This study is focused on small retail stores of Jammu province of J&K and examines the relationship between retailer's perceptions of the trading area and their assortment policy decisions and their reported performance levels for a FMCG product category. The study focuses on the external environment as well as internal environment of the small stores which affect the decision making of the assortment. Retailers keep a small range of assortments as market uncertainty is high. Moreover, the study focuses on the impact of store attributes on the assortment policies. This study controls for both store space and the store location factors. The impact of customer profile and the local market environment faced by small retailers is also analyzed as an important factor towards the assortment policy decision. A grounded theory based analysis was carried out. The analysis brought out four criteria used by the retailers in selecting products for their store based on the evaluation of the external and internal environment.