Majority of retailers use a form that summarizes the basic budgetary information for a given merchandise grouping during a specified period normally for a period of six months. The retailer must select the control unit for which projections will be made, before making sales estimates. The “control unit” is the merchandising grouping that serves as the basic reporting unit for various types of information namely, past, present and future. The retailer has the choice to estimate future sales for an entire store, for a merchandise division or department, or for an individual product-line or item. The most three acceptable control units can be merchandise groups, merchandise classes and merchandise categories of all these three, experts recommend merchandise categories as the basic control unit as it is generally much easier to aggregate the information than it is to disaggregate information, i.e., breaking down merchandise groups into classes and categories. This attempt increases the accuracy in estimating future sales and to get greater degree of control throughout the entire budgetary process. Sales planning in Retail Merchandising involves two types of estimates namely annual and monthly.
1. Annual Sales Estimates
A thorough examination of retailer’s past sales records is the alpha point for making sales forecasts for each merchandise category-better known as control unit. By plotting the actual sales forecasts for each control unit over the last few years, the retailer can identify part sales patterns and gain some insight into possible future sales trends. This approach to sales estimates is generally referred to as time series forecasting . It represents a simple, inexpensive and used method for getting reasonably reliable estimates of sales in the near future. Time-series forecasting is generally quite appropriate for staple merchandise, somewhat less appropriate for fashionable merchandise and totally inappropriate for faddish merchandise.
Annual sales for each merchandise category are estimated largely by means of judgment or qualitative methods. Two such methods are namely, Fixed and Variable Adjustment Procedures.
- Fixed Adjustment Method. Under this method, the retailer adjusts last year’s sales by some fixed percentage to estimate the coming years sales. The direction i.e., plus or minus and the size i.e., the exact percentage of the adjustment are based on the retailers part sales experience with each merchandise category. Fixed adjustment method usually works reasonably well in the estimating future sales if a clear and stable sales trend has been established. However, when the part sales pattern are erratic. a fixed percentage adjustment is inappropriate.
- Variable Adjustment Method. Under this method, the sales estimating starts with an examination of the past sales history of the merchandise category. Based on the sales history, the forecaster determines a percentage change that appears quite reasonable. The figure is then adjusted upward or downward by a degree that depends on the nature of the merchandise and its exposure and sensitivity to environmental influences. To make these adjustments, the retailer takes into account the external and internal environmental factors. The external environmental factors are: (a) general prosperity of local and national markets (b) rate of inflation (c) chances for recess nary developments (d) discernible trends say growth or decline in the size of the target population (e) changes in the demographic make-up of the population (f) developing legal and social restrictions (g) changing patterns of competition and (h) changing consumer preferences and life styles. The internal factors to be considered while adjusting the sales estimates include (a) changes in the amount and location of shelf or floor space devoted to the merchandise category (b) changes in the amount and type of planned promotional support and (c) changes in basic operating policies say, longer store hours or higher level of service.
In short, the annual sales estimate for a particular merchandise category equals the previous years sales plus or minus a fixed or variable percentage adjustment. The adjustment factor is a fine blend of forecaster’s judgement, experience and analytical skill.
2. Monthly Sales Estimates
Retail planning periods typically are based on one month or several month periods. For example, some retailers estimate sales for products for the three month winter season or six month rainy and winter season. The best operational estimate for budgetary planning purposes is monthly sales estimates. Estimating monthly sales involves three steps namely (1) Making annual sales estimates (2) Determining estimated monthly sales and (3) Adjusting monthly sales estimates using monthly sales index. The following box clearly gives the estimation of monthly sales.
Once the monthly sales index is calculated, it can be used to adjust the future or estimated annual and average monthly sales to obtain the planned monthly sales.