In today’s ever-evolving retail landscape, adopting the right merchandise financial planning (MFP) strategy is pivotal. It’s the cornerstone of optimizing profitability, aligning with customer needs, and navigating the ever-changing market. But traditional MFP often prioritizes margins over the very customers it aims to serve. The revamped approach focuses on a customer-centric strategy coupled with robust scenario planning, empowering retailers to thrive in an era of uncertainty.

Shifting focus: Customer-centric MFP

Traditionally, MFP revolved around maximizing margins and optimizing product assortments. While these remain important, a customer-centric lens is imperative. Retailers must leverage data and customer insights to tailor offerings and anticipate demand.

By placing the customer at the center of the planning process, retailers can anticipate demand, identify emerging trends, and deliver personalized experiences that resonate with shoppers. This shift empowers retailers to drive sales and profitability and forge long-lasting customer connections.

Aligning merchandising with financial goals

Effective MFP necessitates seamless integration with overall financial strategy. It’s not enough to simply analyze sales data and forecast demand; retailers must align their merchandising decisions with broader financial objectives. This means considering factors like budget constraints, profit targets, and capital allocation when making purchasing and pricing decisions.

This holistic approach ensures your merchandise strategies align with the company’s financial objectives. But, to make informed decisions, retail CFOs require a comprehensive view of financial performance at the macro (company-wide) and micro (store) levels. For example, what may work for one group of customers in a particular region or area on pricing and promotions may not work for others, creating significant problems with revenue planning and performance. A one-size-fits-all does not work for your customers and it’s certainly not going to work in retail FP&A.

The ability to drill down into micro financial data at the store level is crucial to a retailer’s ability to quickly adjust to consumer trends. And it remains one of the biggest challenges for retail CFOs when tackling the financial planning process.

It’s essential to understand merchandise and how it performs. Getting precise on the cost to serve and other variable costs at the store level is critical. Beyond getting products in stores via the supply chain, it’s necessary for retailers to strategically consider new fulfillment models and the associated impact on costs and margins.

A single version of the truth

For optimal planning, collaboration between the finance office and the MFP team is paramount for understanding return on capital employed, at scale and at the pace of modern retail. One of the most common things we hear from our Board retail customer community is the power of a single version of the truth.

Take for example Open-to-Buy (OTB). Having a fully integrated FP&A and MFP provides:

• Accurate inventory projections: Precise on-hand and closing stock forecasts enhance control of spend and inventory.
• Improved financial confidence: The office of finance can operate with greater certainty.
• Collaborative synergies: Breaking down silos between planning teams unlocks powerful synergies for managing resources effectively.

Scenario planning: anticipating and adapting to change

The retail landscape is inherently unpredictable. To thrive in this uncertainty, retailers must embrace scenario planning as a strategic tool for anticipating and adapting to change. By exploring various hypothetical situations and assessing their potential impact on sales, margins, and overall performance, retailers can:

• Develop better contingency plans: By considering a range of possible outcomes and developing contingency plans for each scenario, retailers can better prepare for unforeseen challenges and capitalize on emerging opportunities.
• Increase agility: Whether responding to shifts in consumer behavior, navigating supply chain disruptions, or adapting to regulatory changes, scenario planning enhances agility and resilience.

Customer-centricity is the future of MFP

Mastering MFP is more important than ever in today’s retail environment. By prioritizing a customer-centric approach, integrating financial considerations into every aspect of the planning process, and leveraging scenario analysis, retailers will improve performance and achieve financial goals.

Ultimately, and critically, retailers who adopt this methodology will better position themselves for success in an increasingly competitive marketplace.