BASIC RETAIL PRINCIPLES

Prepared for : PMA Members

Category Management
The principles outlined in the category management section are based on many years experience in retailing and proven
fundamentals. They are presented in a format to encourage you the retailer to work on these principles within your business. By
the very nature of retailing, markets and customers will change over time. Retailers must understand and mange this information
through category management. Due to the limited amount of time available in the review, the principles will be limited in there
scope to generic retail principles.
Managing your retail business through category management improves your knowledge and ability to react quicker to the
customer’s wants and needs. As a retail owner you need to have at least 15 categories based on product groupings within
your store. You can also break down each category into sub categories for further analysis. The categories that you establish will be
the basis of ongoing management across key performance indicators (KPI’s) that you want to manage within your business.
The categories you chose should be based on product types or groupings. If you are in food for example your categories would be
your menu offer for example: sandwiches, cold drinks, coffee, cakes, salads, donuts. If you are in home wares categories like:
gadgets, dinnerware, saucepans, kitchen ware, and glass ware are some examples.
How good is your collection of data? To collect information on categories you need to ensure that you have a suitable cash register
or point of sale program that will show the various indicators of the business.
By defining your categories you are laying the foundations on which to build your retail business.
These principles reflect my own views and does not necessarily reflect the views of any other entity or company. The principles
provided in this document may not produce positive results. Therefore you must make your own assessment of the principles. Any
commercial decision by you to implement the principles is at your risk and not any other entity or company.

Ken Tickle
Astanda Pty Ltd
ktickle@pacific.net.au
www.mfp.net.au
Mobile 0419 419 634
 The 10 Basic Principles
• Embrace category management

• Build product family trees/ product mix

• Implement sound Information Technology

• Understand Key Performance Indicators

• Develop forward Open To Buy budgeting each month

• Quantify your Profit and loss outcomes

• Set a cash flow budget

• Build the business equity

• Manage the outcomes monthly

• Build a partnership with your suppliers

KEN ©
TICKLE
Who is Your Customer? YOUR CUSTOMERS:

AGE OF PRIMARY CUSTOMER:

The Principle: Female %
Understanding who your customers are is critical in Male %
getting your product offer right in your store.
Successful retailers will agree that they fully understand TYPE OF CUSTOMER:
their target customers wants and needs. A retailer must
identify the top five customer attributes and type of TYPE 1 %
customers that visit the store. Profiling the customer in
your store needs to be ongoing. TYPE 2: %
Steps to Complete;
1. Market research on customer buying behavior and TYPE 3 %
profiling.
2.Identify your target customer. SPENDING PROFILE: low medium high
3.Develop the relationship with your customer through AVERAGE SPEND: $
customer service and selling skills.
SHOPPING PATTERNS WEEK DAYS:
Attached are some ways of getting information on your
customer: 10am-12pm %

EXIT POLLS: as per questionnaire attached. 12pm-2pm %

2pm-4pm %
POINT OF SALE INFORMATION: Captures information
at time of purchase e.g. post codes, average purchase, 4pm-close %
number of units and other relevant information.
SHOPPING PATTERNS ON WEEKENDS:
CONVERSION RATE: the % of customers who enter the Comments:
store and purchase.

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
Exit Poll a sample for you to use in your business
Questions Very Good Good Poor

Where our staff friendly?

Did they know about our

products?

What do you think about our

product range?

How do our prices compare?

How do you rate the cleanliness

of our shop?
Was it easy to move around in
our shop?
How convenient are our
shopping hours?
What is your overall opinion of
our shop?

Will you shop with us again? YES NO

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
 POINT OF SALE a sample for you to use in your business

Post Male/ Age Age Age Age Age Senior Product Average
code Female Under 25 Under 35 Under 45 Under 55 Under 65 Citizen Category Spend $

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
 YOUR CATEGORIES:
What are your Category Sales
%
Growth, Stable,
Declining
Sales categories?
The Principle:
Category management is an important tool required in
your retail business to maximise the sales and profit
margins of a category or group of categories.

A category is an assortment of SKU’s (stock keeping units

that the customer sees as reasonable substitutes for each
other.

An analysis of categories through POS systems or manual

cash registers is a fundamental requirement for the retail
manager .

Identifying growth categories, declining categories and

stable categories is part of this analysis.

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
A basic form to collect sales by category

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
How does this link to your stock and floor space?
Category Sales per year % Stock level at retail % Floor space %

Notes:

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle
©
What is your YOUR PROMOTIONAL PLAN:

promotional plan? Event Examples Point of

Difference
The Principle: New Lines

Promotions need to be designed to bring more

customers into your store and to keep them coming back
to see your new products or offer. Loyalty

Some promotions do not work therefore it is important to

plan and measure the results of all promotions to learn Major Events
for the future.
The promotion needs to be focused on core customers.
All Year
In general you should run promotions for no longer than
2 weeks. They can educate customers about your
products, market new items and provide a means to
market your business within your retail precinct . Mega Sales
It is a good principle to have a promotions calendar to
identify your major events.
Special events
Your point of difference to other retailers should be part
of the promotion e.g. service, range, warranty.

Trends

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
 PROMOTIONAL CALENDAR
NO: MONTH EVENT/T SERVICE OR PRODUCT FOCUS METHODS/MEDIUM TOTAL PRODUCTION COST STAFF ADVISED REMARKS ON PROMOTION
ITLE
DISPLAY/POS/TIC
THEME SUBCATEGORY EMPHASIS KETING PLANNED ACTUAL

1 START

FINISH

2 START

FINISH

3 START

FINISH

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
 What are your
Key Performance
Indicators?
The Principle: YOUR KPI’s:
Key Performance Indicators (KPI’s) enable you as a retailer to understand First Margin %
what is happening within your categories and business each day. It is very
important to have information collected and summarized across a range of
KPI’s by category. This can be done through your POS or cash register. Markdowns %
These KPI’s are detailed on the right and are the most important for
successful retail management. There are many other KPI’s that you will also
need to monitor. Shrinkage %
Your accountant can help you in quantifying all of these within your
business. It is important to work with your accountant to maintain good
financial controls in your business.
If you have a POS system, talk to your software provider to ensure reports
Final Achieved GP %
are available from the system that can deliver KPI’s by category.
Stock Turn Average

Breakeven Sales $

Orders Committed $

Conversion Rate %

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
 BUYING MARGIN
(The First Margin / Prime Margin )
Cost Base Mark up % Recommend Potential Buying Margin
On Cost Base Retail Price RRP $ Profit Profit/RRP %
=Cost+MUP$
$100 20% $120 $20 16.6%
$100 25% $125 $25 20.0%
$100 33% $133 $33 24.8%
$100 40% $140 $40 28.6%
$100 50% $150 $50 33.3%
$100 75% $175 $75 42.9%
$100 100% $200 $100 50.0%
$100 125% $225 $125 55.5%
$100 150% $250 $150 60.0%
$100 200% $300 $200 66.7%

Mark on Cost to achieve Buying Potential Buying Margin

Margin Profit divided by Cost Profit divided by RRP
KEN ©
$50 / $100 = 100% $50 / $150 = 33.3%
TICKLE
What is Your Best Sellers
your buying plan? CATEGORY CORE ITEMS

The Principle:
All retailers must go into the market with a shopping list
to buy for their customers.
The shopping list must be planned in advance to ensure
that the product offer is well thought through. This is
important in making sure that you are never out of
wanted products for your customer.

In the supermarket industry it has been quantified that

about 3% of total turnover is lost to out of stocks.

The retailer should develop efficient means by which

they can manage the replenishment process.

PRODUCT RANGE PLAN:

The attached product range plan is a model used to
identify core products within each category. It focuses
the retailer on buying for the target customers.

Retailers need to develop a range plan in each category

of the business.

The retail principles should be read in conjunction with the attached consultants report. Ken Tickle ©
 What is Merchandise Financial
Planning?
A buying plan is a “living and breathing” plan
put in place by retailers to manage inventory levels
at category level by using key KPI’s from the information
base.

The MFP uses retail inventory (retail prices) rather than

cost. This means all KPI’s are planned at retail.

Improvement in inventory management impacts on

profitability, cash flow product mix , visual presentation
and customer relationship.
KEN ©
TICKLE
 YOUR PRODUCT RANGE PLAN
CATEGORY: 1ST PRODUCT FEATURE 2ND PRODUCT FEATURE 3RD PRODUCT FEATURE

CUSTOMER PROFILE: %
GENDER:

AGE: %
SPENDING PATTERN: %
%

%
Category
%

% %

PRODUCT FEATURES
AND BENEFITS:
%

%
%
The retail principles should be read in conjunction with the attached consultants report. % Ken Tickle ©
 6: 1: 5 Principle
Actual Sales $925,000 $980,500 UP 6%
GP $ $277,500 $304,500 UP 1%
to 31%

less Rent 462 psm $ 46,250

less Wages & on Costs $ 92,500

less Depreciation $50,000 / 5 Years $ 10,000

less Interest 8.0% $145,000 $ 11,600

less Other $ 29,650

total Expenses $190,000 $180,500 - 5%

equals EBT (Earnings before tax) $ 87,500 $124,000 UP 42%

KEN ©
TICKLE
 Building the net worth of the retail business

Retail Inventory Product & Range Merchandise

Management Planning Financial Planning
- Open to Buy-
Reporting controls Customer profiles
Setting retail goals
Sales Planning Sales Categories across categories
Buying Margin Category action plans Stock turn
Markdowns Promotional Plans Cash flow
implications
Shrinkage Product family tree
Gross Profit Profitability
outcomes

BUILDING A STRONG BUILDING A STRONG BUILDING A STRONG

KEN ©
PROFIT MARGIN PRODUCT OFFER BALANCE SHEET
TICKLE
ACTION PLAN category
management
IDENTIFY ISSUE ACTION TO COMPLETE PERSON IN CHARGE DUE DATE COMMENTS
Disclaimer- Astanda Pty Ltd

This disclaimer has been provided on the following basis:

A person who relies upon the category management information contained in this document does so at their own risk.
In accordance with our normal practice, we emphasise that the recommendations contained in this document are based
on industry sources. However, as no independent verification is possible, neither the firm nor any employee of the firm takes
responsibility for any errors that may occur, however caused. The accuracy of those assumptions cannot be and is not,
guaranteed. As the document involves recommendations which can be influenced by a number of unforeseen events or by the
management decisions affecting the project or implementation, no warranty can be given that the recommendations contained
will achieve the desired outcome. No officer, employee or agent of Astanda Pty Ltd has the authority to waive or modify
this Disclaimer In any respect in any way whatsoever.

Astanda Pty Ltd des not represent or warrant that the figures will necessarily apply with respect to the operation of
individual operators.

This report may not be reproduced or used in part or in whole , without prior consent of Astanda Pty Ltd.
All images in this document are positional only and require image rights approval prior to marketing and use.
RETAIL FINANCIAL DISCIPLINES 
Understanding your retail business to manage future challenges. 

In today’s retail environment it is critical that retailers face the facts and start managing their business into the 
future with a particular focus on retail financial disciplines.  

Retailing is a fast changing industry in which you must be able to quantify important financial information. Both 
today and in the future this will help you build a sustainable winning product offer for your customer. The result ‐ 
business growth and the freedom to pursue new directions and innovations as your customers expectations change 
and as new competitors enter the market.   

These disciplines will also result in a higher quality visual offering.  As retailers, when forced to plan the product 
range, will think about space management, hot spots, visual merchandising and traffic flows within the store.  

“Close enough” is not good enough and “gut feel retailing” will not work effectively for you to maximise the 
potential of the retail business and the return on your substantial investment. It is therefore important that you have 
the management “culture” required and have people bigger than the job that will take ownership of the planning 
methodology required in retail financial disciplines. 

What are the retail financial management steps that will enable you to manage this challenge? 

1. Embrace category management: All retailers must ensure superb category management principles are 
present. This enables you to micro manage the business across the categories and allows further “drill 
down” to sub categories. It will also focus you on category strategies to improve store traffic flow, increase 
transaction size, and increase gross profit. 

2. Product family trees/ product mix: Retailers must build their product range for their customer. The family 
tree is a method that allows the scope of the mix to be determined well in advance of the purchasing 
decision. This is often referred to as “building a buying plan not a spending plan”. The facts are that “less is 
more” in retailing. This means that 80% of sales will come from 20% of the product range‐ therefore how to 
plan to ensure that the 20% is constantly on the shelves is an ongoing issue for many retailers. 

3. Implementation of Information Technology: In today’s high tech world there is no excuse for not having up 
to date information on your business performance. Inventory is your biggest asset and not to understand 
best sellers, worst sellers, inventory values and importantly your future purchase orders will result in 
reactive management rather than proactive management. 

4. Understanding Key Performance Indicators (KPI’s): There are many KPI’s in retailing but quantifying your 
buying margin, sales , inventory levels, markdowns , stock turn, purchase orders, final GP, and shrinkage by 
category are basic requirements that must be understood by the your management team.  To have a culture 
that talks about selling “heaps, lots and plenty” is not industry best practice. 

5. Merchandise Financial Planning (MFP): This is often referred to as Open to Buy (OTB) and without doubt is 
the single most important retail financial methodology that retailers must embrace. This involves planning 
your inventory levels (and therefore range) by category by future months using the retail KPI’s. This provides 
a wonderful understanding of the direction of the business and allows you to go into the market with 
confidence to purchase to a predetermine budget. It will allow you to see “what if” scenarios well in 
advance. From this buying plan a “shopping list” of product is developed by month by category. 

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 6. Profit and loss outcomes: Retailers must put in place adequate monthly Profit and Loss controls that allow 
confirmation of the actual Net Profit of the business. This must include accurate stock on hand information 
(from the POS) so that confirmation of final GP and expenses are in a format that can be reviewed ongoing. 
Relying on your accountant’s yearly accounts after the financial year closes may not be sufficient to allow 
you to react to trading trends during the year.  The MFP is the methodology that allows the Profit and loss 
outcomes to be planned well in advance. 

7. Cash Flow management:  A detailed understanding of your cash flow needs is part of the planning required 
in retailing. Once a detailed buying plan is in place and you understand the profit outcomes from this plan, a 
forward cash flow can be prepared to ensure adequate capital is available to fund the plan. 

8. Business equity: Business owners need to ensure that the business builds retain earnings to fund growth 
and allow for possible passive investment activities to take place e.g. purchase of a building, superannuation 
and / or investment in shares. Putting in place adequate planning and management controls will provide an 
improved focus on the net assets of the business. This also allows you to quantify your return on the 
investment in the business.  

9. Management of the outcomes: Ongoing (monthly) review of your business KPI’s across categories provides 
a wonderful focus for the management team. Taking a proactive approach in both under and over 
performance of categories and the business will mean you approach the market with much more 
information that results in improved decision making. Remember that “knowledge is power”. 

10. Negotiation with suppliers: This final step also must be ongoing. It is not good enough to allow your 
suppliers to dictate range, purchase orders and/or placement of product without your input. You must go to 
the supplier well briefed on your requirements and therefore build a partnership with the supplier. They 
must understand your requirements for stock turn, your requirements for margin growth and your 
requirements for product range.  

These 10 steps will allow owners to improve the wellbeing and direction of their business, will lead to a sustainable 
winning product offer and will ensure that retailers have control of basic retail principles. Businesses will continue to 
get into trouble but by having a well thought through plan risks will be minimised and opportunities capitalised on.  

Prepared by: 

Ken Tickle    B Comm, FCPA 

ktickle@pacific.net.au 

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