The merchandise traffic cop

Starting out in 1959 as a single retail shop for ski and tennis buffs in southern California, Sport Chalet Inc. has grown over the years into a regional chain with 45 stores offering gear and apparel for nearly every sport and recreational activity under the sun, from baseball, badminton and boxing to rugby, racquetball and roller hockey. Make that everything under the sun in Nevada, Arizona and, starting this year, Utah, as well as California.

The expanded range of products has coincided with a move away from the small shop environment to the retailer’s typical 42,000-square-foot store arranged in multiple-boutique style to give special attention to different product categories. Combined with its expanding geographical base, Sport Chalet’s expansive merchandise offerings are thrusting the retailer into a whole new level of challenges that have led to its decision to spend more than $6 million this year on new merchandise and financial planning systems.

“It’s paramount for us to leverage our investments so we can add stores and support our stores without excessively growing overhead,” says Howard Kaminsky, chief financial officer.

“As we continue to create density in our current markets as well as expand into our fourth state, Utah, over the course of calendar 2007, we are committed to offering the best in performance, technical and lifestyle merchandise and services to meet the needs of our customers,” chairman and CEO Craig Levra says in a recent quarterly financial statement. “We look forward to maintaining the momentum of the past year and continuing on our growth track.”

Web-enabled merchandising

But to realize these goals, the retailer will need to improve how it chooses and promotes merchandise, how it figures the amount of space designated in each store for different products, and how it allocates assortments of products across its growing number of stores in areas as different as coastal southern California and the dry and mountainous Arizona, Nevada and Utah.

In other words, it needs a more effective and web-enabled merchandise planning system. Sport Chalet likes the merchandise planning software it has used for years, MarketMax from SAS Institute Inc., which provides useful sales forecast information to help plan merchandise displays and assortments, Kaminsky says. And it will probably continue using MarketMax for a while, he adds.

But the application works outside of a web environment with information presented on desktop spreadsheets, making it nearly impossible for multiple teams of managers at the headquarters and store levels to collaborate on merchandise plans and quickly respond to sudden opportunities or problems, Kaminsky says.

So, crucial information that headquarters managers dig up on hot products and trends that could spur sales and profits never turns into action in stores, or vital information that store managers have about local demand never makes it to headquarters.

Moreover, information on product trends that merchandise managers have isn’t combined with demand forecasts devised by financial planners or with information on inventory and supply chain insights compiled by distribution managers.

Beyond spreadsheets

“So we’re not able to see and share forecasts on a changing merchandise mix,” Kaminsky says. “Like last winter with dry weather, stores weren’t selling winter sports products, but we expected water sports products to pick up the slack.

“We may know that at headquarters, and plan to move some hot summer-related apparel to the front of the store while moving winter stuff back for two weeks, but when we try to transfer that information to stores, it doesn’t happen. We may share the information in conference calls or in wall presentations at meetings, but the information is prone to error. Someone makes a copy of a spreadsheet during a presentation, but then while carrying out the plan doesn’t realize he’s looking at the wrong version of the spreadsheet.”

This August, however, Sport Chalet will go live with SAP for Retail, an enterprise software system built on SAP AG’s web-enabled NetWeaver platform. Integrated with MarketMax, the new platform will enable the merchandise planning system to pull in more operations data that can be simultaneously shared through web browsers with executives and store and department managers throughout the company.

“It will allow us to pull together core business processes around merchandising, demand and revenue planning, supply chain operations and store operations,” Kaminsky says.

Catering to customers

Indeed, the new system will enable a whole new level of planning, providing for low-level planning by departments, stores and cost centers that share plans with headquarters and multiple operations, including merchandising, marketing and supply chains, he adds. “This way we’ll be able to make sure the right merchandise is there in stores when it needs to be to satisfy customer demand, and that it’s gone when it needs to be—sold out in time so we don’t have to sell at steep markdowns.”

The SAP system, which was chosen and is being deployed with consultants and system integrators BearingPoint Inc., is capable of gradually replacing Sport Chalet’s existing collection of systems that were both home-grown and bought from a developer, says Andy Williams, managing director of the consumer markets practice at BearingPoint, where he heads up the Sport Chalet project.

The new system is designed to correct what are common problems in the retail industry, where merchandise planning is often fragmented among systems and operating groups—and at a time when retail industry competition is forcing merchants to cater more specifically to customer demand, whether in individual stores or across groups of stores or entire chains. “Many retailers don’t merchandise down to the right level of granularity, because they plan their merchandise for more of a national or chainwide market,” says George Lawrie, principal analyst with research and advisory firm Forrester Research Inc.

In a report released last month, “Consumer Centricity Takes Merchandising Into New Territory,” Lawrie and his co-authors contend that smart retailers are trying to tailor their in-store merchandise offerings to satisfy more segmented demand among consumers, but that many operate under ineffective merchandise planning processes that rely on year-old data on customer demand, fail to consider supply chain costs, and don’t share plans among multiple teams within merchandising departments, including those that prepare sales goals and product roll-outs, and those that allocate merchandise across stores and plan replenishments.

While merchandise managers may look at demand forecasts based on year-ago sales along with their gut feelings about fashion trends to plan merchandise buys and assortments, for example, they often fail to bring in pertinent information from corporate marketing managers on planned advertising campaigns, or local promotions planned by store managers. The result can be merchandise roll-outs that don’t coincide with actual demand across a store chain or within regional groups of stores or single locations, experts say.

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Merchandise managers who are isolated from other operations and don’t consider crucial information like supply chain costs, for example, can’t determine whether rolling a broader assortment of goods to particular stores would produce targeted profit margins after factoring in the costs of shipping.

Making it exciting

Merchandising plans to promote new versions of products in an effort to create a buzz with customers might wind up hurting sales and profits tied to related ongoing or discontinued products. “How to price new hot products without taking away from other products is a major challenge,” says Sahir Anand, retail analyst with research and advisory firm Aberdeen Group, a unit of Harte-Hanks Inc. “The best strategy is to balance price promotions among a full product line based on the retailer’s overall pricing model, such as steady discounting or generally higher prices supported by a high level of service. When retailers try to go outside of their regular strategy, such as when they try to promote certain products suddenly pushed into the supply chain, that’s where problems start for many merchants.”

That’s one of the main reasons Sport Chalet decided to upgrade its merchandising system, Kaminsky says. Operating with the old spreadsheet-based system can work when things are going routinely, but the reality of retailing is that unexpected developments are often what makes things exciting for customers and drives sales—for example, hot new items from suppliers, or sudden changes in weather that make demand for certain products either surge or die—and merchandise managers must be able to act quickly in concert with managers in finance, marketing and supply chains to make fast decisions on changing merchandise displays and pricing strategies.

“We need to be able to get on top of opportunities and problems before things go too far,” Kaminsky says. “We want to feel comfortable about committing to a promotion. We don’t want to have to wait until the next financial statement comes out to find out that we had great sales but that our related costs were way out of line, or that we under-spent our markdown budget and got stuck with too many products that didn’t sell in their planned selling period.”

Such challenges become even more difficult for retailers like Sport Chalet, which has 50,000 SKUs in its stores without counting all colors and sizes and is adding more as it enters new markets.

“The proliferation of SKUs is a major problem for retailers,” Anand says. “For example, if a retailer merchandises a desktop printer at a price discount along with an ink pack, is it really helping overall gross margin and sales? Is it helping or not helping the sale of paper, pens or binders?” Retailers need to know how such merchandising tactics are affecting sales and margins on complementary as well as non-complementary products, he adds.

Multiple applications

The SAP system, backed with XML and web services technology, is designed to address such issues by pulling data from multiple applications, including sales and inventory records, to produce reports on sales forecast by region, store or products from general classifications down to SKUs, while showing the impact on sales across multiple product lines and stores.

“Sport Chalet will have more visibility into pricing data and how well particular products are selling in particular stores, have better ability to time when and how to arrange and price merchandise in particular stores, and an improved ability to allocate products to stores to take advantage of how some products sell better in one region or individual stores than in others,” Williams says. “And everyone in different operating departments will have visibility into the same information.”

The system is also designed to be user-friendly for business managers, who will be able to configure ad hoc reports and what-if analyses viewed in graphical reports on a single screen, Williams says.

So if a merchandise manager is trying to decide whether to ship to a region of stores a new baseball mitt promoted by one of its suppliers, or to use the store selling space to display another suppliers’ mitts already in distribution centers or stores’ backroom warehouses, she can view in colorful graphs how each plan is likely to produce sales as well as profit margins by factoring in supply chain shipping costs, expected customer demand, the impact of other promotions and cost of in-store labor to receive a new shipment and arrange a new product display.

Although the SAP system is designed to be user-friendly, however, it still takes an extensive amount of training to assure that retail managers and employees know how to get the most out of it, Williams says. “There are all sorts of challenges when putting in a new system, and one thing you can’t lose sight of is the change management piece,” he says.

BearingPoint involved merchandise managers, store managers and others in deciding how to deploy the SAP system around Sport Chalet’s business processes, such as how they need to analyze data and who has access to it. The consultants directly trained and certified six “super users” in operating the SAP system. About 3,800 Sport Chalet employees, including headquarters managers and store staff, will learn the system over a several-week period leading up the system’s launch in August, Williams says.

“We’ve been very involved in this deployment from the CEO on down,” Kaminsky says. “We involved all levels of personnel to make sure we’re getting the results we expect and that the system has the controls we need to serve our customers.”

Art vs. science

Technology can’t do it all, of course, and merchandise managers will continue to inject some of their gut feeling into merchandise plans, experts say. “There’s a lot of argument today about art versus science in merchandise planning,” says Hung LeHong, an analyst with research and advisory firm Gartner Inc. “Merchandise optimization injects science into decisionmaking rather than art. But there’s no way a computer can tell you that you need a blue shirt here and a black shirt there. That’s a fashion decision. That’s art.”

But with its new web-enabled system, Sport Chalet will blend its art and science in a more systematic and effective way, Kaminsky says.

“When blending the art and science of merchandising, we’ll all have quicker access to accurate information,” he says. “So if things are turning out better or worse than we had expected, we will immediately know about it and can start asking one another questions about how to build on good things or fix problems.”