circumstances, the size of the company, the presence and influence of external merchandisers, suppliers, etc.
Based on our experience, we at LEAFIO can advise large and mature retailers that the merchandising department should be a separate structural unit of the retailer, equal to other departments involved in the sales chain.
If everything is organized and works systematically, a separate department has checklists, employees can check out and arrange goods at the opening of the store, help during promotions or holidays.
The realities and impact of merchandising as a component of sales also change over time, evolving even at all levels. While innovation and experiments play a central role in retail strategies, consumer awareness of retailers' tricks is constantly growing. In such circumstances, digital technologies and a strong analytical base are playing an increasingly important role in sales and display. Companies need to stay ahead of consumer expectations.
A solution that helps to optimize and automate processes will help with this. LEAFIO has solid experience in this area, and we are ready to help you achieve your business goals.
Our software solution LEAFIO Shelf Efficiency will increase productivity of all departments and employees involved in merchandising, regardless of your business' organizational structure, in several directions at once:
- it will establish a business process for managing shelf space so that it is effective regardless of which department it is located in;
- save time, as it allows you to create and modify planograms faster than you can do in graphic editors or Excel;
- monitor planograms in stores without going to the outlets;
- create an analytical basis for merchandising and, optionally, for the associated supply chain: that is, you will be able to plan and analyze your actions relying on the power of artificial intelligence.
If your company has not yet formed a merchandising department, LEAFIO Shelf Efficiency, in synergy with our support, is an excellent and effective set of tools for its creation and development.
Let’s organize your merchandising together!