Contours of Retailing Management [1 ed.] 9789350434321, 9788183186650

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CONTOURS OF

RETAILING MANAGEMENT S.A. CHUNAWALLA B.Com. (Hans.), D. Pharma, MBA, Communication Consultant, Benzer, Borivali CN). Murnbai-400 103. E-mail: [email protected] [email protected]

(

EDITION: 2009

)

lUI GJIimalaya 4PuhlishingGJIouse MUMBAI • NEW DELHI • NAGPUR • BANGALORE • HYDERABAD • CHENNAI • PUNE • LUCKNOW' AHMEDABAD' ERNAKULAM

©

s. A. CHUNAWALLA, 2009 No part of this book shall be reproduced, reprinted or translated for any purpose whatsoever without prior permission of the author and Publisher in writing.

ISBN :978-81-83186-65-0 . Revised Edition : 2009

Published by

Mrs. Meena Pandey for HIMALAYA PUBLISHING HOUSE PVT. LTD., "Ramdoot", Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004. Phones: 2386 01 70/2386 38 63, Fax: 022-2387 71 78 Email: [email protected] Website: www.himpub.com

Branch Offices

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Nagpur

Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018. Phone: 2738731, 3296733 Telefax: 0712-2721215

Bangalore

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Hyderabad

No. 2-2-1 167/2H, 1st Floor, Near Railway Bridge, Tilak Nagar, Main Road, Hyderabad - 500 044. Phone: 65501745, Telefax: 040-27560041

Chennai

No. 85/50, Bazullah Road, T. Nagar, Chennai - 600 017. Phones: 044-28144004/28144005

Pune

First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth, (Near Prabhat Theatre), Pune - 411 030. Phones: 020 - 24496323/24496333

Lucknow

C-43, Sector - C, Ali Gunj, Lucknow - 226 024. Phone: 0522-2339329

Ahmedabad: 114, "SHAlL" 1st Floor, Opp. Madhu Sudan House, C.G.Road, Navrang Pura, Ahmedabad - 380 009. Phone: 079-26560126, Mobiles: 09327324149,0931467413 Ernakulam

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CONTENTS 1. Introduction to Retailing

1 - 15

2. Retail Organization

16 -23

3. Retail Theories and Formats

24-46

4. Retail Planning

47 -53

5. Store Location

54-64

6. Store Design and Layout

65-74

7. Supply Chain Management (SCM)

75-99

8. Customer Services

100 -107

9. Pricing of Merchandise'

108 -113

10. Advertising and Promotion

114 -130

11. Human Resources in Retailing

131 -137

12. Retail Accounting

138 -145

13. Understanding Consumer Behaviour

146 -154

14. IT in Retailing

155-161

15. Brand Management in Retailing

162-171

16. Distribution and Retailing

172 -194

17. Operating a Retail Business

195 -199

18. International Retailing

200 -202

"This page is Intentionally Left Blank"

RETAIL MARKET India ranks fifth in the list of30 emerging retail markets, throwing a vast retail opportunity. In all, there are 12 million retail outlets, out of which five million are in urban India. The current organized retail is minuscule - just two per cent of the total retail market worth $ 180 billion globally. Yet, it is growing at a healthy 8.5 per cent on an annual basis and is likely to become 20 per cent by 2CI0 end. In India in dollar terms, organized retail has grown three-fold from $ 11 billion to $ 33 billion. It has the potential to grow to $ 80 billion in the next few years. Consumer spending growth is at an average rate. India has retail outlets numbering about 12 million, as against 1 million outlets in the US. Of these 1.2 crore outlets, only one twentieth are bigger than 500 sq. ft. in terms of floor area. More than 80 per ·cent of these 12 million retail outlets are run by small family businesses. These neighbourhood stores employ 21 million people directly or indirectly. As against this the volume of retail market in the US is 13 times that of India with just 10 lakh outlets. We feel tempted to call India a nation of shopkeepers. But Indian shopkeepers are in the unorganized sector, and the level of service rendered to the consumers is very low. Accessing these outlets is also problematic. Mostly these outlets sell all and sundry items ranging from confectionery, cigarettes and soaps to groceries and consumer durables. These outlets are scattered all over the country, especially in the six lakh villages. Organized retailers constituting about 2 per cent are confined to major cities. With about 11 retail shops per thousand persons, India has the highest shop density in the world. There is one shop for every 20-25 families. In cities, the density is much higher. In the US, there are about 4 shops per 1000 population. Singapore has similar density. In the UK, there are nearly 5 shops per 1000 persons. In India, there are many shops, but they are smaller. Big retail would lead to fewer shops. In the last four years, the contribution of retail trade to the GDP has reached 13 per cent. Of the total labour force in the country, 7 per cent is working in the retail sector. The retail trade contributes around 10-11 per cent of our GDP. It currently employs over 4 crore people. Retail metamorphosis in recent years is to be seen to be believed. There is a slow but steady shift from the unorganized to the organized sector. Still, people resist the organized stores as they are too intimidating and perceived to be overpriced. Consumers also have a feeling that large stores spend heavily on promotion, and pass on the burden to them .. Small . outlets with lower overheads and reasonable margins become successful. The owners are hardworking, work beyond normal hours and accept low margins.

2

Contours of Retailing Management

But now people are slowly dropping their inhibitions and have started accepting the organized sector. In the US, the mom-and-pop stores were driven out by the organized sector. There is a feeling that this may be repeated in India. But this is unlikely. It has not happened in Europe and other Asian countries. India still has place for locationally convenient small stores. Here large stores also have to think of setting up a chain of stores closer home. Since Indian environment is totally different from that of the west, we are still not sure what Indian business model would be like. For every consumer product the average age of purchase has come down. Higher disposable incomes, younger people having money and mobility on the one hand.and deepening of organized retail development are a chicken-and egg situation. Who would have imagined hyper-markets and other such formats a few years ago? Before locating a retail outlet, major retailers do undertake a survey of the kind of house and car ownership. A store is not just a retail outlet or conduit. It is becoming a marketing medium - a 'theatre of sales'.

WHAT IS ORGANIZED RETAILING? Organized retailing is a service-oriented professional set up, which provides consumers a pleasant shopping experience. There are two characteristics of organized retailing- consumer focus and professional management.

INDIAN RETAIL MARKET It is estimated to be worth Rs. 13,50,000 crore or $ 330 billion, though only a small part of it is organized. It accounts for three per cent at present. It is set to grow to 16 per cent by 2015. In 2004, the size of the organized retailing market stood at Rs. 28,000 crore, making up a mere three per cent of the total retailing market. Organised retail forms 20 per cent of the total retail sales in China. Organised retail is worth $ 14 billion in India. It will grow to $ 30 billion in three years. The share of organized retailer will increase from 2 per cent to 10-15 per cent. Unorganized retail still constitutes 97 per cent of the Rs. 13,50,000 crore retail market. It is the livelihood of 40 million people.It is expected for grow to $ 421 billion by 2011, and to $ 635 billion by 2015. It currently employs nearly 15 per cent of educated youth. It has the potential to employ 2 million people in the next 4-5 years. It can create 1-2 million jobs every year for the next decade. In the past five years, cumulative growth in retail has been 133 per cent. Mostly, it comprises small dad-and-mom stores. According to KSA Technopak, the organized retail is estimated to be Rs . . 35,000 crore in 2005, and is expected to grow to Rs. 13.51akh crore by 2010. Its growth rate is 2530 per cent every year. The contribution of the organized retail to the retailing sales is likely to rise to 10 per cent by the end of the decade (2010). It is estimated that organized retail would be worth $ 21.5 billion in 2010, another estimate puts it at $ 30 billion.

URBAN ORIENTATION Organized retailing is mainly confined to the cities and big towns. Urban areas are attractive for the companies, as they have the right kind of environment - higher disposable incomes, dual income families, aspirations and life-style suitable for such business, lack of time and premium on convenience. Metros are preferred for organized retailing.

Introduction to Retailing

3

EMPLOYMENT India employs 8 per cent of its population in retailing, as compared to 20 per cent in the US.

GOLD RUSH IN RETAIL Reliance has announced its proposed entry into the retail sector with an initial investment of Rs. 3700 crore. It is reported that Reliance has kept aside Rs.100 crore to get the trained manpower. Reliance proposes to buy 40 cargo aircrafts to carry perishables and other goods to their retail outlets. Reliance proposes to tie up with Sahakari Bhandar outlets in Mumbai. Mukesh Ambani of Reliance launched its first retail format - Reliance Fresh - in Hyderabad on Sunday, October 29, 2006. The store has been thrown open on Wd November 2006. This format will mainly sell fresh fruits and vegetables. There will be 11 more Reliance Fresh stores shortly. Reliance Fresh stores has an independent section for Pooja flowers. Reliance will open collection points in rural areas, which are close to farm lands. These will procure products from the farmers to be transported. Metro, the second largE.st retail chain after Wal-Mart, will set up a cash-andcarry outlet at Bhandup to retail merchandise. Reliance is planning to start sourcing operations from China by employing local people there for its private label business. Reliance is in tie-up talks with Sanyo. Retail sector CEOs salary has overtaken IT and call centre salaries. Retail has the potential to absorb 9lakhs employees directly, and many more indirectly. Mulund has 10 lakh sq. ft. retail space, Andheri 12lakhs, Kandivali and Goregaon 9lakhs each -in all Mumbai has 70 lakh sq. ft. retail space. In the next couple of years, there will be an addition of30 lakh sq. ft. Delhi, Bangalore, Chennai are not lagging behind. These centres have already attained a turnover of Rs. 35 thousand crore. The Indian economy has changed for the better in the last 15 years. There are 300 plus TV channels, 12 airlines. There is a sale of 94 thousand mobile phones everyday. There is an investment of Rs. 50 thousand crore in mutual funds. Every year 10 lakh cars and 50 lakh twowheelers are being sold. There are 24-hours news channels. There are 70 thousand bank branches all over the country. India has foreign exchange reserves of$ 135 billion. The export has grown by 20 per cent and salaries by 15 per cent. Purchasing power has improved - four-wheelers sales have touched Rs. 40,000 crore and two-wheelers Rs. 14,000 crore. Airline passengers are doubling every year. India has 60,000 crorepatis and in next four to five years it is going to rise to 1.5 lakh. Those earning salaries of Rs. 1lakh every month are increasing. Every year more than 50 lakh Indians visit abroad as tourists and 65,000 couples go abroad for honeymoon. Ofthe total manpower, 8 per cent is in the retail sector. There are 50 lakh small mom-pop type retail outlets in India. About 95 per cent shops occupy less than 50 sq. mtrs. There were 3 shops per thousand population in the past. Now there are 7 shops per thousand population. The rural scene has changed drastically. There are more than 800 third and fourth grade centers. The neo-rich here beckons the retail sector. Corporate sector has recognized the higher purchasing power in the rural India. ITC has taken e-choupal initiative. It has benefited 35lakh farmers. Everyday 30 villages are joining this initiative. This project has an investment of Rs. 1,000 crore. Tata group has started Kisan Sansar Yojana. Of the total market, 60 per cent market is in rural India. India has allocated 90 thousand crores to the rural sector in the plan. The number of those farmers whose income is less than Rs.16,000 per annum has decreased from 60 per cent to 20 per cent.

4

Contours of Retailing Management

There are about 3.25 crore consumers between 20 and 25. They want innovative products. Another major segment between 25 and 35 is 1.75 crore. They have advantages of the new economy. There are 4 crore customers between 40 and 50. There are 1.25 crore senior citizens above 50. Mall of America, Minneapolis has spread over 7 acres. It has actually become a tourist attraction. More than 4 crore tourists visit it every year. It has everything-from amusement park to sports. There is imagination centre, underwater acquarium and chapel oflove. India's urbanization rate is 30 per cent. The growth rate is amazing for those cities where population is more than 10 lakh. Organized retail thrives here. P & G sells 36 per cent of its products through big stores. Wal-Mart sells 35 percent of products by Revlon, Gilette. An ordinary supermarket has about 15000 SKUs. India has 4.5 crore credit card holders. There is a market of Rs. 1,000 crore of luxury outfits for men; and Rs. 2,500 crore for women. Abroad Seven Eleven has spread over 18 countries. They have 26,000 stores. The turnover is 36 million dollars. It is a chain that sells milk, bread, butter and eggs. China changed in the 80s. In the 70s there were 10 lakh outlets there. In the 90s there were 1 crore outlets. In China, the hyper-markets have entered in a big way. In the next two years, 100 new malls will appear on the scene. Gold rush in retail has just begun. In 2005, 11 cities saw the mushrooming of nearly 10 million sq. ft. of new mall space. In 2006, 18 million sq. ft. of space is set to spring in 12 cities. According to KSA Technopak, in the next five years India will have 2,500 hyper-markets and 5,000 supermarkets, either as standalones or jostling for space in swank malls. In January 2006, the Government permitted 51 per cent foreign direct investment (FDl), in retail for single-brand stores, which earlier existed as franchised operations. This is likely to usher a spate of mass luxury brands to India. Khadi and Village Industries Commission (KVIC), is a mammoth organisation with Rs. 13,105 crore in annual sales and presence in 3 lakh villages. It is artisan's best friend. It is a retailer to rural India. Woolworth entered into India by setting up a subsidiary, in India for exclusive supply to Croma, the new consumer durables chain from the Tata group, under the wholesale operations route. According to recent NCAER Survey average annual household income is a high as Rs. 2,79,000 in Delhi, Rs.1,95,000 in Mumbai and Rs. 1,60,000 in Bangalore. The number of households with annual income of Rs 10 lakh in these cities is 1,47,000, 1,10,000 and 12000 respectively.

REASONS FOR THE GROwrH OF RETAILING • • •

Higher disposable incomes Dual-income families ,Discerning consumers

Introduction to Retailing

•

Changing life-style

•

Lack of time

• •

Seeking of convenience Shopping experience

•

Wide range of products

•

Quality products

•

Value for money (VFM)

5

SHOPPING PATTERNS The shopping patterns in India are changing. The following table gives the data about shopping patterns in 1999 and 2003. Items of Expenditwe

Percentage of income spent

1999 Grocery Books Books, music, movies and entertainment, Eating out Savings Clothing and Consumer Durables

2003

'44%

9%

14%

8%

11%

14%

5%

11%

13.5%

According to retail researchers, over half of the shopping in India takes place between five and eight in the evenings. Shopping for heavy ticket items is generally done on the weekends.

SKILL SETS IN RETAILING Retailing in the organized form is still in its nascent stage. We shall derive the benefits of organized retailing after attaining a certain scale. Much depends on the area of the stores, footfalls it attracts, conversion of footfalls into customers, average buying per customer and space productivity. Apart from these operational parameters, success comes only when there is availability of the requisite skills in the following areas: • Strategic Management where the mission of the stores, its objectives, its target audience, its positioning are examined. Besides this, the location of stores is also an important factor.

• Merchandise Management involving vendor selection, inventory and warehouse management, product portfolio, pricing and promotion. • Store Management consists of the design and layout of the stores, placement of merchandise, display facilities, customer relationship and inventory management at the stores level.

Contours of Retailing Management

6

• Administrative Management consisting of human resource or personnel management, financial management, sales and marketing management, office management, etc. As these skill sets are developed by professional training, we have short-term and fullfledged management courses in retailing. The organized retail in India is still in a nascent stage. In the year ending March 2004, it accounted for Rs. 21,150 crore, a mere three per cent of the total retail market that is estimated at Rs. 7,05,000 crore. Even so, organized retail has made a beginning. Its share will grow rapidly. In 2003, it grew by 23 per cent. It will constitute six per cent ofthe industry by 2007, and to 20 per cent by 2010. Even so, India has a long way to go. In the US, organized retail accounts for 85 per cent ofthe industry, in Malaysia, it is 55 per cent, in Thailand it accounts for 40 per cent and in China, 20 per cent. In India, retail sector has 12 ~nillion outlets. It is a sunrise industry. It is the second largest employer. In the 90s, organized r(;tail added a mere million sq. ft. of space a year. There will be 300 more malls coming up by 2G07. Around 40 million sq. ft. of organized retail space will be added by 2006. Ifforeign direct investment is allowed, the industry will explode. Birla Retail of Aditya Birla Group plans to invest Rs. 10000 crore over the next six years. The plan is to have 3,000 supermarkets and 200 hyper-markets in 100 Indian cities. Retail forms nearly 40 per cent of the GDP for any country. The retail space per person in the US is 13 sq.ft per person, while for Asia it is 7 sq. ft. Ifwe extend this to the 300 million strong middle-class in India with an average of 5 sq ft. one gets a fair idea of what we are sitting on. The retail industry is booming and will show an expected compound average growth rate (CAGR) of30-35 per cent for the next few years. Organized Retail Pie, 2004

Clothing, Textiles & Accessories Food and Grocery Consumer Durables Footwear Furniture and Furnishings Catering Services Watches Jewellery Mobile Handsets

39 per cent 11 per cent 9 per cent 8 per cent 8 per cent 7 per cent 4 per cent 3 per cent 3 per cent

Books, Music & Gifts Entertainment Health & Beauty Products Health & Beauty Care Services

3 per cent 2 per cent

Source: KSA Technopak.

2 per cent 1 per cent

Introduction to Retailing

7

Types of Organised Retail Outlets Food and Groceries

Life Style

Consumer Durables

Home Solutions

Books and Music

Mobile Stores

ApnaBazaar Subhiksha Reliance Fresh Food Bazaar Trinethra Hypercity Metro Spencer's Big Apple Sabka Bazaar Big Bazaar Vishal Megamart Shoppers Stop Landmark Pantaloon Globus Westside Trent Next E-zone Reliance Digital Future Bazaar Home Town Home Care Magnet The Home- Store Crossword Books and Beyond PlanetM Oxford Bookstore HotSpot Subhiksha Mobile Mobile one C

RETAIL BOOM SPREADS The retail is now concentrated in the metros. It would percolate to Tier - II cities with population of 5-10 lakhs such as Surat, Lucknow, Dehradun, Bhopal, Indore, Baroda, Nasik, Bhubaneshwar and Ludhiana. By 2006, these cities would see major retail format development ofless than 11akh_ sq. ft. Right now, there are 50 malls.

8

Contours of Retailing Management

By 2009, there would be 250 malls. There would be over 300 malls by 2010.Some estimate the number of malls in 2010 to be 600. Investments in the sector are estimated at Rs. 2000-2500 crore in the next two to three years (2006-2008), and over Rs. 20,000 crore by end 2010. Indian entrepreneurs cannot put this kind ofmoney. The FDI route can bring this kind ofmoney.

REASONS FOR RETAIL BOOM Changing life-styles, resulting from rising disposable incomes, real estate development and the demographics have spurred growth in the retail sector. The media boom and the exposure to TV channels further stoked aspirations. For the first time, Indian consumers have been exposed to not just good products, but a veritable brand buffet. In the last couple of years, consumers have been exposed to a mall culture. It is a new buying experience; where shopping and entertainment nestled under the brand umbrella. Even smaller towns are awash with the retail boom, all bringing a semblance of organization to the industry.

EMERGING SECTORS IN ORGANIZED RETAILING The following table summarises emerging sectors in organized retailing Sector

Format

Examples

Food and Grocery

Supermarkets/ Chain stores Convenience stores Fast food chains

Food World, Apna Bazaar, Nilgiris HP Speedmart McDonald's, Dominoes

Non-food

Life-style fashion Apparel! accessories Books/ music! gifts Consumer Durables Drugs and pharmacy

Shoppers Stop, Life Style, Globus Westside Pantaloon, Reeboks, Adidas, Globus, Crossroads, Music World, Planet M, Archies Vijay Sales, Viveks Apollo Health and Glow Medicine Shoppe

Hyper-markets, Large supermarkets (3500-5000 sq. ft.) Mini supermarkets (1000-2000 sq. ft.) Conveniem:e stores (750-1000 sq. ft.)

Spencer's, Big Bazaar HyperCITY

-

New

Globally, retailing is a significant business. There happens to be one retailer in the top 10 companies in many countries abroad. Wal-Mart in the US, Marks and Spencer in the UK and Karstadt in Germany have a multi-billion dollars turnover. The trend abroad suggests further consolidation of the retail business by mergers and acquisitions. Since India does not allow free foreign direct investment (FDI) in the retail sector, global companies are unlikely to enter India in the near future. Besides, there are infrastructure bottlenecks, supply chain problems, fragmentation of the retail sector and relatively poor purchasing power of the Indian consumers.

Introduction to Retailing

9

There is, however, optimism generated by growing corporate interest in the retail sector. In this sector, we have groups like the Rahejas, the Piramals, the Tatas, the Goenkas and others. It is likely that these Indian ventures will have foreign tie-ups in time to com~.

KEY REQUIREMENTS FOR SUCCESS 1. The winners in this highly competitive field are going to be those who realise that the customer is the most important factor. 2. Retailing has to professionalise itselfby gearing up to meet higher expectations of the customer by providing them facilities, conveniences and by satisfying their demands through trained, motivated and efficient manpower. 3. Retailing has to concentrate on supply chain management and location. 4. Infrastructures should support the development of the retail network.

ATTRACTIVENESS OF THE RETAIL MARKET Indi~'s retailing can be put into three major categories. These categories are based on consumer readiness in terms of accepting pre-packed, price-marked and pre-weighed merchandise and the availability of the supply chain. The first category is the developed retailing where the consumer readiness and supply chain sophistication both are high. The examples are dry groceries, men's clothing, books and music, electronics and shopping malls. The second category is the emerging sector where consumer readiness is yet to be developed by promotion and education and supply chain is also moderately placed. The examples are fresh groceries like fruit and vegetables, meat and poultry, women's outfits, fast food, personal care products, and do-it-yourselfproducts. The third category is the undeveloped sector with low consumer readiness and low level of supply chain sophistication. We can put medicine and liquor business here.

FDI IN RETAIL The Government is unlikely to open the sluice gates to FDI in one go. It may open up gradually. But one thing is certain - the sector will open up sooner rather than later. Several big retailers from abroad are drawing up plans for India in anticipation of this sector opening up. The following prominent players have an eye on India: Wal-Mart Carrefour Tesco Metro Cash & Carry Shop Rite

$ 288 billion retail giant Euro 90 billion maior £ 33 million UK-based retailer Euro 26 billion German giant South African retailer

PEFirms The Government is considering a proposal that would allow single-brand foreign retailers such as Diesel, Louis Vuitton, and Mark and Spencer to dilute stakes in their Indian ventures, in favour of foreign private equity (PE) firms. Such deals would be within the current overall FDI cap of 51 per cent. This proposal would give a fillip to retail ventures though infusion ofPE funds.

10

Contours of Retailing Management

All these have world-wide presence, and have deep pockets. According to A. T. Kearney's, "The 2004 Global Retail Development Index", India is the second most attractive market after Russia. It puts it even ahead of China. Carrefour, the retailing giant, is the French word for Crossroads. Marks and Spencer's largest store is located at Marble Arch, London.

NATIONAL MARKETING POLICY ON RETAIL Retail contributes 11 per cent to the GDP and employs more than four crore people. It is the second largest employer in the country after agriculture. We need to have a policy to deal with this segment of economy. We need a policy on distribution, agricultural marketing, raising of institutional finance for the retail trade. Urban areas will continue to receive much more exposure of organized retail than rural areas. Organized retail in rural areas means returns not in proportion to the investments. ITC has taken an initiative to enter the rural markets through e-choupal but it still uses the same marketing channels. Organized retail in the form oflarge professionally managed multi-product shops is yet to reach the rural markets. Malls have been drivers for the growth of organized retail trade but they remain unprofitable. It is a case of oversupply that leads to under-pricing. Retailers need a wide assortment, and should procure this from the entire domestic and international market. Though retail will soon have to face foreign competition, the traditional shopkeeper's interests must be protected as he ensures that goods reach customers conveniently and employs many people.

DARK PERIOD FOR RETAILING Over-optimistic projections and a slow-down in the retail sector has prompted a rethink of the business models. Reliance Retail which proposed 3000 outlets has started only 800 outlets and is planning to shut, resize or re-structure around 200 non-profitable stores. India Bulls has closed four of the nine hyper-markets and retrenched hundreds of employees. Hypercity has downsized its plans. Future Group is the only one that continues its plans as far as Pantaloon and Big Bazaar outlets are concered. India has seen rising inflation in 2007-08 and consumers have tightened the purse strings. Terrorist activities in major cities have also dampened retail sales. The economics slowdown has affected the overall growth of modern retail. Though the growth expected was 35 per cent, it will touch just 15 per cent this year (2008). There are issues of supply chain constraints - inadequate warehousing facilities. Shoppers Stop has suffered losses in two consecutive years. Spiralling rentals have added to retailer's woes. The current slowdown will give all players an opportunity to reassess their business models. Liberty Shoes have reduced the area of their retail outlets. Retailers expect a longer credit period from their vendors. Consumers are averse to spending and have gone into a saving mode. The Government has brought out a revival package, and one more such package is proposed soon. There is a cut in Excise duties. Though the market has the potential, the challenges are equally daunting.

Introduction to Retailing

11

VISIBLE TRENDS • Firms have slashed their ad budgets. • Temping or temporary staffing in the retail sector has indeed declined. • The demand for store supervisors and merchandisers has reduced significantly; as expansion plans have been frozen. • Hiring has stopped except for front-end staff. • Salary hikes are going to be minimal. • There will be migaration from the retail sector to other sectors. • In 2009, while total ad revenue in the country is expected to be Rs. 23,000 crore, retail advertising is likely to account for only 4 per cent of this. However, this is a short-term blip, things will improve. Several segments will continue to do well e.g. food and grocery, consumer durables. There is a normal market correction now. Retail is a low margin business and hence, there should be focus on cost management. The size of the store, its positioning, the product line and pricing - all these must be carefully planned before committing finance. India is a value-conscious country.

12

Contours of Retailing Management

MAIL BOXES ETC. (MBE) It is a wholly owned subsidiary of United Parcel Services (UPS). It is a full service network of retail outlets which: •

Ships anything from place to place. It is more than a courier service and includes packaging, holding and forwarding over-sized parcels.

•

Provides services such as copying, printing and finishing, colour printing on speciality paper, binding and laminating.

•

Computer time rental services.

•

Faxing.

•

Rubber stamps, engraving.

•

Money transfers.

•

Travel services.

•

Office and mailing supplies. It is more than a run-of-the mill business centre. An initial flagship store has been set up in Nariman Point in Mumbai. It will soon be followed by 150 stores throughout the country. Its target audience is small and medium-sized businesses, people on the move, mobile workers, SOHOs (small office, home office), private consumers. It has expanded globally through master licence agreements. It will follow a franchise route.

GLOBUS Globus, Bandra is 30000 sq. ft;.Second store launched at Kalaghoda, Fort. Expansion plan: 50 stores across the country by 2007 at an investment ofRs.150-175 crore. Rajan Raheja group which manages Globus launched Globus in January, 1998. First store opened at Indore in 1999. Two stores opened afterwards in Chennai. Mumbai stores opened in November, 20q1. Later opened a store in Delhi. In 2003, two stores opened in Bangalore. In 2005, four more stores came on the scene. Globus sells designer clothes which are affordable and wearable. The garments are trendy but accessible. Media used include print, hoardings, radio, magazines and other promotional activities. Internet is effectively used. Target: Youth. Promotional tie-ups with colleges. Merchandise is a mix of established brands and private labels. Currently, its private labels are Globus and f21. Most ofthe apparel under Globus label htdesigned for customers upto 35 years of age. Globus has an in-house team of designers.

Introduction to Retailing

13

In the retail sector, to begin with, the product or the merchandise was the distinguishing factor to attract the footfalls. This is no longer so. Many retailers have the same merchandise but there are other distinguishing features:

WAL-MART: THE RETAILER THEY LOVE TO HATE Robert Slater has authored a book 'The Wal-Mart Decade.' Wal-Mart's founder Sam Walton expired on 5th April, 1992. Their turnover then was $ 44 billion. Even then the firm was inching towards number one position. Sam left the Wal-Mart legacy for his wife, Helen and his four sons. Rob Walton is the eldest son who is now the President of the company. Exactly five years back, Wal-Mart was included in the Fortune 500 list. Its turnover then was $ 218 billion.It is now a $ 285 billion company. Wal-Mart is popular because it is highly affordable. Wal-Mart has market presence in the US, Brazil, Canada, Germany, England and China. Sam Walton was an economics graduate (1940). His first drawn pay was $ 75 per month in JC Penny. Who would have imagined that he would own an MNC in future? He presented himself as Captain in the Americim Army in 1942, at the time of World Ward II. The security of the aircrafts was assigned to him. He later became the security officer ofPOWs in California. He married Helen during this period. He borrowed $ 20000 from his father-in-law to set up a retail shop. He acquired Butler Brothers.and renamed it as Ben Franklin store. During this period, retail chains like Sears, Woolco emerged on the scene. To compete with these chains, Sam Walton set up a retail shop in collaboration with his brother, James and called it Wal-Mart. It was set up in Arkansas. He promised that you will get anythingfroni 'pin to piano' at a fair price in Wal-Mart. The first year turnover ofWal-Mart was $ 1 million. Walton personally supervised the stores and paid surprise visits. Lee Scott is now the CEO ofWal-Mart. Always low prices, this is its deceptively simple maxim. In 1979, Wal-Mart had 278 branches and 21000 employees. The turnover then was $ 1 billion. It reached this turnover in just 17 years. It has now 5,00,000 employees serving 49 million customers a week. In 1980, Wal-Mart employees started unionisation. Wal-Mart has been under attack for a variety of reasons, including poor wages it pays, the incredibly difficult prices it demands of its suppliers, and for driving other retailers out of business. Wal-Mart has braved the criticisms and continues to grow. In 1987, Wal-Mart earned the reputation of a fast growing organisation. David Glass was appointed the CEO in 1988. The profits after taxes ofWal-Mart in 1989 rose to $ 1 billion. Wal-Mart's international business is in charge of Michael Duke. It is a $ 62.7 billion retail empire (2006). It has 2700 stores in 13 countries outside the U.S .. Its sales in year-ended January 31,2006 is $ 312 billion. It earned profits of$ 11.2 billion. Wal-Mart employees welcome the customers by standing in a queue. The employees claimed 'we are number one'. They have a 'quick market intelligence' department. When Sam Walton expired in 1992, he was the second richest man of the world after the Sultan of Brunei.

14

Contours of Retailing Management

Wal-Mart has overtaken Sears in 2000 and has become the world's largest retail firm. India attracts Wal-Mart. It is important from a sourcing point of view. It also has a lot of potential in the future. Wal-Mart would like to improve the food supply chain in India. Wal-Mart would decide the retail format in India after doing research. It is open to have partnering in India. Wal-Mart already sources $ 1.5 billion worth of goods from India. Over 100 million customers visit Wal-Mart in the US every year. There are some who oppose Wal-Mart calling it the Beast from Bentonville (the Wal-Mart headquarters). Business Week senior writer, Anthony Binaco has penned a not-so-flattering profile called The Bully of Bentoville. But Binaco also admits that Wal-Mart saves directly and indirectly billions of dollars for shoppers. It saved $ 263 billion (Rs. 11,83,500 crore) in 2004 alone. But what is good for consumers need not be good for the country. Wal-Mart has agreed to buy a Chinese hyper-market chain (Trust Mart) to become a top player in China's fragmented retail market. Trust-Mart is a closely-held Taiwanese company with 100 super centers in China. The deal would push Wal-Mart past Carrefour SA for the most supercenters in China, Asia's second biggest retail market. Wal-Mart is currently in India to recruit the first layer of managers forits Indian operations. It is looking for the right partner in the country for its retail operations. It may start wholesale operations called Sam's Club. Wal-Mart buys 30 per cent ofits products from China, according to the global retail industry estimates. The Chinese connection was started in the mid-80s. Chinese goods are cheaper by 4050 per cent. Chinese companies are quick on delivery. Wal-Mart has tied up with Bharati for its Indian operations. To begin with it will set up cash-n-carry outlets. Their joint venture agreement has been signed on Aug 6,2007. Their TV company will set up 10-15 stores in tier-II and tier-III tours over the next seven years and cater to B2B customers such as other retailers, hoteliers, push court vendors and Wal-Mart thus, enters India through the wholesale route. INDIA'S RETAIL TRADE Year

Retail Business in $ Billion

1998 2000 2002 2004 2006 2008 2010

201 204 238 278 321 368 421

Source: Retail in India, A CII- AT Kearrney Report

Estimate

Introduction to Retailing

Sector Clothing, Textiles &Fashion Accessories Foods and Grocery Durables Footwear Jewellery and Watches Home Decor Books, Music and Gifts Beauty Product

15

Per cent Share 40 19 13 9 7 7 3 2

Source: ClI-AT Kearney Report

10 Success Rules of Sam Walton 1. Commit to achieving success. Always be passionate about it. 2. Share your success with those who have helped you. 3. Motivate yourself and others to achieve your dreams. 4. Communicate with people and show them you care. 5. Appreciate and recognise people for their efforts and results. 6. Celebrate your own and other's accomplishments. 7. Listen to others and learn from their ideas. 8. Exceed the expectations of others by setting high standards. 9. Control your expenses. 10. Swim upstream, be different and challenge the status quo.

CHAPTER

2

~tai{ Oroanization RETAIL ORGANIZATION Organizing is an important management function which consists of dividing work-load or tasks into groups and establishing authority-responsibility relationship amongst these. The end

result is an organization structure that serves as a mechanism to realise the organizational objectives. Organization structure is staffed by people who are assigned the tasks. An effective structure satisfies the needs of the target market, employees and management. In organization, authority flows from top to bottom and responsibility or accountability flows from bottom to top. In a retail organization, the usual tasks are buying the merchandising, selling the merchandising, controlling the operations and promoting the store and merchandise. There should be co-ordination amongst all these functions.

ORGANIZATION CHART The simplest possible organization chart of a retailer groups the retail functions, and assigns these to respective functionaries.

I I

-I Promotion Manager

, (

GENERAL MANAGER

]

I

I ~

Merchandise Manager

Human Resource Manager

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1

Operations Manager

,

Promotion Manager

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"4

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Fig. 2.1 Retail Organization

The organizational functions can be arranged into product groups, each in charge of a separate functionary. STORE MANAGER

I

I Men's Apparel Manager

,~

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I

-----,

Ladies' Apparel Manager

,"I

Children's Apparel Manager

Appliances Manager

Fig. 2.2 Product-Group Retail _Organization

1

Denim Garment's Manager

17

Retail Organization

A multi-location store can have separate functionaries for each location.

r I

GENERAL MANAGER

I

I

Store Manager Location C

Store Manager Location D

I

Store Manager

Store Manager Location B

Location A

~.

Fig. 2.3 Location-based Retail Organization

A combined chart of a typical retail organization could look like:

I General Manager

Promotion Manager

Store Operations Manager

Merchandise Manager

I

I

I

1

Manager Location X

Manager Location y

Manager Location X

Manager Location

I

y

Controller

I

Manager Location X

Manager Location Y

I Manager Location X

1

I Manager Location Y I

Men's Apparel Manager

Ladies' Apparel Manager

Denim Apparel Manager

Fig. 2.4 Typical Retail Organization

ORGANIZATION STRUCTURE FOR SMALL RETAILERS Small retailers are mostly run by owner-managers. Their structure looks like:

OWNER MANAGER

Merchandising Staff

Operational Staff

Fig. 2.5 Owner-manager Retail Structure

18

Contours of Retailing Management

ORGANIZATION STRUCTURE OF A DEPARTMENTAL STORE Departmental stores are organized by some sort of a modification of what is basically called a Mazur Plan after Paul Mazur who put forward this plan in his book, (Principles of Organization Applied to Modern Retailing'. This plan puts the workload into four areas merchandising, publicity, store management and accounting and control. The areas are organized in a typical line-staff format, where staff means an advisory function. To illustrate, publicity and controlling are staff functions to merchandising. But under each function the line structure is followed. The following diagram illustrates the original Mazur Plan.

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I;~~RAL MANAG~;-I ---

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Divisional Merchandise Manager __ 1_______ --

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Fig. 2.6 The Mazur Plan for Oeptt. Stores

Adapted after Paul Mazur, 'Principles of Organization Applied to Modern Retailing'.

19

Retail Organization

A buyer in the above plan runs a cost centre. Mazur Plan has led to three derivatives: (i) mother hen with branch store chickens organization (ii) separate store organization (iii) equal store organization The first derivative means HQ exercises overall control over the branches. The second alternative means each branch has its own buying. The third alternative means buying is centralized, but each branch operates ~s a sales unit with equal operational status.

ORGANIZATION STRUCTURE FOR CHAIN RETAILERS Chain retailers generally adopt equal store format as given in the following diagram:

J r=~erchan~~-1 -~~operat~~ns-~

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_____ L___,

,____L.._~,

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Finance Managers

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. Manager

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Maintenance Manager

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Fig. 2.7 Equal Store Format for Chain Stores

In this structure, the overall authority and responsibility is centralized. Store managers have selling responsibility. Many operations are standardised.

ORGANIZATION STRUCTURE FOR RETAIL CONGLOMERATES Retail conglomerates have diversified firms which are centrally controlled. The individual firms could be in different types of retail operations, e.g., a discount store, a departmental store, etc. The different types of retail businesses are treated as divisions, and are managed independently under the overall policy guidance ofa central structure. The resources must be deployed amongst different divisions carefully.

Contours of Retailing Management

20

CAREERS IN RETAILING Retailing is a process involved in selling products directly to consumers for personal or household use. It has two major components - merchandising and selling. Retailing

I Specialisations

• • •

Related Careers

Store Manager

•

Sales Management Trainee

Retail Manager

•

Retail Sales Representative

Retail Buyers

•

Assistant Buyers

• • •

Visual Merchandising

•

Merchandise Managers

Retail Sales SupervisorlManager

•

Sales Manager

Department Manager

•

Wholesale and Retail Buyers

•

Promotional Manager

•

Stock Clerk

•

General Manager

LITANY OF LICENCES Retailing in India involves litany oflicences. Organized retail cannot afford to flout norms. The result is often a long wait for licences. The time span for all licences could be 60 days, or 60 days for each licence. Here, rationalization is called for. It is easier to set up a company in India than to set up a superstore or a mall. The rules are the same for all- whether you are the best managed company or an ordinary small retailer. There is a demand for single window clearance for all licences. There should be one general licence for all the stores across the State. Big retailers have either a legal department who looks after licences or they outsource this function. Litany of Licences Licence Approving Authority Shop and Establishment Shop and Establishment Inspector Operating store for 360 days Municipal Extending work hours Municipal Glow signboards Municipal Municipal Storage of yarn / inflammable goods Municipal Eating house Municipal Valet parking Municipal Lifts / escalators Municipal Health

Retail Organization

Premises Grade I Rating Selling food items Trade Way-bill and C-form Employee State Insurance Contract labour Security I Maintenance I House Keeping Pollution Control Power Provident Fund Central Excise Service Tax Entertainment Performance Copyright Music TradeMark Police Permission NOC from the Fire Dept. VAT Professional Tax Standard Weights and Measures Drugs and Medicines Liquors

21

Municipal Municipal Municipal Municipal Municipal, Sales Tax ESISdept. Labour dept. Labour dept. State Pollution Control Board SEB PFdept. Excise dept. Excise dept. PPL PPL PPL Tradmark Registration dept. Police official Fire dept. Sales Tax dept. Sales Tax dept. Legal Metrology dept.

FDA State Excise dept.

Source: Retailers Association of India.

INDIAN RETAIL REPORT, 2009 The retail market in the country is expected to be worth Rs. 18,10,000 crore by 2010. Organized retail is likely to exceed Rs. 2,30,000 crore at constant prices. In 2007, Indian retail market was Rs. 13,30,000 crore. It is growing annually at 10.8 per cent. The share of organized retail in 2007 was estimated to be 5.9 per cent or Rs. 78,300 crore. The organized retail pie is shown below (2007)

Category . Clothing & Fashion Accessories Food and Grocery Consumer Durables Footwear

Percentage 38.1 11.5 9.1 9.9

22

Contours of Retailing Management

Out-of-Home Food Furnishings, utensils, Furniture Leisure Mobiles and Accessories Entertainment Jewellery Watches Health and Beauty Care Pharmaceuticals

7.3 6.4

2.8 3.4

3.1 2.9 2.7 0.8 2.0

Market size in 2007 is Rs. 78,300 crore at prevailing price.

In the overall retail pie, food and grocery was the dominant category (59.5% share), followed by clothing and accessories (9.9% share). Interestingly, out-of-home food services has overtaken jewellery as the third largest retail category. Consumer durables is the fifth largest retail category. Health and pharmaceuticals follow it. In organized retailing, however, clothing and fashion accessories is the largest category, followed by food and grocery, footwear and consumer durables. The fastest growing segment in successive years in the overall pie in 2007 was mobile and accessories. In organised retail, the fastest growth has been recorded by the tiny health and beauty care services. The second fastest growing segment in the organized retail is entertainment. It is followed by mobile and accessories and food and grocery.

THE GREAT INDIA BAZAAR REPORT, McKINSEY, 2008 By 2015, more than 300 million shoppers are likely to patronize organised retail chains. The country's overall retail sector will become a $ 450 billion (Rs. 20.85 trillion) business by 2015. Modern retail currently accounts for only about 5% of the country's annual retail business. It will account for 14-18 per cent ofthe total retail business by 2015. Modern retail business will create 1.6 million jobs in the next five years (by 2013). The following five main consumer segments are in the market.

Household Income Per annum Globals > $ 22000 Strivers $ 11000 - 22000 Seekers $ 4000 - 11000 Aspirers $ 2000 - 4000 Deprived < $ 2000

Total Households in million, 2005 1 2 11 91 101

Retail spend $ per household 12800 5200 2300 1350 700

By 2015, the Globals will grow to 3 million and strivers to 6 million. There is going to be great growth in seekers, from 11 million to 55 million and aspirers from 91 million to 106 million. The deprived will reduce from 101 million to 74 million.

23

Retail Organization

Organized retailers will be known for: Price Promotions Discounts Convenience Authority / Range Service

Low Prices Convenient location, Convenient layout Mix of brands Fashion drives the footfalls Responsive, competent staff

Availability of products Family experience Comfortable Safe The location of the store for most people is a drive of 15 minutes. Experience

Country Brazil US France China Russia India

Percentage of people travelling less than 15 minutes 78 . 74 70

69 69 64

The surveyed shoppers are extremely open to credit but find it hard to come by. In India, 31 per cent people are open to credit whereas 7 per cent use it. In 2005, Indians spent 42% on food, whereas its share will decline to 34% by 2015 and 25% by 2025. There is a marked shift from food to more discretionary spending. Fresh food, ethnic apparel and mobile electronics will be the key categories for organised retail. Rentals are very high in absolute terms and as a percentage of sales. Retailers may find it difficult to sustain.high rentals. A typical hyper-market in Mumbai finds that rent as a percentage ofsales is 12 per cent. Ma.ny carry the perception that organized retail is more expensive. This should be corrected. The existing customers must be retained by effective relationship marketing. The retailers will have to stimulate the consumption by creating new shopping occasions, increasing purchase per occasion and financing consumpti~n.

Retailing is evolving as we move on. The environment is fast changing. There is internet revolution which has brought about interactivity. It has given a new customer relationship paradigm. It has spawned the whole new area of e-commerce. Technological advances have made retail to become organized. There are faster checkouts from supermarkets on account of point-of-sale (POS) terminals and scanners. The supplier-retailer relationships have changed due to data sharing. There are ATMs for cash withdrawal at every nook and corner. Soon we will have vending machines to disperse milk, newspapers and beverages like Pepsi and Coke. New retail formats are evolving. Instead of the traditional bania shops, we have air-conditioned, well-stocked, well-appointed shopping malls. Hair grooming, beauty treatment, cosmetic surgery, weight loss clinics, gyms, and dental implant centers all these have appeared lately. We have to understand the evolution of retail trade, and the new retail formats.

EVOLUTION In the olden economy, transactions were by barter, which were soon replaced by money as a medium of exchange. Merchandise was traded in the market place or by peddlers. Supplies were from near-by sources. Customers had to travel however,long distances to get the required merchandise. The development of transport and communication gave a spur to the retail trade in the 18th century. Telegraph came to the aid of trade in the placement of orders. Railways carried ordered goods over long distances. The travelling salesman was one important intermediary here. He developed wholesaling. Wholesale led to the development of departmental store. These down-town stores were given a further fillip by motorization and road network that took people from far and wide to these centrally-located stores. Volume was emphasized in the departmental format for the first time rather than profits. The first departmental store was set up in France (1852), and this format later spread to Europe and America. It flourished till World War II. In the beginning of the 19th century, the first 5 and 10 per cent stores were set up to serve the poorer sections. The oirect marketing through mail-order was initiated in 1870. Chain stores appeared on the scene in 1859. Dollar stores were pioneered in 1879. Industrial Revolution leads to urbanization. It gave birth to the small neighbourhood shops for a large concentration of people. Mass manufacturing led to mass consumption through the longer distribution channels. This gave birth to mass merchandising. Co-operative societies were initiated in the UK and were fairly well-established by the start of the 20 th century. These mainly served the needs of the working classes.

Retail Theories and Formats

25

Self-service as a concept evolved in the 20th century. Here the consumer is in direct contact with the merchandise. He can feel and touch the merchandise. He selects the merchandise he needs without the assistance of the salesman. Thus, two barriers were removed. The barrier of a counter in the small mom-and-pop store, and the barrier of salesmen. A counter limits the number of customers that could be served, and so do the salesmen. Hundreds of customers can enter a self-service area in a big store, and that makes mass retailing possible. The first time this concept was put into practice in Piggly Wiggly started by Clarence Saunders in Memphis, Tennessee. Self-service is an efficient method of selling as it reduces costs of manpower. In the 30s of 20th century, the supermarkets came on the scene. The World War II came to an end. Retailing registered its presence in a big way by then. Discount stores were established to take care of the needs of the factory workers. The hyper-market appeared on the scene in France in 1963. The new format options catered to different types of consumer needs and gave customers an improved choice. The products before being picked up from the self-service racks must indicate their weight and price. The products were therefore pre-packaged, pre-weighed and pre-priced. The labels also indicated the details such as date of manufacturing and 'best before' time period. All this facilitated buyer decisions. The products were arranged department wise. In the 1970s, the bar-coding made the billing and record-keeping simpler. Commodity specialized mass merchandisers became common. Chain stores and large shopping malls came on the scene in the 80s. Malls provided everything under one roof. A flagship brand store was used to draw the customers to the mall. Malls improved their infrastructure by adding game parlours, multiplex theatres, restaurants, amusement parks, swimming pools and a lot more. Mall visitors spend several hours in the mall. Amazon.com became a shopping site in 1995. Since then many dot. corns have appeared on the scene. The retail evolution !las kept pace with economic, social and technological evolution. Retailers are always on the look out of new options in this competitive environment.

THEORIES OF RETAIL DEVELOPMENT We can appreciate the evolution of retail by studying certain 'theories of retail development, though no one theory is fully capable of explaining the entire retail scenario. We shall examine some retail theorielj. here .

•:. WHEEL OF RETAILING: McNAIR It is a very old theory that describes retail development. According to this theory, innovative retailers come on the scene as low-price, low-margin and low-status operators. It is an entrylevel phenomenon. Later, they improve their facilities and trade up to become moderate to high price retailers with better skills. Their operating costs rise and investments too. Most probably, these retailers then enter the vulnerability phase where they charge moderate to high prices and raise their margin, making them vulnerable to low-margin retail competitors.

26

Contours of Retailing Management

Fig. 3.1 Wheel of Retailing

The process is repeated. The wheel of retailing focuses on product quality, prices, customer service. Scrambled merchandising takes place when a retailer adds producers unrelated to each other and to the organization's original business. It increases the overall sales and profit margins, e.g., a supermarket adds pharmacy, book-store, florist and photo studio to its business. But too much of this is not advisable, since the organization may lack skills in buying and selling these added products. It may dilute the brand equity of the retailer.

I·:·

RETAIL ACCORDION: HOLLANDER

Retailers offer a wide assortment of merchandise but later become specialized stores with narrow assortment. These general stores convert into specialized stores. The process is repeated when the assortment is again widened and then again narrowed down. The contraction and expansion of merchandise is called retail accordion.

RETAIL LIFE CYCLE Retail institutions, like products, pass through several stages such as innovation, growth maturity and decline. This is called retail life cycle (RLC).

Maturity

Decline

Fig. 3.2 Retail Life Cycle

Retail Theories and Formats

27

The stages are described below:

Innovation (Introduction) This stage is characterized by a risk-taking bold entrepreneur. It is an innovative organization which takes a different approach to retailing. It may be a simple distribution method or unique product assortment. The promotion could be different. It may add to convenience. It may have location advantages. Being innovative, its growth is fast. There is lot - of experimentation. Though sales show an upward trend, the margins are low. This stage currently applies to e-tailing in India. Growth

Sales and profits both shoot up in the growth stage. This invites other retailers to enter this field. The pioneers get the advantage to leverage their position. Operational costs increase as more manpower and systems are needed. Both market stage and profits tend to reach their peak towards the end of this stage. Airport-based retailers are in the growth stage. Food malls also fall in this stage.

Maturity Growth continues unhampered but then it reaches a plateau. Organization becomes large and complex. Competition is high, which stagnates growth. Retailer has to revise his strategy. He may have to re-invent himself. There may be a change in format or the merchandise mix. A new retail cycle can be started. Departmental stores have reached a maturity stage.

Decline The competitive edge is lost. There is decline. Profits fall. The rate of growth is negative. Factory outlets fall in this category. The retail life cycle is getting shorter these days. New formats quickly move from one stage to another. Large retailers acquire other retail outlets in the early stages. As India has just entered the mass retailing business, it is difficult to point out a single organization which has passed through all the stages of RLC. Just like individual retail outlets, the entire retail markets all pass through the RLC stages. The African markets ~:re now at the introductory stages. Indian markets are at the growth stages. South Asian markets are in the maturity stages. The developed markets have reached stagnation.

I·:·

RETAIL FORMATS: OWNERSHIP BASIS We will now consider the various types of retail outlets:

INDEPENDENT An independent retailer owns his own retail outlet. Most of the retail outlets in India are independents. This is the easiest option to adopt to start any business. It requires the introduction of reasonable capital mostly from personal savings, borrowings or bank loans. The licensing requirements under the Shop Act are easy. Pharmacies acquire licence from the Drugs Control authorities. Every year several thousand new stores open up in India. There is heavy competition amongst independents. There are many cases of business ~ailure.

28

Contours of Retailing Management

Advantages 1. Small stores have flexibility in site selection and segment selection for targeting. Merchandise selection is according to the needs of the target audience. 2. Capital requirement is modest. 3. There is quick decision-making. The owner-manager is on the premises itself. 4. Independents have chances to specialize. 5. Independents have a personal touch. Other stores are impersonal. 6. As independents operate from one geographic location only, they show consistency in policies. 7. Independents are accountable to themselves, and thus have less constraints on decision- making. 8. The involvement is high. It is the owner's own baby. Disadvantages 1. Their bargaining position with the vendors is not so strong. 2. They do not enjoy economies of scale. 3. There is lack of automation and computerization. 4. Independents find it difficult to us~ mass media for advertising. 5. There is centralization of decision-making. There are problems in succession planning. 6. The approach of the owner-manager is tactical. He lacks the benefit of long-term strategic planning.

CHAIN STORES When there are multiple outlets run by a retailer, he becomes a chain retailer. All outlets have common ownership. Purchasing is centralized, even if the individual stores purchase some merchandise it is co-ordinated centrally. Decision-making is centralized. In India Bata and Carona run a chain of footwear outlets allover the country. There are several laundry firms operating as a chain. In Mumbai, we have retail pharmacies operating as a chain, e.g., Medicine Shoppe. It is the leading pharmacy chain in the world which operates more than 1400 pharmacies in 8 countries. In South, there are grocery stores being operated as a chain. The outlets of a chain have a similar look, fa~ade and layout for easy identification. The promising areas in a chain are to run departmental stores, discount stores and grocery stores. The less promising areas are liquor shops, book stores arid beauty salons. Advantages 1. Chains have bargaining power against the suppliers as purchases are centralized. 2. They enjoy economies of scale. 3 .. They are more efficient in operations, and store resources. 4. They can have automation and computerization.

Retail Theories and Fonnats

29

5. They can advertise in the national media. 6. Chains have well-defined policies and strategies. They have good succession planning. 7. Chains resort to long-term planning. Disadvantages 1. There is limited flexibility. It is difficult to take locational decisions. Locations may overlap. The stores are homogenous and may not adapt to the local needs. 2. High capital investment. 3. Widespread chain makes controlling complex. 4. There are many constraints on decision-making.

FRANCHISING A franchisor has a successful business model which he wants to be replicated so as to promote growth and expansion. Similar units under this model are called franchises. It is one of the fastest methods of doing business in the world today. A franchise arrangement works on the basis of an agreement involving two parties - a franchisor and a franchisee where the franchisor allows the franchisee the right to conduct a given business under a particular name and as per the given model. A franchisor could be manufacturer, a wholesaler or a serviceprovider. Against the benefit ofthe franchisor's name and business model, a franchisee pays an initial fee and a particular percentage of sales. Small businesses flourish using the goodwill of bigger businesses under franchise arrangement. There are two types of franchise arrangements. In product or trademarks franchise arrangement, a franchisee is an independent unit. He owns his own premises. He decides his location. He plans his displays. He only uses either the products of the franchisor and/or uses his trademark. Monginis stores selling pastries, cakes and snacks are autonomous units, but they buy their merchandise from the franchisor and operate under franchisor's brand name. Most of the franchise retail business follows this pattern. There is business format franchising. Here there is greater interaction between the franchisor and franchisee. The entire business model used by the franchisee is given by the franchisor-site selection, quality control, operating systems and practices, training and response to problems. In addition, the franchisee also sells the products ofthe franchisor. Restaurants, computer training institutes, MBA coaching institutes, and shoe retailers follow this type of a franchisee arrangement. Franchising as a concept got currency in England in 1800s England. discouraged liquor consumption by licensing. These licences were costly to obtain. Besides, it was difficult to maintain the premises. Brewers then came forward to help the innkeepers financially. In return they expected patronage of their brands. It gave brewers a guaranteed distribution channel and the innkeepers got exclusive rights. This was a win-win situation for both the parties. This is the genesis of the concept of franchising. But the credit to popularise the concept goes 'to the United States. Globally, franchising is the number one mar.keting and business development format and contributes to over 50 per cent of retail in the US .. According to Small Business Administration, less than 5 per cent of all franchise units fail every year. This is compared to 30 to 35 per cent of small businesses which fail within the first year of operation. Franchising

30

Contours of Retailing Management

further contributes to women entreprenurship. In the US, franchising is a trillion dollar industry and contributes 20 per cent to the GDP. Franchising started in the US in the middle ofthe 19th century. But it gained a foothold only at the beginning of the 20 th centur;r.

Advantages 1. Franchise arrangements enable small entrepreneurs to operate a reputed business. 2. Franchise arrangements pass on the technical know-how to the franchisee. 3. Franchisee can take advantage of the joint promotional effort. 4. Franchisee purchases are economical. Disadvantages 1. There is geographical overlap. Market saturation occurs if there are far too many franchisees. 2. There may not be correct assessment of the potential of a franchisee. 3. Franchise, being contractual, does not allow purchases from outside sources. 4. Franchisee agreement can be set aside if the terms and conditions are violated. Sometimes, the agreements have a short tenure. 5. Most franchise agreements stipulate royalties against sales, rather than profits.

FRANCHISING In order to be a part of organized retailing, individuals with little or no previous experience can opt, for the 'right franchise' at the 'right price.' It is the least scary proposition to start our own business. It is rightly called 'the science of reproducing success.' The franchise sector consists of a variety of businesses ranging from French fries to auto parts. Some common franchisee businesses include: Automotive Business services Children's sector Entertainment Fitness Food and Restaurant Health and Beauty

Different areas of repairing Advertising, promotion, consultancy, training, staffing Child-care and education Retailing movies, theatre, drama, tickets Gym or health club Baked products, pastries, beverages, fast food, pizzas, etc. Diet and fitness, hair care, cosmetics, tanning, skin care, etc.

Franchisees experience a higher success rate than that of the independent businesses. Buying a franchise greatly reduces the risk of starting a stand-alone outlet or independent business. Franchi&ing capitalizes on the strengths of the 'chain' or larger organization. It also benefits from the entrepreneurial skills and commitment of the proprietor ofa small business. Transparency is crucial for a successful franchiser-franchisee relationship.

Retail Theories and Formats

31

Franchise sales executive meets prospective franchisees and explain to them the business opportunity. They have the power to award the franchises to those who meet the criteria. Franchise lawyers look after the documentation work. A franchisee is one who buys a franchise of a reputed company. The only drawback is that it leaves little room for innovativeness. An extravagant franchisee could head for trouble. Franchiser is the one who runs a reputed business, and franchises its concept for faster expansion and reduced financial risks. A franchise manager maintains relationship with franchisees on behalf of the franchiser company. He also looks after the training of the franchisees. He helps the franchisees to realize their objectives. A franchise consultant helps franchising companies to franchise their operations. Franchising is not a panacea for business expansion under all situations. At times, net receipts from franchises may be less than the net receipts from companyowned operations. It takes almost half a year to an year for the franchisees to break -even. Running a franchise store requires a different set of skills. There is a trade body called Franchising Association oflndia which organizes annual exhibitions and conferences. Co-branding is the future of franchising, and will offer tremendous opportunities in times to come.

AMUL PARLOURS Amul has forayed into retail in 2007, launching Amul Preferred Outlets or Amul Parlours, a franchise concept where the company will stock its entire range of pro ducts. They help the company in range selling. Shopkeepers who convert to an Amul Parlour have to pay a certain fee to the company and pay for the refurbishment oftheir shops. Amul supplies them its entire range on which the shopkeeper can gain an additional margin close to 2.5%. The company also gives promotional offers exclusively to these outlets to increase the traffic. In 2007, Amul collected Rs. 200 crore from these parlours. There are currently 5000 parlours (2008). By 2010, there will be 10000 parlours.

BENEFITS TO THE FRANCHISOR A franchise model leads to greater expansion with lesser financial resources. A franchisor decides the eligibility criteria for a franchisee. He realises money when products are delivered. He can exercise greater control by enforcing strict rules on franchisees. There is much at stake for the franchisees as they are the owners. They are thus motivated to work harder.

DRAWBACKS Brand equity of the franchisor is at stake if the franchisee fails to come up to the expectations of the customers. Customer loyalty can be adversely affected if there is no consistency amongst the franchised outlets. There may be competition between two franchisees. It is not desirable. Poor performance and management ofthe franchisees affect the franchisor. Franchisees demand more freedom for themselves.

32

Contours of RetaiDng Management

LEASED DEPARTMENT As the name itself indicates, it is a department within a departmental store that is made to an outsider on lease rental. It is run as an autonomous unit responsible for its profits and losses. Generally, it pays a percentage of its sales as royalty to the parent store. The leased department must conform to the design restrictions imposed by the parent store to maintain consistency. Leasing this way broadens the merchandise range. Leasing is useful to run specialized stores requiring specialized skills, e.g., a pharmacy, a salon, a foot-wear counter, a photographic studio, a cosmetic counter, food counters, etc. availabl~

Advantages 1. Useful for handling specialized merchandise. - 2. Broadens the merchandise range and makes available for the customers a variety of products under one roof. 3. Leased departments commit their own resources, e.g., inventory, personnel. 4. The lessees are responsible for promotion and purchasing. 5. It generates a cash flow for the lessor. Disadvantages 1. Their operating systems might be at variance with the parent store. 2. Customers aggrieved are aggrieved with the parent store. 3. Brand equity of the parent store might be diluted. Benefits for the Lessees 1. Brand equity of the existing store is responsible for the footfalls. 2. As some facilities are stored, costs are reasonable. 3. The lessor undertakes promotion as a whole and these result in savings for the lessee. Problems for the Lessees 1. There is operational inflexibility, e.g., working hours and operating style has to be in conformance with those of the lessor. 2. The merchandise made available in such departments is usually limited. 3. Success created its own problems. The lessors tend to increase the lease rental or may not renew the lease. 4. The sales generated may not be satisfactory.

I.) RETAIL FORMATS: STRATEGY BASIS The first major category of strategy-based retail formats is constituted by food-oriented retailers. The following are the major types of food-oriented retailers:

CONVENIENCE STORES These are neighbourhood stores, small in size, carrying limited merchandise of essential items such as bread, eggs, milk, etc. Supermarkets are huge and impersonal. Convenience stores with their personal touch appeal to the buyers. This category is yet to take roots in

Retail Theories and Formats

33

India, except a few petrol pumps where outlets like In & Out are set up. Convenience stores have also expanded their merchandise these days to items such as sandwiches, tobacco products, snacks, soft drinks, newspapers, magazines, alcoholic beverages such as beer and wine, lottery tickets and car washes. Convenience store spares the consumers a trip to a supermarket. Convenience stores operate for long hours, and are open for seven days of a week.

CONVENTIONAL SUPERMARKETS A supermarket is defined as a self-service food stOre. Its merchandise includes food products, groceries, meat. A conventional supermarket is departmentalised. It sells limited general merchandise. Supermarket is the harbinger of large-scale retailing. Self-service has build volumes for the supermarket, and has reduced costs. Supermarkets'owe their success to carownership and fridge-ownership. Supermarkets offer low prices to lure customers. Many supermarkets abroad have set up chains. Conventional supermar.kets believe in large stock turnover. In India, Food World chain is an example of conventional supermarket. Conventional supermarkets face the challenge of other formats - convenience stores, superstores and combination stores.

VARIATIONS OF SUPERMARKETS Food-based Superstores It carries wider assortment than a conventional supermarket, and is larger than a supermarket. But it is less diversified than a combination store, and usually smaller than a combination store. This format came on the scene in the 70s. Most superstores occupy an area of25000-50000 sq. ft. Apart from food items, they also carry general merchandise, e.g., appliances, wine, film developing, garden supplies and this contributes almost 20-25 per cent to their sales. Many supermarkets abroad have converted themselves to food-based superstores. Combination Store A combination store, as the name itselfindicates, combines food and general merchandise in the ratio of 60:40 of the total sales. Sixties and seventies of the last century witnessed the arrival of combination stores. Combination stores occupy an area ranging from 30000 to 100000 sq. ft. They are operationally efficient, and allow consumers to have shopping under one roof. General merchandise attracts better margins than that obtained on food products. Some combination stores have food and drugstore combination. Supercentre It is a combination of an economy supermark,et and a discount department store. It is popular by this name in the US, but is called hyper-market in Europe. They carry 80000 plus items. It is a format preferred by mass merchants. Wal-Mart, Kroger, K-mart prefer this format. Hyper-markets These are huge in size, occupying 1lakh plus sq. feet. They combine supermarket discount and warehouse principles. They have a combination offood and non-food items in the ratio of 60:40. They stock large number of SKUs, larger than the combination stores. The non-food items include garments, jewellery, hardware, exercise equipments, cycles, books, music, TVs, electrical accessories, computers. This concept was pioneered by Carrefour in France.

34

Contours of Retailing Management

Hypermarkets are most reasonably priced stores. Abroad, hyper-markets are on the outskirts of a city with other shops, cafeterias, restaurants and petrol pumps. They also house banking facilities, pharmacies and photo processing labs. Hypermarkets offer customers a destination shopping experience with everything available under one roof. It offers price-offs on MRP. There are plenty of products. The environment is conducive to shopping. Real estate, however, . will be the key factor in the growth of hyper-markets. Owing to the real estate scene in India, supermarkets are easier to roll out as compared to hyper-markets. In future, however, there will be a shift towards the hyper-markets, and the super-markets will become what the kirana stores currently are . Reliance has opened its first hyper-market in Ahmedabad.

Box Store: Limited-Line Store , . It is a food store having limited items mostly private brands and some manufacturer's brands. It carries few refrigerated perishables or does not carry it at all. Transactions are by cash. The merchandise is cheaper by at. least 20-30 per cent than the supermarket. Box stores are Europeans in origin, a 70's product which later went to the US. Warehouse Stores These are also cheaper'food stores carrying a moderate range of merchandise. It is a nofrills store. It appeals to one-stop shoppers. The focus is on special purchases of manufacturer brands. These stores buy the brands agai,nst schemes. Therefore, sometimes when there is no scheme, the brand may not be in stocks. The large warehouse stores are called super warehouse. They are located at industrial sites.

GENERAL MERCHANDISE RETAILERS Specialty Store A specialty' store is devoted to o'ne product line, say toys or apparel or furniture. Its assortment is deep. Their expertise is great. Consumers therefore, like to patronise them. They are not crowded places, and the merchandise is not unrelated to what the consumers need. It is easy to navigate such sores. Category Killer: Power Killer It is a new type of specialty store. It offers a large choice of merchandise at low prices. Consumers are drawn from far and wide. Toy R is one such store abroad stocking several thousand toys. They buy economically, and sell cheap. Nalli's sari shops can be .treated as category killer. In Bangalore, on Airport road, we have Toys Kemp. Traditional Departmental Stores It is a large-scale, multi-levelled outlet offering a wide range of merchandise which spans across several product categories. Each category of merchandise is placed in a department. It is an anchor store of an entire shopping area. Many departmental stores operate a chain. Marks and Spencer, Harrods, Sears and Selfridges are some famous international departmental stores. In India, we have Akbarally's and Superbazars. A traditional departmental store stocks moderate quality merchandise, offers self-selection and prices on the moderate to high side. It is responsible for many retailing innovations like same price for the same goods, computerized check outs, money-back schemes, decentralized management and going from down-town location to suburban locations.

Retail Theories and Formats

35

Traditional departmentru stores have oflate lagged behind owing to new formats, including malls, high pricing, non-availability of private labels, change in orientation, etc. They have to define their role and improve their services. They s1-.ould revisit their pricing policies. They should utilize space better. They should move to smdler towns.

Full-line Discount Store It is a type of departmental store which sells at economical prices a large volume of goods. Its turnoveris fast. There is self-service and minimal customer servj.ce limited to the centralized area. It has a mix of manufacturer and private brands. Mostly non-durables are private labels. It is operationally cost-effective, and is not ostentatious. Variety Store It is a cash store selling a wide variety of useful merchandise such as women's accessories, stationery, gift items, cosmetics, health aids, toys, light hardware and confectionery. Variety stores do not carry full product lines. It has minimum sales staff. They may not be organized departmentally. Dollar Stores They are versions of the conventional variety stores, but are simpler in their approach. Their prices are lower than those in the conventional variety stores. Off-Price Retailers They sell merchandise at lower prices. Their buying is economical, since they procure seconds, over-runs, and off-season items. They do not carry certain brands on a continuous basis. They sell brands which they can procure at deep discount. Some merchandise they carry may have minor defects. Such outlets can be owned by the manufacturer, or may be. operated as departmental or specialty stores. Factory-Outlets It is owned by the manufacturer. It stocks the merchandise made by a manufacturer. Textile mills run their own outlets. Consumer electronic firms also have factory outlets. A manufacturer uses the outlet to exercise control over the seconds sale which otherwise could have entered the mainstream market, affecting its image. As the operating costs ofthe way off factory outlets are low, it is lucrative to sell goods even at lower discounted prices. There is also, savings on account of the retailer's margins due to disintermediation. It channelises the proper disposal of the seconds and discontinued items. Membership Club It is also called a warehouse club. It is meant for price-sensitive customers. It has members who pay nominal fees. The purchases are made at wholesale prices. The members buy the merchandise either for their retail outlet or for personal use. Members contribute 60 per cent to the sales of the club. The club sells general merchandise, food and cosmetics. Their market is however limited to members. Recycled Merchandise Retailers These stores sell rejected clothes, furniture, sporting goods and computers. The retail format could be a pawn shop, thrift shop, consignment shop or even flea markets.

36

Contours of Retailing Management

A flea market has many retail vendors who sell products cheap. Traditionally flea markets used to sell used merchandise but these days they sell new merchandise too. Individual retailers rent space in a flea market. Price haggling is one prominent feature of a flea market. Transactions are by cash. Off-price chains, factory outlets, warehouse clubs and flea markets are low-cost operators. They cater to price-sensitive customers. Liquidators When an established retailer shuts shop or downsizes its operations, a liquidator comes in to sell the left-over goods. Liquidators pay cash to cash-starved retailer, and take the risk. Some liquidators just perform the sale, and guarantee a minimum return to the retailer. It requires special skills to run such closeouts. Cash-and-Carry Ventures Cash and carry ventures offer attractive prices for its merchandise. The local kirana stores can source their requirements from such stores, they manage to save an extra 3-5% on their sourcing cost. These cash-and-carry ventures improve the supply chain of mom-and-pop stores. The policy of cash-and-carry was established at the onset of World War II in 1939. The US economy was showing signs of revival after the Great Depression. There was however, still a need for industrial manufacturing jobs. The cash-and-carry programme helped to solve this issue. The US benefited through sale of cash-and-carry programme to its Allies. It also ensured that the US did not give away all its supplies and rations. This programme helped Britain and France who were not faring well and required war materials. Any allied ship that could make the risky trip across the North Atlantic to the US coastal ports could get war materials for cash. Depite its success this policy soon left the Allies, especially Britain bankrupt. This forced the US leaders to revise the policy.

MALL A mall is not just a structure that houses retail outlets which are leased out and recreational facilities. It calls for mall management right from research before it is opened to the positioning statement that defines its character. A mall has to spend a certain percentage of its revenues on advertising and sales promotion. Rents charged at the mall are not a function of location, but of the business generated. If mall developers sell the space, the mall is likely to lose its character as retailers are likely to use the space as they wish. A mall may have vacant stores, and vacancy upto 10 per cent is acceptable. But a vacancy beyond this invites trouble. A mall must attract footfalls. It must be a fun place. Retailers will have to devise methods to attract footfalls constantly. It is like bicycle pedalling. The moment you stop pedalling, you fall. They need to connect to the customer. Footfalls must be traced continuously, and must be compared to the corresponding previous period. A fall in footfall must be analyzed and corrected. Special events can be arranged at malls to create a buzz, e.g., film shooting. In the beginning, people visit malls for the novelty factor, but over a period of time, the novelty factor wears out and only serious shoppers visit the mall.

Retail Theories and Formats

37

While Indian cities lay red-carpet welcome for the malls, citizen groups in the US are opposed to these big box stores. Malls cripple the small entrepreneurs, essential to any vibrant economy. Right now in India, papa shopper, mama shopper and baby shopper are all o:ut at the malls. Though there are footfalls, there is not enough high-value shopping happening.

DIFFERENTIAL RENTALS The developer of mall works on differential rentals for various retailers. The anchor retailer gets the most favourable rate, while others pay as per their capability and business proposition. The anchor provides a good following, and give culture and character to the mall. There is a turnover-based rental model. Select Citywalk in Delhi has adopted this model. For a given month, the tenant pays higher monthly minimum rent or a percentage of sales, whichever is higher. This is the most perferred model in the US and the UK. In-Orbit, Malad follows the same model.

MINIMUM GUARANTEE DEALS The developer fixes a floor rent as rental and then fixes a share in the percentage of turnover. It ensures that better performance by a retailer leads to better profits for the developer. The deal could be Rs. 15 per sq. ft. as rental or one per cent ofturnover. If the outlet performs better by building volume, it could fetch the developer Rs. 30-35 per sq. feet. Such deals could be at 1-10 per cent of turnover, depending upon the type of retailer. If the business proposition is very strong, the deal could be just on the basis of a certain percentage of turnovers. There is revenue-sharing between the retailers and the mall owners instead of conventional rentals. A fixed charge and a particular percentage of revenue can be given to the owner (say 5-15 per cent). The fixed charge of a certain amount per square foot per month (say Rs. 25-30 psftlpm) is the minimum guarantee money. Lease rentals cost higher, say between Rs. 150 - Rs. 500 per square foot depending on the location and the city. In view of the high real estate cost in India, under this. model, it takes longer for the developers to get their returns. Yet, the trend is catching on. .

RENT-FREE PERIOD This is a period between possession and the commencement of business. Generally, it is one to two months. The rent is waived by the developer for this period. The developer at times waives the security deposit for key retailers just to attract them to the mall. According to Chesterton Meghraj report, in 2006, 26 new malls will come up in metros, adding 7.1 million sq. ft. of retail space. A mall is pre-booked to the extent of 40-50 per cent before it is ready. As such, it is a lo"Y'lrisk business. Over the next 3-4 years, 300 malls will come up across the country. It will translate into over 50 million sq. ft. of retail space. By 2010, over 600 malls are expected to come up across the country'. That would be 100 million sq. ft. of new high quality retail space.

38

Contours of Retailing Management

.9lppenaii( Retail Player

Tatas

Plans

Westside life-style stores. Star India Bazaar - Hypermarkets

Ambanis

Webworlds, Petroleum retail outlets, Java green coffee shops

ITC

Choupal Sagars

HLL

Lakme Beauty Salons, Ayush Therapy Centre, 7-eleven type convenient retail stores

Hero Group

Broadband retailing

Bharati

Raymond - hypermarket, Wadia Godrej - Environment Scanning

Wadias, Singhanias, Godrej RPGGroup

Health and Glow - beauty centres, Music World - music stores, Food World and Spencer's - hypermarkets

Ajay Piramal

Pyramid Life-style stores with supermarkets. Choupal Sagars

Life-Style,stores,

HOT RETAIL FORMATS Category

Players

Food and Grocery

RPG, Pantaloon, Tatas

Life-Style Retailing

Shoppers Stop, Pantaloon, Pyramid, Westside, Lifestyle

Consumer Durables

Vivek's, Vijay Sales

Rural Retail

ITC

Broadband driven

Reliance Infocomm

Fuel-pump driven

Indian Oil, BP, HP, Reliance

Retail Theories and Formats

39

MALLS •

Citi Mall, Andheri is the first mall in Mumbai to have a multiplex. The multiplex is r\ln by Fame Adlabs. The mall is set up by Ajmera Builders. It has 2 escalators, 3 multiplex, 100 shops, 1 multiplex with five 'Screens, 1 food court. It has parking space for 300 cars.

•

Every mall must have a focal point. It could be an atrium. Crossroads has a huge atrium. It is used to hold events. Crossroads has knit together three existing buildings of Roche Pharmaceuticals. It has 1.10 lakh sq. ft., 2 escalators, 1 restaurant, 1 food court, 1 entertainment zone, parking space for 175 cars. In-Orbit, Malad is by far the largest mall in Mumbai with an area of 5.5 lakh sq. ft. It is architecturally sensitive to the physically-challenged. All areas are accessible to them. It has 7 escalators, 21 restaurants, 85 shops plus 4 stores of50000 sq. ft. approx, 1 entertainment zone, 1 play area for children, 1 six-screen multiplex. It has parking space for 1200 cars.

SCENE ABROAD Golden Resources, Beijing 6 million sq. ft. 230 escalators; More than 1000 stores; Restaurant space-the size of two football fields Skating rink

WEST EDMONTON HALL, CANADA 5.3 million sq. ft. 800 retail stores Over 100 restaurants 6 amusement attractions A 335-room hotel A casino An indoor wave pool 26 movie screens in two multiplexes.

MALL OF AMERICA, BLOOMINGTON, USA 4.2 million sq. ft. More than 500 stores 50 restaurants Big enough to hold 32 Boeing 747s 14-screen multiplex An aquarium

40

Contours of Retailing Management

DUBAI - SHOPPING PARADISE Shopping Hotspot Mall of the Emirates Ibn Batuta Mall

Souk MadinatJumeirah

Burjuman Centre Deira City Centre

WafiMall

Emirates Towers GoldSouk Spice Souk AI Air Plaza (Computer Plaza)

Remarks 400 retail outlets, theatre, ski centre. Themed around six countries China, India, Persia, Egypt, Tunisia and Andalusia Various restaurants and cafes, Supermarket, Multiplex Cinema 75 shops Numerons bars, restaurants, cafes, night club and theatre. Expensive, Targeted at tourists. Premium and luxury boutiques. Restaurants (not serving alcohol) Most popular mall, High street brands, Multiplex, Restaurants and cafes, Souvenir section, Traditional textiles area. Carrefour hypermarket is attached. Luxury brands, Jewellery and expensive boutiques, Upmarket restaurants and bars, Luxury spa, Egypt-themed architechture. Part of the Emirates Tower Hotel complex. Popular nightlife spot. Not a mall, but historic market. Gold is sold in large quantities, Non-Ac. Like Gold Souk, as old as Dubai itself Non-Ac Specialised in computer-related products.

LOOT STORE: DISCOUNT STORE Jay Retailing and Merchandising has been rechristened as The Loot India Ltd. India retail industry will have many discount stores in time to come. Loot-Store is a multi-branded discount store with a wide assortment. It offers discounts ranging from minimum 25 per cent to maximum 70 per cent. The concept was launched in July 2004 in Mumbai. Within a short span, they have opened 16 outlets. The chain has a current turnover of Rs. 25 crore (2005-2006) but looks at a huge growth in the next fiscal. By 2008, it expects to reach Rs. 90 crore plus turnover.

Retail Theories and Formats

41

The >rganized discount store industry is about Rs. 200 crore. It is still an untapped category. Loot is among the first few retailers to get into this category. It is a mass market business and has a great scope to grow. Research shows that 45 per cent of brands produced are sold below MRP. It means the discount market is 45 per cent of the full price market. The growth in this sector is likely to be 40 per cent every year. Many players will jump into this category. This model has the potential to go to smaller towns and cities. Currently, Loot has 16 stores. It wants to increase the number of stores to 23 across India. They have a strategic alliance with Spencer's. They are in talk with other retailers to have a shop-in-shop. They will soon have a franchise model. They expect 100 stores by 2007-08, and a turnover of Rs. 300 crore. It has roped in Gulshan Grover as its new brand ambassador. It has tied-Up with Spencer's. It will have a shop-in-shop outlet at every Spencer's hyper-market. It spends 3-5% of its total sales on marketing. Previously, Loot was only a youth-centric store and products ranged from apparels, shoes and accessories targeted to this segment. The company plans to transform Loot into a complete family stores.

Contours of Retailing Management

42

City

Numbers ofMalls

Areas in sq.ft.

Delhi

29

6,533,374

Thane

27

6,575,000

Kolkata

34

741,660

Hyderabad

5

695,000

Pune

5

1,230,000

Bangalore

5

1,260,000

Mumbai Navi Mumbai

Chennai Others

2

1,350,000

20

3,179,830

Source: Images Study, 2005

Biggest Malls in the World Name

Country

Areas in sq. m.

South China

China

892,000

Golden Resources

China

678,000

West Edmonton

Canada

492,000

Panda

China

4,74,000

Grandview

China

418,000

Mall of America

US

390,000

Source: Interational Council of Shopping Centres

Retail Theories and Formats

43

First Malls: Chronology Country

Year

US Germany Brazil Japan France Spain' Thailand Turkey Argentina China Taiwan India

1957 1964 1966 1968 1969 1980 1981 1988 1988 1990 1999 1999

Source: International Council of Shopping Centres.

MallSpace per Capita Space in sq. ft

Country

US

20.2

Canada

12.8

Australia

6.4

Singapore

4.3

New Zealand UK

4.3 3.2

Japan

3.2

Source: International Council of Shopping Centres.

Spread of Malls by 2007 Region

North West South East

Spread in percentage

39 33 18 10

• 600 new malls have to come up in 2007 creating 68 million square feet of mall space. Source: KPMG-FICCI Retail Survey.

44

Contours of Retailing Management

MUMBAI MALLS

NIRMAL LIFE STYLE, MULUND Spread over 5 lakh sq. feet. A complete family destination. Mulund is a junction of Navi Mumbai and Thane. It targets a 5-million population that falls within a 30-minute radius from the mall. Anchor tenants - Shoppers Stop, Fashion Right, McDonalds. PVR Theatre, cafes and fashion tables. There is another mall at Mulund - R. Mall.

IN-ORBIT, MALAD WEST Set up in 2004. A family destination. High-end fashion brands. Cafes, restaurants. Hypermarket - Spencer's resident. Three-levels more than 70000 customers on weekends. Anchor tenants - Shoppers' Stop, Lifestyle, Charles and Keith, Marks and Spencer, DAKS, Cookieman. Videogames section. Pizzahut; Naturals, Four segments ofcustomers-BPO employees, young families, Malad residents, customers across the city. It is the second largest mall in South Asia - 500,000 square feet of buying space across three levels. About 50000 people (footfalls) enter the mall on a Sunday.

RAGHULEELA, KANDNALI (WEST) First birthday in April 2006. Area 450000 sq.feet. 700 stores. Two banquet halls. 12000 sq. ft. terrace. Food courts. Anchors - Tru Mart, Blue Square, Koutons, Tomato, Killer, Madame. Four-Screen Fame multiplex.

HUMA MALL, KANJURMARG Bargain on labels. 22 stores and factory outlets. Four screen Adlabs multiplex. Two restaurants, food court. Area 25000 sq.ft.

HYPE RCITY With the opening of HyperCITY at Link Road, Malad, Mumbai, a true hyper-market measuring 1,20,000 sq.feet has arrived in India. Its promoters are K. Raheja group ofthe Shoppers Stop. HyperCITY is headed by Andrew Levermore and B.S. N agesh, two experienced retailers. The group wants to set up several new stores across cities but has put the plan on the backburner due to recessionary conditions. Its assortment is distinctive and dominant. It provides international shopping experience. Hyper-market is basically a large format store. It is a single point of contact between the brand owners and the customers. It showcases an astonishing array of product categories groceries, food, home needs, apparels and consumer durables. The customers enjoy low prices and great savings. Hyper-markets also offer time-pressed consumers convenience, variety and value for their money - all under one roof.

Retail Theories and Formats

45

Everytime, the consumers walk into the HyperCITY, they will have an opportunity to discover something new and exciting. HyperCITY has entered into an exclusive supply arrangement with Waitrose, a top supermarket chain in the UK for high quality food. All fixtures have been sourced from Yonguan, a Chinese company. Wanzl has supplied trolleys with skid-proof design and travelator locking system. BaxGlobal, an SCM company, is providing end-to-end logistics and SCM to HyperCITY. Their support extends to warehousing, repacking, labelling, promotion bundling, bar coding, quality checks, transportation of stocks, home delivery, etc. JDA has offered the mall's merchandise management system (MMS). JHP, London is responsible for in-store design. It gives the store a fresh and modern look. The USP is 'there is more to discover.' Every department is colour coded to give a sense of personalisation. The lighting is different for different products. There are 30 check-out counters to ensure faster check-outs. There are private labels across all categories. HyperCITY has developed a co-ordinated range of clothing, footwear and accessories. There is an ATM. There is a customer self-scan and check-out facility. There are disabled-friendly facilities. The store is kid-friendly. There is a 24hour pharmacy with two in-store restaurants. Hypercity is the first food outlet from the management of Shoppers Stop. The K. Raheja group proposes to invest around Rs. 1500 crore for setting up 68 hyper-markets named Hypercity and 250 convenient stores named Expresscity. There would be a third format for high-end consumers which would be set up in Mumbai in the near future. Vishal Mega Mart It operates 29 integrated stores.

SPENCER's At present, there are 125 Spencer shops. By 2009, the RPG Group would take the number to 1000 outlets with an investment ofRs. 1000 crore. It will become the flagship retail brand of the group. Between 2009-11, there will be further expansion of retail operations. The formats used are express stores selling daily use items, cell-comm express, super stores, book stores, music stores and hypermarkets. They have introduced private retail label in stores. So far for its 125 stores, the company has invested Rs. 300 crore. Subhiksha Subhiksha In Sanskrit, it means the giver of all good things in life Promoter R. Subramaniam, MD and founder. B Tech from IIT and MBA from IIM - A (Gold Medallist) Floated Subhiksha in 1997. Journey From a single store in South Chennai to more than 450 outlets in five states. Their first outlet was of 1500 sq. ft. Selling Method They started with 'across the counter' method, but now all outlets have adopted self-service.

46 Business Model

Competitors Competitive Advantage

IT

Plan Hub and Spoke Model Cluster Bombing Approach

Contours of Retailing Management

Every Day Low Price (EDLP). The same model is followed by retail giants such as Wal-Mart and Tesco. Sustains low pricing constantly. Passes on savings generated by scale and efficiency. Local kirana stores. Leverages centralised purchasing and supply chain management. Buys directly from FMCG companies, thus cutting costs. Subhiksha uses IT which is a key enabler and difi'erentrators between operations well-run or not well-run. Proposes to set up 1000 stores across India. It readily replicates stores in a region without increasing complexity of operations. As opposed to opening 3-4 outlets in a city and expecting the entire city to converge there, they open multiple outlets across the city.

CORE STATUS FOR COLD CHAINS India is the world's second largest fruit and vegetable producer, but has cold storage for 10% of the prodllce. It results into huge losses offruits and vegetables, say to the extent of3035% of60 million tonnes of them. It amounts to an estimated loss ofRs. 58,000 crore. IfIndia has to provide cold storage facilities at current production levels, it requires an investment of Rs. 15,700 crore. To boost organised retail, the Government is considering the move to provide infrastructure status to cold chain facilities. The provision of an integrated cold chain at various stages from farm gate to the consumption point is one of the most important requirements of the food processing industry. At present, there are 5000 cold storage facilities in the country with a total capacity of 19.54 million tonnes. Most of it is in the private sector. Most of it is used for potatoes only, and only 0.2% is used for other fruits and vegetables. There is cold chain for meat, dairy and frozen foods.

RETAIL PLANNING Planning is about thinking of the future, setting goals, formulating strategies to attain them, and implementing these through programmes. We have to see whether what we planned has been achieved or not. It is called controlling. Planning and controlling are two parts of the same coin. They are like the Siamese twins, deeply entangled with each other. Each plan iii based on certain premises or assumptions. Each plan requires a variety of decisions.

STAGES IN PLANNING There are several stages in retail planning.

Situational Analysis A retailer considers the overall environment around him. He has to decide where he is at present, and where he would like to go. He has to adapt to the changing environment. A retailer has to carry out what is called SWOT analysis - the analysis of strengths, and weaknesses and opportunities and threats. Business opportunities are identified and then analyzed to see whether these can be exploited. Ifpeople would like to see a movie at home at reasonable . rates through a VCO, there is a business opportunity to set up a VCO hiring services. There are certain threats to the existing business, say multi-screen theatres are a threat to the single screen theatres. But these threats can be converted into opportunities by adaptation, e.g., a single screen theatre can be converted into a mall with a multiplex. Business strengths are seen in terms of the expertise in running the business, the financial resources, the manpower available, the location, the distinctive competence, etc. Business weaknesses are the presence of strong competitors, lack of financial muscle, way-off location, inexperienced manpower, lack of expertise to run the business, etc. A retailer has to scan the environment, and study the trends. He should be a pioneer in tapping the business opportunities. A laggard gives leeway to the competitors, and misses the early advantage. Certain goals and strategies are capable of being modified soon, e.g., merchandise decisions. Some decisions such as location is not easily modifiable. Situation analysis leads to a retailer's business mission. Business Mission It is also called a statement of business purpose. It spells out what a business is expected to achieve. It shows a retailer's commitment to a distinct type of business. A mission used to be

48

Contours of Retailing Management

desired only in terms of product/merchandise to be sold. These days, however, it has been broadened and is defined in terms of the consumer need it serves. Thus, a chemist can say he sells medicines or he can say he is in the healthcare. This makes him sensitive to other business opportunities such as exercise equipments, pathological testing, wellness counselling, etc. Business mission also decides whether we would play the role of a market leader or follower. Most mission statements include the business philosophy such as 'giving customer satisfaction' or 'clean and pleasant environment', etc. Business mission also mentions the target audience of the business, e.g., a coaching class for lIT aspirants, a beauty parlour for young women, a supermarket for quality-conscious households. I

OWNERSHIP/MANAGEMENT ALTERNATIVES When setting up a retail store, the first thing to do is to choose a legal structure for the business. It is a part of the business plan. A structure should satisfy the business laws prevailing at the time of setting up the store. A retailer can adopt out of several forms of business organization. Most mom-and-pop stores are sole proprietorships where the ownership and management are cent:ralized in one or a few individuals. There the capital is brought by the owner-manager either through personal resources or loans or a combination. The owner takes all the risk. This form is quick to react to changes, and is here to survive as a neighbourhood convenience store. A partnership firm is either registered or unregistered. There is either an oral or preferably a written partnership deed amongst the partners. Partners bring in capital in certain proportions. Partners have unlimited liability. They also have individual and joint liability. The profits are shared as per the agreement. Partners can dissolve the partnership firm. A corporation is a legal person having perpetual existence. Its capital is contributed by the promoters and many shareholders scattered over large geographical areas. Organized retail requires huge financial resources, and generally organized as joint stock companies. Apart from the shareholders who are the owners of the company, a company can borrow funds from the financial institutions and individuals. A company is managed by a Board of Directors elected by the shareholders. A Board takes policy decisions. The decisions of the Board are implemented by a CEO - Chief Executive Officer. A CEO is assisted by several line and staff managers who are paid employees of the corporation. In this form there is a divorce between ownership and management. It is thus a revolutionary form. The liability of the shareholders is limited to their shareholding and thus, their personal assets are not at risk. It is a limited risk form. A company is registered under the Companies Act. The voting rights of the shareholders are in proportion to their shareholding - one share, one vote. A company has a Secretary who signs on behalf ofthe company, which has its own seal. A company can sue, and be sued by others. A company has perpeptual existence unless it is wound up. A co-operative society is another corporate organization form popular in India. Several supermarkets such as J anta Bazaar and Chinthamani (Coimbatore) are consumer co-operative societies, the capital of which is contributed by the shareholders who are called members. A cooperative society is run for the benefit of its members. Here, the principle is one for all, and all for one. The voting principle is one man, one vote rather than one share, one vote as in the company form. A co-operative society is formed under the Co-operative Societies Act, either state act or multi-state society under the central act. Amul is a co-operative organization.

Retail Planning

49

Organized retailing in India was given a boost in the co-operative sector in the 70s. The purchases were made by the federations ofthe co-operative societies, either National Federation or State Federation. NCCF is the National Consumer's Co-operative Federation, located at New Delhi. The individual societies bought goods on their own, and through the federations. There is a training organization for senior managers called Vaikunth Mehta National Institute of Cooperative Management (VMNICM) based at Pune. There is a Ministry of Co-operation at both the State and the Central level. A retailer can be franchisee of a manufacturer or service provider, e.g., Monginis pastry stores are run by the franchisees on behalf of the franchisor. The franchisee is the owner, but the management assistance and technical know-how is given by the franchisor. The franchisor is paid royalties as a percentage of sales. Ownership pattern affects the overall planning. A mom-and-pop store has informal planning and a corporate store has formal planning. A mom-and pop-store manager has all the authority but a professional manager operates under several constraints. There can be centralized or decentralized planning.

MERCHANDISE The line of merchandise chosen could be fast moving consumer goods, consumer durables, personal services, amusement services, repair and maintenance services and hotel catering services. A person's aptitude, qualification and expertise determine the line of merchandise chosen. Certain businesses and services require special professional qualifications such as Diploma in Pharmacy for a chemist shop, an MBBS for a clinic or a BDS for a dentist. Some skills are learnt by training, and some are innate. Persons with different set of skills come together to synergize in running a business.

FINANCIAL PLANNING A retailer has to raise finance for his outlet. The financial resources must be planned to set up a store and then to run it. The typical investment pattern of a retailer is given below:

Investment Needs of a Retailer Property: Acquisition or lease cost Fixtures (Lighting, carpeting, display units, storage, etc.) Equipment (Computers, office equipment, cash registers, etc.) Inventory (Merchandise) There are certain expenses he has to make: Manpower (Sales staff, stores staff, cashiers, etc.) Promotion Withdrawals Miscellaneous: Repair and maintenance Bad debts

50

Contours of Retailing Management

Professional services Loan servicing A retailer has to acquire funds for his investment needs and expenses. The common sources for funds are: Share CapitaJ/Personal Savings Long-term Loans Short-term Loans (Working Capital Loan) Sales Revenues The collateral offered for bank loans could be property, inventory, fIXtures or personal guarantee.

STATEMENT OF GOALS AND OBJECTIVES This is the second step of retail planning. Goals and objectives are drawn from the mission statement and show key result areas. They provide direction to the retailer and a standard for performance comparison. There are market performance objectives such as sales and market share and financial performance objectives such as profitability. In addition, a retailer can have societal and personal objectives.

SALES It refers to the volume of merchandise a retailer sells. Most often a retailer seeks growth in sales, stability in sales and market share. Market share is the retailer's sales as a percentage of the total market sales for the product line under consideration. Market share does have an effect on profitability.

PROFITABILITY Mostly a retailer sets a profit objective in terms of the net profits after taxes (NPT), which is called bottom-line. Profits can also be expressed as a percentage of net sales. Those retailers whose investments in fixed assets are heavy define profits as return on investment (ROI). ROI refers to the relationship of company profits and investments in capital terms. Return on Investments could be interpreted as Return on Assets (ROA) or Return on Net Worth (RONW). The ROA indicates return on all capital-whether contributed by owners or cr~ditors. RONW, on the other hand, indicates only the return on owner's contribution.

51

Retail Planning

The following diagram explains the concept of return on investments: Net Profit Margin

Asset Turnover x

Net Profit

= Total Sales

=

\.

TotalSales Total Assets

..J

~

Financi al Leverage

Return on Assets (ROA) Net Profit Total Asset~

x

=

Tota I Assets Networth

Return on Networth (RONW) Net Profit After Taxes

=-------Networth SOCIETAL OBJECTIVES A retailer may have some social concerns such as employment generation, philanthropic activities, socially responsible behaviour in payment of taxes, giving consumers a wider and better choice of merchandise and treating them fairly.

PERSONAL OBJECTIVES Retailers provide opportunities to employees for personal growth, social prestige, selfgratification and enjoying power and authority.

SATISFACTION OF STAKEHOLDERS There are several stakeholders - shareholders, debtors, consumers, vendors, employees and Government. A retailer tries to give as much satisfaction as possible to these stakeholders.

STORE IMAGE OR POSITION An image is a perception of the consumers and others about a store. One of the main goals for a store is to create an appropriate image about the store. A store could be conservative or laidback or fashionable or a modern. A store can be high-price or discount store. If the image created in the minds of the consumers is what the store intends to create, it is a successful image. In positioning, a store is put into a slot of the consumer's mind against competitive stores. A store can be a women's undergarments store as against the general stores, supermarkets, departmental stores arou~d it. A store can have a mass merchandising position with wide and/or deep merchandise or niche merchandising position which caters to a specific segment.

52

Contours of Retailing Management

TARGETING CONSUMERS Every retailer has to identify his target audience, e.g., mass market, teenagers, women, sports enthusiasts, patients, car owners, students, etc. A retailer caters to a particular segment or segments. It is his target audience. When he caters to a large number of consumers, he is in fact targeting a mass market. If he focuses on a specific segment, it is called concentrated marketing. In differentiated marketing, the focus is on two or more separate segments, and each of these are given a separate retailing programme. Departmental stores and supermarkets are in mass market. A sports retailer sells to sportsmen and sports enthusiasts. It is concentrated marketing. Retail chains have divisions appealing to different segments, e.g., regular price stores and discount stores. It is differentiated marketing. Each retailer has a target audience which shows typical demographic and psychographic characteristics. Some retailers cater to high-income upper-class customers, whereas some to middle-class moderate income customers. A retailer has to assess the consumer's buying behaviour to serve the target audience better.

STRATEGY A retailer has to realize his goals and objectives by carefully designing his strategy. A strategy is a plan that on implementation leads to an expected level of performance. A retailer's strategy has two major com ponents - those variables which the retailer can influence directly or the controllable variables and those which affect him more and he has to adapt to them or the uncontrollable variables. The business hours, the merchandise mix, the prices, the sales persons-these are the examples of the controllable variables. Competition, economy, business laws, technology - all macro factors are the examples of uncontrollable variables. The organization mission, ownership/management decisions, merchandise selection, goals and objectives and the target audience are all parts ofthe plan. These are subject to management of controllable variables and the adaptation to uncontrollable variables. It leads to the development of overall strategy. A retailer's strategy generally covers three areas: how to have more footfalls in the stores, how to convert these footfalls into sales and how to do so at the least possible cost, and at an appropriate level of service. A retailer has to differentiate itself from his competitors. Most of the times there is focus on price promotions. These are temporary in its impact. Any other retailer can also do the same and lure our customers away. A retailer has to reduce the operating cost to offer lower prices on a sustained basis. There are other methods of differentiating on the basis ofmerchandising, the after-sales satisfaction, the selling process, the availability ofinventory and location. A retailer's goals and objectives and its strategies are co-related. Goals and objectives show the direction of travel, whereas strategies show how to travel with the availabl~ resources.

CONTROL A retailer revises his strategy from time to time against the mission, objectives and target market. It is called a process of retail audit.

Retail Planning

53

Those elements of strategy that are contributory to the desired performance are allowed to stay. The others are revised.

FEEDBACK Each stage in the development of strategy provides signals and information to the man.agement. It is called feedback. Good sales and customer satisfaction is the positive feedback. Declining sales and customer dissatisfaction is the negative feedback. The feedback enables the retailer to see where things have gone right or wrong.

.

Situational Analysis

.

Mission Statement

--..

Objectives

...

Target Audience

... r'

Strategy

--"'~

Control

~

~

~

..>0:

14

::§ 0)

~

r'

! ! ! ! !

Fig. 4.1 Components of a Retail Strategy

CHAPTER

5

.

SrroCR!,E

£OCflrtION

MARKET IDENTIFICATION A retailer has to understand which market it wants to cater to considering market attractiveness. India has so much diversity. Each region has its peculiar characteristics. All these must be understood. This is especially true for global expansion. Market analysis received attention of the researchers after the First World War. Various theories developed as a result are summarised in the panel below:

1-:-

Reilly's Law

Reilly's Law of retail gravitation puts the gravitation principle in the centre. It is also called retail gravity theory. William Reilly has developed this theory. It states that two cities attract trade from an intermediate place approximately in direct proportion to the population of the two cities and in inverse proportion to the square of the distance from these two cities to the intermediate place. Travelling distance remaining the same, people tend to shop in the larger city. Even farther travelling distance make people gravitate to the larger city. The assumption is that the larger city will offer better product selection. Mathematically,

Sa Bb

Where

=[Pa)(D b)2 Pb

Da

= the business which city A draws from the intermediate space ~ = the business which city B draws from the intermediate space P = population of city A • Ba

Pb = populationofcityB D. = distance of city A to the intermediate place Db = distance of city B to the intermediate place Thus, City A's population is 4 lakhs. City B's population is 10 lakhs. City X = 40 kms from city A = 100 kms from city B The customer would spend for every rupee spent in city B, Rs. 2.5 in city A.

Cont.

55

Store Location

Reilly's original law was revised to establish a point of indifference between the two cities. The point of indifference is the breathing point at which the customers are indifferent to the shopping at either city. The new law is expressed mathematically as: Dab

=

~d

1+ Pb

Pa

Where Dab =limit of city A's trading area in miles along the road to city B. In other words, it is the breaking point from city A in miles along the road to city B d = distance in miles between city A and B along the major highway

p. = population of city A Pb = population of city B Thus, if p. = 180000 Pb = 20000 d = 40miles Point of indifference

= larger city 30 miles smaller city 10 miles

Dw

40

= ---r========= 1 + .J20000/180000

Reilly's Law rests on the assumptions that the two competing cities are equally accessible from the major road and their population is a good indicator of the availability of the products in two different cities. The major limitation of this law are that perception of distance is subjective, the time taken to travel is more important than the distance and the distance is measured along the throughfares and not along cross streets.

18000 Population

Point of Indifference

20000 Population

SATURATION THEORY It is a method of identifying attractive potential markets based on the retail saturation. A market with too many stores to yield a fair return is over-stored. A market with too few stores to meet the customer demands satisfactorily is under-stored. Such a market gives a high yield on investment. Cont.

56

Contours of Retailing Management

Saturation is assessed in terms of existing store facilities and their exploitations. It implies a balance between the existing stores (supply) and their exploitation (demand). We have to calculate index of retail saturation (IRS) as follows: IRS

= (H x RE) RF

Where IRS = index of retail saturation for an area H =the number of households ofthat area RE = the annual retail expenditure for a particular line oftrade per household and RF =the square feet of retail facilities of a particular line oftrade in the area (including the square feet of the proposed store) IRS has numerator with two terms which when multiplied gives rupee sales and denominator which is square footage of retail space. Thus, IRS essentially is sales per square foot of retail space in the market for a particular line of retail trade. .

CENTRAL PLACE THEORY Christaller put forward this theory. It proposes a hierarchy of retail centres. The central place is the centre of commerce with a cluster of retail organizations. It is surrounded by smaller centres with specialist retailers. They in turn are surrounded by smaller centres with basic good retailers. The farther we travel from the centre, the lesser will be the demand as transport cost increases. Ultimately, the demand will touch zero, as beyond this the consumers would not travel further to get the product. Thus, range is the maximur.1 distance a consumer is willing to travel for a particular product. Threshold is a level beyond which a retailer will not trade since the demand is too low. It indicates the minimum amount a consumer must buy for the store to exist. The threshold differs from product to product. High threshold products are costlier and not bought frequently. Low threshold products are cheaper and purchased regularly. This theory facilitates our understanding of different shopping districts. The residents of an area dictate the needs of retail development. A range, technically speaking, should exceed the threshold for a store to be economically viable. The theory assumes a similar pattern of retail outlets. It, however, fails to explain the agglomeration of retail outlets where centre exists based upon a high number of similar retailers.

BID RENT THEORY Retailers, it is assumed, tend to locate in the central city or downtown area. This area thus, attracts maximum rents and are costlier. Some retailers can afford such central locations, whereas others move further away from these locations. Thus, the spacing of the retail outlets is based upon land value theory. Different types ofland, it is assumed are segregated depending upon the re!lt commanded. In a competitive environment in the long run, all sites will be occupied by the highest bidders of rent. Land is thus exploited to its maximum utility. The city centre has maximum economic activity, as it is the most accessible location.

PRINCIPLE OF MINIMUM DIFFERENTIATION Similar retail outlets are located at one particular place, e.g., a stationery market has all stationery outlets and dava bazar has all chemist shops. This forms a retail Cant.

Store Location

57

agglomeration. Some outlets tend to locate near complementary outlets, rather than similar outlets, e.g., booksellers are located near schools and colleges and chemist shops are located near hospitals and clinics.

ASSESSING THE MARKET POTENTIAL A market's potential can be assessed by studying the demographic characteristics ofthe market (size, sex, education, rural-urban break-up, etc.). This is further enlarged by studying household income and the distribution of this income. The competition and compatibility of the retail outlet also counts. The other retail outlets in the area are considered while deciding the location. The legal factors also must be considered before locating an outlet. The most important part is to do the trade area analysis.

TRADE AREA ANALYSIS Market potential is gauged by analyzing the trading areas - geographic areas which generate majority of the customers. Trade area has its boundary. Thus, each trade area has a certain potential or the number of potential customers. Each area is studied in terms of its demographic and life-style characteristics. A trade area can go beyond the limits of a town or a city. It all depends upon the type of merchandise and the market segmentation. Trade area analysis facilitates promotion decisions also. A trade area consists of three components with the retail outlet or shopping centre as its epicentre, and the other being treated as concentric rings. The three parts are: Primary Trading Area It is that part where majority of the customers are based, say 60-65 per cent. It is close to the store. Secondary Trading Area It is situated at a distance of 2-7 miles or under 20 min utes of driving time from the outlet. It contains 15-25 per cent of the outlet's customers. Tertiary or Fringe Area It contains the rest of the customers. It includes those who occasionally shop as an alternative to local shopping. It can extend upto 50 miles, where there is a lack of alternatives. The following figure illustrates the concept of the trade areas:

58

Contours of Retailing Management

Fig. 5.1 Types of Trading Areas

Trading areas are based on travelling time and distance. They need not always be concentric. There can be different sectors depending on different rents charged. There can be multiple nuclei where different types of activity tends to group together. Different types of businesses will have different trading areas - people may travel greater distances for certain product categories. A destination store has a better assortment of products, promotes itself aggressively and projects a positive image. It may have larger trading area than its staid counterpart located in the same shopping area. A parasite store on the other hand has no real trading area of its own. Such a store depends on traffic generated by some other outlet, e.g., a magazine vendor in a five-star hotel or a florist near a cemetery. The larger the size of the outlet, the greater the trading area. The logic behind this is that a large-sized store has greater product assortment. Trading areas for supermarkets are larger than those of convenience stores. Competition influences the trading areas. If shoppers happen to be situated between two stores, the size of the trading area of both the stores is reduced. If the two stores are situated apart, the trading area normally increases. Residential concentration near a store tend to reduce the trading areas. Geographically spread out housing means larger shopping areas. Travel or driving time also influences the size of the trading area. Differential taxation also affects the size and shape of the trading areas. A retail outlet can enhance its trading area by promotion.

Store Location

59

TRADING AREA OVERLAP A retail outlet can take business from existing stores or can cater to new customers. A store may have a trading area of 2 miles. It may set up a branch three miles away from the present store. There will be overlap in the trading areas of both these stores. In this overlapped area, the customers will receive service from both the stores. The same set of customers, in other words, are served by both the stores.

h

1m;l.

h 1

.-___ • --...r-f---+!-f---- • ----+-

~l

1 mile

Trading Area of Store A

~

2 miles

Trading Area of Store A

Fig. 5.2 Over-lapping of Trading Area

GIS: GEOGRAPHIC INFORMATION sYSTEM Retailer uses the Geographic Information System (GIS) software for mapping their trading area and its analysis.

SITE IDENTIFICATION AND' SELECTION Once the market potential is assessed, a retailer has to decide the site to locate the store. This site could be a vacant real estate, a plot ofland or the site of a planned shopping centre. Since many retail outlets go out of business, their vacant sites are available for occupation. Some of these sites may be ~inxed' by being failure-prone time and again. Some investigation is necessary before thinking of such sites either vacant in ready-to-occupy form or a vacant plot of land. The reasons for the vacancy must be carefully analyzed. A shopping centre or a mall will have a proper mix of stores, the appropriate infrastructure like the parking facilities, the security, insurance, etc. and healthy traffic. But maybe, the centre is not properly planned. A shopping centre may have non-rented galas which needs consideration. The fol!owing factors are considered while selecting the site:

Traffic Both vehicular and pedestrian traffic is taken into account. The traffic that passes the site indicates what its likely sales potential is going to be. The sheer numbers are' not important.

60

Contours of Retailing Management

The nature ofthe traffic too must be considered. A fashion boutique selling haute couture may have two alternative sites under consideration. One is in the downtown Mumbai with heavy traffic. The other is in an affiuent area like the Lokhandwalla or Santacruz-Juhu with sparse traffic but of the rich and famous. It is better to opt for the second site. Most importantly, these days while selecting the site is the availability of sufficient parking space. There the shopping malls are at an advantage. The space for parking cannot be exactly pinpointed. It depends upon the number of customers, the public transport available, the size of the store, the frequency of customer visit and the length of customers visit. Roughly, a store needs five spaces for every 1000 sq. ft. in midsized centres and ten spaces in large centres. The case of access is another consideration. It depends upon the quality of the access road. Customers generally tend to avoid highly congested areas. Malad Linking Road is easily accessible, and so a good location for the In-Orbit Mall.

Competition Who are our neighbours? They can be good or bad, depending upon the nature of our business. A coaching class and a pub are not good neighbours. A teaching institution and a bookstore are good neighbours. Goodness here refers to compatibility with our line oftrade and badness to incompatibility. Store compatibility improves sales. Two bookstores side-by-side do greater sales than what each would have done had they been alone. Clustering is helpful to customers to do comparative shopping and provide them easy access from store to store. Buying/Leasing A site can be purchased outright or can be obtained on lease. The lease terms require careful study - whether the period of lease is long or short and the rent that is charged. A short lease may necessitate a change oflocation. A high lease rental may affect the final accounts. Product Mix Merchandise available for sale also influences the site selection. A grocery store may be located in a residential society. It may not work out in a commercial business district. Anticipated Profits Each possible site is evaluated on the basis of return (estimated) on assets. This will require three inputs - total sales, total assets and net profit. Each will vary from site to site. The retailers generally do their own search, approach the brokers and put ads in the media for site selection. Before selecting the site, a retailer prepares a comprehensive checklist. An illustrative checklist is given here.

SITE EVALUATION I. Site Location City/Town Address Far;ade . Area in sq. ft.

C~CKLIST

Store Location

61

ll. Demographic Factors Population - Households Life-Style Income Age

Education Occupation

llI. Traffic Vehicles passing Access road Pedestrians passing Congestion Physical barriers like speed-breakers Bridges, etc. IV. Competition Types of stores in the area Key players Direct competitors Collaborative possibilities

V. Site Characteristics Parking facilities Access Visibility . Compatibility Physical condition of the building Entrance and exit routes Safety aspects VI. Cost Lease cost and length Maintenance cost Restrictive clauses Voluntary regulations The sites are shortlisted from the available lot. The sites are actually visited. They are assessed. The official site visited report is generated.

DIFFERENT TYPES OF LOCATION SITES Various sites are available for locating a store. The product lines dealt with and the target population we have in mind and the format of the retail store-all these affect the type of site

62

Contours Of Retailing Management

chosen. A designer boutique of course needs a posh'location whereas a grocery store needs a modest neighbourhood location. The three typical options for location are: 1. The solitary site 2. A planned shopping centre 3. A business district or unplanned business district. 1. Solitary Site

It is a single free-standing store on a road or a street. It does not have for its company other stores; in a sen$,e it is isolated. It is obvious that it faces no competition. Being isolated, it does not pay a high rent, and offers enough parking space. Since the operational costs are low, these lead to consumer savings. Isolation itself makes it necessary to promote the location, resulting into higher promotional costs. The sharing of security and maintenance is not possible, again adding to costs. The solitary sites are preferred by food joints, dhabas on the highway, petrol pumps, convenience stores, garages, and warehouses. Distance is a constraint and it tells upon its customer drawing ability.

2. Shopping Centre When a group of retail outlets co-exist near one another, and are planned, developed, and managed as a single property, we get a shopping centre. Its architecture is unified. Mostly it has complementary retail outlets. Each shopping centre has some key stores and smaller stores so as to have enough drawing power for the -diverse products. " As a whole, it is a balanced property. A single centre gives opportunities to shop in comfort for diverse products. The centre itself is promoted as a brand. The security and maintenance are stored. The centre is marketed as a whole, e.g., Crossroads or In-Orbit Mall. The shopping centres are configured as malls and strip centres.

A Shopping Mall A mall is a huge complex of stores admeasuring at least 100000 square feet. It is an enclosed building and is all weather-proof or temperature-controlled. It has open pedestrian walkways, the sides of which have shops in a lipe. Ifa mall has more than one floor, then the anchor store or stores may extend to the higher floors, e.g., Shoppers' Stop at In-Orbit mall extends from lower storey to the first floor. A mall may be a free-standing one, or in a shopping area. Each mall has big brand stores and several smaller stores. A shopping mall is marketed as a whole. Each mall is successful depending upon the type of shops it houses. Mostly, ~ll retailers in the mall are non-discount ones except a grocery hyper-market. ' A Strip Centre , It is a row of stores with pushing facilities in front of the 'store. It is also called a retail park. Mostly, they are developed on the outskirts of the city. These are not single-building properties like the malls. Retail Park has retail outlets of at least 10000 sq. feet. 3. Unplanned Shopping Area Here, retail outlets are situated near each other at a retail location. The development happens over a period of time and is not due to any planning. The ownership is fragmented.

Store Location

63

The majority of shopping areas in the city are unplanned. It gives a good variety to the customers. It is easily accessible. The customers can take a comparative view. There are problems of parking and congestion. The overheads are high. Properties. may not be first-class. Manpower has to travel long distances, and so staff retention is problE:;matic. Retail stores located near one another at a centrally located place are said to be located in a Central Business District (CBD). CBD happens to be the main centre of trade and commerce in the city. The shopping area and the office area within the district are generally different. We have in N avi Mumbai CBD at Belapur. In Mumbai, CBD happens to be Fort, Colaba and Nariman Point. CBD is well-connected by different means of transport. In addition to CBD, a city may have one or more Secondary Business Districtls (SBDs). It develops when a city expands. Bandra-Kurla Complex (BKC), is developing in Mumbai as SBD. A neighbourhood business district is an unplanned shopping area developed to serve the local needs of a residential colony, e.g., Lokhandwalla at Andheri and I.C. Colony at Borivali have neighbourhood business districts.

Locational Decisions There are two broad decisions in respect of the locations - proximity retailing and destination retailing. Proximity retailing provides convenience either at the workplace or home. We have thus retailers like a neighbourhood bania, chemist, green grocer, petrol pumps, newspapervendors,~: general stores, etc. These retailers consider the traffic and visibility. They try to satisfy the local needs. They meet our routine and day-to-day requirements. Destination retailing pulls the consumers towards its location, which involves some travelling. The consumers are drawn to destination retailers, as they happen to be large supermarkets, departmental stores, hyper-markets, life-style stores, discount stores. Car ownership is the major contributing factor towards development ofthis type of retailing. Mostly, these stores sell specialty goods and high involvement goods. According to Paco Underhill, the worst location for retail store is next to a bank. It takes consumers 25 feet to slow down from a quick walk. There is nothing to look at in a bank's window, and so consumers pick up speed and do not slow down fast enough to notice the store directly next to it. .

SAM WALTON'S STRATEGY: BIG STORES IN SMALL TOWN Sam Walton concentrated on tapping the rural American market. Competitors who were .lready established such as KMart, Sears, Woolworths, Montgomery Ward were all metro"ased, and failed to notice Sam Walton's rural adventure. People believed there is no business in ,mall towns. But Walton's big box stores attracted customers from a radis of 50 miles. His mother strategy was to charge low prices. The bigger competitors were taken unawares. By the time they took cognisance, Sam Walton had enough muscle to take them head-on.

Store Sites The five essential factors that affect site selection are cost, the neighbours, the size, the iOok of the store, the direction in which the town is going - in other words, the future, and the catchments.

64

Contours of Retailing Management

Site selection science varies from category to category e.g., an electronics store follows different criteria than those followed by a food store. Luxury brand stores are located on the basis of market pOpulation, value and potenti~. The propensity to spend also matters. There could be scientific selection starting with the newspaper ads and interacting with the brokers. On the other hand, there could unscientific selection e.g., stopping the car and spotting a site. Just quantitative factors do not matter always. There are more important demographic or societal factors.

STORE DESIGN The design of the .3tore is not merely a matter of aesthetics. It communicates to the shopper what a store stands for. Store image is the launch pad for all the marketing activity. Store design must be understood for the point of view of both the retailer and the shopper. The exterior as well as the interior of the store is the part of the store design. A shopper requires a pleasant, easy to navigate store which gives him a sense of security, assurance and belongingness. The components like the merchandise, the sales staff, the cashiers, the location, the pricing - all these contribute to the store image. But the most important is the ambience that affects a consumer, and make him relate to the store. Ambience and other elements together create a desired image of the store.

STOREFRONT DESIGN Storefront is the most visible part of the store, and is a key to identify it. It should be memorable since it creates the first impression. It should carry the name of the store, and must indicate the type of merchandise it carries. The frontage, the architectural style, the location, the physical facilities, the display windows -all these are the part of the store exteriors. Display windows must be maintained on regular basis, with frequent changes to reflect the merchandise within. The building can have special architecture, e.g., a heritage structure. The . store theme is related to the clientele it serves and the merchandise it offers. If the store is a part of the mall, its exterior should be consistent with the image and design of the mall. The lighting of the exterior is also carefully considered. The exteriors playa great role in attracting the customers within a store.

INTERIOR DESIGN Here we have to consider the fixtures, the flooring and ceilings, the lighting, the wall coverings and the graphics and signages. The floor covering could be concrete, vinyl or wooden. There could be the use of marble, granite, vinyl or synthetic carpets. These surfaces leave an impression on the shopper. The floor covering could give a low-cost statement, upscale statement, home-like statement; or an exclusive statement. Walls can be painted or wood-panelled. Ceilings can also be variously designed - suspended ceilings' are very common. There could be various architectural designs from floor to wall to ceilings. Parking lots must be adequately lighted. Lighting plays an important role. There should be ambient lighting which is general lighting

' 66

Contours of Retailing Management

and special lighting for !'i'ome areas of the store, Coloured lighting can be used on the walls to give visual relief. Graphics and signages inform the customers about the merchandise, schemes, and prices. They also indicate the directions for traffic circulation. A store can follow a theme in graphics, or can have graphics as per the present advertising campaign or SP graphics. Sign ages can be directional, merchandise-related, instructional and courteous. Signs and graphics are examples of visual communication. Store design is also a sensory experience that touches all senses - sight, sound, touch and smell. Some stores employ greeters while the customers enter the store. Before allowing the customer into the actual selling area, some stores allow them to be in the decompression zone which acclimatizes them to the store ambience waiting for them. Smell creates mood, and one can introduce such smell in the lingerie section, tie section and so on. Piped in music brings about a relaxing environment. Music selection is based on the merchandise and clientele served.

RETAIL IDENTI'IY A retailer's name, logo and supporting visual elements are components of his identity. Name and logo are on the front of the store. Besides, they are used in all media ofcommunications consistently. Formerly, retailers named the stores after the founders, but this practice has slowly gone out offavour. Retailers now search for meaningful, tr~ndy, distinctive and memorable names. A logo is developed to accompany the name creatively. A tagline might be appended to the logo - each logo must be simple, yet suggestive. A single brand store can easily acquire a brand identity but it is challenging to have it in case of a multi-brand store. The store has to hold it against the various brands it stocks. This is resolved by following a 'shop-within-a-shop' approach. The store must have its unique layout and promotion. Visual communication must focus on the retailer only. The store itself should become a destination.

LIFE,S'IYLE GRAPHICS Various evocative life-style images can be put into the stores. These images may show the product in use. Or else, they may be images of celebrities projecting a life-style consistent with the merchandise. It creates a c()nducive climate and favourably disposes us towards the merchandise. Such photography should be general, and must not be offensive .

. POP: POINT OF PURCHASE Several companies spend 15-16 per cent oftheir total advertising and marketing budgets on POP. Many brands are becoming POP-Savvy. The POP is growing at a rate of30-40 per cent per year. It has a current turnover of Rs. 1,800 crore. POP enhances shopping experience. It overhauls a store's image, redirects stores traffic and helps organising product through shelf-management system. Displays can be used for extra

Store Design and Layout

67

merchandise. Displays also provide extra visibility to sale items. POP can be used to solve out of stock problems for seasonal items. It can be used to cross-merchandise related items. POP at the retail level includes: • High exposure for products • Product introduction • Sampling opportunities • Extending product of non-traditional venues • Leverage shelf objectives • Build traffic • Contests POP is both a strategic and tactical tool. It helps build a brand image and educates the customers. It stimulates impulse purchases.

LOCAL FLAVOURS Instead of copying a western format, a store in India should use the local flavours and custom while designing a store. A Japanese store can have elements like rock gardens and bamboo.

CURVES A 'big white box' design is being replaced by comfortable and pleasant ambience. Instead of straight lines, there is a tendency to use 'curves.' It wards off the feeling of being stuck in a box.

CHANGE A store has to change according to the changing environments. Its design has to be flexible. There should be more movable elements which can allow frequent design changes.

CIRCULATION Upon entering the store, most shoppers head in the right direction. The first 15 feet inside the store is called the 'transition zone'. Before this space, shoppers do not feel like they are inside the store yet. In organized retailing, large number of people move in the stores. They are to be exposed to the merchandise. Circulation pattern refers to this movement and exposure. It also determines the very nature of the store. There are four fundamental layout patterns in use - the free flow, grid, loop and spine. They have been described here. The circulation pattern along the aisles is:

Free Flow Smaller stores follow this pattern. The shoppers are free to move freely through all the fixtures. Merchandise is kept in a free flowing pattern. Merchandise is grouped into types such as garments, further sub-divided into tops and bottoms. If there is a variety of merchandise, it can be divided into core merchandise, convenience goods, and impulse goods.

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Contours of Retailing Management

+- Entry ......... Exit

Il11>ulse goods

Fig. 6.1 Free Flow Circulation

In free flow layout, a shopper is clueless when one department ends and the other starts. But since the store is smaller, the chances of confusion are less. Grid Here the counters and fixtures form long rows or runs, and are so placed that they form a right angle to each other. Shoppers move up and down. It is a typical supermarket or drug store layout.

[~

- - . Exit

Core Merchandise

Convenience goods

Impulse goods

Fig. 6.2 Grid Layout

In this type of layout many customers would like to traverse the entire floor area of the store, e.g., in supermarkets, customers would like to move up and down all the fixture runs so as to spot whatever they may need. Such a layout is, however, inconvenient when the shoppers need some specific commodity. Many-a-times, shoppers have to seek the assistance to locate the required merchandise. The core merchandise or staple goods such as the meats, the dairy products and other frequently purchased items such as cereals are placed in the rear of the store.

69

Store Design and Layout

Retailers must be careful and assist the shoppers, lest they go away elsewhere. Loop or Race-track It is a productive layout in which a customer enters the store and loops through the store usually in a circle, or a square or a rectangle and then comes outto the front of the store. This layout is used in larger stores. It exposes shoppers to the greatest possible amount of merchandise.

t t t

-+ -+ -+ -+ -+ -+

+-- +-- +-- +-- +-- +-Fig. 6.3 Race·track or Loop Layout

There should be sales assistance. Shoppers must be able to see the merchandise to the left and right. The aisle should, therefore, never stray more than 60 feet from the merchandise. Spine This is another form of the free-flow, grid and loop layouts, and combines the merits of all these three under certain conditions. In this layout, a single aisle runs from the front to the back of the store; along which the customers move in both the directions.

~

4

~

~

4

~

~

Cashier

I Fig. 6.4 Spine Layout

On both the sides of the aisle, merchandise is kept till the wall. The departments herf can be arranged in the free-flow form or grid form. Medium-sized stores use spine layout. Herrington circulation is used for a narrow store, where the aisle cuts the store lengthwisf with side-roads leading towards the walls from it.

70 .

Contours of Retailing Management

I I

I n

Cashier

Fig. 6.5 Herrington Layout

PLANNING THE FIXTURES AND MERCHANDISE PRESENTATION Space utilization must be very productive. Merchandise presentation therefore, acquires aqded importance. Merchandise presentation is an art, which is to be learnt hands on. Certain basic aspects of merchandise presentation are discussed here. In a store, we come across merchandise which is displayed on racks, shelves, counters and fixtures throughout the length and breadth ofthe store. This is called on-shelfmerchandising which comes in direct contact of the shopper. He can touch, try, inspect and understand this merchandise. We say "eye it, try it, and hopefully buy it." On-shelf merchandise must be good to look at and must be easily accessible. It should not be tedious for a shopper to replace the merchandise all by himselffor the next shopper. It should not be intimidating to the shopper or else no shopper would dare touch it. There are freak accidents on account of the falling merchandise. Goods stores put most merchandise at shoulder-length.

FIXTURES Retail fixtures are of three types-soft lines, hard lines and wall fixtures. "loft Lines Fixtures In fashion merchandise, we handle soft lines which are often put on hangers. Most widely used flxtures are four-way feature rack and round rack. Previously, a straight 'ack was used. It was a long pipe with legs on each end. The clothes were hung on it. This has lOW been replaced by specialized fixtures. The straight rack was simple to use, and carried arge amount of clothes. But it did not lend any distinction to the garments. Distinctive display s a key to sell more. Straight rack just gave a glimpse of the sleeves. It is good for a wardrobe vhere a person can identify clothes by sleeves on account of long usage. A shopper does not lave this awareness. The more the exposure, the better are the chances of his arriving at the lurchase decision. A face-out presentation is better than a sleeve out one. The round rack does lot look heavier like the straight rack. However, it also gives a sleeve-out display, unless upported by special devices. The four-rack piece is a feature fixture which presents merchandise rith its features. It also carries a considerable quantity of merchandise on the hanger arm/il ehind the four face-outs. However, the garments on each arm must be similar for the ease of hopping. If there is no matching between the face-out piece and the pieces behind it, it causes ~nfusion.

Store Design and Layout

71

Fig. 6.6 Four-way Feature Rack and Round Rack

Hardline Fixtures Gondola is the most widely used fixture in most hardline departmental stores. It is a long structure with a large base. It has a vertical spine or wall reaching upto eight feet. There are sockets or notches into the spine. In these sockets, different types of shelves, bins, baskets, peghooks and other devices are inserted. Gondola carries a wide variety of merchandise. You must have come across these heavy-duty structures in supermarkets. There are other hardline flXtures like tables, decks, large bins \Vhich are m,ostly used for promotional purposes or to display special merchanttise. . . Wall Fixtures These hang from the walls. There are vertical columns of sockets or notches to fit shelves, bins, baskets or hanger bars. These hanger bars like our wardrobe bar carry large quantities of clothes in a sleeve-out fashion. The bars can project out in a perpendicular fashion from the wall-either straight or at an angle, so as to present a face-out view ofthe clothes. Merchandise can reach a considerable height in the wall-system. The floor system are oflow heights to allow shoppers to see over them the other merchandise. The height of the clothes should not cross the accessible limit, say 6 feet at the most. Wall system can have two runs of garments (doublehang) or three rows (triple hang). Walls are appropriate to display a large quantity of merchandise. They provide a visual background to the sfore.

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Contours of Retailing Management

PRESENTATION PLANNING Merchandise can be presented in the following six ways:

• Hanging from racks, gondolas and walls. • Pegging on peg-hooks (a small rod inserted into fixtures). The presentation is appealing, though tedious to maintain. • Stacking on shelves, base decks or platforms on the floor. It is useful for hardline merchandise. It is easy to maintain, and gives a feeling of volume-sales oflarge quantity at a lower price. • Shelving on gondolas or wall system gives an element of flexibility. It is a major method of presentation. It is easy to maintain. • Folding is useful for premium soft lines. It is stacking on shelves or placing on tables. It gives a feeling of haute couture. Premium bath towels are generally kept folded on the table. • Dumping in bins or baskets is a promotional method used for softlines such as socks or hardlines such as groceries and cells. It gives a feeling of high-volume and low cost. Merchandise presentation does affect the buying behaviour. Research indicates that shoppers view a store while moving at an angle of 45° from the path of travel. Most stores are set at right angles to save space and to ease the setting. But racks can be adjusted to the line of sight of the shoppers. ~

~

a:

a:,

~

I

I I I

~

.

... ... , . ... " tn I ' ....... "~ ,

·'··~·D

Fig. 6.7 Shopping View

VISUAL MERCHANDISING (VM) AND DISPLAYS Visual Merchandising (VM), is the aesthetic display of merchandising and the use of decorative props to set the scene in the stores. On-shelf-merchandising is also tastefully done, but at times it looks mundane. Visual merchandising adds spice to the whole thing, though some low-price stores may make a mess of it. Visual merchandising displays are concentrated on areas away from the customer's reach or feature areas or a focal point. It facilitates the buying process. Visuals may not always display merchandise. Tlley might be just mood elevators or creators. There are many props to do so. Miniatures are used, e.g., planes, barrels, trees. Visuals correspond to the graphics in a book. It makes the whole thing interesting. It gives you a kind of shopping experience.

Store Design and Layout

73

Effective visual merchandising, however, employs the relevant merchandise, e.g., use of mannequin to show the clothes as they would look when worn. The garments can be mixed and matched along with the accessories. It becomes easier for the shopper to extend the garments on the rack to the garments worn in real life. Consumers prefer those stores which allow customers to touch and feel the products. VM is governed by two aspects -life-style and brand identity. VM has to support life-style. In addition, customers try to find synergy with what they purchase, e.g., a customer going to a sports store may not be an athlete, but may be a sports enthusiast. Visuals should not hamper the free movement of the customers to the other areas of the store. At POP Asia, 2007, VM & RD Retail Design Awards have been given to recognise outstanding retail design and visual merchandising efforts.

ELEMENTARY PRINCIPLES OF SPACE MANAGEMENT • • •

• •

The most important principle is customer convenience. It should over-ride all other considerations. The customer must be able to walk around freely. Ifhe browses through the merchandise, there is every possibility of his buying. Trading and non-trading areas must be carefully planned. Trading areas are designed to generate maximum sales. Non-trading areas add to customer convenience. They allow the customer to be in the store for a longer time. It directly contributes to revenues. Conduct regular space audits and carry out the corrections, if necessary. Ambience must appeal to all the five senses, and must be aesthetic. Ambience must occupy the mind-space ofthe customer. Space planning has to suit the requirements of the target audience. It must bring the customer back to the store again. It must establish a bond with the customer. • According to experts, the best layout for a retail store places the store's signature items e.g., suits in a men's clothing store at the back of the store. Clients then walk through the entire store to reach these items. This way the client can pick up extra items on the way or out of the store. \

DENSI'IY AND ITS INTERFACE WITH OTHER ELEMENTS Density and Merchandise Different retail formats stock different types of merchandise, and that influences the density. A furniture store and a designer's boutique stock a few pieces, and being exclusive they have low density of merchandise. A supermarket stocking groceries will have a very high density of merchandise - say 5600 plus pieces per 100 square feet. A departmental store h~ moderate density of merchandise, averaging 500 plus pieces per 100 square feet. A lower density means the store has to recover higher margins from the merchandise. A high density store has to drive volumes, and expects lower margins from the merchandise.

74

Contours of Retailing Management

DENSITY AND FIXTURES Jewellery has to be set against the backdrop of wood, marble and granite. Fixtures and merchandise must have a synergistic relationship. Fixtures enhance the value of merchandise. Density of fixtures and density of merchandise should be complementary to each other. It facilitates shopping.

DENSITY AND EMPLOYEES The number of employees for selling is proportional to the type of merchandise they sell, e.g., more sales persons to sell garments, and less in a departmental store.

DENSITY AND ODOUR Positive odour enhances the shopping experience and negative ones ward off the customers. The potency of odour also influences the traffic. Even the right odour which is too intense may not be liked.

DENSITY AND SOUND Agreeable and disagreeable sounds affect the store atmosphere. Pleasant sounds enhances the shopping experience, e.g., piped-in music. Unpleasant sounds do have a negative impact. The merchandise type determines the sound used.

CHAOS SELLS In some stores, as a matter of policy, the shopping aisles are so narrow that trolleys get stuck, there is spillage of grains on the floor, there are black spots on the onions, and there is noise all around. Elsewhere, people may like to shop in pristine and quiet stores. But such sterile environments do not appeal to Indians; especially the lower middle-class shoppers. Indian shopping is in the tiny, cramped stores with a lot of haggling. Some stores therefore, introduce noisier, untidy, chaotic elements as a part of the design. Dirty black-spotted onions provide an opportunity to customers to pick and choose. Both Big Bazaar and Food Bazaar stores seek to invoke the atmosphere of a public market.

WINDOW DRESSING Window displays have emerged as the most important art. Window dressing attracts attention, makes a statement and is a link between the customers and brands. The brands constantly update the window displays. The window displays can select a theme. Some use animation to liven up the windows. Windows convey a brand image. Outside windows entice customers to enter the store. Window displays have gone a long way from merely having a mannequin in the window. While doing window displays, a retailer must be clear about the objectives. The components that would make a display are decided carefully. The proposal of display is drafted by the visual merchandising team. The budget is fixed. A sample window is created first before the final rollout. The feedback is obtained.

SUPPLY CHAIN MANAGEMENT (SCM) Retailing is concerned with making the goods available to the consumer at the right place and the right time. This is possible only when the retailer assesses the needs and wants of the consumer correctly. He has to source the products from the right vendors and buy these products in the right quality and quantity. Though this sounds simplistic, it is a very complex procesS'. Consider a typical departmental store. It has several departments-garments, appliances, kitchen items, electronics, etc. Each department has several sections. In the garment department, we have women's wear, men's wear, and kid's wear. Each section has sub-sections like formals, casuals and fashion-wear. Each sub-section has several product forms such as saris, salwar-kameez, western outfits, lingerie, etc. Such product forms have differ~nt sizes, colours, styles. Collectively, it makes up a large number of items. The organization structure that deals with this merchandise has several functionaries such as merchandise managers, buyers, finance managers, floor managers, etc. It adds to the complexity. Each store has several hundred suppliers or vendors. They could be manufacturers or agents. The task to keep the supplies flowing to the stores from them in the right quality, quantity at right priCI:! is challenging. We have to understand the importance of supply chain management (SCM) and logistics in this chapter.

SUPPLY CHAIN A supply chain essentially is a network through which-the products flow from their suppliets to the customers. It performs the functions of procurement of materials, its transformation and processing and its distribution. A supply chain has to.ensure a smooth flow of the materials. In the traditional system, the materials management function was fragmented into buying, production, and distribution and selling. Supply chain integrates all these functions concerned with the movement of goods. It makes the system efficient in responding to the needs of the.customer. A supply chain works both in manufacturing and s.ervice industries. It optimizes production and selling functions. The goods flow from the raw material S'Upplier to the consumer thro~~h a chain. The information, on the other hand, flows from the customer back to the raw material supplier in the reverse direction. It helps in creating the right product.

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Contours of Retailing Management

Fig. 7.1 Elementary Supply Chain

EVOLUTION OF SUPPLY CHAIN MANAGEMENT Rising cost of the operations in the 70s and 80s was a matter of concern, and cost reduction of operations became the focus of the organizations by achieving efficiencies in those areas wherein there was greatest scope of cost reduction, e.g., purchasing, logistics, production, etc. Production Planning and Control (PPC) was developed as a technique. The entire supply chain management, rather than a small fragment of it, became the matter of attention. It led to the birth of the Supply Chain Management. The genesis of SCM can be traced to the garment industry in the US. This was a very competitive industry in the 80s. The Crafted with Pride was formed by the stalwarts of the industry, which undertook a study of supply chaih. The delivery time in the garment industry was found to be too long, 60 weeks plus, of which most of the time was in storage or in transit, about 40 weeks. This was an inefficiency, resulting in losses, due to inventory financing and unavailability of the products. To counter this, response time was quickened by what was called QR: Quick Response. For this, retailers and suppliers started sharing information electronically by ED!: Electronic Data Exchange. The products were codified under UPC: Universal Product Code. All this led to better product accessibility and lower inventory; reducing the costs. The supplies were m.a de floor-ready; and were supplied direct to the retail store, rather than a depot or distribution centre. The distribution costs were thus lowered. This influenced the grocery industry to develop Efficient Consumer Response (ECR) task force to make supply chain more efficient.

MERCHANDISING Merchandising is a comprehensive term that refers to everything we do to the merchandise such as planning, buying and selling. Merchandise management is the planning, procurement, handling and control of the merchandi se in retail operations. Merchandising has evolved over a period oftime, ahd has come of age now with organized retail with large-scale buying and selling.

MERCHANDISING PHILOSOPHY Merchandising philosophy provides the overall guidance to the retailer pert~ning to the merchandising decisions. Merchandising philosophy is a reflection of the aspirations of the tar~et audience a retailer caters to, the retail format adopted, the positioning adopted, the

Supply Chain Management (SCM)

77

competitive scene, the product trend, the value chain adopted and so many other factors. Product lines carried by a retailer, the shelf-space given to different SKUs, the inventory turnover, the pricing-all such important decisions are driven by the merchandising philosophy. The retailer's assortment with its depth and width isjust one important aspect of merchandising philosophy. Within the assortment, there are decisions regarding the quality of SKUs, the branding philosophy - whether national brands of private labels, the pricing policies, the stability of merchandising and the surprise twist. Merchandising philosophy guides the organization structure adopted and the staffingwhether it is going to be merchandising in its widest amplitude - both buying and selling or whether the staff to buy and sell will be bifurcated. Merchandising philosophy has generated two more trends-micro-merchandising which adapts shelf-space to the demand pattern of the buyers and cross-merchandising where a retailer carries complementary products and services, e.g., Shoppers Stop stocks not only apparel but accessories too.

MERCHANDISE PLANNING Merchandise is a unique term used in retail industry to refer to the whole process inventory planning and management. Merchandise planning leads to a better ROI, and thus greater profitability.

WHAT IS MERCHANDISE PLANNING? Merchandise Planning has to take care of 7 R's. of the: • Right product • Right place • Right quantity • Right quality • Right price • Right assortment • Right time. A retail outlet exists to serve the customer by satisfying their needs by making available the right product at the right place. There should not be stock-outs, and so the products must be bought in the right quantity. The quality and price must be right for the consumer. A consumer must be given a choice by a right assortment of products. The product must be available at the right time, e.g., Diwali greeting cards must be available sometime before Diwali.

STEPS IN MERCHANDISE PLANNING There are several steps in merchandising planning. They are briefly dealt with here.

Sales Forecast Forecast calculates what the sales are going to be in a given future period under given conditions. The top management generally prepares the sales forecast and hands it over to the

78

Contours of Retailing Management

merchandiser. Or else the merchandiser prepares a sales forecast based on the targets provided by the top management. Sales forecast leads to the proper inventory management. Sales forecast could be in terms of quantity for different products or its money value. It leads to the purchasing plan. It also indicates the scope for adding new products to the assortments. Generally, a forecast is made for long-term, medium-term or short-term-of. A retailer . may prepare a forecast for a week, a month or a year. Forecaster has to scan the environment and must respond to the changing tastes and attitudes of the consumers; the consumption patterns, the spending pattern and the overall market size. Several methods can be adopted to make the forecast. Past can be extrapolated into the future. Economic scenario can be analyzed to arrive at the forecast. Market potential can be considered. Competitive scene and marketing strategies all these are factored in the forecast. A forecast leads to the planning ofthe quantities of merchandise.

Merchandise Requirements To begin with an organization has to plan a merchandise budget and later merchandise assortment. Merchandise budget provides the budgeted figures of sales (sales plan) and stock plan indicating the level ofinventory to achieve the budgeted sales. Allowance is made to reduce the inventory. The purchase plan is a part of the budget. It indicates the quantity level to be purchased for each product. Inventory Planning There are several methods of inventory planning: • Basic Stock method • Percentage Variation method • Week's Supply method • Stock/Sales Ratio method. The following panel deals with these methods.

1. Basic Stock Method It assumes a given level of inventory at all times; called basic .stock which is the minimum that ought to be kept for a product, category or store, irrespective of sales. It is computed as under: Average stock for the season - Average Basic Stock = monthly sales for the season Where, Average stock for the season

=

Total planned sales for the season Estimated inventory turnOver rate for the season

79

Supply Chain Management (SCM)

Average monthly sales for the season = Beginning ofthe month stock (BOM)

Total planned sales for the season Number of months in the season

= Planned monthly sales + Basic Stock

Illustration: Compute the BOM by the basic stock method for the month of October considering the following data: Planned sales for October = 50000 Average monthly sales = 30000 Average monthly inventory = 60000 Basic stock = 60000 - 30000 =30000 BOM stock = 50000 + 30000 =80000

PERCENTAGE VARIATION METHOD This method is employed when the stock turnover rate is greater than six times a year. It presupposes that inventory levels reflect the actual sales. It is computed as under:

BOM Stock

=Average stock for the season x If2 [

1 (Planned sales for the month )] + Average monthly sales

Illustration Calculate BOM using the percentage variation method on the basis of the following data: Planned sales for October = 50000 Average monthly sales = 30000 Average monthly inventory = 60000 BOMStock

=Average Stock for the season x 1/2 [

BOM Stock = 60000 x 1/2

(1 + 50000]

l

30000 = 60000 x 1/2 (1 + 1.67) = 60000 x 1.335 = 80100

1 (Planned sales for the month )] + Average monthly sales .

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Contours of Retailing Management

WEEK'S SUPPLY METHOD Grocery stores plan inventory on a weekly basis. Then there are retailers whose sales remain stable. They also follow this method. It is computed as follows: Number of Number of weeks in a given period Weeks to be Stocked = Stock turnover rate in the said period

=

Average Weekly Sales

=

BOMStock

Estimated total sales in a given period Number of weeks in the same period Average weekly sales x Number of weeks to be stocked

STOCK TO SALES RATIO METHOD • to It is a simple method to use that depends on the opening stock / sales ratio at the beginning of the month. It aims at a specific ratio of the inventory to sales to indicate the inventory level at the beginning of the month to cover the monthly sales. Stock to Sales Ratio

=

Inventory value Actual sales

Planned BOM Inventory

=

Stock to sales ratio Planned sales

Illustration: Calculate BOM inventory for the month of October based upon the following data: Stock to Sales Ratio = 1.3 Planned Sales for October = 25000 Planned BOM inventory = 1.3 x 25000 =32500

STOCK TURNOVER RATE . . Planned sales for a given pariod It IS given by = PI anne d average Inventory . f h ·d . d 0 t e sal peno Planned sales for a given period equals planned average inventory of the said period. It indicates how fast the stock moves in and out ofthe retail outlet. It shows efficiency. The turnover rate varies from department to department, e.g., higher in groceries and lower in appliances. Management is enlightened about capital usage by this ratio.

REDUCTION PLANNING Expected retail reductions are to be estimated. It is the difference between the opening stocks plus planned purchases and planned sales plus closing stock. Planned reductions take care of the anticipated price discounts given as incentives, price cuts given to employees, senior citizens, etc. and stock shortages on account of breakages, pilferages and accounting errors.

Supply Chain Management (SCM)

Planned reductions

=

(Beginning inventory + Planned purchases) - (Planned sales + Ending inventory)

OPEN-TO-BUY It is the difference between planned purchases and the commitments already made by the buyer for a given time period, say a month. It shows the amount the buyer has . been still left with to buy and is reduced with each purchase. At the beginning of the month, an organization's planned purchases and open-to-buy are equal, if no purchase commitments have been made before the start of the month. Open-to-buy is recorded at cost.

OTB: OPEN-TO-BUY It is a planning and control tool available to a retailer. It ensures the flow of merchandise to keep pace with the estimated sales at the expected stock turnover rates, so as to generate a positive cash flow. An OTB plan prevents both overstocking and understocking by fixing an ideal stock to be carried at the beginning of the month and the amount of merchandise to be received during the month. An efficient OTB consists ofthe following components:

1. Forward Sales: These figures are sales forecast figures for the month. 2. Forward Cover: It depends upon the stock turnover expected. For instance, if the stock turns 4 times a year, the ideal cover at any point of time should be equivalent to three months' stock cover. 3. Stock Required: It is drawn from forward cover planned. Assuming it to l?e 3 months with current month to month one, the stock required is the sum of forecast sales of months 2, 3 and 4. 4. Opening Stock: The first month opening stock is an estimated figure. With second month onwards, it is the closing stock of the previous month carried forward. 5. Intake Requirement: Intake required equals (forecast sales + stock required) minus (opening stock). 6. On Order: These stocks have been ordered already and are expected to be delivered during the relevant period. 7. Open-to-Receive (OTB): It equals the difference between intake and the stock on order, if any. It is the OTB quantity. 8. Closing Stock: It is the opening stock less sales plus on order and OTB quantities.

81

82

Contours of Retailing Management Components

Month

Month

Month

Month

Month

Month

1

2

3

4

5

Forecast Sales

1500

2000

2500

2000

1500

6 1500

Forward Cover (in Months)

3 6500

3

Stock Required

~' 000

3 5000

3 4500

3 4500

3 4500

Opening Stock

3000

6000

5000

4500

4500

Intake Required

5000

6500 1500

1500

1500

1500

1500

On Order

2500

1500

OTB

2500

0

1500

1500

1500

1500

Closing Stock

6500

6000

5000

4500

4500

4500

Fig. 7.2 Model OTB Plan

Advantages ofOTB 1. It enables an organization to optimize returns and support planned sales. 2. It leads to proper working capital management (WCM). 3. It enables a store to receive the right merchandise at the right time. 4. It ensures a continuous flow of merchandise from month to month. 5. It is a control tool- performance and planned target can be compared, and deviation if any can be corrected. 6. It provides an opportunity to top profits.

MERCHANDISE HIERARCHY Merchandise mix is understood in the context of merchandise hierarchy which is a way the merchandise is grouped at different levels. The highest level represents a broad product category, and lowest level an individual stock-keeping-unit (SKU). The grouping can have four or five levels as shown in the Fig. 7.3.

Supply Chain Management (SCM)

83

Examples

Broad Product Category

Garments

~

I

Women's Garments

~

~

Saris

• I •

Brand

I

6 - Yards

+

I

Colours

y,

Colour I

'.

I.

I

"

y

Colour 2

,

•

•

Casuals

I

Ajay

9 - Yards

I

option

Cotton

Poonam

I

~

i

II

. .

....

Sfyle

•

Silk

Garden

~

Children's Garments

Westerns

i

Synthetic

~

Men's Garments

Salwar Kurta

I

..

class

I

.

I

....

Sub-category

Appliances

I

.

Department

I I I . .

Groceries

J

+

,y

Colour 3

T

l,

I

l

Price

. DesiRns

,y

III

Design I

II ,

Price I ---'~ .... '--_ __ , _ Price _ _2_.... '

JI,. Price 3

J y

."

Design 2

rl

Design 3

I

I,;

Fig. 7.3 Merchandise Hierarchy

f

Contours of Retailing Management

84

The merchandise mix can be planned by planning the merchandise at different levels. The problem areas at each level can be identified. The hierarchical decisions can be delegated to different levels of management, e.g., broad category-level decisions are taken at the top level of the management and SKU-level decisions by the front-line managers. The hierarchy levels can be different for the different product categories. For example, in a supermarket the levels of pickles would be: Department Category Sub-category Brand Options

Food Pickles and sauces Mango Mother's Touch 100 gms, 200 gms, and 500 gms.

ASSORTMENT An assortment simply means a selection of merchandise. Merchandise lines consists of group of products which are similar or c1oselyrelated, as their end use is the same and are sold to the same customer group or are within a similar price bracket. In marketing parlance, it is called product line. In grocery business, generally the term used is category management, e.g., detergent as a product category, grains as a product category and so on. Variety refers to the. various merchandise lines a retailer stocks. An assortment has breadth - the number o~ merchandise brands that are found in a merchandise line. A supermarket has good breadth - a large assortment, e.g., it may carry several brands of edible oil and several brands of sunflower edible oil. Merchandise depth refers to the average number of stock-keeping-units (SKUs) within each brand of the merchandise line. Variety (Merchandise Lines)

~ Merchandise

Depth (Average SKUs)

Breadth

Fig. 7.4 Merchandise Mix

A retailer can offer a wide variety of items to appeal to the consumer's taste. It is called large assortment strategy. It may not always succeed as sometimes it becomes too confusing. Depth and breadth are planned by taking several factors into account. There are budget

Supply Chain Management (SCM)

85

constraints. A retailer has therefore a trade-off between variety and a lot of breadth and depth. These constraints can be overcome by suitable credit extension policies extracted from the suppliers and by buying goods on consignment. Another important constraint is the space constraint. It requires large space to maintain large breadth and depth. Variety meansjudicious space allocation to the different product lines. Stock-turnover constraints is another important factor. The more the depth, the greater will be the variations of the product. This will cater to smaller segments. It tells upon inventory turnover; and increases the probability of being outof-stock. There are market constraints. These three factors do affect consumer perception and consequently the footfalls. A specialty store is perceived as a low variety, and breadth store but with a large depth. A consumer perceives a general store as a store with more variety and breadth, but with restricted depth.

CATEGORY MANAGEMENT Category management is a technique employed by many retailers to improve profitability. Here the focus is on the results in a product category and not on individual brands/products. A group of products is taken as a strategic unit on which ROI is optimized. There are functionaries responsible for the financial performance of every product category. A category is properly defined. The role of categories are spelled out. The main product offering can be one category, e.g., groceries. There may be routine product categories like toiletries. There is occasional or seasonal categories, e.g., seasonal fruits. There is a convenience category such as eggs, bread, butter, etc. Each category is properly assessed. Its performance is measured in terms of Gress Margin Return on Investment. We have to use tactics and strategies to move the categories. A periodic review is undertaken.

MERCHANDISE BUYING The buying process consists of (i) Sourcing the merchandise, (ii) Contacting the sources, (iii) Evaluating these sources and (iv) Negotiating with them.

SOURCES OF SUPPLY Sourcing is the soul ofthe retail trade. Sourcing was initiated by Indian merchants before the Portuguese who reached Malabar coast in the 15th century and the Britishers who arrived in India as the East India Company in the 17th century. It is necessary to gather information about the overall environment through research and feedback. Sales people pass on the information to the management as they are close to the customers. Information can be obtained from the suppliers too. We can get information about the suppliers through; • Trade publications, yellow pages, directories, and references • By attending trade shows • Visit to the markets • Searching the web • Our suppliers can be:

86

Contours of Retailing Management

• Our own manufacturing unit • Regular outside supplier • New outside supplier The suppliers can have several formats - they can be manufacturers, wholesalers, agents and brokers. A supplier may be either domestic or from abroad. The trend today is to have as much disintermediation as possible, and buy directly from the manufacturers. The price advantage thus gajned is passed on to the consumers. There are some areas of conflict between the retailers and suppliers - the use of private brands by the retailers and the practice of chargebacks, whereby the amount of bill remitted is less than the cost of damaged or short goods and such other infractions.

FOOD AND GROCERY RETNL Food and grocery (F & G ) retail account for more than 70 per cent of all retail sales. But the penetration of organised retail in the F & G segment is negligible - 1 per cent F & G consists offresh fruits and vegetables, milk and milk products, fast moving consumer goods (FMCG) and food grains. Products like food grains, unprocessed fruits and vegetables, which account for half the sales are sourced from farmers. The supply chain is still under-developed in India. Organized retail can be a blessing as it can save costs, and the benefits could pass on to farmers as better prices for the produce. In the developed countries, farmers are paid around 60-65 per cent ofthe retail price. Farmers will start producing for the retailers when they get prices higher than those in the mandis. Retailers can source from the farmers through relationships and contracts. Retailers get good margins due to disintermediation. Higher farm incomes will enhance the purchasing power of60 per cent of the population.

PRIVATE MANDIS India has about 7500 mandis with about 10 - 12 per district where farm produce is traded. Some big mandis conduct business worth Rs. 20 crore a day. Here the produce is traded directly or through intermediatries. With reforms in the Agriculture Produce Marketing Act (APMC), transactions would be allowed outside the government-owned mandis and the sector would be open for private players. Several States allow companies to set up and operate mandis e.g. A.P. MP, TN, HP, WB and Bihar. Government-owned mandis charge a fee on transaction that could go up to 4 per cent of the volume traded. In private mandis, this could be saved. Besides, they get reliable and quality supply.

WAREHOUSE AND COLD CHAIN Along with private mandis, retailers and large traders are expected to build warehouse and cold chain capabilities. It will provide the retailers an integrated supply chain.

EVALUATION OF MERCHANDISE We may choose any source, but we have to outline a procedure to evaluate the merchandise chosen. There can be individual item inspection or an inspection of a sample of total items or

Supply Chain Management (SCM)

87

buying on the basis of description. Expensive, unique pieces can be examined individually. When a large volume ofitems are purchased, inspection ofindividual items is inefficient. The items are sampled and examined, e.g., a lot from the watches. Standardized items which are not fragile are bought on the basis of description which can be verbal, written or pictorial.

VENDOR ANALYSIS An organization can study vendor profitability analysis statement. Here, purchases less the discounts plus freights are recorded. The mark-ups are recorded. It shows the contribution of each vendor to the gross profit. Vendors can be classified into A, B, C, D and E categories depending on the profitability and relationship. Class A vendors are our true partners, and we prefer to buy a minimum quantity from them. Class B vendors are satisfactory. Class C vendors have outstanding lines but we do not deal with them at present. Class D vendors are minor suppliers. Calls E vendors are not favoured as the past experience is not good.

VENDOR NEGOTIATIONS After selecting source, and pre-purchase evaluation, negotiations about purchases are carried out. If the order is new or special, an agreement is negotiated. Regular orders are placed against a standard contract. Negotiations are required for off-price deals and discounts. Negotiations are required for those items which do not live up to the expectations ofthe buyers. Terms and conditions of sales are also negotiated, e.g., delivery time, transportation mode, packing required, payments to be made, etc. Quantity should be clearly spelled out. There should be a provision for the cancellation of orders if quantity requirements are not fulfilled. Discount structure against periodic payments must be spelled out. There should be clear indication ofthe party responsible for transport cost, e.g., Free-on-Board (F.O.B) factory means the supplier loads the goods on the carrier but the retailer bears the transport cost. The point of transfer of the ownership of the goods - change of title - must be noted in the contract. Some special clauses can be inserted in the contract, e.g., ad support or fees for shelf-space. A smart buyer does not leave anything to chance, and discusses most of the things with the vendor before signing the order. There should be a win-win situation for both the buyer and the supplier. Price is the most important factor of negotiation. The buyer tries to extract maximum price benefit. Buyer's bargaining power comes through his large orders, and as such organized retailers are at an advantage as compared to the mom-pop stores.

DISCOUNTS The following types of discount are available to the buyer:

Trade Discount This discount is given on the MRP by the manufacturer to the wholesaler and the retailer for the services they perform, and to cover their costs and give them profits. To illu&trate, an item costing Rs. 1000 is offered 30 per cent discount. So its discounted price becomes Rs. 700. Every transaction in the distribution chain takes a discount; a discounted price ofRs. 700 is given a further discount at 10 per cent. The discounted price then becomes Rs. 630, and so on. I

88

Contours of Retailing Management

Quantity Discount Quantity discount is a discount given as an incentive to the buyers to stimulate them to make larger purchases and get additional benefits. Non-cumulative quantity discount is based on a single purchase. Thus, if a firm allows zero per cent discount on the purchase of the first 1000 units and 10 per cent on further purchase between 1000 units to 5000 units, a buyer would not get any discount when the purchase is split between 900 units and 500 units when non-cumulative approach is followed. If the cumulative discount method is followed, he is eligible to get 10 per cent discount on 1400 units he has purchased in total. There is a free merchandise discount, where a buyer is compensated by giving him the merchandise instead of the price discount. Sometimes, quantity discount may not work in favour of the seller and the deal is open to negotiation for the buyer. The situation is tricky when a higher slab of discount is lost by a marginal amount. Promotional Discount It is offered to the retailer when he takes efforts to promote the product either by displays, advertising or extra effort. A vendor purchases 1000 copies of the Times of India. He is offered a discount - either extra products or a gift, if he sells 500 more copies of the Times ofIndia and participates in the display or undertakes local advertising. Seasonal Discount Off-season purchase attracts this discount. It stimulates retailers to buy in advance of the regular buying season. Cash Discount It is a discount received for paying the bill promptly. To illustrate 3/15, net 35 discount means a 3 per cent discount is given if the amount is cleared within 15 days of the invoice date and the credit period given is 35 days.

CONCLUDING THE PURCHASES Purchases are electronically concluded by the large retailers through EDI and QR and are manually concluded by the small retailers. Transfer of title receives special attention. The title might be transferred as soon as the purchase is made. Or it might be assumed on loading. It might be assumed on receiving the goods. The retailer may defer taking the title till the payment is made at the end ofthe billing cycle. The supplies can be accepted on consignment basis. The following delivery terms must be understood; as these indicate the point at which the ownership title passes to the retailer and whose responsibility it is to bear the freight charges.

Supply Chain Management (SCM)

89

COMMON SHIPPING TERMS FOB Factory It means free on board at factory, i.e., the ownership is transferred as soon as the goods leave the factory, and all transport costs from the factory onwards are borne by the retailer. FOB Mumbai It means free on board at the Mumbai shipping point. The vendor bears all the transport costs till the goods are loaded in Mumbai. The ownership at Mumbai is assumed by the buyer. Further than Mumbai, transportation costs are borne by the retailer. FOB Destination It means free-on-board up to the point of delivery. The title remains with the vendor till goods are delivered. The vendor bears all the transport costs.

RECEIVING AND STOCKING MERCHANDISE The ordered goods are received. There is arrival check. The goods are stored. There is a payment procedure for the invoice. The prices and inventory are marked. The merchandise is handled in-store. The retailer with many SKUs like a grocer has significant incoming goods. He has to arrange the receiving and handling space. There should be appropriate material handling equipments. Unloading is partly manual and partly mechanical. After removing the merchandise from the receiving area, it is counted and marked, and shifted to the storage area. The goods can be warehoused or sent directly to the selling floor. Receiving area is prone to thefts and so it must be properly planned. There are losses on account of vendor's actions such as short weight, deficiency, old stock, stale stock, in-transit thefts. Employee theft is another area of concern. Generally, the goods are stolen from the storage area. Though they can be stolen from the selling area too. The supervision must be tightened to prevent such losses. Customer theft is another problem. Shoplifting is common in self-service area. The thefts can be reduced by security watch, electronic surveillance, exit watch and trial room watch. The tags that give alert on exit are also used. However, the issue is a trade-off between the retailer's right to security and the customer's right to privacy. All reputed stores warn the customers about electronic surveillance. Some retailers arrive at a percentage of pilferage cost, and mark-up the prices to this extent to compensate for such losses. Price marking is done manually in small stores. Big retailers do it by using computer tags or by bar-coding. Some retailers expect vendors to do the price tagging. The more information the price tag carries, the better it can be used as a control device. In-transit thefts during transportation is also a possibility. The goods must be properly insured. . The goods are placed on the stores. The assortment depends upon the retailer and the merchandise being dealt: with. Bin and rack displays are common in supermarkets. Some merchandise is placed on the floor. Departmental stores simply have display pieces and the rest of the inventory is kept in the warehouses.

90

Contours of Retailing Management

The customer off-take of merchandise completes this process. There are baskets, bags, trolleys for customer off-take. The goods are packaged while delivering to the customer. The transactions are done either in a centralized manner at the cash counter or decentralized manner at the level of the department. Most of the operations are automated. There should be a procedure for the returns and damaged goods. The retailer must be clear when the goods will be accepted back and how the customers will be compensated. There must be clarity as regards the responsibility of the retailer and vendor regarding customer returns.

UNIT CONTROL SYSTEMS Merchandise control is exercised in terms of units rather than in rupees. In the unit control system, the inventory accounts are kept in terms of quantities to assess the movement of products, to assess stock on hand, to assess the turnover of the inventory, to assess the re-ordering time and to assess either branch-wise or department-wise inventory and sales levels. Rupee or value control system records merchandise in terms of its rupee value. Both the unit control and value control system are physical inventory systems, the former measuring the number of units, and the latter in rupees. In the physical inventory system, either physical visual inspection or actual counting methods are used. A perpetual inventory system is an improvement on the physical system.

PERPETUAL INVENTORY SYSTEM Perpetual system, as the name itself indicates, is kept running to record the movement of product units on account of sales, transfers, receipts and other transactions. Plus and minus entries are made from the opening stocks. Perpetual system is- eithe:r maintained manually or electronically. Manual system examines inputs such as sales vouchers, receipts of merchandise, transfer requests, etc. Coded data are tabulated. Point-of-sale (POS) terminals can be used for data processing. These POS points can be networked. Scanners are used to record the data. A retailer may use a combination of physical and perpetual system. Key items are controlled by the perpetual system, and other by the physical system.

RE-ORDERING MERCHANDISE Each store has a procedure to re-order merchandise that requires to be ordered frequently. Here, we must consider the time taken to process ap ord~r at our end, and the time taken by the supplier to fulfil it. Sometimes the lead time - the time taken between the placement of an order and its delivery - is so long that we are required to order even though we have not run Qut of the inventory. However, some products are delivered as soon as they are ordered. We must know the off-take of each item - how fast it moves? Fast moving products present two options - carry a larger stock and space out orders over a larger period or carry a smaller stock and order quite often. A slow-moving item provides the retailers an opportunity to carry a smaller lot, and space out the re-order period. The financial commitment while exercising different options must be considered. A larger order means more financial commitment. A smaller order

Supply Chain Management (SCM)

91

means lesser commitment. There is always a trade-offbetween inventory holding costs or carrying costs and the ordering costs. Larger stocks means better discounts, lower transport cost per unit, customer satisfaction and better control. Larger stocks also have disadvantages such as larger finance, risk of damages, obsolescence and storage, larger carrying costs and opportunity cost. Ifwe order frequently and keep a small stock, the carrying costs are lower. There are less risks related to storage. But there are risks of stock-out and high per unit cost and high ordering costs. Quick response (QR) inventory lowers both the carrying costs and the ordering costs through better buyer-seller relationship.

INVENTORY CONTROL The stock levels at which inventory must be replenished by new orders is called a re-order point. Three factors affect re-ordering - the lead time, the usage rate and the safety stock. The lead time is the time taken to receive the supplies ready-to-sale after the order has been placed. Usage rate refers to the average sale on a daily basis in terms of the units of merchandise. Safety stock refers to the extra stock kept as a buffer against stock-outs due to unanticipated demand and delivery delays. The formula for re-order point is: Re-order point =Usage rate' Lead time. Here, the assumption is that demand being stable and there is no need to carry safety stock. A retailer who maintains the safety stock, the formula is: Re-order point =(Usage rate x Lead time + Safety stock) In an automatic re-ordering system, the data is fed from the perpetual inventory system and Re-order point formula so that the computer orders automatically when the stock reaches the re-order point.

HOW MUCH TO RE-ORDER OR EOQ Economic Order Quantity (EOQ), in terms of units is that quantity which optimizes the ordering costs and carrying or inventory holding costs. Carrying or holding costs include storage cost, insurance cost, taxes, depreciation, deterioration and pilferage. Ordering costs fall down as the quantity per order in units goes up. However, holding costs go up as the quantity per order goes up. The two costs are collectively shown as the total costs. Total cost Cost (Rs.)

t Ordering'Cost EOQ

~

Order Qualltity

Fig. 7.5 Economic Order Quantity (EOQ)

92

Contours of Retailing Management

Mathematically, the EOQ is EOQ=

~2;a)

Where Q = Annual requirements in units a = Unit cost of placing an order c = Annual carrying cost (this is generally expressed in percentage)

Illustration: Calculate EOQ on the basis of the following data: Q = 2400, a = Rs. 15, c = 20% per annum EOQ=

2 x (Annual requirements) x (Cost of placing an order) (Annual carrying cost %) x (Unit cost in Rs.)

2x 2400 x 15 1x 0.20

=

600 units

It is assumed that unit cost of the product is Re. 1. The above formula is called square root formula and is developed by R. H. Wilson in the 1930s and it can be modified as per our requirements.

TRANSPORTATION AND WAREHOUSING As a retailer has to receive the goods from several suppliers, there are decisions such as: • Mode oftransport to be used, combination of various modes (whether manufacturer's trucks will reach the retailer and then ~etailer's trucks to the individual outlets ). • Transport considerations for special items such as medicines, dairy products, poultry, vegetables and fruit and perishables. • Special transportation needs for contingencies, e.g., Diwali rush. • Terms and conditions of dispatch to be negotiated with the suppliers. • Frequency of merchandise to be transported. • How smaller lots will be handled? • The type of transporter to be used, e.g., manufacturer, retailer or third-party specialist. Transportation is facilitated by the infrastructure, e.g., expressways, highways, refrigeration facilities, airports, ports and docking facilities, traffic conditions, tolls, parking, etc. Some logistical bottlenecks must be overcome. Some retailers maintain centralized warehousing facilities which receive merchandise from the different suppliers. These then are dispatched to the different outlets. Many outlets, especially supermarket~, do not rely on centralized distribution. They receive merchandise directly from the suppliers, which is called direct store distribution (DSD). DSD is useful for those retailers who use ED!.

Supply Chain Management (SCM)

93

Centralization provides better control and allows mechanized processing of merchandise. It is good from the security point of view. There is a free flow of merchandise. Returns are easier. But then centralization is not suitable for small retailers and to handle perishables. It

also slows down the QR system. DSD means fresh stocks and quick replenishments. The data generated is valuable for the managers. Individual stores can get the merchandise suitable for their kind of target audience. But this system increases back-office processing, and makes the relationship between the vendor and the retailer complex. It piles up documents.

LOGISTICS Logistics is concerned with the physical movement of merchandise from the manufacturerwholesaler to the retailer to the customer. This movement requires planning, implementation and co-ordination. The aim is to be time and cost-efficient and administratively effective. It is a process of supply chain that covers order processing, fulfillment of orders, transportation, and warehousing, customer services and inventory management. There can be several bottlenecks in the whole process. The major logistical goals are: • To economise costs • To facilitate order placement • To facilitate receipts • To reduce the time between placement of an order and the receipt of supplies • To co-ordinate the supplies from the different vendors • To place the merchandise on the sales floor • To fulfill the customer requirements • To interact with the members of the supply chain • To manage returns and damaged goods • To have contingency plans.

BUYING ORGANIZATION Buying can be centralized or decentralized. In centralized buying, the buying decisions of all types are taken at one office. In decentralized buying, buying decisions are taken locally. For instance, a chain having 15 outlets will allow each outlet to buy its requirements. Centralized buying means economies of scale and better control. But at the same time it lacks flexibility as it is not adapted to the local needs. It is time-consuming also. Decentralized buying is tuned to the local requirements and is quick to respond. But at the same time, it is disjointed and inconsistent and not so economical. Many organizations have centralized buying combined with decentralization to some extent, whereby store managers have the authority to amend the orders or place their own orders. ' A buying organization can be general where one or more people buy all the requirements. It can be a specialized buying organization where buyers are appointed to buy different types of merchandise.

94

Contours of Retailing Management

MERCHANDISE MANAGER In a departmental store there can be specialized merchandise managers for the different products. Each merchandise manager handles several buyers. The managerial functions of a merchandise manager are merchandise planning, directing and training the buyers, co-ordinating their efforts and controlling their performance.

BUYER He buys the merchandise actually under the overall guidance of a merchandise manager. He has to source the merchandise from the vendors. He should do proper market analysis, price analysis, consumer demand analysis to select the suitable merchandise of the required quality and quantity. Wrong merchandising leads to mark-downs and affects the profits. A buyer buys a particular line of merchandise in a big store or he buys the entire merchandise. Youngsters start as assistant buyers who assist the buyer in merchandise procurement. A buyer has to perform myriad of functions; 1. He is sensitive to the merchandising philosophy ofthe firm. 2. He develops the strategies consistent with the philosophy. 3. He plans and selects merchandise assortment. 4. He undertakes vendor's selection and negotiating. 5. He prices the merchandise. 6. He is responsible for the inventory management. The organization structure of the merchandising department varies from organization to organization.

REVERSE LOGISTICS It is a backward flow of merchandise from the retailer through the supply chain on account of purchase returns. These returns could be due to defects, damages or less than expected sales. Some retailers buy unpopular merchandise at a discounted cost. This is not returnable. It is meant for re-selling at a heavy discount. Reverse logistics decisions pertains to: • • • • • •

Purchase returns--terms and conditions. Re-imbursement of returns. Transport of return goods--responsibility ofthe parties. Documentation required. Handling of repairs. Processing of returns by the employees.

INVENTORY PRICING sYSTEMS Inventory is priced by two methods - FIFO and LIFO or first-in-first-out and last-in-firstout.

95

Supply Chain Management (SCM)

FIFO

It assumes the oldest merchandise is sold first and then the latest merchandise. It equates the inventory value with the current lost structure. (Example from Production book). LIFO It assumes the latest merchandise is sold first, while the older stock remains inventory. Last-in-first-out method is an inflationary cushion. It puts the latest price on the merchandise. As it reflects current replacement costs, most retailers prefer this method. It brings in line the current sales with the current cost structure. (Example from Production book.)

(1) First-in-First-Out Method (FIFO Method): FIFO method, as its name suggests, is governed by the principle that the materials which are received first are issued first. The issues are priced at the cost price of the oldest consignments till it gets exhausted. As soon as the oldest lot is exhausted, the issues are priced at the cost price of the next of the oldest lot in the sequence, e.g., the following transactions occurred during the first week of April, 1993: April 1: 200 units purchased @ Rs. 5 per unit April 3: 500 units purchased @ Rs. 6 per unit April 5: 300 units issued to job No. 1001 The issue of 300 units will be priced as under From the first lot: 200 units @ Rs. 5

= =100 units @ Rs. 6

Remaining 100 units from second lot

Rs. 1,000 600 1,600

The value of the closing stock of 400 units (i.e., second lot of 500 units less 100 units issued) will cost @ Rs. 6, i.e., the value of closing stock would be Rs. 2,400. (2) Last-in-first-Out Method (LIFO Method): LIFO method reverses the procedure as followed under FIFO. The cost of the last lot of materials received is used to price the issue until that consignment is exhausted, then the next lot of pricing is used and so on through the successive lots. This method is based on the premises that the materials which are issued to the jobs should carry the cost of the most recently purchased materials, and that is why it is also known as the ''replacement cost" method. It should be noted that like FIFO method, the actual physical handling of the material in the bins and shelves in the sequence of purchases is imaginary. It is considered only for pricing the issue made from the stores, e.g., the following transactions occurred in the stores department during the first week of April, 1991. April 1: 500 units purchased @ Rs. 5 April 3: 300 units purchased @ Rs. 6 April 6: 400 units issued to Job Order No. 1086 The issue of 400 units on April 6, will be priced as under: First 300 units @ Rs. 6 = Rs. 1,800 Remaining 100 units @ Rs. 5 =

Rs.

500

Rs. 2,300 The closing stock of 400 units will be priced @ Rs. 5, i.e., Rs. 2,000.

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Contours of Retailing Management

(3) Average Cost Method: Under this method, issues are charged at a price ascertained from the common pool made up of the varied prices of several lots. It is advantageous to use this method when the prices are subject to constant changes. In the periods of rise or fall of material prices, an average cost tends to even out the extreme price changes. The upward and downward trends are moderate as contrasted with the steep rise or fall under the FIFO and LIFO methods. The average price is calculated in different ways as under: (1) Simple average of the stock on hand at the price of the issues. (2) On the basis of the simple average cost of each kind of material on hand at the close of the month, and to apply it for all issues made during the following month. (3) On the basis of the simple moving average wherein the earliest price is dropped, the moment the new purchases are made, cost of such fresh purchases will be included while arriving at the new average. It should be noted that instead of the simple average wherein only the unit cost is considered for calculating the average cost to be charged to the issues, weighted average cost can also be used. Under the weighted average cost, along with the unit cost the quality of the units is also considered, e.g., the following two lots were purchased during April, 1993. (1) 1,000 [email protected]. 3 (2) 5,000 units @ Rs. 5 The simple average cost would be Rs. 4 only (i.e., Rs. 3 + Rs. 5 .;. 2) while the weighted average cost would be as under: Weighted cost Unit c~st Weight Rs. Rs. (1) 3 1,000 3,000 (2) 25,000 5 5,000 28,000 6,000 28,000 Weighted average cost 6,000 = 4.67 = (4) Replacement Price Method: This method is also known as market price method, under which the material issues are priced at the prevailing market price on the date of the issue. This method is based on the principle that the materials issued for any job on a particular day should be charged at the rate at which they could be replaced immediately from the fresh purchases on the same day. In short, material issues are priced at the prevailing market price on the date of its consumption. This method is applicable to the raw materials of standardized grades which are traded at the commodity exchanges such as cotton, cereals, certain metals, etc., because the prices of such items are quoted in the newspapers and it is relatively easier to ascertain the current market price. The main advantage of this method is that it considers the current market price which is more significant for the purpose of the pricing policies. It enables the comparison of the operating efficiencies with those of the competitive units. The comparison between the purchase price and the issue price (i.e., the market price) reflects on the efficiency or otherwise of the purchase department. The main drawback ofthis method is that it distorts the data for the accounting purpose which necessitates the adjustments in the Stores Ledger.

Supply Chain Management (SCM)

97

There is bound to be a discrepancy between the purchase price and the issue price. The difference between the market price and the purchase price is adjusted to the 'Price fluctuation reserve account' which indicates the efficiency or inefficiency ofth~ purchase department. (5) Standard Price Method: Under this method, the material issues are charged at a pre-determined, budgeted or estimated price which reflects a normal or an effected future price. Generally, standard price is fixed after the careful examination of the current market price, trend of the price, market conditions, etc., so that a fairly correct average standard price may be pre-determined. The standard price is made applicable for a definite period say a month, a quarter or a year. The material receipts are recorded at the actual price while the material issues are costed at the pre-determined standard price. So there is bound to be the discrepancies between the standard and the actual price. The difference between the actual price paid and the standard price charged is recorded to a separate 'Price Variance Account.' The standard price is revised periodically, if the discrepancies go beyond a particular limit. The main advantage of this method is that the pricing of issue becomes a simplified function. Like FIFO, LIFO and average cost method, the issue price need not be ascertained after each receipt or issue ofthe materials. However, it is not advised if the materials involve frequent and substantial price fluctuations. (6) Actual Price Method: Under this method, the material issues are priced at the actual acquisition cost of the respective materials. This method is applicable where the purchases are made for the specific jobs and are kept physically separate in the storeroom. Each material receipts is recorded in separate stores ledger card and the material issues are costed at the actual acquisition cost. This method is relatively awkward, however, it is advised where few costly items are used in the processing and where non-standardized materials are purchased to meet the customer's specification. It is more suitable to the jobbing industries. (7) Inflated Price Method: This method of pricing is based on the principle of uniform spreading of normal wastage on the residual units. There are certain types of normal wastage which are incidental to materials usage, e.g., loss of breaking the bulk, evaporation, etc. the cost of such normal wastage is absorbed by the good units through charging the ~aterial issues at inflated price, e.g., 100 units at Rs. 15 were purchased. This material is subject to 10% normal wastage, so the total cost of Rs. 1,500 (100 units x Rs. 15) will be spread over 90 (100 units -10 units normal wastage) good units, and the issue of the materials will be charged at an inflated price ofRs. 16.67 (Rs. 1,500 x 90 units) instead ofRs. 15. In conclusion, it should be noted that the material pricing should be on the basis of the acquisition cost of the materials. The acquisition cost should consider the net invoice price of the supplier and the transportation charges which are 'the visible costs.' They should also consider certain invisible costs like the cost of ordering, receiving, unpacking, inspection, insurance, storing, etc. The precise cost analysis of these aspects requires exhaustive treatment which is beyond the scope of this book.

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Contours of Retailing Management

BIYANI'S RETAIL EMPIRE Kishor Biyani, the CEO of Pantaloon is thinking of changing the brand image from that of a men's apparel brand to be a fashionable, youthful and fresh life-style brand. Biyani owns and controls Pantaloon, Big Bazaar, Indigo Nation, Planet Sports, quick service restaurants, Marks & Spencer (M & S) and food courts. Biyani is planning Home Town, a home store that will stock everything from white goods, furniture, hardware to electricals besides offering property services. Pantaloon Retail is his listed company. It is spread over 2.2 million sq. ft. and 75 stores across 12 cities under four different formats. It has a turnover of 1000 crore plus and expected to touch 8000 crore plus in the next four years. The first Pantaloon was opened in Kolkata's Gariahat in 1997. Pantaloon is a fairly textbook multi-format store. It is focused on mass consumers. It is heavily Indianised. It exploits the weakness ofIndian consumers for bargains. Biyani also built his other retail outlets on the bargain platform - Big Bazaar and Food Bazaar. He felt that ambience can be compromised so long as the bargains are attractive enough. The aisle width in Big Bazaar is just enough to fit in a cart. Retailing success is attributed to efficient merchandising (buying and promoting the goods the stores carry) and operations (running the stores). According to Biyani, if merchandising is right, the rest falls into place. He backs up his retail formats by financial commitment. Once the Kolkata format showed signs of success, he rolled out Big Bazaars in quick succession. Each Bazaar has a little less than 1lakh SKUs, and an investment of Rs. 10 crore. Biyani thinks that the most critical factor in retailing is location. He feels that though people would prefer shopping for the everyday articles in the neighbourhood, they venture out to far-off areas for their aspirational needs. ' He has also set up the seamless central malls. Biyani also wants to diversify in unconventional ventures. He wants to incorporate 'farm to plate', format in food retailing. Biyani and his family owns as promoters 40.48% of the Pantaloon stock. Biyani has started professionalisation by setting up an A team. They have acquired two brands Indigo and Scullers. They have also acquired 49 per cent in Planet Sports. Bennett Coleman has acquired 4.98 per cent of Pantaloon. Biyani is to pass on substantial ad spend to the TOr. He has acquired stake in Galaxy, thus entering leisure and entertainment business. Retailers have to manage the supply chain efficiently. Cost cutting has tremendous scope. Assets can be utilized productively. All this can improve ROC - return on capital from 10-12 per cent to 30-40 per cent. It has to pay attention to optimization of inventory, productive use of space, high margin products, ensuring depth and width of products. Big Bazaar has 27 outlets. It has recently opened an outlet at Sangli. Food Bazaar has 42 outlets. It plans to open a shop-in-shop Electronics Bazaar in 25 locations for consumer durables. Pantaloon has 99 outlets.

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99

TRUMART The Pyramid Group, after setting up Crossroads, is now in the process of setting up stand-alone TRU Mart and TRU Mart Daily. There are four outlets in Pune, three in Mumbai and one in N agpur. DMA was employed as consultants. The main finding in research was that though consumers were comfortable with their current grocery store or supermarket, there were concerns about service levels, the range of products and freshness. They wanted to position TRU Mart as a dependable neighbourhood store that offers genuine value in terms of the level of service, experience, depth and the width of products. They also discovered that people do bulk shopping for groceries every fortnight, they also shop every other day for things they run out of. That is the reason to plan TRU Mart Daily, a smaller store that will stock products used daily. In Pune and Mumbai, TRU Mart will be stand-alone stores. In other cities, it will be a part of the main Pyramid store. TRU Mart follows the food, household and personal care (FHPC) format rather than the food and retail format.

CUSTOMER SERVICES Many equate customer services with just the loyalty programme or purchase returns. Customer service is however, a comprehensive term that includes all those activities which contribute to the satisfaction of a customer so as to establish a long-term relationship with him. Customer service is a highly subjective concept since it is difficult to set an absolute level of service. Services are benchmarked against customer expectations. A customer in a hurry may consider a half-an-hour hair-cut session dissatisfactory, whereas one who is keen to look well-groomed may consider the same session to be satisfactory, though the service level was the same and other things such as ambience, seating, skill of the hair-dresser, etc. were also the same. The difference in the evaluation is a function of the different expectations. Just as a copywriter is as good as his last copy and writer as his last book; a retailer is as good as the last experience he provides to the customer. A shopper may have experienced satisfactory services on several occasions in the past but on the last occasion, he is dissatisfied, and that wipes out all the goodwill generated so far. Customer service thus always keeps a retailer on his toes. Customer service is all about meeting given performance standards to satisfy the customer needs. Customer service ultimately contributes a great deal to the customer satisfaction. Customer satisfaction is the end result of service performance on the part of a retailer. Customer service creates buzz or word-of-mouth publicity. A satisfied customer and a dissatisfied one too, tells others in his circle about his experience and that affects the image of a store. The level of service offered depends upon the type of outlet, the target audience and the type of merchandise. Supermarkets will have to be careful about the prices they charge and the product quality they offer. If the customers are not satisfied with these, they may prefer a small neighbourhood store. A specialty store like a boutique or jewellery showroom, however, must provide salesman-assisted-sale where the salesman acts as a counsellor. Even while purchasing durables, we require help and guidance. A store selling durables must 'also have credit schemes and after-sales-service. . . The entire infrastructure of a store can be duplicated elsewhere, but the total experience a customer receives should remain unique, and becomes a differentiating factor or a competitive advantage, e.g., McDonald's, Domino's Pizza.

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101

A retail organization has to cultivate service culture within it by developing proper goals, strategies, manpower and processes.

SERVICE OBJECTIVES The organization must have clear service goals such as leadership on account of superior service, service to keep the target audience happy, manpower training to meet the service objective and processes to be followed while rendering the service.

TARGET AUDIENCE Customer aspirations must be met by an organization. In fact, a customer must be surprised pleasantly to receive more than his expectations. A customer of an airline may soil his clothes while being served. His expectation is that someone should be accountable and should express regrets. Ifthe crew shows courtesy, and provides him wet towels to clean the dirt, he receives service more than what he expected. But he will be definitely delighted to receive a new garment ofthe same size and colour on reaching the destination from the airlines. It goes far beyond his expectations. A customer has some basic minimum expectations. He desires more, and appreciates it on receiving as per his desires. He is surprised when the organization goes beyond what he desires. The Oberoi chain of hotels are very particular about the service. If a customer is genuinely aggrieved, he can write directly to the Chairman, who personally looks into the matter; and apologizes ifthey are at fault. One such aggrieved customer was sent back the full refund of the room tariff, and was offered a free four-day stay at any oftheir chain property.

VISION Service vision is philosophical in its intent. There is a deep-seated desire expressed through a vision statement to serve the customer. It shows the futuristic slant in relation to the customer service. Vision statement is widely shared so as to provide direction to the organization. When vision is fulfilled, it leads to greater customer satisfaction.

SPELLING OUT PROCESSES Every retailer would like to attract as many footfalls into the store as possible. These footfalls must be converted into sales. To do this, a retailer has to operate as efficiently as possible. He examines his business processes critically and improves them if necessary. All the processes must facilitate promise delivery showing their dependability. It should be seen how much time is necessary to respond to the customer demand or responsiveness. The retailer must instill a sense of confidence while delivering - it is called authority. All these processes must be customer-oriented or empathetic. There should be tangible evidence of the performance of the service.

STANDARDS AND SERVICE STRATEGY Once the processes -are spelled out, it should be seen how new standards can be set, and new methods developed, keeping the customer at the centre. Alteration time can be set to a matter of hours, rather than next day which would improve the overall customer satisfaction.

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Contours of Retailing Management

Methods should be developed to meet these new standards. Customer service thus, would become a distinguishing feature ofthe organization.

MANPOWER FOR SERVICING After all, most ofthe services are rendered by the staff. Manpower must receive training to render best possible service. Any service requires a human touch. Every employee is the brand ambassador of the organization. They must be informed about our policies, values, vision and plans. It is they who are a great help in fulfilling the vision ofthe organization. The most crucial input is training. HR function in retailing has been dealt with elsewhere in this book.

MONITORING SERVICE Services rendered must be monitored, so as to know if there is any gap between the level of the actual service and the expected service. We have to see whenever the services we render contributes to the service goals we have set up and implements the strategies we have formulated. There may be room for improvement. Monitoring is a continuous process. We may use 'mysteryshoppers'to assess the service quality. Service quality is perceived subjectively, and hence we can bring an element of objectivity by clearly spelling out the parameters on which the service is being judged. Service is important not only for front-office staff, but back-office and administrative staff also. It should have top-management support. It shows how customer-oriented a retailer really is. Employees are given feedback about the service they are rendering and the shortcomings, if any. Suitable counselling and training improves service quality in the future. Even customers can participate in this process of providing feedback.

WHAT ARE THE COMMON SERVICES? • • • • • • • • • •

There is a facility for trials and demos. There are sample pieces to do so. There are alteration facilities for garments The delivery Gift-wrapping Toilet facilities Credit facilities Returns of goods Extended shopping hours Car parking facilities All these services are not charity. They are meant to build a relationship with the customer. Services give competitive edge to the retailer, since there is hardly any difference between the merchandise offered. Retailers may also be on par in terms of location and interiors. The only distinguishing feature could be the services rendered.

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103

The total service approach establishes a relationship with the customer leading to customer loyalty. It also helps in attracting new customers. Any retailer worth his salt would not like to have what are called transient customers, who do not patronize a store time and again on account of their experience about the service quality. Certain factors go a long way in creating a service level for the retailer. Promotion should be informative, and helpful. There is courtesy in personal dealings. Sales persons are ready to assist. The -products being promoted are available in adequate quantities. The product knowledge of the sales staff must be good. Civil Engineering of the infrastructure should be good to serve the customer well. The features should be convenient for the customer. The air-conditioning and heating should be up to the mark. The layout must be customer-friendly. There should be rest-rooms and lounges. There should be arrangements for parking of vehicles. The location itself matters a lot. The way cash is accepted also matters. The lighting should be proper. The length and width of aisles and the toilet facilities - all these matter.

WHAT IS CUSTOMER SERVICE? Credit facilities: The customer can be extended credit by the retailer himself or through banking channels. Credit is an integral part ofcustomer service. Credit is a facilitator. It influences the purchase decisions. Some retailers go in for a co-branded credit card, e.g., Big Bazaar with ICICI and Shoppers' Stop with Citi. Card purchases also help to monitor the database. Price Management: All prices must be clearly marked. They should be visible. There should be an element of fairness here. The price of credit must be brought to the notice of the customers. We cannot delink pricing and customer service. Various types of customer services are tabulated here:

Name of the Service

Details

Working Hours

They should be as convenient to the customers as possible, e.g., extended working hours for bank branches in suburbs, morning hours for bakery and grocery sections. 24 x 7 shops are common to sell medicine, laundry services, autorepairs and food services such as coffee shops.

Information Aids

An easily navigable Internet site is maintained to tell about merchandise, schemes and give news. Regular demos are held to excite the customers. Informative booklets are distributed.

Remarks Cost of providing the service and additional revenues must be studied. Local shopping act must not be violated.

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Contours of Retailing Management

SMS messages about promotional schemes are sent on cell phones of the customers. Credit

Buy now and pay later schemes are introduced. In-house credit is offered.

Credit processing should be professional.

Gift Wrapping! Packaging

Proper wrapping of purchased merchandise must be given thought. Some merchandise canjust be put into a bag. Some merchandise like jewellery, cutlery, etc. require special packaging. Good stores provide carry-away boxes. Free giftwrapping is common.

Gift-wrapping and packaging can be exploited to promote the store.

Cash counter

Cash must be accepted promptly and small change given back. Retailers abroad discount cheques on the spot. Credit card terminals should be sufficient.

Persanal shopping

Customer's order can be accepted on phone, and goods are homedelivered. The shopkeepers choose an assortment of goods for the customer.

Personal selling

Right type of personal selling results in customer satisfaction. Sales staff should suggest at times. If sales staffis involved properly, it leads to a very satisfying experience.

It is a relation-building exercise.

Merchandise availability

Easy access to the products one seeks is very important. There should not be a stock-out. The store may not have assessed the customer needs properly. The customer himself may be confused about his requirement.

Well-designed layout, proper inventory management,proper placement and displays and helpful and informed staff are necessary.

Sales Transaction

Ambassadors or escorts may act as advisors to the customers. Check-

Recreation and entertainment while shopping must be

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105

out lines should be kept short. Rest rooms are necessary. A retailer has to decide whether to have multiple lines or a single serpentine line.

worked out. Waiting time to complete a purchase is called dwell time. It is a subject of research.

Merchandise Returns

Some retailers go to one extreme of 'no returns' at all, whereas others give a leeway to the customers which goes to the extent of 'customer is' always right.' The policy should be fair. It builds a lot of goodwill. Returned goods may be dated, may depreciate in value and may lead to losses.

May be abused by the customer, e.g., a customer returns a TV set after the cricket match.

Complaint Redressal

Customer complaints require proper handling. Both the customers and the employees are likely to err. Misunderstandings are common. It affects the store image. Put yourself in the shoes of the customer. A little loss now will be compensated later by a lifetime relationship. There should be a policy regarding who will handle the complaint.

Makes a difference in performance. Problem must be understood. Symp a thetic listening is necessary. Problem should be restated to see whether the retailer has understood correctly. Think of creative solutions which are fair enough.

Servicing and Repair

Most machines do need repair. Some other items like torches, toys, paintings also require repairs. Satisfactory performance means repeat purchases.

Most difficult service. Scheduling repair calls is called for. There should be tie-ups with the manufacturers to undertake repair jobs. On-site repairs are also given for electronic goods and computers.

Delivery

Home-delivery is expensive. Delivery cost can be absorbed in the product price. Customers can be charged nominally for this service, e.g., daily newspaper vendor puts a service charge on the bill.

Some products are better homedelivered, e.g., fast food like pizzas; flower bouquets.

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Contours of Retailing Management

CUSTOMER SERVICE LEVEL How many services could be offered to the customer? It is a tricky question. The service level corresponds to the cost-benefit analysis a retailer undertakes. There should be a long-term perspective, and not short-term. The characteristic of the retail outlet itself will determine the services, e.g., whether you are a down-market retailer or a suburban one. The competitive scene is also considered. If a competitor offers a particular service, it is better to maintain parity. The merchandise offered also determines the services, e.g., complex products do require after-sales maintenance services. The reputation and image ofthe retailer influences the service level, e.g., a premium store is expected to offer more services rather than a discount store. Lastly, the profile of the clientele does affect the service level.

SUPERIOR CUSTOMER SATISFACTION In the olden days, services was considered to be the prompt and correct handing over of the desired merchandise by the salesman. These days there is self-service. Yes, it is true that time is still valued. The location of inventory should be such that we access what we want quickly. There should be ready assistance available. There should be immediate check-out; and no one likes to wait for a long time in a check-out queue.

SELF-CHECK-OUT AND HAND-HELD DEVICES In India, there are no self-check-out counters; because these occupy costly floor space. Under the supervision of an official of the store, the shopper does the self-check-out. The official verifies the scanning of all the items. Hand-held scanner holding persons can quicken the chl:lck-out traffic when queues develop. The pre-scanning allows the payment to be made immediately.

IN-STORE WIRELESS LAN Wireless LAN makes available several points-of-sale (POS) terminals at a reasonable cost for quick check-out. The terminals can be set up at any point where there is traffic build-up. This system introduces flexibility. PDA-style gadgets can be connected to WLAN.

IN-STORE KIOSKS Self-service kiosks deliver product information; promotional schemes and do-it-yourself tools. These are touch skin kiosks. They guide us to the item, the schemes available and the usage suggestion.

SCAN AS YOU SHOP Scanners can be attached to the shopping cart's handle, and things can be placed in the shopping cart after scanning. This provides a running total of the purchases made.

COST REDUCTION Productivity of costly space must be improved by innovative in-store displays using vertical space. Different kinds of display units create visual variety. Inventory turnovers must be improved.

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107

VENDOR PARTNERSHIP Vendors and the stores must jointly do the product development, cost reduction exercises, and response time studies. They should share profits by a productive partnership.

LOGISTICS Central or regional distribution centre is set up which receives supplies and makes them ready for the shelf or floor by bulk breaking or regrouping. This may involve palletization and cross-docking. As the retail space is costly, the merchandise is made floor-ready at the distribution centre: DC level itself. This merchandise is transferred directly from the transport vehicle of the retail space. The DC locations and supply route taken are cases of Operations Research.

RADIO FREQUENCY IDENTIFICATION TAG (RFID) RFID tag is as small as a coin, and emits RF waves, which can be decoded by a radio receiving device. When this tag is attached to an item, its movement can be tracked in a predefined area. It is expensive to put RFID tags on all items. The tags are attached to the pallets and cartons to track movement through the supply chain. When these tags will become economical, these can be used to monitor movement of items off-shelf.

INTERNATIONALIZATION Indian Government is thinking of allowing global investment in the retail sector. There is going to be presence of retailers from abroad. Another dimension is the outsourcing of products from India. The suppliers must meet the standards set by the foreign procurers - EDI 4030 . compliance for JC Penny and RFID tags for Wal-Mart. Indian suppliers must study how the global retailers operate.

SHOPPING TROLLEYS We require light and easy to push trolleys while shopping. As they are light, even women and children can push them. Some trolleys are badly maintained and are not navigable. There should be compartments to segregate the products. They should be of good finish and quality. Most retailers import these carts from Europe. They cost between Rs. 3000 and Rs. 7000. As steel prices are rising, they are likely to be more expensive in future. A hyper-market format requires on an average 200 trolleys. A smaller store would deploy 20-50. A trolley (cart) has a life-span of not more than 3 years. Spencers imports trolleys from China, HyperCity from Caddie of France and Big Bazaar from Wazl, Germany. They should roll smoothly and must be able to accommodate children. The cost oftrolleys from Caddie in France (105 litre capacity) is Rs. 4421 at source, and Rs. 4900 here (landed cost). A bigger trolley (210 litres) costs Rs. 5127 at source and Rs. 5700 when it reaches the outlet. HyperCity uses 400 trolleys. Trolleys should be silent movers. There should be a good braking mechanism. As carts are multi-purpose vehicles, they should be made out of plastic. There are trafficjams in the store due to the manoeuvering of the trolleys. Carts can get swapped with other people's carts. There should be some sort of labelling on the carts to identify the buyer.

CHAPTER

9

)

PRICING OF MERCHANDISE Pricingis a balancing decision amongst various pulls and pressures. India is a price-sensitive market and setting the right price is a challenging task. Price sensitivity is the reaction of the consumers to the changes in price in terms of the quantities they buy. It is called price elasticity. Ifrelatively small percentage changes in price leads to substantial percentage change in demand, price elasticity is higher. It happens when good substitutes are available and the urgency to purchase is not much. When there is a substantial change in the price, but smaller percentage change in demand, it is called inelastic demand. This happens when the purchase urgency is more, and consumers are not satisfied with the substitutes available, and maintain their brand loyalty. Thus, price elasticity is given by = Percentage change in quantity demanded Percentage change in the price charged Or

Elasticity

=

Quantity 1 - Quantity 2 . Quantity 1 + Quantity 2 Price 1 - Price 2 Price 1 + Price 2

As quantities purchased generally come down as the prices move up, elasticity tends to be a negative number. Let us fi,rst examine the factors which affect the retail prices.

FACTORS AFFECTING PRICING Pricing is a part of the marketing mix. Marketing mix consists of product, place or distribution, promotion and price. Thus; price affects the other elements of the marketing mix and in turn is affected by them. It is an interactive decision.

Product or Merchandise Merchandise and nature thus affect pricing. The attributes that consumers seek from the merchandise affects its pricing. The more valuable these attributes are, the more is the . willingness to pay more for them. Sometimes, merchandise is price leveraged for the quality. Sometimes, merchandise of the expected quality comes at less than the expected cost. These are all tricky decisions to be taken carefully.

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109

The price range being made available to the consumer depends on the merchandise selection. A given price is the sum of the cost of the merchandise and its mark-up. A retailer can set a particular price by attaining low cost but putting a higher mark-up to cover the overheads and other cost to sell at that price. Alternatively, high cost and lower mark-up and overheads enable a retailer to sell at a specific price. Place We have discussed the significance oflocation of the store in a separate chapter. Ifa store is located closer to other competing stores, the scope of price flexibility is lesser. We have to fall in line. The distance between the customers and the stores also affects the prices. The more remote the store is from its customers, the lesser are the prices to offset the time and cost of commuting to the store. Factory outlets are always cheaper than the neighbourhood stores, as they are located at a far-off place. A customer tends to buy in the neighbourhood, if the lower prices offered are not enough to cover his travelling expenses. Prestigious locations have stores which charge slightly higher prices. Promotion We have treated promotion separately in a chapter. Pricing and promotion are interrelated. A heavily promoted store charging reasonable prices experiences more off-take. Just high promotion or just lower prices exclusively would not produce an off-take higher than both practiced simultaneously. A low-priced store also needs promotion, so that consumers become aware of its low prices. The retailer's prices contribute to the store image. Some stores are high-fashion stores or boutiques, their prices are high. Some are discount stores. Their prices are less. Though a store keeps all other factors constant, pricing itself is capable to give it an image. Miscellaneous There are other factors such as credit facilities and customer services which affect pricing. Customer services increase the operating expenses. There is a tendency to increase prices to cover these additional costs. But if customers have to pay for the services such as alteration of clothes, they are likely to resent. It is better to cut margins and maintain the prices. Some stores keep well-informed manpower for guiding the customers. Customers are then ready to pay more as their selection is facilitated for certain special merchandise. Some stores appeal to the philanthropic motives of the customer, e.g., we will share our proceeds with a charitable cause. Returns are accepted readily by certain stores. Such stores can demand certain extra price.

HOW RETAIL PRICE IS

~D

AT?

Let us understand what constitutes the retail price. Here we should understand the term cost ofgoods indicating the cost ofthe merchandise plus the expenses associated with it such as transport of goods from the supplier to the store. Expenses are of two types - fixed and variable: Fixed expenses are called overheads and remain constant, irrespective of the amount of merchandise sold or business done, e.g., rents, electricity bill, telephone bill, etc. Variable expenses as the name itself indicates vary with the level of sales directly, e.g., profit margins. The retail price is fixed keeping our profit expectation or mark-up in mind, which is expressed as a percentage (of retail price or cost price).

,11 0

Contou rs of Retailing Management

Retail price = Cost + Mark up Or Cost = Retail Price - Mark up Mark up = Retail Price - Cost Mark up Percentage (at retail)

= Retail Selling Price - Merchandis e Cost

Retail Selling Price = Mark up in rupees x 100

Retail Price

=

Mark up Percentage (at cost)

Retail Selling Price - Merchandise Cost Merchandise Cost Mark up in rupees Cost

----~--~----x100

Illustration A piece of merchandise costs Rs. 100 and the mark up is Rs. 75. The retail price = 100 + 75 = 175

Mark up Percentage on Retail

,

100

= -175

x 100 = 57.147

Based on cost price, the mark up percentage would be: Mark up percentage on cost

75

= -100

x 100 = 75%

This mark up is called Initial Mark up, which could be modified by mark downs, discounts and shrinkages. Mark downs are reductions in the original retail price. The initial mark up equation is: Initial Mark up Percentage

=

Planned retail operating expenses + Planned profits + Planned retail reductions Planned net sales + Planned retail reductions

Initial mark up is the mark up placed on the merchandise when the store receives it. Maintained mark up is based on the actual prices received for merchandise sold during a period less merchandise cost. Retailers would prefer to have the initial mark up and maintained mark up to be equal, but this rarely happens. The difference between these two mark ups is due to mark downs, added mark ups, shortages and discounts.

Pricing of Merchandise

Mark down percentage

111

Amount of reduction Original selling price

The maintained mark up or gross margin is the main factor contributing to profitability, since it is the actual difference between the actual selling price and the cost of that merchandise. Gross margin = Net sales - Total cost of goods

SOME BASIC MARK UP FORMULAE 1. To find mark up percentage on cost when mark up percentage on selling is known:

Mark up percentage on cost

=

Mark up percentage on selling price 100% - Mark up percentage on selling price

2. To find mark up percentage on selling price when mark up percentage on cost is known: .. Mark up percentage on sellmg prIce

Mark up percentageon cost =-------=--=-----.:::::.-----100% - Mark up percentage on cost

3. To find selling price when cost and mark up percentage on cost are known: Selling price = Cost + Mark up percentage on cost 4. To find selling price when cost and mark up percentage on selling price are known: Cost Selling price = 1 - Mark up percentage on selling price

PRICING STRATEGY A pricing strategy could be demand-oriented, cost-oriented or competition-oriented.

Demand-oriented Pricing In this strategy, an assessment is made' about the consumer demand at various price points. A consumer perceives that he derives functional and psychological benefits from the merchandise. This is called the value derived. There is always a psychological price-value equation in the consumers mind. There is a feeling that the higher the price, the higher the quality and vice-versa. It is more relevant when other attributes of the merchandise are hard to assess and branding plays no signification role in the merchandise choice. But when retailer's image and branding are carefully introduced, price alone, loses its dominant significance. Demand-oriented pricing works when the retailer analyzes the target market and the value proposition they seek. Prestige pricing assumes that premium products are patronized by the status-conscious elite target audience. Prestige pricing also leads to the selection of a particular retailer. Some people however, are bargain hunters in spite of their economic condition and would not bait for prestige pricing.

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Cost-oriented Pricing We have already studied mark ups over the cost. It is a most commonly used pricing strategy. Mark up prices factors in the merchandise cost operating expenses and expected profits. The selling price minus the merchandise cost is the mark up. The percentage of mark up depends upon the trade norm, supplier's suggested price, stock turnover, competition, overheads, alteration costs and the selling effort. It may not be possible to have a single mark up percentage for a product category. Therefore, variable mark up policy is followed. Variable mark ups allow to factor in variable costs, associated with separate merchandise and even in the same product category. Variable mark up allows for differences in finance locked up in inventory, e.g.,just-in-time ordering and carrying an entire assortment. Variable mark up recognizes the differences in selling efforts and the merchandising skills. Certain products carry especially attractive prices to build up traffic. This is possible by adopting variable mark up method. Competition-oriented Pricing Instead of demand and cost being the benchmarks for price setting, a retailer benchmarks its prices against a competitor. A retailer keeps competitive parity while pricing. Competitionoriented pricing would be below the market, at the market or above the market.

APPROACHES TO PRICING STRATEGY Customary Pricing: Here, prices are kept constant for an extended period, e.g., newspaper prices, phone tariff, restaurant menus. Everyday Low Pricing (EDLP): Here, in the entire selling season, low prices are maintained.

Yield Management Pricing: It is a computerized demand-oriented pricing. A service provider here tries a combination of prices to optimize his yield, e.g., an airline sells discounted tickets, full-fare tickets and first-class tickets in certain proportions. The discount decisions are based on time and season. One-Price Policy: The same price' is charged to all the customers. Here, there is no bargaining.

Flexible Pricing: Allows bargaining over selling prices. Hard bargain brings the prices down. Such pricing may be followed by - jewellery showrooms, electronic goods dealers, auctioneers, auto dealers, etc. Contingency Pricing: Here, no payment is made to the service provider. The payment is made after the service is performed and is contingent upon its being satisfactory. Odd Pricing: Here, prices end in odd numbers, e.g., Rs. 99.99, Rs. 299, Rs. 599 , etc. It is a form of psychological pricing, and gives a feeling that the amount is below a particular ceiling. Leader Pricing: Some popular items are deeply discounted to build up traffic, e.g., a Vicks Vaporub bottle whose MRP is Rs. 30 may be sold for Rs. 22. It fetches the customers to the store, who may then buy other goods on regular prices.

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Multi-Unit Pricing: A package of3 soap cakes is priced at Rs. 25, though each soap cake individualiy costs Rs. 10. Thus, the multi-unit costs cheaper. It increases the total purchase of the merchandise. It also quickens the sale of slow-moving merchandise. Bundled Price: A firm sells a package, e.g., shaving kit consisting offoam, blades, razor, and after-shave at a reasonable price. Related items thus, can be sold as a bundle. Price Lining: Here, the merchandise is sold at a limited range of price points, where each point represents a quality level. Price Zone: It is range of a prices for a particular merchandise. A price point represents a specific price within this range. Market Skimming: Here, merchandise is initially priced higher, and the prices are lowered later. It is a discriminatory pricing, the basis of discrimination being time. Market Penetration: It is the antithesis of market skimming. Here, the merchandise is priced lower initially to capture the market. Discount Pricing: Here, merchandise is offered at a discount-mostly highest possible discount to give the lowest possible prices. Predatory Pricing: Here, goods are sold even below their cost price, destoyingthe value. There should be a law against predatroy pricing. Harford's: Pricing Theory in the Undercover Economist According to Harford, utility is a very individual thing. Product differentiation enables a firm to charge different prices. A coffee shop is cited as an example. A cappucino cup can be differentiated by adding either white chocolate or a squirt of whipped cream. A consumer is offered several options. The options may double the bill. Starbucks is able to smoke out customers who are less sensitive to price. It does not add much to the costs by adding some ingredients or using a larger cup. This phenomenon of charging different prices for what is largely the same product is known as price targeting. Sale pricing is another area where price targeting is normally used. Retail chains offer discounts by organising sales to the extent of 40 - 50 per cent. Then why not sell at a di~count of 10 per cent throughout the year? Some customers seek a bargain and some do not. Those not seeking the bargain can be charged more and those who seek less. Middle-of-the-road prices are no solution, as these are not high enough to exploit loyal customers and not low enough to attract bargain hunters. In supermarkets, packaged commodities are priced several times higher than the loose ones. A typical customer buying a small quantity does not check the prices. Customers are price blind when buying popcorn while watching a movie.

ADVERTISING AND PROMOTION What is promotion? It is a communication package in marketing which aims to exchange information between the buyers and the sellers. Beyond informing, it also accomplishes the task of reminding and persuading the consumers so that they respond to the product or service being offered. Retail communication is broadly defined as any communication by a retailer that informs, reminds and/or persuades the target audience about any aspect of the organization. Promotion first builds up awareness about the current offerings. mtimately, it generates sales. But some sales are always generated even if there is no promotion. For instance, the neighbourhood households will approach the retailer next door to buy their requirements as it is convenient. A passer-by may stop at the retailer and may make impulse buying. Some sales are generated by window displays, price discounts, merchandise available and customer service. Promotion is an additional method to generate sales, and is used in combination with the other methods. Promotion is used by many high-profile retailers to bring traffic into the stores and direct the traffic to different areas of the store, and persuade the traffic into buying the merchandise.

COMPONENTS OF PROMOTION There are four broad promotional tools available to a retailer: Advertising which any paid form of non-personal presentation of ideas, goods or services by an identified sponsor in a media mix .. A retailer has to inform the potential buyers about his offering, and its problem-solving nature. His aim is to develop a preference for his outlets, as a whole retailer mostly uses print media, local radio stations such as FM, television, Internet and direct mailers. Personal Selling is an oral presentation made to the prospective customers so as to generate sales. It is just a conversation with a purpose. Selling thus involves face-to face interaction with the customer. It has been discussed in detail in a separate chapter. Sales Promotion (SP) are those marketing activities excluding advertising, personal selling and publicity which stimulate consumer purchasing, dealer and sales personals effectiveness. It is a short-term activity. It can be considered as a pressure applied on the consumer, retailer/wholesaler and salesman to stimulate trial and increase consumer demand. The most commonly used SP methods are

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free fits buy-one-get-one free, coupons, displays, contests, sweepstakes, sampling and product demonstrations. Publicity stimulates demand in a non-personal way. It includes public relations involving maintenance of effective relations of the organization with different publics like employees, shareholders, suppliers, dealers, government, media and so on. Public relations put commercially significant news in media and gets favourable coverage in different media. As media costs of his promotion are not paid for by the sponsor, it is called publicity. ~ four components of promotion are so blended by the retailer that it achieves the retailer's promotional objectives. A retailer may project through advertising premium quality image. The same image must be re-enforced by personal selling, sales promotion and publicity. If consistency is not maintained, it projects a confused image of the retailer.

DISTINCTION BETWEEN ADVERTISING MANUFACTURER AND RETAILER

STRATEGIES

OF

A

A manufacturer may have a wider market geographically spread. As against this, a retailer has a geographically-confined concentrated market. A message from a retailer has to be tuned to the local customs, needs, habits and preferences. Mostly, retailers use the local media. Only retailers with a national-wide chain can think of using the national media, of course, a direct marketer is an exception which uses national media. Retail ads are geared to immediate needs, and short-term sales. National level firms on the contrary try to develop a favourable attitude for long-term effects. Retail ads emphasize price whereas manufacturer's ads are broad-based. A retailer's ad is a multi-product ad, whereas a manufacturer advertises for a single productJ brand or a few productslbrands. Media spend of retailers is lower than that ofthe manufacturers. This is an incentive for the manufacturers to collaborate with the retailers by sharing costs and indulging in what is called co-operative advertising.

RETAILER'S PROMOTION Retail Promotion must contribute to the overall business plan of the retailer. It should be directed to the primary trading area the customers of which are being served by it. Later, it should extend the promotion to the secondary trading area. Retail promotion must build traffic. Retailer's customers buying on plastic must be addressed, especially as they are generally highspenders. A retailer also addresses loyalty card customers and co-branded card's customers. Promotion can be used to increase the cash flow. The property and fixtures of the retailer must be consistent with the promotion. Promotion can be considered as customer service by being informative, which results in a better choice on the past of the customers.

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PROMOTIONAL PLANNING Promotional plan has the following steps: Promotional Objectives

Fig. 10.1 Promotional Plan

The plan is derived from the overall business plan of the retailer.

PROMOTIONAL OBJECTMS There are two broad objectives for any retail promotion - Improve long-term performance and short-term performance. Long-term performance has two components - store image and public service. Short-term performance can be improved by attracting new customers from the existing markets and new markets. Short-term performance can also be improved by concentrating on the existing customers and practice what is called relationship marketing.

Promotionai Objectives

Existing Trade Area Attract new Customers New Trade Area

Concentrate on existing customers Fig. 10.2 Promotional Objectives

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A store projects its positive image by institutional advertising. Public promotion establishes the store as a good citizen, and a responsible citizen. A store may honour meritorious students in a locality. It may contribute towards charity. Promotion is directed at the existing customers who are motivated to spend more at the store. Besides, promotion aims to increase the number of customers attracted to the store. Promotional objectives have to be SMART by being specific, measurable, actionable, realistic and timed.

COMMUNICATION OBJECTMS Promotion has to build the brand and product awareness. Promotional comparing is informative and imparts knowledge about the product. This creates interest in the product. Interest leads to a desire to possess the product. In other words, product preference is created, which ultimately leads to buying of the product or action.

BUDGETING THE CAMPAIGN Money spent on promotion must be used effectively. The first questions is who is to boot the bill- whether the retailer itself or in tie-up; with other retailers or the manufacturer. If the retailer has to campaign all alone, he uses one of the following method!? to determine the budget. Affordable Method A retailers puts aside as much as he can afford for promotion. This may be insufficient or may not relate to what is actually required. A small retailer generally uses this method. Percentage-ot-sales method A specific percentage of the estimated sales are allocated to advertising. This method is controlled and provides affordable amount for ad spend. Task-and objective Method In the above methods, advertising chases sales. In this method, advertising leads to sales or some other pre-determined objective. First, the advertising objectives are decided. Then the tasks to be performed are spelled out. These tasks are necessary to achieve the objectives. Each task has an associated cost. All these costs are summated to get the advertising budget. For example, a retailer would like to build awareness about its name in 60 per cent people within a month from the current level of 40 per cent awareness. He then decides the tasks to achieve this objective. The method is most scientific, since expenditures are goal-oriented. Its success and failure can be easily assessed. But at the same time, it is difficult to set the goals and tasks; particularly for the small retailers.

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Objective 1. Develop awareness in passers-by 2. Develop awareness in car-owners 3. Develop awareness amongst students

Task Distribute 6000 shopping bags Put radio spots on FM of 10 seconds duration during prime time. Use quarter page ads in Sunday midday for 4 weeks

Total Budget

Cost Rs.12000

Rs.25000 Rs.40000 Rs.77000

Competitive Parity Method Here the retailer brings his budget in line with the competitor's budget. If a leading retailer increases his budget by 12 per cent, all other retailers in the area fall also do the same. This method is suitable for bigger as well as smaller firms. However, this method is not pro-active but reactive. Besides, it is difficult to know the competi~or's budget. It also ignores the fact that budgets should be set according to individualistic needs. The competitor's budget may be right for it but not for the retailer.

co-op CAMPAIGNS Sometimes, other retailers or a man ufacturer join hands with the retailer in the promotional effort. Vertical co-operative advertising allows retailers to share his ad expenditure with other channel members. A manufacturer may pay 30 per cent of ad expenditure to a retailer. The ceiling however is 3 per cent of the yearly purchases by the retailer from the manufacturer. Thus, if a retailer spends Rs. 1,00,000 on advertising, he is paid back Rs. 30,000 by the manufacturer, if his total purchases amount to Rs. 10,00,000. The retailer should not consider this money ex-gratia payment. On the contrary, if the advertising is effective, he will reap the benefits. Since the manufacturer exercises control over the form and content of the co-op and, a retailer should think that he in fact is contributing 70 per cent to the manufacturer's cost of advertising. Manufacturer also benefits from the discount given by the media to the retailer. Horizontal co-operative advertising is a system where some manufacturers come together to share the cost of advertising. As it is a joint effort, it gives greater bargaining power to an individual retailer. A mega mall can conduct a joint campaign increasing traffic for all the participants. Mostly such campaigns are event-related.

SELECTING THE PROMOTIONAL MIX A retailer has to choose from the promotional tools of advertising, personal selling, sales promotion and publicity. A smaller firm with no marketing muscle may rely on in-store displays, mailers, banners and flyers and publicity to generate the traffic. A large-scale mass retailer may use TV and Press for Promotion. The type of the retail outlet is a major factor that influences the promotional mix decisions. The following table illustrates the promotional mix suggested for various types of the retail outlets.

Advertising and Promotion

Types of Retailer

Preferred Media

Emphasis on Personal Selling

119

Remarks

Chemist shop

Trade journals, doctors by personal contact

High

Pharmaceutical conferences are a good promotional opportunity.

Restaurant

Local newspapers, Point-of-Purchase, sign age outdoors

Moderate

Word-of-mouth publicity. Favourable coverage in the media.

Auto spare parts

Local press, yellow pages

Moderate

Mailers can be sent

Beauty Parlours

Exterior signs, media like Femina and Cosmopolitan, Yellow pages

Moderate

Word-of-mouth publicity.

Bookstores

Local press, mailers to academic institutes.

Moderate

Author's reading and signing sessions.

PROMOTIONAL DECISIONS Some important promotional decisions are related to the media mix, the scheduling, the message design and development, the personal selling, the sales promotjon methods and the overall co-ordination.

MEDIA SELECTION There are several media alternatives available - print media, 'broadcast media and out ofhome advertising. Print includes press and magazines. Broadcast involved radio,.TVand cinema. You have new media options such as Internet. Newspapers and TV are mass media alternatives which cover a broad market whereas radio, magazines, direct mail and Internet are selective media options that can be targeted to the specific market segments.

NEWSPAPERS Newspapers are either national or local. Even national newspapers have local editions. These are thus very appropriate for the retailers whose markets are confined to a local trading area. Newspaper ads for retailers are easy to create. His deadlines are short - the time lag between ad creation and its appearance is shooting. It is thus suitable for topical announcement and crisis situation. It is a substantial ~dvantage Newspapers are discarded fast. The message therefore has no permanence. It has a short life. The time spent on reading a paper is also not much. The recorder might miss out on the message. The reproduction quality is not as good as that of the glossies. It isdifficult to match the target audience of the retailer and the readership of a newspaper.

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In spite of all the above demerits, newspapers continue to attract a substantial proportion of retail advertising.

MAGAZINE ADVERTISING Magazines generally do not attract much retail advertising. Magazines can be used for institutional advertising of retailers to build up their image. Magazines can be used for some premium products. Their reproduction is superb. The message has durability as the magazine is kept for reading for many days. It is also shared amongst with and kin friends. Editorial matter may be helpful in polity across certain messages. A health magazine may provide features on diabetes, and put the consumer in a proper mood to consider buying electronic glucometers to check the blood sugar. Interior decor articles can accommodate ads ofretailers selling draperies and tiles. Magazines are not suitable for topical announcements as the lead time is longer.

1V ADVERTISING It has been proved by research that the video has far greater effect on the consumer memory than mere verbal or audio messages. Big retailers, therefore, use TV advertising to project their brand image and to position their store. TV advertising is costly. Besides, it goes far beyond the trading area. There is the problem of clutter, as many messages vie with one another to arrest the consumer attention. There is fragmentation of audience as the number of channels have increased. It however, is an opportunity in the sense that retailers can target their message to a specific audience. Though TV advertising for the retailers have several drawbacks, it still has its utility in view of the fact that TV has emerged as a powerful medium of recreation, has a wider reach and is an audio-visual medium. In addition to regular TV channels, the retailers have the option of choosing the cable channels. The rates for such local cable channels are very economical and compare favourably well with the local press advertising. TV advertising is used to sell both the products and the store image simultaneously. Cable TV has also made available shopping channels which carry information of various products, and use direct marketing. According to an AdEx (a division ofTAM Media Research) report, advertising by the retail industry registered a rise of 12 per cent on TV during Jan-May, 2007 over Jan-May, 2006.

RADIO ADVERTISING Radio messages are the preferred media for several retailers. The message can be targeted to a select audience by choosing the appropriate radio station and time. It is a great medium to create the store image. Radio jockeys are great favourites with the audience. They develop channel and programme loyalty. These jockeys are useful in putting across the adverting message. Radio messages are transient. They cannot be referr.ed to again like print media messages. Many radio messages are in the form of announcements, dialogues and jingles. They lack. creativity. It is their greatest drawback. It is necessary to produce better radio commercials: Radio is the background medium and is enjoyed while working or driving. Radio lacks the video

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121

effect, and therefore not suitable for couch potatoes. It stimulates those who can visualize the word picture. National radio network covers greater area than the retailer's trading area. However, FM channels are suitable for his purpose.

DIRECT MAIL Direct marketing is one more media which allows a retailer to target a specific audience. It consists in sending the message to a select mailing list. Mailings may consist of a sales letter, promotional brochures and catalogues. It allows the retailers to establish a relationship with the customers. Customers are also sent invitations to events and special promotional offers. Direct mailer reach the customers without the competitors knowing about it. However, direct mail is an expensive proposition - the per contact cost is the highest. The reach is a function of the mailing list. The quality of the mailing list contributes to the success of direct marketing. An outdated list means a huge wastage of promotional budget. Several mailers are consigned to the dustbin - they are called junk mail. The mailers also intrude on the privacy ofthe persons.

INTERNET Internet is also used as a media of promotion by the retailers. Internet provides the latest information An organization can share information with the consumers. Internet is low cost integrated marketing communication mix - It can take care of all the elements of communication mix such as advertising, publicity and PR, and sales promotion.

MISCELLANEOUS MEDIA A retailer can use media other then those listed above, such as cinema, transit media such as buses, outdoor media such as posters and hoardings, yellow pages, shopping guides, etc. These other options are used in conjunction with the mainstream media. Some small budget retailers may use these as the main media.

CRITERIA FOR MEDIA SELECTION A retailer has to weigh the pros and cons of the medium or media he decides to select. The choice is affected by the media cost, media coverage and reach, the frequency of the message, the lead time and the editorial content. Coverage It is the maximum number of persons that can be reached by the medium. It shows the potential of the medium. It does not denote the number of actual persons reached. For instance, if a magazine reaches 80 per cent of the 50000 households in a retailer's trading area, then its coverage is 40000 households. Reach It refers to the actual number of customers who encounter an ad message. Cumulative reach is achieved over a period oftime.

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Frequency The average number of times each person who is reached is compared to the ad message in a given period oftime. Costs A medium's efficiency is given by the cost of reaching a given number oftarget audience. Cost per thousand expresses the media rates. Cost per thousand

=

Cost per message x 1000 circulation

As the retailer's is appeal confined to a limited target audience, only that limited portion is factored in

Cost per thousand (target audience) =

Cost per page x 1000 Circulation x

Target audience 100

Suppose a newspaper has a circulation of2,00,000 and cost per page is 10000. Also suppose 80 per cent of the readers are the target audience of the retailer (20 per cent are outside the trading area) Cost per thousand = (Target audience)

10000 x 1000 200000 x 0.80

= Rs.62.5 If we compare cost per thousand for the target audience for different media, we will get information about the efficiency or effectiveness of the media. Lead Times Newspapers accept the ads shortly before publication. Magazine ads must be placed months in advance. Editorial Content A retailer has to think about the editorial environment for the placement of his ads health or wellness column, sports page, women's features, etc.

SCHEDULING OF ADS Scheduling is all about the timing of the ads in terms of the day, week, month and year. The following factors are considered: •

Ads should appear at such times when the possibility of purchase is the highest. Since md,st groceries are purchased on weekends, the ads for these could appear on Thursdays.

•

Ads could coincide with the salruy disbursal schedule when people have high disposable income. Ads of retailers are generally placed at the fag end of the month, and the earliest part of the month.

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•

Those retailers who have limited ad budget concentrate their ads on periods of the peak demand.

•

Ads could be so timed that cost per thousand is the least, e.g. late night TV slots.

•

Ads coincide with the purchase habits of the consumers for a particular product class. Some retail ads like clearance sales ads are timed to react to a situation. Retailers have to advertise to rise above the clutter, and some of them may choose to advertise when others do not, and not to advertise when others do.

EVALUATION OF ADVERTISING Advertising is a result -oriented activity. Results are a function of the overall design and development of the message and advertising planning. There are efforts to assess the effieiency and effectiveness of retail advertising. Advertising effectiveness is the extent to which the advertising attains its desired objective, say creating awareness, induce trials, increase sales, etc. Advertising efficiency is the attainment of the results with the least possible expenditure. Informally, ad effectiveness or efficiency is evaluated by subjective assessment. Formally, advertising research can be conducted prior to running an ad (pre-testing) and after running an ad{ Post-testing) Ineffective ads are a result of some common pitfalls: • Wrongly targeted ad. • Improper media mix • Inappropriate budget allocation, say the budget was too thinly spread over. • Ads do not pass on the full information or passes information lacking in certain things for instance, the ad may not mention the shopp~ng hours or the full address, assuming that the consumers know about it. • Ads may lack the creative element. They may be commonplace mediocre ads that do not distinguish the retailer • Too many ads also dilate the appeal ofthe ads. • The internal communication may be faulty, say ad advertised item's full particulars are not known to the sales persons.

PUSH VS. PULL STRATEGY A company either chooses a push or a pull strategy or a balance between these two. When a whole store or channel is promoted, the consumer is pushed through the channel. When products and merchandise are promoted so that the consumers get pulled to the retailer, it is called the pull strategy. Benefits of the store or channel are promoted Retailer

t Fig. 10.3 Push Strategy

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Contours of Retailing Management

Benefits of the store or channel are promoted

~R_e_tTa_il_er__~I~~--------------------------------------;1

t

•

Customer

f

Fig. 10.4 Pull Strategy

These are the days of the relationship marketing. As such retailers tend to use more of push strategy rather than pull strategy.

SALES PROMOTION Sales Proinotion (SP), is technical term in marketing and refers to the measures which are direct inducements to sales. They are sometimes called sales incentives. In a sense, the whole marketing effort is sales promotion, but conventionally the term is restricted to the promotion schemes directed to three target audiences 1. Consumers 2. Trade (distributors, retailers) 3. Sales force Sales promotion is a short-term exercise, whereas advertising is a long-term brand-building activity Sales promotion campaigns add value to the product. Some of the SP methods are tabulated below.

Types ofSP Point-of-purchase! point-of-sale (POP or POS)

Description Window displays, floor displays, counter displays. Tends to prompt impulsive buying, separate treatment is given to this topic elsewhere.

Contests

Store or brands are promoted through games, slogan writing, puzzles, etc. leading to a prize.

Sweepstakes

Lucky draws are held. The winning is due to chance element, rather than skills as in contests.

Coupons

Discounts are offered.

Stamps/points

Frequent shoppers collect stamps or points to be redeemed against prizes.

Referral Gifts

Member-get-member (MGM) schemes offer a prize on introduction of a new customer.

Buy-one get-one free

Extra merchandise is given.

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125

Give-aways

Items such as pens, calendars, bags, etc.

Samples

Free samples of the product are given.

Premiums

Merchandise given free or at reduced prices to improve traffic or to stimulate sales. In self-high dating premiums the customer pays something towards the cost.

Special Events

Fashion shows, celebrity meetings, exhibitions, etc.

SP is used in conjunction with other promotional methods. SP considers the cost of promotion and the benefits of promotion. It is difficult to carry out such cost-benefit analysis.

PERSONAL SELLING All of us have visited retail outlets. There the sales staff interact with us to affect the sales. This oral communication with the prospective customers with a view to generating sales is called personal selling. The amount of personal selling is a function of the nature of the products, the method of selling, the importance attached to relationship marketing and the expectations of the customers. Personal selling also conveys a peculiar image of the store to the customers e.g. a fashion boutique will have a high-level of personal selling and a self-service superbazar a low-level of personal selling. Sales staff are helpful in suggesting related items to the customers which is called crossselling. Sales staff acts as advisors to the customers, especially those customers who return the merchandise. They suggest alternative merchandise of different colour, size, style and quality.

OBJECTIVES OF PERSONAL SELLING • • • • • •

Sales staff act as persuaders Facilitate the transactions Take valuable feedback from the customers Stimulate impulse buying Improve customer satisfaction Provide customer service

GOOD SALESMANSHIP A good salesman addresses customers by his name. He tries to solve his problems and redresses his grievances. He is a good listener. He welcomes customers with warmth. He has good product knowledge. He keeps his department good-looking and up-to-date. He is adept at handling several customers at a time.

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ADVANTAGES OF PERSONAL SELLING A salesman can show flexibility while dealing with a customer. Everyone who steps in the store is a potential customer, and this potential can be tapped by the salesman. There is little wastage here. He comes to know the problems a customer faces, and his immediate concerns. He draws the attention of the customers.

DISADVANTAGES OF PERSONAL SELLING As salesman has limitation in terms of number of customers he can handle. Personal selling by itself cannot pull a customer to the store. Sometimes, a customer likes self-service and would prefer to be left on his own. Some customers consider sales people as intruders.

TYPE A salesman may be a more order labour or an active order getter who leads the customer through the process of buying. Sales people may receive incentives or push money from the marketer to induce them to sell his brand. Sales people work in stores or visit customer homes. They may also do telemarketing.

SELLING FUNCTIONS The function of selling starts with the greeting of a customer. Later, the salesman tries to assess the needs ofthe customers. Then he leads the customers to the merchandise that satisfies his needs. At this stage, depending upon the nature of the products, he is required to do sales presentation. It is infact a motivating talk to make him buy the product. A salesman demonstrates a product, ifthere is a need to do so during a sales presentation. A salesman may face questions and may object during the sales presentation. A sale is closed including the purchase with words like. Where would you like it to be delivered? Or would you pay by card or cash or is it to be flight-packed? Or what colour have you chosen?' A sales person must master the art of selling. He must be motivating enough, must be well-versed with the product must keep the consumer interest in mind and must be a good communicator. Greeting Customer

Assessing customer needs

Lead to Merchandise

Sales Presentation

Closing the sale

Meet objections

Demo

Feedback

Fig. 10.5 Selling Functions

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127

PUBLIC RELATIONS AND PUBLICITY Public relations (PR), is a function that aims at building up relationship with the various publics an organization has to deal with - employees, customers, media, government, pressure groups, shareholders, financial institutes and public at large. PR is basicallY-an image-building function. PR can be handled by an in-house PR manager or by an outside agency. In this media given society, PR has to manage media relations through interviews, press releases and funhouse stories. This is called publicity, as it is not directly paid-for like advertising. In retailing, there are several occasions when PR skills come handy such as inauguration of the stores, celebrity visits to the stores, renovations at the stores, new product launches, award functions, sponsored events and fashion shows.

IMC: INTEGRATED MARKETING COMMUNICATION Advertising started as mass communication but slowly evolved as targeted communication. Each product was meant for a target audience and its communication must be geared to do so. Advertising, personal selling, sales promotion, public relations direct marketing - all these must work in a unified fashion. It is called IMC. IMC provides clarity, consistency and maximum impact communication. A retailer has maxim um exposure to the customer. He is in a position to assess the customers through database. He has to adopt an IMC approach towards marketing communication.

POINT OF PURCHASE It is a matter of research as to what makes a consumer buy a particular brand-whether it is brand image, brand experience, advertising or word-of -mouth. It is also recognized these days that POP plays a significant role in the consumer's buying decision.

In organized retailing, we come across POP material such as posters, danglers, displays, festoons, fancy shelf-holders, contests, etc. It is a method of interacting with the consumers at the shop floor. Mainstream advertising faces the problem of clutter, and so POP receives increasing alternation. It constitutes nearly 7 per cent of advertising. Majority of buying decisions (say to the extent of74 per cent) in favour ofthe brand are made in stores. POP can change a consumer's choice of brands at actual point of purchase therefore, we need innovative POPs. POP is a visual medium. It therefore, stimulates a high brand recall. POP industry now takes into its scope the entire store design, visual merchandising, pointof-purchase material, store construction and exhibit design. In India, POP spending is worth Rs. 1,800 crore. It is growing at the rate of30-40 per cent per annum. POP will be sustained ifit innovates a great deal. It should become an effective last-minute look. POP is both a tactical and strategic promotional medium.

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Contours of Retailing Management

According to Kiydon, a shopper strolling about the shop floor will notice a stationary sign, but a stationary shopper will notice a moving sign Moving signs are therefore placed at checkout counters where payments are made. Impulsive goods are also placed at such spots. Retailers become involved in POP if it benefits them. It should contribute to their bottom line, and should be in the overall interest of the consumers. Store Displays The following table spells out the major types of displays: Types ofDisplay

Remarks

Window

On outer fa~ade of the shop, they are attention- seekers ofthe passers-by. Such displays can have various designs, exclusive windows have a closed back-up. Windows allow the customers an inside-view.

Marquees

Marquee panels are set up in the front or forecourt. They are ideal for garments and super-markets.

Island

Generally, at the entry point so as to announce new arrivals and special offers. A display podium may be erected.

Brand Corners

Exclusive brand displays in supermarkets. Promotion associated with the brand can be seen.

Cascade Waterfall

Apparel can be arranged on linear walls with the stopping roads.

End-cap

Arranged on terminal sides. Commonly found on gondola fixtures.

Counter

Display on glazed display shelves e.g. jewellery, watches.

Live

Models or animated characters are used. Generally used for apparel. -

RETAIL ACTIVATION There are studies which indicate that many brand selections are unplanned and happen on the floor of the retail outlet. Marketers therefore, allow direct interactions with the brand e.g. gaming stations of Microsoft X box 360 at malls and big stores to give the feel to the consumers. Retail activation plays an important role in choosing a brand. It can be done in many ways and can encompass all facets of out-of-home advertising. Retail activation definitely increases brand recall. Retail activation requires involvement of the retailer. It also needs good people for execution.

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129

NARROWEST ADVERTISING Instore TV advertising provides special sales promotional deals on items being sold, or complement the regular TV commercials. Generally, there are shorter versions of the TVCs. They are reminder versions. Instore advertising is also suitable for instore brands. These ads are point-of-sale reminder medium. Regular TV ads have lot of wastage, but instore ads are focussed. There is flexibility of putting across the message in different languages. It is broadcast in more controlled environment and can speak directly to the consumer. Advertisers put their spend on retail marketing initiatives at Rs. 1000 crore. It is likely to double by 2010. According to experts, consumers are more likely to buy a product whose advertisement they see in a shop because they are already in a buying frame ofmind. Consumers have a convenient touch-and-feel opportunity for products being advertised, BiG FM of Anil Dhirubhai Ambani group airs its programmes at Big Bazaar stores by paying Rs. 1 lac per month for each store. Most companies are leveraging the advertising potential of their stores.

INSTORE ADVERTISING Retailers are tying up with the advertisers to promote their brands within the stores. These include product displays and demos, creating experiential zones, lead generation, and cobranded promotions. There is money in virually every nook and corner of the store and retailers are finding innovative ways to monetise these non-core income avenues. Retailers are exploring newer avenues of non-core revenue generation.

PLAYERS IN THE RETAIL GAME Name of the Player

Focus

Where

Future Media

Instore TV network, store windows publications, dropdowns

Pantaloon properties

Out-of-Home Media

Out-of-Home TV screen network

Retail stores, commercial properties, salons, cafes, etc.

V Jive Networks

Out-of-Home TV screen network

TAG Media Network

Out-of-Home TV network

Percept Retail

Marketing solutions to brands and retailers

Spencers,Fab Malls, Food World, Trinetra

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Contours of Retailing Management

Dialect (Group M)

Instore advertising

MASH (Madison Group)

Shopper-marketing solutions

LintasING

Instore and inmall advertising

O&M

Instore advertising

HUMAN RESOURCES IN RETAILING Human resources are the most valuable assets for any organization, more so for a retailing outlet. Human resource management is that part of management which deals with the procurement, the development, and the motivation of human resources so as to attain organizational objectives. It aims at creating and maintaining organization climate conducive to such development. Edwin B. Flippo defines HRM ·as "the planning, organizing, directing and controlling the procurement, development, compensation, integration and management of personnel to the end that organizational objectives are effectively accomplished." Retailing is a major employer today in India and all over the world. The human resource environment of retailing has peculiar characteristics which are discussed below.

HR ENVIRONMENT Retail sector employs a large number ofless educated, less experienced or inexperienced workers. In retailing, the workers have to keep working long hours. Retailing also employs many part-time workers. These are the factors which influence the HRM in retailing. Retailing is the first opportunity to work for many high-school, and college students. Some enter retailing because of the convenience factor; the retailer is near the residence of the employee. Some 'retail jobs are routine such as packing, wrapping, labelling, store clerks, etc. Even some sales jobs are routine. Some counters like check-out counters do not require staff with great expertise. Such jobs have moderate job specifications. The hired persons are raw youth. There is always a high employee turnover. Employees report late. Many absent themselves. The nature of the work force creates these perennial problems. Retailing is a tiring job, especially because of long hours, with no weekly offs. Retailers work sometimes in two shifts. Many prospective employees do not dare to brave these odds. Retailing is a visible job. The employees come in direct contact with the customers. Their training therefore should be extremely well-planned. They must be taught to have a right attitude, impeccable manners, and cheerful disposition. The employees must be well-dressed and presentable. Many mom-and-pop stores have employees who are shabby in look. Part-time employees must be managed properly. They tend to be laid-back in their attitude. They are late and absent. They might quit the job at the drop of a hat. Customer traffic follows a particular pattern. It is heavier at certain hours and certain days. There should be a match between the number of people during peak hours and the manpowe~.

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Contours of Retailing Management

Retailing in short should emphasise recruitment and selection, training, compensation, packages, career planning, employee appearance and motivation. The organised retailing industry has a workforce of 1.8 million people. Even the present present level of manpower is a challenge. Half the people employed are women. The Retailers, Association ofIndia (RAI), estimates that 2 million people will be required by 2008. That is twice the current level. As a rule of thumb, in a typical mall or large forinat of operation, one person is required for every 250 sq. ft. of space. So a 1 lakh sq.ft. mall will require 400 people on an average. It is estimated that 80 per cent staffis front- end entry-level staff. The balance 20 per cent is back-room crew, managing merchandising, store operations and the like. According to another study, by 2010, retail will employ 2 million people, of which 5 - 6lakh will be required in the organised sector itself. Enam study estimates that 5 lakh employees will be needed in the organised retail sector, with an average space of 275 sq.ft. per employee and the total operational retail space of 150-160 million sq. ft. by2010.

RECRUITMENT OF RETAIL MANPOWER Recruitment is concerned with the sourcing of manpower. It is the sum total offunctions needed to discover and develop reliable sources of supply for the types of applications needed by a retailer. It is aimed at getting an adequate number of applications for all the vacancies. There are vacancies due to reth'ements, desertions, deaths, disabilities and expansions. Recruitment is thus a continuous activity. The potential sources to get the employees are educational institutes, competitors, advertisements in the media, other members of the supply chain, employment agencies, current employees, former employees, recommendations and walking or unsolicited applicants. These days there are several job-related web sites like monster. com, times job.com, naukari.com. The ultimate aim of recruitment is to generate a list of potential employees. The next stage is selection, which is basically an elimination process; and reduces the recruitment list.

SELECTION After recruitment, the selection process starts which matches the candidates available to the requirements of the job. In this process, first job analysis,job description, andjob specifications are fixed. Later comes, filling the application blank, testing, interviewing, checking references, and physical examination. A retailer can delete any of the components and can retain the components, relevant for his purpose. All these steps are integrated. Job analysis is the process oflisting all the tasks, functions, duties, responsibilities for the performance of the job and the qualifications required to perform these. Job analysis leads to job description which gives the title of the job, the relationship, the role expected and the tasks to be performed. A newspaper advertisement generally mentions the job descriptions. Job specifications are the qualifications required and skills necessary to justify the job description. Applications are received on the basis of job descriptions and job specifications. An application blank is the first tool to screen the applicants. It captures the bio-data of the applicant in a structured way. It gives the personal details, academic details, work experience details and references.

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133

It can be used for probing at the time of interview. Some employers use a weighted application blank which assigns different weightages to different components of the application blank. Some retailers may hold a written test. Tests must be standardized by making them reliable and valid. A reliable test measures what it purports to measure, say logical thinking or quantitative ability. A valid test gives the same score when administered to the same group with plus minus some percentage. Larger retailers employ testing whereas smaller ones just rely on interviews. The tests could be aptitude tests, achievement tests or skill tests. Many retailers turn to computerized application blanks and testing. The interview seeks to gather further information about the candidate and to assess his personality. An interview is defined as a 'conversation with a purpose.' An interviewer puts the candidates at ease. There are generally questions about career objectives. Power of expression of the candidate is given credit. Some interviews are stress interviews to test the presence of mind of the candidates, and the ability to cope with the pressure situation. There are freeflowing interviews or structured interviews. In addition to interviewing and testing, retailers seek the references from the candidate and check them if necessary. The check can be done by mail or phone. There are some retailers who would like to conduct a physical examination before placing a candidate. Retailingjobs are strenuous, and checking physical fitness is considered necessary. Selection steps are complementary to each other. The decision is taken based on the whole package. When the candidate is offered ajob, it is called placement.

TRAINING OF RETAIL STAFF A newly-selected person on placement undergoes what is called induction training. Here he is acquainted with the organization, its objectives, the organization structure, his own job and the role he is required to play and the chain of command. He is also informed about the compensation package. Induction training is an orientation programme. It is also called pretraining. Later, training programmes are designed on a continuous basis by identifying training needs, setting the objectives of the training programme, administering it to the trainees and evaluating it. Training programmes can last for a short-period or for a long-period. Refresher training is always necessary to keep pace with the changing environment. Training methodology consists oflectures in the classroom, participative session and seminars, case studies, business games, demonstrations and hands-on experience. A trainer is a facilitator, and the process of learning is emphasised more than the process of teaching. The teacher adapts to the learning process. A trainee should feel a sense of achievement by undergoing training.

COMPENSATION OF RETAIL PERSONNEL Compensation package depends upon the paying capacity of the organization, the pays the competitors offer, and the fairness ofthe package. Some payments are direct money disbursals such as salaries, comI:lission and bonus. Some payments are indirect in the form of club

134

Contours of Retailing Management

membership, insurance payments, medical benefits, leave travel concessions, etc. Some retailers offer employees stock options (ESOPs) and profit-sharing schemes. The payments are governed by the Minimum Wages Act. But mostly the payments are made lucrative enough to attract the best talents. These salaries exceed the minimum wages prescribed by the law. If the retail staff is unionised, the package is governed by the collective bargaining process between the management and the union. A straight salary plan is a fixed periodic payment (per hour or per week or per month or per year). It is the simplest plan to operate. The expenses are known. The employer executes control. At the same time, it is non-motivating and inflexible. Cashiers and clerks are generally paid a fixed salary. A straight commission plan ties the earnings to performance, e.g., sales. It is a flexible plan. The employees' earnings vary, and a limit is placed on their earnings. This plan is used for insurance selling, auto sales, loan selling and real estate. A better option is a combination of salary plus commission. Appliance selling personnel and managers are paid by this method.

PROMOTION Salesmen in the past had to mark time for 4-5 years to be promoted to supervisory roles. They can now be promoted to supervisory position in a year. There is a paucity of experienced manpower for mid-management positions.

MOTIVATION OF EMPLOYEES There are two aspects to work. The capacity to do work, and the willingness to do it. Motivation pertains to the wilingness part. It is a drive within people to attain the work-related goals. It is the spur to act and to sustain such activity till the goal is reached. Motivation is always considered a positive concept, but there could be negative motivation too, though it is contradiction of what motivation stands for. Several theories have been put forward to explain motivation. These fall broadly into two groups - content theories answering the question what motivates? and process theories answering the question how to motivate? First we shall discuss the content theories - Theory X and Y, Maslow's Need Hierarchy and Herzberg's Two Factory Theory.

THEORY X AND Y This is proposed by Douglas McGregor. Theory X assumes that employees are lazy by nature, and tend to avoid work. In order to make them work, they need close supervision and economic incentives. Employees are either induced or coerced to work. Theory Y, on the other hand, assumes that work is as natural for the employees as play and employees do enjoy work. They do not need close supervision, but they are self-reliant. They can be delegated authority and responsibility can be extracted out of them. It means a conducive environment is far more important than money. Money alone is not a primary motivator.

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135

MASLOW'S THEORY OF NEED HIERARCHY The following diagram illustrates the theory of need hierarchy:

Esteem Status, Higher Responsibility Social Recognition Work Groups Safety and Security Job, Security, Fringe Benefits, Safety Physiological Hunger, Sex, Air Fig. 11.1' Maslow's Theory of Need Hierarchy

There are five broad categories of human needs. The lower level needs are to be satisfied first. On their satisfaction, the next level of needs become potent, and require their satisfaction. Thus, employee needs shelter or housing, fou('. and sex and these physiological needs are met when he receives sufficient salary. Once he is satisfied at this level, he becomes concerned with safety and security needs. Retailers provide a secure tenure of service, safe working environment, and car parking facilities to satisfy security and safety needs. Social needs are the need to belong. An employee can be made 'the best-salesman of the month.' It gives him the belongingness. E-steem needs are satisfied by promoting employees, giving them perks such as well-appointed office and good job-title. Self-actualization needs make you realize your full potential. The retailers will have to understand the need pattern of the employees to motivate them properly. Employees'lower levels need to be satisfied first, but once these are satisfied, the higher level needs act as motivators.

HERZBERG'S TWO FACTOR THEORY These are two motivating factors - the hygiene factors or job context factors external to the individual and the motivators or job content factors intrinsic to the individual. Job context factors are pay, admiration, working conditions, etc. Motivators are the desire to excel, the desire to accept challenges, etc. Hygiene factors lead to job dissatisfaction if absent, but their presence does not mean job satisfaction. Motivators lead to job satisfaction but not to job dissatisfaction.

136

Contours of Retailing Management

JOB ENRICHMENT Job enrichment programme enhances the content of the job to improve worker motivation. A job must have more and more variety, task identity, task significance, autonomy, and job feedback.

SALES PER EMPLOYEE Current retail sales in India per employee is about Rs. 78,045 (retail sales at current prices being Rs. 3,12,180 crore and 4 crore being the total employed), whereas the turnover per employee for Wal-Mart International is around Rs. 74,18,332 (Wal-Mart's annual report of 2005 puts total sales at Rs. 2,44,804 crore, with 3,30,000 employee). The annual turnover per employee ofWal-Mart International is nearly 95 times that of an Indian retail employee.

RETAIL AND CUSTOMER FOCUS More than 75 per cent of employees of any corporate retailer are in consumer-facing duties. It makes retail a service business. We come across retail staff who hesistate to make eye contact with the shoppers. It may be due to lack of confidence and motivation. There are very few smiling faces. Right training will remove these shortcomings. A customer service associate (CSA), should be interactive and should be willing to help the customers. There should be basic training in shelf-management, product identification and regular briefings on promotional schemes. Cashiers are the staff at check-out points. The duties at the cash desk gives exposure and understanding of store merchandise. Store managers are like ship captains. They should identify the consumer touch points and sensitise the staff about them. Resources should be shuffled between consumer touch points and back-office work. The Great Indian Bazaar Survey 2008 puts the manpower requirements around 1.6 million employees by 2015. There are two issues - retention of employees and availability. Though availability of manpower may not be a problem, equipping them with requisite skills will be a challenging task. The assumption is 1 front-end customer associate per 250 - 300 sq.ft. internationally. It is assumed to be 250 sq. ft. for India. The support staff/ manager requirements are in line with the global standards.

Year

Employee requirement (cumulative)

2002 2007 2010 2015

1,00,000 3,25,000 7,00,000 1,600,000

SATISFACTION AND SALESPEOPLE When a customer enters a retail outlet, he expects to be treated well. What he dislikes most is indifference towards him by the sales people. A sales person might continue placement of stock, dusting the counter, chit-chatting. He ignores the customer. He avoids eye contact.

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137

This is the most irritating. It leads to dissatisfaction. The customer shares his experience with many others. It ultimately affects the retail outlet adversely. A salesman should not retreat into a shell on seeing a customer. A customer must be greeted with warmth Shoppers do not like stockouts, lack of parking space, but they tend to be lenient towards such shortcomings. But they cannot be forgiving towards uninterested sales people. Young shoppers are more likely to be dissatissfied. Maybe, they are more demanding. Consumer durables are to be sold by knowledgeable sales people. Customers are most dissatisfied at these stores because sales people are not competent enough. Customer psychology plays a role in service expectations. A particular customer may need lengthy sales talk. Another is turned off when he is talked to. There should be a right balance between such service levels. Sales people should be properly trained and sensitized to customer expectations. Customers should be guided to locate the products in a large store. Technology is a great help. Hand-held devices should be kept showing the placement ofthe products. There should be proper signs in the store to guide the customer. Consumer durable stores should have information kiosks to supplement the sales people's presentation.

RETAIL ACCOUNTING Accounting is the most important function for any business, especially, for retailing. Accounting shows the state of affairs of the business at the end of a particular period. It measures business performance. Book-keeping provides the input data for the accounting system. In bo()k-keeping the business transactions such as purchases, sales, expenses, etc. are recorded. The records follow the double-entry system which means for any credit there is a corresponding debit and vice-versa. In a business transaction, we thus have to identify two accounts affected, i.e., one for debit and the other for credit. To illustrate, when goods are purchased by cash, we will debit goods account, and credit the cash account. Accounts are of three types - personal accounts where the receiver is debited and the giver is credited; real accounts such as goods account, cash account, furniture account, etc. where what comes in is debited, and what goes out is credited, and nominal accounts such as expenses, profits, income where expenses and losses are debited and incomes and gains are credited. Transactions are first recorded injournal and entries are posted into the ledger. A cash book is maintained where cash receipts are debited and cash payments are credited. As the transactions have both debits and credits, a periodic check is exercised about the accuracy of the transactions by extracting a trial balance which is a summary of all credit and debit balances. At the end of an accounting year all balances from goods account (purchases and sales) are transferred to the trading account with the opening and closing stock to arrive atthe gross profit figure. The following format illustrates this: TRADING ACCOUNT Dr. Cr. To To To

Opening Stock Purchases Less: Purchase returns Gross Profit Transferred to P & L AlC

-

-

By Sales By Closing Stock

-

The gross profit is then transferred to the Profit and Loss Account tow'ards its credit side. Other income such as interest income is also recorded here. All expenses including depreciati~n

Retail Accounting

139

are debited by summing up the ledger balances to the P & L account. The gross profits less expenses give us the Net Profit Before Taxes and once we subtract taxes, it gives us Net Profit After Taxes. The following format illustrates this:

Particular To Salaries To To To To To To To To To To To

Electricity Telephones Postage Packaging Material Insurance Depreciation Retail Repairs Computer Accessories Advertising Net Profit transferred to Capital Account

Amount

-

Particular By Gross Profit transferred from Trading Account By Other Income

Amount -

-

-

-

-

-

-

-

-

-

-

-

-

-

The above two statements are part of the finalization of accounts. It leads to the generation of balance sheet which lists the assets and liabilities of a business at a given point oftime. What a business owns are called its assets, and what it owes to others are called its liabilities. Assets can be current assets such as cash, bank balance, sundry debtors and bills receivables which could be converted into cash in short-term. Fixed assets are not expected to be converted into cash in short-term. They are assets like land and building, parking lot, furniture and fIXtures. Fixed assets are shown at their depreciated value on account of their wear and tear and decline of useful life to get a more realistic picture. The liabilities are business capital surplus (capital minus withdrawals) and retained earnings which together give the Net worth of the business. The current liabilities of business are to be paid out in short-term such as bank overdraft, sundry creditors and bills payable. There are long-term liabilities such as term loans. The basic equation of a balance sheet is Assets = Liabilities + Net worth The following format illustrates the balance sheet of a retailer:

140

Contours of Retailing Management

Liabilities

Amount

Networth Capital Surplus Retained Earnings Current Liabilities BilIspayable Sundry creditors Bank Overdraft Long-term Liabilities Long-term debts Mortgage

-

-

-

Assets

Amount

Current Assets Cash Bills Receivable Sundry debtors Prepaid expenses Building Less: depreciation Furniture and equipment Less: depreciation Goodwill

-

The trading account and profit and loss account can be converted into a statement format. Performa Income Statement for the Year Ended 31.03.YY.

Particular

Amount

Sales Less: Cost of Goods Sold Gross Profits Less: Operating Expenses Earnings before Interest and Taxes Less: Interest Less: Taxes Profits After Taxes Less: Equity Dividend Retained Earnings

CASH BUDGETING A budget is simply a time-bound schedule of activities or transactions presented usually in money value or quantitatively. A cash budget is an important statement offinancial planning, especially cash management. A cash budget is time-phased schedule of expected cash inflows and cash outflows, disclosing the cash shortages or surpluses with reference to timings and magnitude. ' A cash budget is prepared on the basis of projected cash receipts and cash disbursements. The usual cash receipts and disbursements are as follows:

Retail Accounting

Cash Receipts

Cash Disbursements

A. Recurring Items

A.

141

Cash Sales Collection from debtors Other Income like Interest, Dividend, etc. Recurring Items Cash Purchases Payment to Suppliers Payment to Direct Labour Admn. and Sales expenses Interest Payments Payments for Taxes Payment for Cash Dividend

B.

B.

Non-Recurring Items Issue of New shares Fresh long-term borrowings Cash realization from sales offixed assets Cash realization from sale of investments Non-Recurring Items Redemption of Pref. Capital Redemption of long-term liabilities like debentures Purchase of new fixed assets Increase in Investments

.

The cash budget can be prepared for any period. Generally, it is prepared on yearly basis, and is broken into quarters or months. The cash budget then takes the following format: Cash Budget for the Quarter, Jan-March

Jan.

Items Cash Receipts Cash Sales Collections

A.

Total Receipts B.

.

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Net Cash Balance (A - B)

-

-

-

Add: Opening Cash Balance

-

-

-

-

-

-

Total Payments C. D.

March

-

Payments Cash purchases Payment to creditors ) Salaries -Other overheads Admn. and Sales Expenses Interest Payments Tax Payments Cash Dividends Cash Expenditure

Feb.

-

Total Cash Balance E. F.

Less: Required Minimum Cash Balance Cash Surplus (Shortage)

-

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Contours of Retailing Management

OPERATIONAL RATIOS The following operational ratios indicate how efficiently the store is being managed: Area Customer Transactions

Operational Ratio

Remarks

It shows how a customer is

Customer Conversion Ratio =

Number of Transactio ns Customer Traffic

x

converted into a buyer. Low figure indicates existing promotion is not yielding results. It also means doing a rethinking on sales efforts.

100

Sales Per Transaction

It denotes rupee value of average sales. It shows a sales trend. Over a period of time.

Net Sales Number of Transactio ns Transaction Per Hour N umber of Transactions Number of Hours

We can also calculate transactions per day, week or season.It helps in manpower planning and cashier management.

Returns of Net Sales

This percentage indicates customer satisfaction. A high figure is a wake- up call.

T._,o;:.::t:::a:!..I.:.R:.::e:..::;tu.:::.:-:rn::;s~a:::n;.;:d,-=A;;I::;;lo;;.w.;.;..;;;a=n;.;;.c.;;.;es;;;... -

Inventory

Net Sales

x

100

Hourly Customer Traffic Customer Traffic Coming In Number of Hours

This can be calculated for the whole store or floor or a section. It helps in manpower planning.

Inventory of Stock Turnover Rate

It shows how often inventory is rotated in a given time period. Lower ratio means excess inventory. This ratio can be calculated by taking cost of goods sold and average value of inventory at cost.

-

Net Sales Average Retail Value ofInventory

Inventory Carrying Cost Percentage Inventory Carrying Cost x 100 Net Sales Gross Margin Return on Inventory (GMROI) Gross Margin Average Value ofInventory

It shows the cost of carrying inventory.

It is expressed in rupees. It shows the return on merchandise investments.

Retail Accounting

143

Average Inventory Value

=

Total Value ofInventory Total Quantity of Inventory Average Selling Price Total Value of Goods Sold Total Quantity Sold Marked Down Goods Percentage

=

A higher ratio means a rethink on merchandise practices.

Net Sales at Markdown Total Net Sales Shrinkage to Net Sales

_ Actual Inventory - Book Inventory

-

Space

Net Sales

xlOO

It indicates percentage of net sales lost due to shrinkage.

Sales Per Square foot =~~~~N~et~S~al~e~s_____________ Sq. Ft. of Selling Space Inventory Per Square foot =~~=-~N~et~S~t~o~ck~__________ Sq. Ft. of Selling Space

Occupancy Cost Per Square Foot of Selling Space Occupancy Cost Sq. Ft. of Selling Space Percentage of Selling Space Selling Space in Sq. Ft. Total Space in Sq. Ft.

Employees

Sales Per Employee =~N~e~t~S~al~e~s~________________

Total Full-time Staff Labour Productivity =

Total Labour Cost Net Sales x 100

Expressed in units or rupees, it helps comparison of alternative uses of-space.

Expressed in value, it indicates how selling space covers the occupancy cost. It enables a n;tultilocation comparison. Depending upon the type of merchandise, this ratio varies. A grocery store run by a bania has little non-selling space. A shoe store has little non-selling space.

It shows sales productivity of employees. It can be used as a performance target.

It indicates labour productivity to attain a particular sales

144

Contours of Retailing Management

Gross Margin Per Employee Gross Margin =-------Total Full-time Staff

volume against a given wage bill.

Space Covered ICustomers Served Per Employee = Total Retailing Space/Number of Customers Served

It is a performance standard.

Total Full-time Staff

FINANCIAL DATA

Used by department The retailer has to estimate his revenues and expenses so as to qm¥e§t a particular period of time whether he is in profits or losses. The following parameters are generally arrived at: Sales Revenue Other Revenue Cost of Goods Sold Shrinkage Occupancy Cost Salary Bill Advertising and Promotion Energy Cost Operations and Administrative Costs Interest Profits Before Depreciation and Tax Depreciation Profit Before Tax Taxes Profits After Tax A mystery customer comes and observes the following areas: Audit Areas: Mystery Customer Area

Remarks

Greetings

How the salesperson greets you? Is the manner right? Does he smile?

Courtesy

Is he helpful? Does he keep talking to others ignoring me? Does he show a negative body language? Is he attentive? Is he available at the counter?

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145

Communication

Is the sales talk clear? Does he communicate likeably?

Grooming

Is he dressed decently? Does he wear his identity badge?Is he presentable?

Awareness

How is his product knowledge? Does he explain the benefits of the product? Does he present the merchandise nicely? Does he help in reaching the right merchandise? Does he understand my needs correctly? Does he help me in product selection? Does he guide me about the new products? Does he demonstrate the use ofthe product?

Sales Presentation

SPACE AUDIT Space productivity has to be monitored from time to time. It is to be seen how effectively the space is being utilized. Space must be utilized in an optimum manner by considering both the selling and non-selling areas. Non-Selling areas are back-end operations area, facilities such as toilet, seating space, etc. Non-selling space must contribute to customer convenience. Space audit identifies hot spots where products go off the shelves very quickly. Some other spots are warm spots where products go off the shelves moderately. Cold spots are areas where product offtake is not too much. A store has to attempt to convert cold spots into warm spots and warm spots into hot spots. The hot spots must be maintained to offer the best sales. Some space register no-customer-traffic. It is called non-traded space. Then there are spaces with less traffic. They are called less traded spaces. We have to assess the reasons for such low traffic. The problems are sorted out and impediments are removed. This will lead to absence of non-traded areas and black-holes.

UNDERSTANDING CONSUMER BEHAVIOUR Consumer behaviour obviously refers to the behaviour of consumers in deciding to use or dispose of or not to dispose of the products which satisfy their needs. Consumer behaviour also refers to the use of scarce resources like time, money and effort on consumption items. Consumer behaviour tries to answer the following questions: • What products and services consUmers buy? • Why they buy them? • When these are bought? • From where? • What is the frequency of buying? How often are they used? The purchase process in its simplest form is the identification of the need, the search for product to satisfy that need, the other stimuli like promotion, friends who influence us, the buyer characteristics and evaluation criteria and purchase or non-purchase ofthe product.

Buyer Characteristic

Need Identification

Search for Product

Product Valuation

Other Stimuli

Fig. 13.1 Buying Procell

Purchase Non-purchase

Understanding Consumer Behaviour

147

The buyer is affected by a large number of factors such as social factors, psychological factors, economic factors and environmental factors. Social factors consist of demographic factors such as age, sex, race, social class, reference groups, and family life-cycle. Psychological factors consist of attitudes, personality, status, perceived risk, etc. There are composite factors like life-style. The buyer behaviour is influenced by economic factors such as disposable income. Miscellaneous factors such as the technological environment, retailer's actions, promotion also affect the buyer behaviour.

DEMOGRAPHIC FACTORS Demographic variables such as the age groups of population, gender ratio, life expectancy, literacy levels, linguistic preferences, household size, potential of retail sales and occupation of people are studied in detail for their implications.

SOCIAL FACTORS Social classes rank people in terms ofincome, occupation and ed ucation with other factors. The classes in India are top class, middle-class, lower middle-class, and lower class. Persons belong to a particular class. Their consumption pattern and life-style are more or less the same. Reference groups influence people a great deal. An aspiration group is one towards which an individual aspires. Membership group is a group to which a person belongs, e.g., medical fraternity. A dissociative group is one which a person wants to avoid. Families are face-to-face reference groups. Apart from these groups, opinion leaders such as leading sports persons, film stars, celebrities and experts do influence buying decisions. Family life-cycle traces the stages a person undergoes in his life- a bachelor, a married couple, married couple with children, married couple whose children have moved away (empty nest), elderly couple, single widow / widower, etc. The FLC (family life-cycle) stages have different needs. The income levels also differ. The attitudes at each stage are also different. The FLC stage is a good guide to a retailer regarding the products he has to offer. Household life-cycle considers life stages of separated persons, deserted persons, single parents and childless couples.

PSYCHOLOGICAL FACTORS An individual's personality is the sum total of the characteristics that make him a unique individual that he is. A person may be creative, innovative, social, emotionally stable. assertive, and self-confident. All these characteristics contribute a great deal to his life-style. Attitudes is a person' disposition towards individuals and objects. These could be positive or negative. An individual also has attitudes towards a retailer- a retailer is good, bad, fairly-priced, expensive, etc. Attitudes, interests, opinions and activities of a person together constitute what we call a life-style. Class consciousness makes a person strive towards social status. It decides the purchase

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of premium brands and the use of reference groups. Perceived risk is the risk associated with Financial Psychological Functional Physical Social Time

Is it over-priced? Can I afford this? Is this purchase worth? Is it correct to have this? Will it meet my expectations? Will it harm me? What my peers think of my shopping from this outlet. How much effort should I exert to purchase?

the merchandise bought from a particular retailer. This perception mayor may not be correct. A consumer perceives the following risks: Perceived risk is higher when we shop from unknown outlets, the brands shopped are new, the shopper is inexperienced, he is on a budget. It is also higher in case of complex purchases and socially visible purchases. The more the involvement, the greater the perceived risk. The lower the involvement, the lesser is the perceived risk. One way to reduce the perceived risk is to have adequate information, and it is for the retailers to provide such information. Psychological factors listed above and especially the attitudes, interests, opinions and activities inventory are used to develop the life-style profiles ofthe target market. Market research has found that the colour light purple makes the customers feel like spending money.

RETAILING IMPLICATIONS The gender roles have great retailing implications. Working women as shoppers are more confident and are more interest~d in convenience products. Working women are more demanding as shoppers. They buy lux:ury products and travel plans. They have cosmetic consciousness. They are particular about appearance. They are not sensitive to small price differences. Working women have also led to metro-sexual men who are keen to share joint responsibilities like child-rearing, cooking, etc., but at the same time, these metro-sexual men also tend to huy cosmetics, beauty treatments and health care. Retailers have to understand the trend ofworking women and the emergence of metro-sexual men. Shoppers have become cosmopolitan in their outlook and are more sophisticated. They are no more loyal to traditional brands and are willing to experiment. eThere is a pressure on time. Consumers balance the work and home life. Leisure is a precious commodity. People tend to spend whatever little time they have with their family, and for themselves. Retailers respond to this lack of time concept creatively - they can set up more branches to reduce commuting time, they can have shopping for extended hours, they can remain open on all days of the week, they can reduce check-out time, they can assist shoppers by increasing personnel on the shop floor, they can start e-tailing and direct marketing. Shopping behaviour is situation-based. A consumer may wait for a sale of a cheap sari, though it costs hardly Rs. 300 but may buy at once a costly suit ofRs. 3,000 without bargaining. Small and trivial items are bought at sale but expensive items like gold bracelets are bought without any fuss. This phenomenon is called component life-style.

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CONSUMER PROFILES Retailers undertake a lot of research to draft the profiles oftheir consumers. Consumers are described in demographic terms and psychographic terms. Consumers are classified into heavy shoppers and light shoppers. Consumers of supermarkets, pharmacies and life-style stores do differ in their profiles. While drafting consumer profiles, assessment is made of their needs and desires. Consumers' motives are the reasons for their behaviour. They are also assessed. The segments of in-home shopping, on-line shoppers and out-of-home town shoppers also deserve attention. Different attitudes towards shopping are shown by different segments, e.g., grocery shoppers may lack time to shop or may be responsible shoppers thinking grocery to be the bedrock of the household. Similarly, web shoppers are comfortable in using the technology. Shopping can be an enjoyable experience or a drudgery. It all depends on the consumer psyche, the retailers ambience and the products purchased. It also depends upon the attitude towards shopping time. Attitudes towards price also keep on changing. It is no longer believed that high price always indicate high quality. Shoppers have become discerning, and would like to strike bargains at low prices. People tend to shop at multiple outlets, e.g., supermarket customers also buy from neighbourhood convenience stores.

CONSUMER DECISION PROCESS So far we have studied the factors which affect the consumer decision-making process. Let us now study the process itself. There are six steps in the decision-making process stimulus, problem identification, information search, evaluation of alternatives, purchase and post-purchase behaviour. The process can be diagrammatically represented as follows: Stimulus

Problem Identification

Information Gathering

Purchase

Alternative Evaluation Post-Purchase Behaviour

Fig. 13.2 Consumer Decision-Making Process

A consumer may skip some stages of the process to reach the purchase decision, and it is not necessary that every consumer progresses through all the stages. Retailers have to facilitate the buying process at each stage by providing stimulus such as promotion, problem identification by offering new models, information gathering by appointing right sales people and POP, alternative evaluation by differentiation, purchase itselfby accepting various modes of payment and post-purchase behaviour by giving guarantees. The greater involvetpent of the retailers in this process leads to consumer loyalty to the retail outlets.

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The outcome of the buying prices is the 'buy' itself though the consumer can stop the process at any stage short of buying. Let us consider the various elements to the buying process.

STIMULUS A stimulus is something in response to which a person is aroused to act. It could be a cue or a drive. Our conversation with friends may provide a social cue. Promotion by a retailer is a commercial cue. Then there are physical drives such as sex, hunger, thirst, cold, heat, pain, fear, etc. There could be an exposure to anyone or all of these stimuli. If stimuli arouses the consumer, he passes on to the next stage of decision-making. If there is no sufficient arousal, the stimuli would be ignored.

PROBLEM IDENTIFICATION Here the consumer recognizes the needs and sees the product as a means to satisfy it. A person may satisfy the same need by different products say, the need to achieve may be satisfied by an MBA degree or a degree in Information Technology. A person recognizes a shortage at the time of buying again. A consumer may recognize an unfulfilled desire, e.g., contact lenses may enhance a person's presentability. A person acts further only if the problem is worth solving.

INFORMATION GATHERING When the problem on hand is to be solved, information is sought about the alternatives which could solve the problem and assessing each alternative in terms of its characteristics. Most of the times memory search decides the product alternatives available or the retailers who would solve the problem. Sometimes, there is an external search using mass media, sales people, reports, family, friends, etc. Each alternative is assessed in terms of its characteristics. The extent to which there is information search depends on the risk perceived. A retailer has to provide enough information to make the consumer feel comfortable in making decisions. POP, displays and well-informed sales people are good sources ofinformation. A consumer then decides whether any alternative is capable to solve his problem or to fulfill his need. If one or more than one alternative are satisfactory, the consumer travels to the next stage. If there is no satisfactory alternative, the process comes to a halt.

EVALUATION OF ALTERNATIVES Here there is a choice from the given alternatives. A superior alternative is chosen, though the choice is not always that simple. Sometimes, several alternatives are attractive. Then these alternatives are judged against criteria and their relative importance. The criteria are the attributes relevant for the consumer. Some such attributes are price, colour, fit, durability and so on. The alternatives are ranked. It is difficult to spell out attributes for untried and totally new products. In such cases, price, brand name and store name are used as criteria. The product that is best on all criteria is chosen. !fno such product is found, one can postpone the buying decision.

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PURCHASE The best possible alternative once chosen makes a person ready for buYing.frl·~etan, the place of purchase is important-it could be a store or a non-store location, say through direct marketing or e-commerce. Another factor is the terms of purchase - the mode of payment say by cash, installments, hire-purchase, loan, credit card, etc. The delivery can be effected immediately or after a time lag. The transport of the item to its place of use is also considered. When these factors are satisfactorily resolved, a consumer is ready to buy. Or else he may not buy.

POST - PURCHASE BEHAVIOUR After buying the item, the consumer may be satisfied, thus leading to repeat purchase in future. A purchase is evaluated in terms of its performance and expectations. If the buyer is dissatisfied, it may lead to cognitive dissonance - the doubt about the correctness ofthe purchase. A consumer may feel short-changed and would wish that another alternative had been chosen. Purchase is thus not the last stage of the decision-making process. After-sales-service of the customer is important. A customer needs help through E-mail.ahelp-lineorservicevisit.An expensive and complex item requires much more after-sales care. Money-back schemes are guarantees against a high degree of cognitive dissonance. Advertising and sales promotion reassure a customer about the correctness of his buying decision. Advertising and promotion should not hype the product so much as to create dissatisfaction when used. A good after-sales service and honest sales presentation go a long way in reducing the cognitive dissonance.

TYPES OF CONSUMER DECISION-MAKING The decision process described above is used at the time of purchasing the merchandise. The process goes on sub-consciously. The characteristics of the consumer do affect the process; a knowledgeable consumer may take less time to decide than a novice or a wealthy consumer decides quickly since he has the means to correct his decision later ifit goes wrong. In a family, the inputs come from all the members and that lengthens the process. The situation also affects the process. House buying is a careful well-thought process, where each step is given enough attention. The perceived risk is higher. Book purchase or newspaper buying may not involve a complex process. There are three types of decision-making processes - extended decision-making, limited decision-making and routine decision-making. They are explained here.

TYPES OF PURCHASE DECISION BEHAVIOUR Consumer behaviour changes depending upon the nature or type of buying - a razor blade may be purchased without much fuss but a colour TV set purchase takes time and deliberation. The nature or type of purchases give rise to three types of buyer behaviour: 1. RR (Routinised Response) Behaviour 2. LPS (Limited Problem Solving) Behaviour 3. EPS (Extended Problem Solving) Behaviour

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RR occurs where there is low product involvement, the consumer knows the brands available and criteria of choice, and the stakes are not so high in terms of price, e.g., bread, soft drinks, pastes, soaps, etc. Here, the customer expects a consistent quality in the products. New customers are drawn by sales promotion and product improvements. LPS occurs when the consumer knows the brands available, but still needs additional information to make a correct choice, especially when a new or unfamiliar brand confronts him. Thus, Ariel or Surf Excel enzyme detergents must convince the housewife that they are superior to conventional detergents due to the presence of enzymes and so the housewife feels the necessity of searching additional information. The marketer here has introduced a new brand in a well-known product category. The promotion here should explain the complete features of the new brand, and build up consumers' confidence to facilitate the purchase decision. EPS occurs when a new product category comes on the scene. Here, extensive information is needed on both the product category and the brand being made available, e.g., micro-wave ovens introduced by Kelvinator first explain the concept of micro-wave cooking as distinguished from conventional cooking, and then sell the brand. Colour TVs as a product category, a particular brand of TV (say Onida or Videocon) and a particular model (say PIP: Picture-in-Picture or Surrounded Sound System) do need information at three levels. Promotion should satisfy the needs of information at these three levels, and especially, how the advertised brand has a unique set of positive attributes. This concept is most applicable to new products, maybe new to consumers. For a tribal, even purchase of a toothpaste may involve EPS, whereas for us it is justRR.

IMPULSE PURCHASES Impulse purchases are unplanned purchases made on the spur of the moment. Impulse purchase can be completely or partially unplanned. Sometimes there is unplanned substitution. Impulse purchases are influenced by POPs. Even check-outs are treated as the last chance area by retailers to sell certain products, e.g., batteries, razor blades, toffees, magazines, etc. The time at the disposal of the customer does affect his impulse buying. There are individuals who are more disposed towards buying impulsively. Some relish the shopping activity and are prone to making impulse buying. A large disposable income also stimulates impulse buying.

CUSTOMER LOYALTY Loyalty towards the store helps the customer to take faster buying decisions. Loyal customers spend more time shopping. Service centres provide satisfaction to build customer loyalty. Loyal customers are the greatest assets for a retailer. Good retailing practices lead to customer loyalty. Customer relationship management is a crucial area for customer loyalty. Though customer satisfaction is a sine qua non for customer loyalty, other factors like value proposition, caring attitude also do count. A store may decide to deal with customers favourably predisposed towards it. It may also have to address the needs of non-loyal customers and indifferent customers.

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LOYALTY PROGRAMMES Customer loyalty is to be rewarded by instituting a loyalty pregramme. The best customers are to be rewarded rather than all and sundry which is a stupid approach. If 80/20 rule is followed the benefits are offered to 20 per cent of customer base who give 80 per cent of profits (not revenues). Most firms give price breaks to loyal customers, but there is a danger that lower prices make them a very price-sensitive lot who switch the moment someone else makes a similar offer. This is prevented by introducing switching costs, e.g., airlines miles are usually not transferable. Loyalty programme should basically aim at collecting information about the customers and using this information to create more value for loyal customers. It is thus a method of differentiating the customers. The information is about the pattern of buying, frequency of buying, personal preferences and so on. Loyalty programmes in India began in the hospitality industry, spread quickly to airlines and have recently been adopted by the retailers. Foreign banks differentiate account holders holding deposits in excess ofRs. 25lakh plus. Petroleum companies like BPCL and Club HP are the recent entrants. Loyal customers, studies indicate, are good spenders. FCC programme of Shoppers' Stop account for 30-35 per cent of sales. A loyalty programme should not be seen as just hand out ofloyalty cards and a software to back them up. It should aim at catching the customers, and keep them spending more and more over a period of time. Some companies conceive loyalty programmes as distribution of freebies but this can be duplicated by the competitors. Instead, loyalty programmes should help us to customize the product, e.g., an airline provides faster check-in, quick check-out or a hotel offering a particular pillow to a customer which he prefers to use. A loyalty programme with a mass-market mindset becomes a customer acquisition drive. They make a plain vanilla programme, e.g., the same discount to everyone. If entry barrier is low enough, the programme is likely to be unwieldy. It is to be remembered that regular communication with the customer is a must, and is an expensive proposition. Customers can be upgraded depending on the relationship, e.g., Cafe Coffee Day upgrades senior custolllers from yellow to,green card assuming that seniority is a sign of loyalty. Loyalty programmes are extended sometimes to the entire family. They also require, like brands, frequent revivals and relaunches. According to B. S. Nagesh, M.D. and CEO Shoppers' Stop, the biggest innovation that they launched is their loyalty programme, started as early as 1994. If managed consistently it can become the biggest differentiator and it did. From a few thousands to more than 600,000 members in the programme, it delivers 60 per cent of the total business.

CONSUMER TOUCH POINTS In a super-market, there are several touch points when a consumer buys something. Some of these touch points are managed by the retailers, while some are not. The unmanaged touch points provide an opportunity to the competitors to lure the customers.

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Home

)

Enter the Supermarket Pick up Item Payment at Checkout POS termianal

)

)

Shopping List

)

Enter the Section

)

Replace Item

)

Payment )

and

)

Travel to a Mall Seek Shopping Assistance Navigate the Shopping Cart Service Request

Delivery

)

)

)

)

Item Drop Off

Fig. 13.3 Step Buying Process in a Supermarket

Consumer follow a different buying process for different product categories such as garments, groceries and durables. The shopping environment influences buying a great deal. Brand-building covers the shopping experience from the consumer's perspective. All processes can be spelled out, and improved upon.

SHOPPERS MARKETING These days most of the buying decisions are made instore. Sometimes, a product is not bought and left on the shelf even if the shopper has planned to purchase it. Point-of-sale is the 'ultimate moment of truth for brands today'. There are differences between shoppers of any two countries, regions and stores. Brands have to invest heavily into shopper marketing. Budgets of mainstream marketing are cut to resort to shopper marketing. Sometimes, a dominant brand outside the store draws the customer to the store, but the sales are captured by the smaller brands promoted instore. According to Deloitte, shopper marketing is the employment of any marketing stimuli that has been developed based on a deep understanding of shopper behaviour and which is designed to build-brand equity, engage the shopper and lead himlher to make a purchase. It can range from on-pack promotion to price promotions, placement, point-of-sale activity or sampling. Shopper marketing is designed to drive growth by improving the shopping experience for shoppers. It involves every aspect of shopping experience. The traditional marketing puts the consumer in the centre, shopper marketing puts the shopper in the centre. It aims to convert every shopper into a consumer.

IT IN RETAILING A large-scale retailer invariably uses IT in its operations. As we check out, we fmd the bar codes being scanned by laser-scanners to prepare the invoices. It is an instance of how IT helps a retailer. Store chains are networked to share data. There is exchange of data with the suppliers and headquarters. It has become affordable even for the medium-scale and small-scale retailers. It will find increasing use in the days to come. IT and technology investment improve the efficiency of business. We have examples of scanning and inventory control, data exchange and management information systems (MIS).

IT OR INFORMATION TECHNOLOGY This is an onmibus term for the management of data and information using microprocessors and computers and encompass production, storage and communication of such data and information. IT thus is two diILensional - hardware-related dimension dealing with equipments to manage information and application - dimension that puts the 'data to use. Computers are of different types-from the large mainframes to midis and minicomputers. PCs are personal computers. Their size has taken computer revolution to every nook and comer. Laptops are portable computers. Then there are point-of-sale (POS) computers. A terminal comes at the end of a computer to input data or to display it or print it out. Computers by themselves are part of the hardware. Software is the set of instructions that run the hardware.

APPLICATIONS OF IT IN RETAILING •

IT is a great help in managing inventory, supply chain and logistics.

•

IT provides information about our target audience and its demand pattern. A retailer can fine-tune the merchandise accordingly and can also develop the private labels profitably.

•

IT streamlines human resources and a retailer can deploy staff productively, and can do performance appraisal.

•

IT makes the operations cost-effective.

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IT reduces waiting time Improves invoice preparation IT reduces stock-outs IT reduces carrying costs IT helps in price changes IT accelerates transaction speed IT brings an element of accuracy IT improves administrative procedures • IT facilitates marketing: Better channel relations Better management of data, e.g., SP, inventory, sales-forecasting Makes additional space available for selling due to reduced merchandise Consumer satisfaction on account of better services Faster distribution cycle Builds customer loyalty schemes and database management • IT automates processes. • IT is a good planning tool. • IT adds value to retail. • IT provides feedba.::k. • IT facilitates shopping electronically. Retail stores can indent in real time the several thousand stock-keeping-units in a chain to ensure that the shelves are always filled with the fastest-moving items. It is all due to ERP software. A store can keep its back-end network in sync with what the customer wants. The management can forecast, and replenish an item. IT revenues from Indian retail totalled $253 million in 2006 and are estimated to grow to $ 1.07 billion by 2010, with a compound annual growth rate (CAGR) of 44% (Springboard Research). Every major retailer has ERP installed SAP, JDA, Red Prairie. Retailers have set up databases of customers. HyperCITY deploys the I - Scan system, which allows the customers to scan merchandise as they pick products off-theshelf and saves time at the check-out counters. After the customer finishes shopping, he can hand over the device over to the customer service desk. Each SAP module costs nothing less than Rs. 50 lakh. Limitations . IT is a late comer. IT boom has started in the concluding part of the last century. It has still a long way to go. In India, a vast sector ofthe unorganized retail is still untouched by IT. It is still not very affordable. There are questions of security and quality of data. E-shopping faces the risk of frauds, though data encryption and 128-bit security are a great help. Retailers should have a long-term commitment to IT to reap its full benefits.

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DATA CAPTURE BY POS Retail data can be collected by several methods. The most widely used method is to capture data through point-of-sale (POS) device or a computer by inputting data manually at the time of retail transaction. The most important details provided are the merchandise purchased mode of payment, use ofloyalty card, time and date of transaction, the sales person who attended and the value of the transaction. This has marketing implications. The stores can be divided into trial stores and control stores, and new products can be tested. Manufacturers can be given access to P~S data to test new products, promotional strategies, seasonal sales, etc. P~S data are timely and accurate. Retailers use P~S data for their own use and for the vendors. Data communication can also be integrated to P~S to pass on the data to HQ frequently.

CODING sYSTEMS A retailer has several hundred pieces of merchandise. He has to assess the sales in terms of the quantity sold, the colour, size and other attributes ofthe products sold. All this is impractical to handle manually; and is quite error-prone. There is thus a need for a machine readable system, which would identify the merchandise across the various retail locations and make available the relevant information about them. This led to the development of Universal Product Code (UPC) or bar code in 1952, which was later introduced into the retail industry. The first patent for what was originally meant to speed up the check-out process at the grocery stores was issued to inventors, Jospeh Woodland and Bernard Silver in 1952 was for bar codes. In the UPC, there are bars and spaces which denote alpha-numeric information. In 1977, the European Article Numbering (EAN) Association was formed which represents 101 countries. Each national association allocates a random 13digit code (EAN 13) to manufacturers and retailers to identify their products. Digits

Denotes

First two digits

Issuing organization, e.g., UK Article Numbering Association code is 50, France 32, US 00 India 89.

3-7

Manufacturer Qr company marketing the product

8-12

Product

13

Check digit to ensure that the code is entered rightly

The allocation for 13 digits is as follows: The US uses a 12 digit UPC, which is compatible with EAN 13. Shorter codes for fashion goods are introduced consisting of 8 digits. Supplementary information can be added to this code, e.g., batch number, sell-by-dates and other information using symbology called Code 128. Publishers use International Standard Book Number (ISBN). Prices are added using a five-digit supplementary code. EAN codes are useful for the manufacturers, distributors, exporters and repackaging units.

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Manufacturers generally supply bar coded merchandise to the retailers. The EAN 13 code can be read by a scanner in any direction - it is omni -directional. New symbology called snowball can be read vertically as well as horizontally. On June 26, 1974, a 10-pack Wrigely's chewing gum was the first product logged in a grocery store by a bar coding system using the modern universal product code. Later that year, the Uniform Grocery Product Code Council became the UPCC which regulates the issue and the use of all universal product codes. In 1971, the Plessey Company developed a bar code scanner and tracking system for library book check-out. Intermec developed Code 3 of 9, a bar code that could store alpha-numeric information. All after codes prior to this could only represent numeric digits. PoS or computer capture data in terms of brands sold, size sold, colour sold and price at which sold. If a loyalty card is used, customer's individual details are also captured. Card swipe terminals are secure way to accept payments. Magnetic strips at the back of the card is read and decoded by the swipe devices. Bar codes generally do not include prices. Merchandise price is kept on file within Pos; or the central computer. The correct price is then entered automatically as soon as the bar code is read. It is called Price Look UP (PLU). PLU is also useful in effecting price changes. Excitement can be built into the system by reducing prices in some specified hours for certain specified products. Promotional prices are correctly calculated by the PoS.

DATABASE MARKETING Database marketing makes use of databases of customers' suppliers and others to prospect them or to sell to them or to establish relationship with them. The database is built carefully and then maintained by proper updating. A database is a strong source of intimate customer knowledge. Database marketing has two components - data warehousing and data mining. Data warehousing is a storehouse of total customer information. Data mining is a set of techniques applied to the data to segment the customers. It facilitates targeting. It helps the customization of products and tailoring of the communication mix. Database marketing also helps in measuring the value of a customer. It is a good method to cross-sell the products. For instance, a customer who has availed of car finance can be sold vehicle insurance. Database marketing these days is considered an investment. In India, Diners Card was the pioneer of database marketing. Before the card was acquired by City, it was issued by the Agarwals. Firms used Diner database to market shares and securities. Even today, credit card and mobile phone users are good databases. A database is different from a mailing list. A database is a refined data that provides valuable information - customer spends, life-styles, buying frequencies and quantum, demographic characteristics and socio-economic characteristics. The data is extended to cities, States and age-groups. Data is focused. A mailing list has a price, whereas database has value. The crucial inputs of database must be constantly updated. Outdated and irrelevant data must be eliminated. The basic quality of data must be good. Data available must have been verified and filtered. But it is also true that a perfect database is a myth. Database marketing also shares information on consumer transactions. It should be seen that this does not violate the consumer privacy.

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BUSINESS DATA COMMUNICATIONS Computer files with data are exchanged amongst the retailers, distributors, various offices, headquarters and vendors. Such communication is through PSTN lines, private telephone lines, ISDN or VSAT apertures. Data exchange could be retail data transaction files, electronic data exchange (EDI) and E-commerce, Extranet and Intranet. We must be clear about the concept of customer service. It essentially means the facilitation of shopping, the awareness being created about a retailer's offering and the customer satisfaction as a result of this. Service is thus three-dimensional - before the transaction, transactional and after the transaction.

RETAIL DATA TRANSACTION FILES PoS transmit files electronically to HO for processing and analysis. This is automatic transfer of data. In a large store, individual computers exchange data with the central computer. It enables a merchandise manager to get a progress report every evening. The price files are updated everyday. The store computer transmits the price files to the PoS terminal.

ELECTRONIC DATA EXCHANGE (ED!) AND E-COMMERCE These days orders are sent to the suppliers electronically. A manufacturer receives it and approves it. It is passed on to the distribution system for execution. The dispatch information is sent electronically to the ordering store. An Invoice is generated and sent to the store.

EXTRANET It is web EDI that uses Internet technology for B2B transactions instead ofthe usual ED!. Extranet is closed and secure Internet service to receive orders from the retailers.

INTRANET Intranet is electronic sharing of data amongst the manpower.

INTERNET: THE MEDIA OF THE NEW l\ULLENNIUM Internet is a global computer network in which millions of computers owned by the individuals and organizations, both private and public, are linked for fast transfer of data. The transfer of data is governed by internationally accepted protocol called TCP/IP. Within the Internet, there are documents or pages linked together - this constitutes the World Wide Web (www). The user's computer called the client accesses these pages from the server computer of either the ISP (internet service provider) or the computers connected to this server. The pages are accessed through software called web browser such as Internet Explorer or Opera or N etscape. Most retailers now maintain a website that is accessible round the clock and throughout the world. Web is a democratic medium which allows equal opportunity to all the players to promote and sell their products and provide information about their products. Internet has an advantage over the other media because of its high degree of interactivity. Consumers can

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establish contacts through E-mails and can fill the forms online. Internet can give customized information to an individual consumer. Internet can be used to sell a retailer's products. The consumer can access an electronic catalogue. He can decide to order. The order can be confirmed as per the schedule he wishes. The payment is made either through a debit or credit card. There is also an option of paying cash on delivery (COD). The card details are protected by encryption and secured sockets. This consumer-to-business transaction is called e-tailing. There are also business-to-business selling (B2B) transactions. Together, consumer-to-business (C2B) and business-to-business (B2B) transactions make up the E-commerce. Etailing is very commonly used to sell PC hardware and software, books, music, gift items, groceries, apparel and entertainment.

RADIO FREQUENCY IDENTIFICATION TAG (RFID) It uses low-powered radio transmitters to read data stored in a transponder (tag) at distances ranging from 1 inch to 100 ft. RIFD tags are used to track assets, manage inventory and authorize payments, and they increasingly serve as electronic keys for everything from autos to secure facilities. It is complementary to bar coding. In retail, RFID can be used to service a customer or track employees. Indian retailers may use it for supply chain managemen t. Goods can be tracked when they move from warehouses of manufacturers to retail shop by putting RFID tags. IfRFID tags are embedded in retail labels, a complete inventory of all products can be taken in a moment. Shoppers can be given bills as soon as their shopping is over. RFID is a trace-and-track technology. It provides service to the consumers. It helps in managing inventory. It helps in profiling customers. It improves shelf space management. RFID tags are specially coded pieces of cloth or plastic which send information to transmitters over radio frequencies. Antennas away from the actual tags can receive RFID. Worldwide standards are being worked out for RFID. At present differing frequencies are used in different parts ofthe world. Bar codes are line-of-sight whereas RFID does not require line-of-sight. Both these are likely to co-exist. RFID is costlier than bar code, as tags are expensive. In India this technology with high cost can be justified to reduce pilferage cost at the retail level, e.g., sale of Gillette razor blades. In India, Fabmall, Sify, Indiatimes, First and Secondhand books are some popular e-tailing sites. Internet is also used as a medium for advertising. We see banners of ads on the Internet sites.

RETAIL SOLUTIONS Some solutions are end-of-end retail solutions, covering everything from PoS to back-office and head-office. Solutions can range from a single store with one PoS to a complete multi-store environment. Some better-known solutions are LS Retail, SAP Oracle Retail, JDA and Landsteiner. These offer end-to-end solutions which are scalable and work in geographically

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distributed environments and are modular enough to suit most retail requirements with minor customisation.

FUTURE TRENDS These days data on cards is encoded on the magnetic strip. But now cards are embedded with a chip. They are called smart cards. Smart loyalty cards can be used across a number of retailers. Smart cards will enable fund transfer electronically. The transactions will become more secure. Smart cards will act as electronic purses or wallets. Multimedia kiosks put at strategic locations will be increasingly used. Customer specific offers can be generated by the grocery stores. The electronic body scanners will record biometry of the anatomy to fit the clothes to the individual's measurement. Paper labels are likely to be replaced by electronic shelf edge labels (ESELS) which could be directly linked to PoS.

BRAND MANAGEMENT IN RETAILING Consumers dictate in modern world who the winners in the market place will be. A retailer succeeds only when he is patronized by the consumers who are ready to accept his retail offer. Brand-building is one way to achieve the consumer patronage. A retail brand facilitates the decision-making process. Just the trading expertise is not enough to build a retail brand. We require marketing effort to invest our brand with equity. When a retail brand is strong, it can be leveraged by charging a price premium. This price premium is also called brand equity. It is the price the consumers are willing to pay above the product value or service value. A retailer has to position itself. It has to manage its operations efficiently. It earns him better returns on capital invested and on the floor space used. A strong brand personality is an attraction both for the consumers and investors. It gives competitive advantage to the retailer. Shoppers Stop is a strong brand. It sells the experience. It sells life-style. It is a destination store. It has created a positive image both for the merchandise and service. A strong brand can be extended domestically as well as internationally. Brand management is all the more important for the companies who want to conduct business in many countries of the world. There are very strong retail brands, e.g., brands such as MasterCard, Visa, American Express, and Wal-Mart. Some banks have very good brand equity, e.g., City bank. Retailers have to build the brands so as not to rely solely on price competition to attract customers. Brand-building ultimately leads to brand loyal customers. Brand-building has acquired added importance since apart from functional uses; brands do have symbolic and psychological significance. They are used to make statements for ourselves. To illustrate fashion brands like Yves Saint Laurent (YSL) and Armani have great significance in retailing. Brands satisfy the recognition needs of the consumers. Let us first understand briefly what a brand is.

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WHAT IS A BRAND? The word brand is gene~ally associated with the brand name. The name must be distinctive so as to differentiate a brand from the competitive brands. Though to begin with brand was considered only functionally, later new dimensions were added to it. Kapferer considers it to be the essence ofthe product, its meaning and direction. It is an identity for the product in time and space. An individual becomes aware about the world around him through experiences, learning, emotions and perceptions. An individual forms a world-view based on this awareness. This view ultimately decides his preferences including product preferences. His demand for the products is the pull effect. The brand is not what the company made it. The brand becomes what the customer associates with it. These associations are the added values. Branding from the viewpoint ofthe consumers is based on their perception and classification ofthe brands. A company just seeks to build images that reinforces such perception. A brand elevates a commodity which is undifferentiated. Commodities are bought on the basis of price and availability. Brands have much more to offer. Aaker and Briel feels consumers attribute more to the brands than just tangible features, e.g., attitudes towards the corporate that makes the brand or the brand itself, beliefs about the brand and so on. Branding is notj ust limited to products but extends to people, places, companies and services. Brands are to be positioned distinctly so as to distinguish them from rival brands. Brand personality must be nurtured. Brand positioning and personality deserve further consideration. A product can be positioned to compete head on with the competitive product. Or we can position it differently to bypass the competitive product. A brand not positioned clearly is likely to suffer. Positioning determines the competition that the firm faces. Therefore, it should be very carefully considered.

BRAND PERSONALITY Most of the brands have little to differentiate from one another, and thus it becomes necessary to add extra psychological values through promotion, packaging and other dimensions ofthe marketing mix. Retailers have taken to advertising in a big way. Brand personality is a combination offunctionality and symbolic values. Functional values are extrinsic, tangible product properties, e.g., a soap that gives good lather. Symbolic values are intrinsic and intangible product properties. A brand is friendly or competent or funny. An organization expects consumers to gel with the brand, and here comes the significance of the brand personality. Consumers describe the brand in terms ofits personality. Mostly brands are described in human terms. Personality stands for the essence of the brand. It is a cue to judge the brand.

SELF-IMAGE Brand choice is a matter of functional capabilities and personality evaluation. A brand should fit into an image that consumers would like to associate with. A brand that is chosen is closer to consumer's self-concept when other things are equal.

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Consumers use the brand to make statements about themselves. Rolex watches tell us about the personality of a Rolex owner. Self-image is the view of consumers about themselves. They buy brands that conform to this view. It is just like choosing like-minded friends.

BRAND PROPOSITION Brand positioning and personality when summed up into statements about the brand, what we get is the brand proposition. It invests the brand with clarity. Brand proposition must be simple enough to understand. There are two dimensions to brand proposition - brand image and brand identity.

BRAND IMAGE As we know, brands can be invested with human characteristics. These characteristics are put on the brands by the consumers as bundles of associations. Consumers experience the brand or have their gut feeling about them. Brand personality is given by the brand manager. Consumer on his part gives brands an image. Consumers benchmark other service providers while judging an image of a retailer.

BRAND IDENTI1Y Brand identity occupies a central position in brand promotion. Identity is the durable, realistic and coherent component ofthe brand personality. Brand identity sends signals to the consumes for interpretation in terms of image. Identity is the concrete concept. It is not idealistic. Each brand has a unique identity - it is called the fingerprint of the brand. Some brands have such established identities that just their logo will evoke their complete identity. Nike's Swoosh logo by itself is enough for promotion.

ROLE OF A BRAND Brand management is vitally important in today's competitive world. It makes us rise above the clutter. It distinguishes us from others. When markets mature, the growth slows down. The organization tries to protect its market share and ensures consumer loyalty. It has to differentiate its offer and outlet. A brand becomes a symbol of identification and differentiation for a retail organization. When a retail outlet builds its brand name, it enables it: (i) to generate demand for its merchandise (ii) to get better returns (iii) to distinguish itself (iv) to lure customers to its premises (v) to ensure trust that the customer's expectations will be met (vi) to establish long-term relationship with the customers and get their loyalty (vii) to withstand competition (viii) to create entry barriers (ix) to be a good employer (x) to bargain with the suppliers from a position of strength.

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Branding does require investments. It is a comprehensive exercise. It covers all the contact points. Branding is strategic by its nature, and not tactical or short-term. A brand can be built by that organization for its exclusive use. Alternatively, a brand can be given on franchise to others. Even other companies can ask us to manufacture their brand. Franchising is a route for rapid expansion in the market place. Franchise agreements allows others to use the brand under certain conditions. The products/service must be purchased exclusively from the franchiser. The franchisee may have to pay a certain percentage of sales as royalty to the franchiser. Many food-processing companies, hotels and training organizations have taken the franchise route.

POSITIONING OF THE BRAND In a competitive market, positioning puts the brand in a context. A brand can be positioned in a variety of ways. Usage can be one such criterion. A beverage can be positioned as a breakfast drink, or a good-night drink or a health drink. Price can be other criteria to position a brand. Designer clothes are high-priced expressive clothes. A clear brand position becomes difficult in view of the competition, for the retail shelf space. A brand that is not differentiated lacks distinguishing brand position to set it apart. Brand position is a function of brand differentiation multiplied by brand segmentation. It gives a competitive advantage to the brand. Brand managers must identify the criteria on which the brands will be positioned. Segmentation is the homogeneous group of customers towards whom the brand is targeted. They are the ones who consider the brand in that context of the other competitive brands. Ries and Trout calls this exercise the battle for your mind. Positioning establishes a brand in the mind space ofthe consumer as against the competitive brands. A retail organization has to position its offer in the most appealing way to its target audience.

ADDED VALUES A brand is augmented by certain unique added values which are sustained to overcome competitions. These added values could be symbolic (Mercedes for prestige), heritage (Colgate as time-honoured dentifrice), quality and trust (Tata), rituals (champagne at celebrations), belonging (Maruti family), legend (Johnny Walker), exclusivity (Rolex). Brand marketers have to match their added values to the preferences of their target audience.

BRAND PYRAMID Kapferer (1992), has conceived a brand pyramid for managing a brand over a period of time. The top of the pyramid represents core value of the brand - its essence or kernel. The middle represents the styles and codes. It is how a brand conveys its message verbally and visually. The base of the pyramid represents brand's communication themes - its current promotional programme.

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Communication Themes Evolution of Products

Adaptation

Customer's Life-style Changes

Fig. 15.1 Pyramidal Model of the Brand Source: Kapferer (1992)

A brand's kernel must be kept constant. There should be awareness about 'excess of democracy' - freedom to consumers to evolve a brand and 'excess of code' - fear to change and adapt.

BRAND UPDATION A brand is not just updated through communication. What really matters is product updating in terms of technical improvement, packaging, distribution and pricing. A brand has to reposition itself considering the changing market needs. A condensed milk container can be positioned as a milk substitute in times of shortage. It however, has been repositioned as a nutritive additive to prepare desserts like kheer. A consumer must however, accept the new version of the brand. Pond's identified as a cosmetic brand failed to attract customers as a toothpaste brand. Some brands are too late to think about updation to adapt to the changing times. A company must always through market research, assess the potential of the brand and changing environment.

BRAND AND PRICING Price reductions as a basis for competition might kill the brand. Price and quality equation must be carefully managed. Expensive brands are associated with premium quality. Newspapers are known for their price wars. Invitation price is used to defend the market share and to penetrate the market. However, a company may find it difficult later to raise the price. Whether price can be used tactically depends on the role of the brand in the portfolio.

COUNTERFEIT OR COPYCAT BRANDS Counterfeits are a great threat to the genuine brands, as they may not live up to the expectations of the consumers, and thus dilute the brand equity of the original brand. Marketers resort to legal action to counter this menace. Copycat brands are look alikes of the original brands and are priced lower than the original br~ds. They may offer better value to the consumer.

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BRAND NAME Brand names evoke certain associations, and invest the brand with an image. Brand names are chosen under the overall brand planning programme, which is subject to overall marketing planning. Brands are shorthand for many properties associated with them. They allow us to take quick decisions. A good brand name captures the brand promise and potential. A brand can have sub-brands to fine tune the associations. McDonald is a corporate brand name with Big Mac as a sub-brand. Brand names are informational memory devices which evoke so many aspects regarding the brand - quality, availability, promotional support, after-sales service, etc. A retailer's brand name must have the support of the marketing programme.

BRAND AWARENESS We like to deal with the familiar things. This is also true about the brands. Rather than dealing with an unknown entity, we are more comfortable in dealing with a familiar brand. The awareness factor puts the brand in the evoked set. Building awareness for the brand is a challenging task for any marketer. An optimal awareness leads to the top-of-the-mind recall. Pyramidally, we pass through the stages of unawareness, recognition, recall and top-of-the mind awareness. Each consumer has a limited number of brands in his evoked set-not more than 3 to 5 brands. Recalling a brand improves its chances of being selected. Advertising is an aid to create brand awareness. It also aids brand buying, repeat buys and ensures brand loyalty.

BRAND LIFE -CYCLE A brand goes through stages of introduction, growth, maturity and decline. A brand can be revived at the decline stage. A product mayor may not be revived; but a brand has better adaptability to new technologies. A brand has the potential to extend its life-cycle. We have around us brands which are fifty or hundred years old. The brands are constantly updated to add to their longevity. Brand management over the life-cycle requires further attention. Declining sales do not mean the end of the brand. It is possible to rejuvenate a brand, and is more economical than the launch of a new brand. Some brands are allowed to rot on account of complacency. Gillette is a good 'example of brand management.

SALES PROMOTION AND BRAND-BUILDING Sales promotions are used to induce sales ofthe brand. They are tactical measures used for short-term. As against this, advertising and promotion are long-term strategic measures for brand-building. Frequent sales promotions dilute the brand equity. Sales promotions are easily copied by the competitors. Price offs may dilute product quality and the brand may again revert to being a commodity. SP also detrains off profits. Brand management is the right approach to manage the brands on a continuous basis over a period oftime. Trade Marks Act and Copyright Act are the protective legislations for the genuine brands. These legislations vest the owners of the trade marks/copyrights with certain rights which work in their favour.

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PRNATE BRANDS In organized retailing, we come across what are known as 'private label' brands. These are store brands. They are defined as a product line which is owned, controlled, merchandised and sold by a specific retailer in its own stores. They enable a retailer to attain higher margins by providing higher value to the customers and by saving costs. They also increase a retailer's bargaining power with the suppliers of national brands. By being exclusive, private labels generate customer loyalty. We came across private labels in garments and foods. Shoppers Stop gets more than 15 per cent of its total sales through private label brands. Foodworld too has private label grocery brands. Private labels should be more consumer-centric. They should fill up the consumer need gaps. Retailers are quite close to the customer. They observe the shopping behaviour of the consumers. They are thus, in a better position to design suitable products. A retailer who chooses to launch private labels becomes a marketer, and not merely a seller of products. It brings the whole brand-building process in the organization. Retailers can exercise flexibility in marketing these brands by adapting to change. There are few questions. Should a private label contribute to the store's image or should store's image be used to market a private label? What should be the brand strategy? What should be the mix between private labels and national brands? Which categories are suitable for private labeling? Private brands can be a no-frill discount product and is perceived as a lower quality product. A private brand can be an exact copy of a manufacturer's brand, e.g., perfumes which resemble the originals. But such copycats can violate the trade dress and patent laws. The idea is to take advantage of the brand equity ofthe manufacturer. Small under-capitalized retailers follow this strategy. 'Invitation to compare' copycat brands closely imitate the national brand's trade dress and product qualities. They are similar to the manufacturer's brand. The two differ in price. Manufacturer's brand attract store traffic, aJ?d the private brand leverages this traffic. Premium private labels offer the consumers the same or better quality than manufacturer's brand. There is no intention to take advantage ofthe brand equity of a manufacturer's brand. Such premium brands compete with national brands. Private labels, thus, have to commit resources to build up its brand just like a national brand. Private brands improve the margins of the retailer by crossbrand cannibalization - converting sales from national brands at lower margins into private label sales at higher margins at the point of sale. .

PRNATE LABELS: AC NEILSEN SURVEY Westside chain of stores is heavily dependent (more than 90 per cent) on private labels. Its private brands such as Richmond, Urban Angel and Street Blues are popular. Pantaloon private brands John Miller, Pantaloon trousers, Shrishti, Scotsville and Ajile account for 35-40 per cent sales. Globus has Globus and F -21 as private brands. At Trent, 95-97 per cent of sales come from private brands. Food World is increasing its count of private labels. Europe has the highest value of shares of private labels at 22 per cent. North America is the biggest market for private labels in dollar terms. Its share is 16 per cent. The fastest growth is seen in emerging markets comprising Hungary, South Mrica, Czech Republic and Poland - the growth rate here is 48 per cent. In Latin-America and Asia-Pacific, the growth rate continues to dip as there is larger presence of multinational retailers.

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Product wise, the highest private labels are paper, plastic and wraps, with a value share of 29 per cent. Private labels have a strong share in most food categories - refrigerated food (28 per cent) frozen food (28 per cent), shelf-stable food (17 per cent) and pet food (17 per cent). Healthcare, diapers and feminine hygiene and non-alcoholic beverages have shares between 11 to 14 per cent Home care, snacks and confectionery, alcoholic beverages hover around a share between 6 - 9 per cent. Personal care has fewer private labels with a 4 per cent share. The smallest shares are those of cosmetics (2 per cent) and baby food (1 per cent). Private labels allover the world are economical. The range of difference is from a modest 10 per cent to a healthy 55 per cent. But these days there are premium private labels, which cost, higher than competitive brands, e.g., Shoppers Stop markets-Kashish a premium ethnicwear brand. Its Stop brand is economical and Life brand is a fashion label. It also has karrot private brand.

PREMIUM BRANDS In India, we witness premium brands in several product categories these days, e.g., we have Nike and Reebok in sports shoes, Dove in soaps, Royale and Swatch in watches, Scotch in liquors and Camry, Sonata and Mondeo in cars. Premium brands have a clientele in the upper and upper middle-class homes with high disposable income and changed lifestyle. Premium is contributed by excellence in quality and features. Its distribution is selective. Thes~ brands command a price premium. The definition of premium changes from market to market and from time to time. Once upon a time, a colour TV was considered a premium product. These days a plasma TV is a premium product. There are different degrees of premiumness. Premium can be leveraged by extending the brand to other categories, e.g., Pierre Cardin fashion wear and Pierre Cardin writing instruments. We can also change the consumer perception about the premium. Premium quality may make it necessary to change the product from e.g., Gold cafe granules. Premium brands have an exclusive image. Premium brands manifest certain exclusive external features, e.g., special packaging. Some brands establish their premium on technological advantage, e.g., no frost fridge. Life-style positioning make certain ordinary products premium products, e.g., Hero cycles for girls and mountain terrain.

SUB-BRANDS Brand extensions are very popular in India, though not always desirable. Sub-branding is a way that falls between creating new brands and stretching the mother brand beyond imagination. A mother brand can generate sub-brands, e.g., Videocon Bazooka or Cadbury's Perk. Sub-branding is done to: (i) Rejuvenate an old brand. (ii) Meet the needs of the consumers in the same segment, e.g., Colgate Fresh Energy gel. (iii) To change the imagery for a new segment, e.g., India Today is another brand whereas India Today plus is a sub-brand catering to an altogether different segment.

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(iv) To distinguish product offerings within the same product category, e.g., Stanch art Classic Card, Stanch art Executive Card, Stanch art Gold Card. (v) To take advantage of an innovation, e.g., Sony Wega. (vi) To upgrade a brand, e.g., from Surfto Surf Excel. (vii) To enter a new product category. A retailer has to shift his attention from just selling to marketing when private labels are launched. A retailer has to start building a brand. It involves assessing consumer needs, design the product to satisfy these needs, develop the product or outsource it, promote it and receive consumer feedback. Some key issues are: • Should the store brand be used as a private label or use the private label as the store brand? • What should be the retailing strategy? • What categories are just right for private labels? • What should be the mix of national brands and private labels? A store logo and word mark built over a period oftime are very powerful assets and can be used on private labels. The private label strategies are summarized in the table below:

Private Label Strategy Discounting strategy Copy-cat branding

Invitation-to-compare branding

Premium Private Labels

Remarks No-frills, generic brand at a discounted price. Imitation of manufacturers brand in appearance and trade dress. Generally a lower priced version and oflower quality. Invitation of manufacturer's brand in appearance and trade dress. But quality is on par with the national brand. The price is lower. Better quality than that of the national brands. Modest price saving.

CORPORATE BRANDING One view is that the whole company should be developed into a brand. Service institutions do indulge in this, e.g., banks and insurance companies. Organizations are established as brands in the minds of the consumers. A corporate is judged not only on the basis of its organizational culture - people, their skills, attitudes and behaviour, organization structure, style, design, communication, adaptability and ethos. An organization has to deal with not only the consumers but other stakeholders such as suppliers, shareholders, employees, Government, pressure groups and so on. These stakeholders must understand what a company stands for and where it is

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headed. Thus, corporate brand is built not by just the marketing department but by all the people who make up that company. Corporate brand-building is a comprehensive approach. There should be communication with the multiple audiences a corporate deals with.

BRAND EXTENSIONS When a product is improved by the introduction of minor charges, it is called line extension, e.g., Regular Coke to Diet Coke. Most of the new product introductions are line extensions. We can also extend by introducing flanker brands, e.g., different detergent brands from the same manufacturers. There can be extension when a brand is offered to a new segment of the existing market or is introduced in altogether new market. It is a process of market development. There can be a combination of brand extension, e.g., a cosmetic brand is extended to accessories. Brand extensions are useful as they are cost-effective in terms of entry, distribution, promotion, recognition. They rub off the qualities of the original to the extended version. They induce trials. Brand extensions are disadvantageous as there are me-too products, dilute brand equity, and may harm the original brand.

BUILD RETAIL AS A BRAND What we require is brand-building in retail. Brand promotions are short-term tactics. There is a big difference between promotions and brand-building. Brand is a value proposition for the customer for which he pays a certain price, which is either discounted or premium. We have to offer quality and consistency in delivery to build the brand. Retail brand is a matter of perception in the market. Perception is to be backed by performance.

DISTRIBUTION AND RETAILING The ultimate aim of marketing is to put products in such a way that provide consumers easy access to them. We can make products available in a variety of ways. Consumer products are sold in shops - retailers - who range from small mom-papa stores to super-markets and departmental stores. These retail outlets are located variously - in downtown area to remote suburban area, in a shopping centre or a neighbourhood store. Retailers are fed by a network of wholesalers or distributors. Some products directly go to the consumers either through direct marketing o,r network marketing. New channels of distribution have emerged such as Ecommerce - buying and selling on the Internet. Distribution is the overall umbrella term which encompasses the whole process of making the goods available to the final consumer. The chains of distribution are the routes along which the products flow to the ultimate consumer. Alternatively, they are called channels of distribution. Thus, channel management is the process of managing the distribution of products and services. A distribution channel, according to Oxford Dictionary of Business , is the network of firms necessary to distribute goods and services from manufacturers to the consumers; the channel therefore consists of manufacturers, distributors, wholesalers an~ retailers. 1

I

Producers

2 Producers

3

4

Producers

Producers

Wholesalers

Wholesalers

Retailers

Consumers

Consumers

Consumers

Fig. 16.1 Channels of Distribution - Consumer Products

Consumers

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ADVANTAGES OF DISTRIBUTION • • • • • •

They provide a ready network of contacts. They are objective. They may offer a wide product line or a narrow one. They provide environment conducive for the customer to exercise their choice. They make distribution cost-effective by sharing fIxed costs with other product lines .. By sharing the risk, they reduce the risk of bad debts. As they are paid a discount off the selling price, the inventory they hold locally does not tie up the marketer's capital. • They have good knowledge of the market as they are quite close to them.

DISADVANTAGES OF DISTRIBUTION • They are not 100 per cent committed to one product line. • They expect manufacturers to promote the product and generate a demand. • They are sometimes tough customers who dictate terms and have cumbersome ordering procedures. • They may ignore the product if another product line generates better revenues for them. • They may use manufacturer's product for their own promotional purposes.

EMERGENCE OF CHANNELS OF DISTRIBUTION We can understand the signifIcant role played by the channels of distribution only when we realize how they have emerged. These channels exist for economic reasons. As a matter offact, a manufacturer could have distributed his products on his own. When he uses intermediaries, he loses considerable control ~ver the conditions of sale to the fInal consumer. In addition, he has to pay mark-ups of the intermediaries. What is then the rational to use the intermediaries? When workload is divided and specialization is brought in through the use of intermediaries, there is overall economy and efficiency. The reasons for the emergence of channels are: (i) they bring efficiency in a process of exchange (ii) they facilitate the searching process (iii) they routinise transactions (iv) they correct the discrepancy of assortment through sorting process. Spatial Discrepancy Marketing is the process of exchange, and barriers to the exchange should be removed. Geographical distance between the source of supply and centre of demand is one such burrier. It calls for physical movement of products. This is another complexity. The individual consumers demand products in small quantities at different points of time. If goods are moved as per these requirements, transportation cost would be prohibitive. This is called the problem of spatial discrepancy between production and consumption.

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Temporal Discrepancy The time of production and the time of consumption do differ. This is a barrier to the exchange process. Mass produced goods must be held in inventory so that they are available for consumption at the right time. Sometimes the output is seasonal, and the consumption is continuous, e.g., food grains. This is called temporal discrepancy. It calls for inventory management. Discrepacy of Quantity and Assortment Manufacturers produce in bulk but the consumers consume a limited quantity. They consume a variety at a given point oftime. Exchange will be facilitated if specific quantities and unique assortments are built up from the range of products produced. Intention to Buy Exchange is not guaranteed unless there is an intention to buy. Exchange process must be influenced favourably so that there is an intention to buy. Marketing intermediaries emerge since they overcome these barriers to the exchange process.

SPATIAL DISCREPANCY AND THE INTERMEDIARIES A primitive society can have mutual exchange of output amongst its households. As society evolves, the sources of supply become specialized and the assortment offered becomes broad enough. It also affects the mutual interaction between the units of production and units of consumption. In a decentralized exchange in a small settlement of five households with specialized outputs require only ten transactions to complete the exchange.(See Fig. 16.2)

Fig. 16.2 Decentralized Exchange

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The total number of transactions in such decentralized exchange is given by: nen -1) 2

Where n is the total number of producers. Many more producers come on the scene. The complex exchange process is then facilitated by the emergence of intermediaries. A central market with one intermediary can reduce one number of transactions to five. (See Fig. 16.3) A

E

B

Central Market

o

C

Fig. 16.3 Centralized Exchange with No Intermediaries

E

A B

Central Market with one Intermediary

o

C

Fig. 16.4 Centralized Exchange with One Intermediary

This influences both transportation and transaction costs. They are reduced. The intermediary brings down the movement of goods and the number of transactions. As the society evolves further, there is more specialization. A variety of goods are produced. There is demand for an assortment of goods. It brings about a multi-stage exchange.

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176 Appliances

Textile Industry

Food Industry

Six Transactions

I

I

I Specialty Wholesalers

Three Transactions

Central Market

Retailers

30 Consumers Fig. 16.5 Multi·Stage System

In the above diagram, we have shown six producers, two each in appliances, food and textiles. There are three tlpecialty wholesalers who make six transactions with the six producers and three more with the central market. There are nine retailers who make 9 transactions.to purchase products from the central market. The total system requires 24 transactions to complete spatial closure up to the retail level. There are 30 consumers. If each ofthem visits one retail outlet of each type, an additional 90 transactions would be generated. Had there been no intermediary, a total of 180 transactions would be necessary to avail of the output of all the producers. We are governed by the principle of minimum total transactions. A manufacturerwholesaler-retailer chain reduces the number of contacts. But if more wholesalers are added to the chain, it increases the contacts. More intermediaries are subject to diminishing rations.

TEMPORAL DISCREPANCY AND MIDDLEMEN Production and consumption do not occur at the same time. Goods are to be stocked till they are required for consumption. The flow in the whole system must be maintained so as to facilitate exchange at the time of consumption. These two considerations require the carrying of inventories.

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When intermediaries increase as in multi-stage exchange, the total inventory to be carried in the system reduces. Had only producers stocked the products, each consumer would have required a large stock to reduce transportation cost and inconvenience. A good multistage system could be worked out by ensuring flow of products with minimum total inventory stock to meet demand and improve buyer convenience.

DISCREPANCY OF ASSORTMENT AND INTERMEDIARIES Sorting resolves this discrepancy. Sorting out means to select homogeneous products from a heterogeneous supply of a given product class. Thus, we can select pens' from a supply of stationery products, or cotton shirts from a supply of textile products. Accumulation means assembling supplies from a number of sources into larger quantities. This is carried out near the demand centres. Wholesalers accumulate supplies for retailers. Allocation means splitting a homogeneous supply in relation to a specific demand, e.g., truckloads to cases to units. Assorting means building up a final assortment of products to match the consumer demand. Wholesalers build assortments for retailers and retailers for their customers. In case of commodities, sorting out and accumulation are predominant. In case of manufactured products, allocation and assortment are important. The discrepancy in assortment promotes specialization in channel intermediaries.

SEARCH PROCESS AND INTERMEDIANIES Sellers and buyers are involved in search operations to bring about desired exchanges. This process is rather uncertain as they are not certain about finding what they are searching. Intermediaries facilitate the search process as: • They are organized along the lines of trade, e.g., chemical suppliers, textile dealers, hardware suppliers and so on. • Mass consumption products are available through different outlets, e.g., battery cells are available at chemist shops, general stores, grocery stores, super-markets, panwallas. • Immediate supplies are arranged by the wholesalers to the retailers, e.g., auto spare parts are supplied to retailers. A manufacturer delivers the goods and services to his final consumers through extra corporate institutions called channels of distribution. The channels are also called intermediaries. They are independent organizations who make the product available for use or consumption. The channels satisfY the demand by supplying goods and services at right prices, in right quantity, right quality and at right place. Apart from this, they do undertake promotional activity to stimulate the demand. A distribution channel is a network which creates value for the consumer by generating possession, time and place utilities. Manufacturers add form utility to their products. The delivery ofthese products requires a different speciaiized set of institutions which add possession, time and place utility. A product should first move from the producer to the final consumer who has to get access to it. A product is stored till it is ready for consumption. A product comes into the possession of the buyer after exchange of money. All these tasks are not generally performed by the manufacturer. Intermediaries perform these tasks.

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FLOWS IN A CHANNEL SYSTEM The participants in a channel system could be manufacturers, agents, wholesalers, retailers and customers. Each participant performs certain functions ranging from processing, inventory carrying, risk-bearing, providing after-sales-service to credit extension. The functions are more important that the institutions and as such though the institutions can be safely eliminated, or substituted, the functions performed do remain. These functions can be shifted forward and backward in the system and are to be performed by the other participants. The functions which are necessary are the transfer of ownership through selling, transfer of possession through transportation, order processing, inventory carrying, storekeeping, negotiations and promotion. It is possible that a function may be performed at more than one level. Workload is thus shared amongst participants. Inventory carrying is less common to all the participants. It may be construed as cost adding function. However, it makes the products available to the consumers at the right place in right quantity and quality. It is therefore a right strategy. A channel represents the path taken by products while title, possession move along and payment is received for goods and service. Distribution channels show a flow of several functions. The following diagram represents the marketing flows: Producers

...... Wholesalers ...... Possesion Financing ...... Negotiation ...... .... Ordering ...... Risk-bearing ...... ...... .... Payment .... Information ...... TItle

TItle Possesion

....

Promotion Negotiation Financing

.... ....

....

Risk-bearing

...... ......

...... -....... ......

Retailers

Title Possesion Promotion .... Negotiation

...... Consumers ...... ...... ......

Financing Risk-bearing

Ordering

.... Ordering

Payment

.... Payment

Information

.... Information

Fig. 16.6 Flows In the channels

Adapted after Valie, Grether and Cox, Marketing in the American Economy, N.Y. Ronald Press.

Title of ownership, possession and promotion are the flows emanating from the producer and reaching ultimately the consumer through the wholesalers and retailers. There are the forward movement flows. Ordering and payment move backwards from the consumers to the producers. Negotiations, risk-bearing and financing are two-way flows. On assuming the title and taking possession of the goods and services, the financing of the preceding level takes place, e.g., a wholesaler assumes title and takes possession, he finances a manufacturer to that extent. It gives an idea of capital cost tied up in inventory. Iffunds tied up are released they can be utilized elsewhere.

CHANNEL PARTICIPANTS There are primary participants such as manufacturers, wholesalers, agents and retailers. The secondary participants are the facilitating agencies such as financial institutions, public warehouses, public carriers and the ad agencies.

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PRIMARY PARTICIPANTS Wholesalers By definition, they sell merchandise to the retailers, to industrial, commercial, institutional or professional users, or to other wholesalers, or agents. Wholesalers are of two types-merchant wholesalers and manufacturers' agents. Merchant wholesalers take the title to the goods they deal in. Manufacturers' agents buy and sell on behalf of their principal, the manufacturer, and do not take title to the goods. Merchant wholesalers can be commission merchants, cash an4 carry wholesalers, etc. Agents can be selling agents, buying agents, etc. Retailers They sell merchandise for individual or household consumption for ultimate use. Wholesalers may sell for ultimate use but it constitutes a small portion of their overall operations. Retail formats have evolved from the small mom-and-pop stores to the giant hyper-markets.

FACILITATING PARTICIPANTS Apart from the wholesalers and retailers, there are other institutions which make a significant contribution towards the efficient functioning ofthe channel systems. These include financial institutions, warehouses, carriers and ad agencies.

Financial Institutions Their major job is to provide finance to the primary participants. They provide term finance and workin.g capital finance, i.e., finance for inventories. Public Warehouses Their major job is to make available storage space against rent. This avoids investment on the part of participants into real estate. Agricultural produce is stored both in the Governmentowned warehouses and private-owned warehouses. Public Carriers They are major cost centres in the distribution. Transporters such as road, rail and water carriers transfer the gocds physically. The working of the transportation system ultimately influences the level of inventory to be maintained in the channel system. Reliable transport means lesser need to maintain inventories. Ad Agencies They produce promotional messages and put them across in the media, thereby creating awareness of the products and stimulating their demand. Ad agencies operate at the level of producers, wholesalers and retailers. In the absence of the right message, product choice would have been difficult for the consumers. .

FUNCTIONS OF THE WHOLSALERS There are two types of wholesalers - merchant wholesalers and manufacturing agents. Merchant wholesalers buy goods in bulk and resell them at a profit to the consumers who could be (i) resellers to others (ii) consume the goods to operate a profit-making organization. Merchant wholesalers are compensated by profits.

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FULL-FUNCTION OR SERVICE WHOLESALERS They participate in most of the marketing functions associated with wholesaling. They participate in most ofthe flows. Physical Possession Flow They take possession of goods, store them, and maintain sufficient stock and variety. They deliver the goods to the customers. Ownership Flow They assume the legal title from the vendors and pass it on to their customers upon sale. Promotion They may collaborate with the manufacturers in advertising and promotion. They can print catalogues for trade. They can resort to promotion to trade. They may have their own salesmen. Negotiation The negotiations are over the prices, specifications and terms and conditions of business. These negotiations are carried out both with the suppliers and customers. Risking Once ownership is assumed, there are risks associated with failure to sell, change in prices and so on. Risk is reduced by manufacturer who accept returns and price guarantees. Ordering A retailer orders the goods and this moves on to the manufacturer ultimately. A wholesaler has to anticipate retailer's needs and should order in advance to fulfill a retailer's needs. Payment A wholesaler receives payment from the retailers which passes on to the supplier minus the cost and profit. A wholesaler may pay the supplier before receiving payment from the customer - it is another type of risk':'

LIMITED FUNCTION WHOLESALERS They perform only some ofthe marketing functions, whereas the rest of the functions are either'eliminated or passed to someone else. Some of them may participate in all functions, but their involvement is to a lesser degree than a full-fledged merchant wholesaler.

FUNCTIONS OF THE RETAILERS Retailers undertake the following functions: Physical Possession Flow They take possession of goods from the wholesalers and stock them, and present them in desired assortments to the consumers. They maintain sufficient quality and variety. Ownership Title Flow The title is taken from the wholesalers or manufacturers and is transferred to the consumers.

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Promotion They facilitate manufacturer's promotion by participating in sales promotion schemes, POPs. They are the ones who dispense SP to the consumers. Negotiation They negotiate with the wholesalers or manufacturers about the quantity, quality, price delivery of goods and other terms and conditions. They also negotiate with the consumers about the price and the terms of sale. Financing Sometimes, retailers offer credit to the consumers. Risk Bearing They assume risks with the ownership of goods. The risk is reduced by the return goods policy offered by wholesalers/manufacturers. Order Flow Retailer assesses the needs of the customers. They direct the orders through the wholesaler to the manufacture. Information Flow Retailers provide information to the consumers about products and promotion. They provide feedback to the manufacturer about consumer satisfaction/dissatisfaction and complaints and problems.

SELECTING CHANNEL MEMBERS Which channels to choose? This is the most important marketing decision. Companies should have complete information about channel geography, channel type and channel members. In the absence of the information, the channel decisions are likely to go wrong. Channel choice affects all other marketing decisions, e.g., pricing depends on whether the product is distributed extensively or through selective channels and advertising and sales force decisions depend upon channel members motivation and training needs. We have to be extra careful while selecting channel when: (a) A new product/product line is launched (b) An existing product is offered to a new market (c) The environment changes drastically Market channels are chosen in response to consumer behaviour-what, where, how and when consumers buy. Service level output expected by an average consumer and aggregate demand function are also important considerations while designing the channel system.

CHANNEL SELECTION CRITERIA Several constraints act upon the channel selection decision. Intermediaries are selected under the constraints of the market, product, customer, company and other characteristics. These constraints are quoted with channel alternatives. For instance, a highly complex machine would be sold directly to the user, rather than through an intermediary. Alternatives are not hard and fast. They are just indicative.

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Market Consumer behaviour is very important in channel decisions. A consumer may prefer buying a product from a specific place. Market size and location are very important in the channel decisions. A large concentration of buyers in a specific location calls for less intensive distribution. Scattered buyers call for more distributors. The distance between the buyer and seller also affects the channel. . Product Product characteristics influence the channel decisions - nature ofthe product, its value, degree of differentiation, technical complexity, etc. Perishable commodities require more direct marketing. High-value products mean more capital commitment. It is better to have intermediaries, e.g., consumer durables. High-value products are high profit items also. This may lead to direct marketing, e.g., computers, photocopiers, etc. Low unit value products are sold through intermediaries. Complex technical products are sold through personal selling by qualified personnel. Such products are sold directly or through selective channels. Customers tend to substitute low-involvement products but tend to be brand loyal for high involvement products. For those products where there is no brand loyalty and substitutability is high we require intensive distribution, e.g., beverages. When brand equity is high, middlemen tend to accept the product for distribution. If the product is new with low brand equity, the market acceptance comes slowly. Here aggressive selling and push approach is required. Customer service is a vital part of the distribution system. Sometimes, customers are required to pay more for the service. For instance, one can withdraw cash from the ATM of the bank where one has the account free, but is charged when the ATM owned by the other bank is used. There may be tie-up amongst banks so as not to charge customers of different banks. Customer service requires careful consideration. Product information goes a long way to help the customer select a product. A channel member's ability to provide such information is an important consideration in channel design. The ability to deliver in time and do so consistently are important. This affects the inventory planning. Company Characteristics The size of the company, its financial capacity, its marketing strategy and product mix affect the decisions regarding intermediaries selection. Competitive Characteristics Competitive channels affect our decision. One and the same retails outlet may sell different competitive brands. Some marketers avoid such multibrand outlets. Environmen tal Characteristics In depressed markets, marketing has to be economical. There should be a shorter channel. The company must scan the environmental components such as economic, technical, legal, and social environment. The distribution channels are accordingly designed.

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ESTABLISHING CHANNEL OBJECTIVES A company has to realize its marketing objectives through a channel structure and hence, it is necessary to establish the distribution objectives. A company may have the objective of penetrating the market. It may appoint a number of wholesalers, semi-wholesales and retailers to achieve this objective. The company has to decide about the location of the specific distributors and the selling space required to produce the desired result for the company. The inventory holding capacity of the distributors is taken into account. A standard inventory is calculated depending upon market experience, and this is suitably adjusted for an individual outlet keeping the area potential in mind. In selecting intermediaries, their inventory holding capacity is considered. Inventory also depends upon the nature of the product. The personal selling capacity is taken into consideration while selecting intermediaries.

IDENTIFICATION OF CHANNEL STRUCTURE There are several alternative channel structures depending upon the characteristics of the market product and the overall environment. )

Manufacturer

Ultimate consumer

Manufacturer

)

Agent

\

Consumer

Manufacturer

)

Wholesaler Retailer

)

Consumer

Manufacturer

)

Retailer

Manufacturer

)

Wholesaler

)

)

Consumer Ind ustrial user

Ifthere are fewer intermediaries, the manufacturer has to bear more risk and may limit his channel options. The operational requirements of channel alternatives are also considered. Captive Outlets These are owned by the manufacturers. Independent Outlets These are owned by individuals. A manufacturer may have a combination of captive and independent outlets. Product Differentiation A manufacturer may differentiate products and may utilize different outlets for such products. This generally called dual distribution. The brand may be single or may be altered. Geographic Differentition Different geographic areas have different requirements, e.g., less populated area may require wholesaler-retailer distribution network and thickly populated area, personal selling and direct marketing.

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Contours of Retailing Management

NUMBER OF LEVELS The tasks can be assigned to intermediaries in a number of ways. Levels in a channel can range from two (manufacturer to customer directly) to five and in some cases up to seven. (Manufacturer - Selling agents - Brokers - large wholesalers - small wholesalers retailers consumers). Most organizations have between two to four levels. Manufacturer -------------------7) Ultimate consumer Manufacturer

--~)

Wholesalers

--------~)

Consumer

Manufacturer ) Wholesaler ) Retailer ) Consumer Levels depend upon the nature of the industry, size of the market and availability of intermediaries.

NUMBER OF INTERMEDIARIES AT EACH LEVEL Intensive distribution requires as many possible outlets as possible at each level ofchannel, e.g., beverages like Coke and Pepsi are distributed in this way. Selective distribution means only a limited outlets are used at each level, e.g., premium products. Exclusive distribution is highly selective, e.g., one intermediary in a particular area.

TYPES OF INTERMEDIARIES Various types of intermediaries are available. The intermediaries are chosen as per the requirements of the product. Trade associations, consultants and customers provide useful information regarding this choice.

APPROACHES TO CHANNEL SELECTION Lambert treats a channel structure just like capital budgeting. Channel selection should be based on estimated earning and cost of capital. It is a financial approach. Techniques of management science such as operations research (OR), simulation and decision theory are used to design optimal marketing channels. Mathematically, it can be calculated which channel structure offers maximum profit at the lowest possible cost to the company. Managerialjudgment can be used for channel selection.

MANUFACTURER-CHANNEL RELATIONSHIP The company must motivate channel members so that the~ realize their potential. The company can ask outsiders to conduct studies regarding the needs and problems of channel members. Marketing channel audit can be conducted to gather information as to how a channel responds to the marketing programme. Weak and strong points of relationship are examined. A distributor advisory council can be set up with representatives from both the manufacturer and the channel members. The council identifies and discusses mutual needs and problems. The overall communication is improved.

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MOTIVATING THE CHANNEL PARTICIPANTS Manufactures may criticize the channel participants for poor sales, not pushing products aggressively, lack of product knowledge, indifference to certain segments, etc. This may affect their motivation. Manufacturers have to motivate the participants to get the best out ofthem. The following approaches are used to motivate channel participants: Co-operative Approach In this there is an agreement between the manufacturer and channel members to provide certain benefits such as promotional assistance, training of sales force, POPs, incentive to improve stores, extra commission, etc. This motivates the participants to put in extra effort to promote the products. Partnership Approach It is a supportive relationship. A manufacturer is clear about his expectations from the intermediaries, and what the intermediaries can expect from him. The support is for product availability, market coverage, market information, technical advice, etc. The agreement is allocated compensation based on the fulfillment of these expectations. Instead of paying 25 per cent commission straightway, the company can decide to pay 5 per cent each for meeting the sales. Feedback on consumer offtake, inventory management, and customer service. Distribution Programming It is a comprehensive approach that covers inventory planning, analysis of marketing objectives, support to achieve these objectives and benefits to be given to channel participants. Power Channel members influence each other. It is their power. Power is manifested through reward, coercion, legitimate and expertise leadership. Power can be used to motivate intermediaries.

CONFLICT BETWEEN RETAILERS AND MANUFACTURERS Big retailers have developed their clout by virtue of a large clientele base. They can bargain with the manufacturers for better discounts and liberal credit. They also expect direct supplies through an exclusive channel. Though FMCG firms have conceded some ground, they are still reluctant to eliminate the stockist-distributor network, since 98 per cent retail is to the unorganized sector, and only 2 per cent to the organized sector. Even small retailers are also in a mood to brave the might of the manufacturers by forming associations. Retailers associations demand better margins and if their demand is not fulfilled they go to the extent of boycotting the products ofthe manufacturers. Some FMCG firms try to mask the higher discounts by offering cash for promotions. Other firms are toying with unorthodox solutions, such as dummy stockist to supply directly, so as to avoid the resistance of trade. Retailers have valid arguments for direct dealings. Some of them buy in bulk greater than the value of the biggest distributor in the area. Sometimes, the offtake by retail chains account for 90 per cent of the distributor's volumes. Besides, in case offood products and perishables, the existing chain does not have the speed to deliver fast. The result is the receipt of products close

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to the expiry date. If products come directly, consumers will get fresher products. In addition, there are stock-out situations when organized retail buys from the local distributors. There is a dilemma for the marketers - face the wrath of the trade channels or lose the high-value customers by not conceding their demands. FMCG firms have started developing new distribution strategies for dealing with large chains. They have started establishing direct communication channels. A separate executive is being appointed to deal with the organized retail trade. Similarly, a key distribution party is being appointed from where all the products of manufacturer can be sourced. It becomes a single sourcing point. The retailers are keen on disintermediation and the passing of resultant savings to them. But manufacturers also want their share of savings. A distributor performs many functionshe keeps stocks, helps selling and collects debts. Manufacturers are also likely to harden their stand. They may set up exclusive outlets of their own. The exclusive outlets will have extra add-on values. But the scalability ofthis model is restricted due to prohibitive cost. The franchising option is also being considered. Retailers are also opting for private labels. These may come cheaper. Retailers may launch their own brands for products where margins are lower. Some manufacturers use their own spare capacity to produce private labels.

MANAGING CHANNEL CONFLICT • When manufacturers open their own outlets, they should not be given preferential treatment, e.g., prior introduction of new product in exclusive outlets and later in the traditional outlets. • Different channels should complement each other. A multi-brand watch outlet can be given an option to convert into an exclusive single brand outlet. An insurance company on its website offers an on-line policy, but first offers an option to contact its advisors. • Service can be improved. A marketer offers new launches first to the traditional channel, later it can be offered on its website for e-shopping. • Different products can be offered in different channels. • Controlling pe~etration considering the servicing through existing trade channels is one way to reduce channel conflicts. A VIP lounge will not be set up in an area where VIP luggage is being sold by several outlets. • Take the existing channel members into confidence and be transparent. There should not be discrimination between different channels. • A brand equity which is stronger than the store equity must be leveraged to pull consumers. • Prices should be maintained on par across channels.

Distribution and Retailing FMCG Marketer Manufacturers

r---+

Clearing and Forwarding Agents 1-3%

Super Stockists 3-6%

187

Stockists 3-5%

Distributors 4-7%

Organised Retailer 6-15% Fig. 16.7 Existing Distribution Channel

FMCG --+-

Marketer Manufacturer

Organised Retailer Existing 6-15% Plus 11-21% on alc of disintermediation

Fig. 16.8 Desired Distribution Channel #

PRIVATE LABELS A retailer has to shift his attention from just selling to marketing when private labels are launched. A retailer has to start building a brand. It involves assessing consumer needs, design the product to satisfy these needs, develop the product or outsource it, promote it and receive consumer feedback. • What categories are just right for private labels? • What should be the mix of rational boards and private labels?

STANDARDS FOR CONTROL Channels structures are judged on the basis of profitability for which certain standards are set. The various aspects while settling the standards are: • The size of the trading area • The sales potential of the trading area • The sales potential of a specific product in the trading area • Manpower required to realize the sales potential • Cost calculations • Cost estimates divided by various customer segments • Comparison of the actual with the budgeted figure.

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CONTROLLING CHANNEL PARTICIPANTS Individual channel participants might deviate from the norms of performance. This affects others adversely. It is therefore, necessary to control individual channel participants. The risk return analysis makes as aware about the decision variables which are used in controlling the channel members. The standards for control are based on these variables. These standards are classified into transaction measures and movement measures. Transaction measures relat~ to bad debts, stock-out cost, customer service level, sales, forecasting accuracy, new markets, and discrepancies in order filling, order size and complaints. Movement measures include distribution cost, transportation cost, storage cost production cost, obsolete items, damaged merchandise, astray shipments, less than standard loading of shipment, i.e., less than wagonload, truck load or carload. Performance is assessed using the above measures. There is a trade off between products and services and costs of services. Cost control hopefully leads to control of services for a product and vice-versa.

CONTROL TOOLS Control is traditionally exercised by three methods - contract, power and structure. Contract Most widely used control tool, it is an agreement enforceable by law. It is governed by the Indian Contracts Act. A contract can be oral, implied or in writing. Channel contracts are generally put in black and white so as to make it explicit and clear. A contract should be welldrafted and should cover • • • •

products handled types of customers to be handled territory to be covered quantum of inventory to be held installation, repairs/replacements

• prices and margins • promotional obligations, e.g., local retail advertising, shop interiors, POPs • sales quotas • terms of contract • payment terms Power Power results from interdependence ofthe channel members. Most commonly used power sources are reward power and coercive power. Rewards are the ability to grant certain benefits to achieve the objectives, e.g., greater sales quota, discounting. If used rampantly, it loses its significance. Coercive power means holding back the rewards, e.g., no quotas are given during shortage or removing a dealer from the priority list of premium products. Companies derive their power on account of market acceptance and the size of the company. Wholesalers derive their power due to market proximity, their numbers and size. They are also intimate with the market and have an understanding of the inventory costs. Retailers

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derive their power from market proximity, customer goodwill, private labels, trade associations and horizontal co-operation. Indian retailers have started getting organized and will develop more clout in years to come. Structure The channel structure and the internal structure of an intermediary are also used for control purposes. The length of the channel and power are inter-related; the longer the channel, the lower the control. A large number of channel participants at a given level also lowers control. An intermediarly must have well-defined structure or else if may be manipulated by outsiders.

RATIO ANALYSIS FOR CONTROL In order to identify the problems, one can use techniques like the ratio analysis. The problems lead to poor profitability and we have to identify the controllable variables which affect the profit function. Return on Net Worth Return on net worth is a function of (1) net profit (2) asset turnover and (3) financial leverage. The ratio is given by (1)

(2)

(3)

Assets Net Profit Sales x 100 x x Owned Capital Sales Total Assets Net profit to sales ratio indicates the profit made on sales. Sales to assets indicate the capital base required to realize the desired sales. Assets to own capital indicates the sources of funds. Some other controllable variables are: Inventory Inventory turnover ratio is given by: Sales Turnover Inventory It indicates how many times inventory is converted into sales during a particular year. Comparative ratios of different periods indicate the status of our performance. It also indicates the time the goods remain in the distribution system. When applied to products, we come to know how each product is performing. Account Receivables (AIR) The total outstanding and their period is given by this ratio. It wards off liquidity risk. Accounts Payable (AlP) It indicates money payable and the frequency with which payments are to be made. It is used to control liquidity risk. Managing cash inflows and outflows is done by co-ordination of AIR and AlP.

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Contours of Retailing Management

Capital Measures Cost per customer and cost per product are capital measures. Oapital productivity is judged by territory cost ratio and sales cost ratio. Labour Productivity Turnover to number of employees indicates how many employees are needed to achieve a given turnover. Customer to employees indicates the number of employees required to service a given clientele. Order to employees ratio indicates manpower necessary to fill a given set of orders. Other Ratios Number of orders received to orders dispatched, number of orders received to numbers of orders wrongly dispatched, number of orders received to number of complaints received, number of complaints serviced to number of complaints received are some other ratios used to measure system effectiveness.

STRATEGIC AND FUNCTIONAL IMPLICATIONS If the distribution costs are significant, say up to 40 per cent, there are implications for the organization both strategic and functional. If the distribution costs are insignificant, say five per cent or so, the organization may ignore the implications. But this is not true always. Industrial products have low distribution cost. Here the winner may be an organization that provides better service facilities. Strategic Implications A distribution system also produces service outputs while moving goods. It facilitates penetration of the market. It is necessary thus, to control the channel. Once the market is penetrated, it is necessary to maintain the market sha:re, for which service is called for. Here, also the channel contributes a great deal. An uncontrolled channel is an invitation for others to appear and render better service. Thus, completion is managed using the distribution channel control. Promotion creates demand. Customer service is necessary to sustain this demand. Both are closely linked. In a mature market, there is less promotion, and more demand servicing. Efficient distribution system makes available goods and services at lowest possible prices. Thus, a distribution system affects the other three Ps of the marketing mix. While controlling the channel, the organization is likely to develop strong personal relationship with the channel members. Functional Implication Physical distribution system has interface with other functional areas. The line responsibilities in PDS are warehousing, order processing, inventory management and transportatiqn. The staff responsibilities are cost analysis, planning and forecasting and customer service. Each area has its own implications. Physical distribution has interface with purchase, production, finance and marketing. It has to co-ordinate with these departments.

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DYNAMICS The power keeps on shifting from the wholesaler to the retailer to the manufacturer. It is not a static process. It is an interactive process.

CHANNEL PERFORMANCE Channel alternatives could be profitable or unprofitable. There should be systematic performance appraisal for the intermediaries. In ranked preference method, the elements which contribute to the success of the channel are ranked in order of preference. Maximum and minimum performance levels are determined for each element. The elements could be product features, competition, investment needed, etc. There is another refined method called cost revenue analysis where estimated revenue and cost are assessed for each channel. The net gain is taken into consideration to choose the best option.

PHYSICAL DISTRIBUTION sYSTEM (PDS) A system consists of input, component or sub-system and output. A system interacts with a given environment. Environment generally puts several constraints on the system. A system works to achieve certain goals or outputs. Input spurs the action in the system. A system can be closed or open. An open system means there is correlation between inputs and outputs. A close system is one where the output is decided by the input and vice-versa. A system can be structured or unstructured. A structured system gives measurable output, whereas an unstructured one does not. Human element's entry makes the system semi-structured system. The PDS - Physical Distribution System is a semi-structured system. The major components of the PDS are - transportation, inventories, storage which are inter-linked functionally and are highly time dependent. Each component has some major objective to achieve. Transportation sub-system has to achieve physical movement of goods to the consumption point through the shortest route, under the specified parameters oftime and cost. The objectives of sub-system collectively make up the system objective and system objectives lead to sub-system objectives. PDS in general has to improve the customer service, reduce the costs, and provide service level in proportion to costs. The system objective is expressed as a channel mission. Let us first examine the outputs and inputs of the system. The system output is the service level provided. It can be subdivided into pre-transaction, transaction and post-transaction output. Policy organization structure, flexibility and technical services are the pre-transaction level outputs. Transport stock out level, follow-up of the order, order-cycle and time are the transaction level output. Production, installation, claims, packaging replacements are posttransaction level outputs. In PDS, money tied up in inventory is a major input. Rent ofthe storage space is another input. Input accounting is not traditional accounting. It is of special significance.

sYSTEM'S MISSION A manufacturer tends to control the channel in view of the risk he bears. A channel mission is of great help to him. Mission statements are market-oriented. In a mission statement, system's output and costs associated with its achievement are defined.

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Contours of Retailing Management

Mission We shall serve Mumbai market with 90 per cent delivery within a week at lowest possible cost.

RISK-RETURN ANALYSIS This analysis is undertaken for independent units whose objective is to maximize returns and minimize risks. ROI is calculated on capital whereas risk is estimated on the basis of deviation in earnings, effort necessary to do average earnings and capital input required to get the desired returns. Products are studied on the basis of incremental contribution. Retail Level Let us examine how risk-return analysis is undertaken at the retail level. Let us first know what are expectations from the retailers. Consumers expect a retailer to deliver on four PS - product, price, promotion and place. He requires products of good quality, wide assortment at right price and with good after-salesservice. He must have good product information and should get products in required quantities and at the right time. A retailer has his tasks cut out. He has to increase his sales, make available a good assortment of merchandise, which has good brand equity. His effort should be cost-optimization and investment minimization. A manufacturer has several expectations of a retailer. A retailer must focus on increased sales. He should provide goods in time. He should reduce the accounts receivable. He should pass on product information. There should be retail price maintenance (RPM). There should be customer service, e.g., good after-sales-service. A retailer, to sum up, creates an assortment of merchandise, maintains an adequate level ofinventory, finances this inventory and provides transactional facility to consumers. A retailer, therefore, takes liquidity risk, assortment risk and inventory risk. Against these risks, he expects a return. Assortment risk is very prominent in retail. As such merchandise buyers have very vital role to play in retailing. A retailer stocks a product offer comparing the risk-return parameters with other similar products or those carried by his competitors in the market. Wholesale Level A wholesaler buys in large quantities and sells to other intermediaries. He receives feedback from the retailers and passes on the same to the manufacturers, and vice-versa. A wholesaler -manufacturer and wholesaler-retailer interface is given below. A retailer - wholesaler interface has to increase sales, provide assortment, minimize inventories, reduce costs and carry brands with good image. A wholesaler has to increase sales, minimize costs and investments, provide credit both to the retailer and manufacturer, break the bulk and facilitate sales. He moves goods and facilitates information sharing. A producer has to improve his sales, minimize inventory cost, and distribution cost. He ensures Retail Price Maintenance (RPM) and provides after-sales-service. This makes it very clear what role a wholesaler plays and the risks that he bears.

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Wholesalers are involved in promotion, financing, bulk breakage, physical movement, storage and market feedback. The risks borne by him are bad debts, liquidity risk and information risk. A wholesaler is thus, primarily responsible for bulk breaking, searching and sorting and bears the risk ofliquidity and inventory.

CHANNEL STRATEGY A company can adopt either push or pull strategy for any given product. It can also adopt a combination of these two strategies. The overall marketing strategy depends on the products life-cycle, the firm's life-cycle and the environmental interface. The company's channel objectives could be to turn the product into a cash cow, increase product coverage or exercise control or maintenance of the market share. The objectives are situation and time-specific. Control issues with regard to a channel arise on account of the non-alignment of the objectives of the firm and those of the wholesaler, undefined tasks, and intermediaries not possessing the required characteristics. Conflicts also arise when an intermediary agrees to carry a competitive product, encroaches on the territory of other members and does not observe price discipline laid down by the firm. A channel leader (manufacturer) has to identify whether control issues pertain to the channel structure or individual participants. It must be seen whether these issues arise from transactionary conflict or physical movement.

LOGISTICAL SUPPORT The cost of entry of a new product in the market has become very high. Extensive MR is necessary before launching a new product. As technology can be duplicated, there is no exclusivity to it. The road to success for a product is thus, a combination of right technology and right marketing strategy.

MARKETING CHANNELS • Historically, the marketing channel for a number of Indian companies has been the stockist in major cities, who supplies stocks ofthe distributor who in turn retails it. In this system, the manufacturer has to extend large amount of credit to stockists. • The other method of distribution has been the appointment of an all-India distributor with an extensive nationwide network at his command. Here, the margins of the manufacturer are very low. The manufacturer rides on the popularity ofthe distributor, but later many venture out on his own. • These days companies are focusing on establishing a rural distribution network. • Traditionally, a distributor was the bania whose methods were antiquated. The new stockist is an educated marketing professional. • Previously companies used to dump their products at the stockists at the month end in order to achieve their sales targets. There were unnecessary stockpiles; and blocked capital. • Super stores all over the country.

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• Franchise stores are commonly seen. • Direct Marketing (DM) is highly cost effective.

"RETAIL MARGINS Retail margins on household products are low - 4 to 9 per cent. For personal care products, the figure would be 11 - 12 per cent. For consumer durables, it would be 15 - 20 per cent. Apparel retail margins are 30 - 45 per cent. In developed markets, retail margins are 15 - 17 per cent. Organised retailers should get higher margins.

DEVELOPMENT OF DISTRIBUTION NETWORKS It is necessary to develop distribution networks comprising warehouses, cold chains and multi-modal transport services. The lack of an organised chain leads to high costs and complexity. The absence of distribution networks connecting smaller towns with regional hubs has restricted rapid scale-up. The presence of a large number of intermediaries along the chain has led to ineffeciencies in the entire process.

A retail business has to perform many operating functions right from the time the business opens to the time it closes for the day. We have to spell out these functions and the responsibility to carry them out. If the store is to be opened at 10.30 in the morning, then who will open it? What activities are necessary while opening? The burglar alarm must be switched off, power must be turned on, the computer system must be started, displays must be set up and so on. All these tasks cannot be left to chance. An operational blueprint is prepared where all the functions which must be performed are listed. A large retailer has many blueprints, e.g., blueprint for maintenance, inventories, credit, displays. A retailer can modify his business plan, say there is more reliance on self-service. This must be incorporated into the operational blueprint.

STORE FORMAT, SIZE, SPACE ALLOCATION Here a retailer takes decisions about location, the construction plan and store design and layout. These decisions are examined with respect to productivity and retail strategy. A retailer may decide to use prototype stores. The multiple stores then have uniform construction, layout and operations. There are many benefits. Civil construction is easier. Costs are reduced. Operating methods are standardised. There can be transfer of employees, merchandise, fixtures from outlet to outlet. But strict compliance to prototype introduces inflexibility - the store cannot exploit local conditions. Rationalized retailing is used with prototyping. It means centralized control with strict operating procedures. Operating procedures are kept the same amongst all the outlets. This helps in duplicating the model anywhere in a short period of time. Store size approach is used to take advantage of the location. A destination store can be a supermarket or departmental store. But the same management can set up a convenience store of smaller size in a middle-class low-rent locality. Retailers have to take several decisions regarding allocation of space. They have to use space most productively. At times, the entire merchandise line gets dropped due to space constraints. There are two approaches to space management - top-down approach starting at the macro level, the space is divided into categories, and products and bottom-up approach where space planning starts from the product-level to category-level to the store-level to the company-level. Customer traffic within the store is allowed to proceed wherever it wishes and the movement is such that the entire store's offering is exposed to it. There are two factors involved - the

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placement of merchandise and the movement of people. In the store layout, there is what is known as circulation planning. It facilitates the customer from one section to another through the aisles provided in the midst of the merchandise. Accent light and displays are so arranged that a customer is drawn from section to section. The main aisle is called the highway. It allows access to both the sides. There are side aisles or roads. The width of the aisles is a function of the traffic. The highway is six feet, and side roads are three feet. Vertical displays occupy less space as compared to horizontal displays. There are hangdown displays from the ceilings and walls to save space. Free space is utilised for PoS-Point of Sale displays. A store can be made to look larger by proper interiors, say open doorways and mirrored walls. The ratio between selling and non-selling space is carefully worked out, say 75 per cent to selling and 25 per cent to non-selling such as storage, rest room, toilets and so on. Merchandise is scrambled and it occupies more space. Long working hours also mean better space utilization.

PERSONNEL UTILIZATION More than 40 per cent operational cost is contributed by wages and benefits. Employee turnover means recruiting again, training them and supervising them. It costs a lot. Poor staff affects the sale and image adversely. Stores should be technology-intensive, thus saving on labour costs. Staffing pattern remains pretty unpredictable as sales ShOW a surge and decline according to market forces. Unionized staff put a constraint on the management. The working conditions are more or less decided by collective bargaining. There should be proper manpower planning. Jobs should be standardised. The tasks of persons with similar postions in different departments are kept uniform, e.g., cashiers and storekeepers. There should be cross-training, so that people learn different tasks. Employees must be subjected to performance appraisal. They should be compensated as per the earning capacity, paying capacity, market conditions and competitor's payments. They should be given incentives. Self-service reduces personnel costs. Employees must stay with the firm longer.

STORE MAINTENANCE Maintenance mainly pertains to the physical facilities - both exteriors and interiors. Exterior facilities are entry points, exit points, parking lot, signages, window displays, common areas. Interior facilities include walls, windows, flooring, climate control, electricity, lighting, displays, fixtures, ceilings, etc. There are several decisions who will look after these faciltiies? Who will pay for maintenance? How long the facilities are to be used? When is the time to replace them? How often are they to be serviced? How to maintain the facilities? All these decisions affect the quality of service the store renders, the image it projects and the operational costs it incurs. Who likes to visit dingy, dilapidated stores? All this brings out the importance of cleaning. Lighting should be maintained well. Bulbs must be replaced when they fuse.

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Some stores replace all the bulbs at a time to ensure consistency in lighting. Good maintenance extends the life of the facilities. Electricity utilization is a major factor. It is a substantial item of cost. Besides, the governments demarket it on account of shortage. Its use should be decided by a proper policy. To store perishables, it is critical, e.g., poultry. There are ways to knock off cost here. The firms must use better accessories and insulation. Electricity can be saved during non-selling hours and off-peak hours. Computer controlled lighting and climate control could be introduced. Bulbs used should be energy efficient.

INVENTORY MANAGEMENT Retailing success is attributed to proper merchandise management, and inventories go a long way in ensuring this. This topic has been disucssed at length in supply chain management chapter. Some operational factors to be considered are: • co-ordination in the handling of merchandise from different vendors. • ratio between storehouse merchandise and shop-floor merchandise. • movement of merchandise between selling and non-selling area. • inventory functions between business hours and non-business hours. • trade-off between faster delivery and large shipping costs. • vendor support to store and display merchandise. • breakages policy. • home-delivery policy.

STORE SECURITY Store security has two dimensions -personal security and merchandise security. Personal security is discussed here. Shopping is not considered safe by many customers, especially at night. Day-time shopping is preferred. Malls have their own safety hazards. Senior citizens avoid night-time shopping. People prefer shopping where they feel comfortable. Parking areas have several security concerns. Some of these issues are addressed by the retailers: • • • • • •

provision of security guards. plain clothes security personnel. brighter lighting in parking lots. electronic surveillance. no access to certain areas, e.g., the storage. cash desposits are put in the bank frequently by armed security guards.

INSURANCE Insurance cover must be purchased against risks of fire, burglary, on-premise accidents of customers. The property is insured. There is health cover for full-time employees; the premium being paid fully or partly by the employers. Insurance costs have risen up to 1 per cent of

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revenues. Insurance must therefore, be properly planned. Facilities must be maintained properly to prevent accidents. Safety issues must be made a part of overall training.

CREDIT MANAGEMENT Some operational issues are: • mode of payments accepted • card logos accepted • credit card swipe precautions • tradeoffs between credit costs and profits due to enhanced sales • terms of credit if EMI is given • handling oflate payments or non-payments. Retailers have to pay fees to card issues ranging from 1 per cent to 5 per cent. There are transaction fees and monthly statement fees. Debit cards are preferred as the customer's account is immediately debited. Some customers, however, would like credit card transactions as they provide them interest-free credit period. Stores have written legal protection against credit card frauds. Non-stores here ar9 at a disadvantage.

COMPUTERISATION Computerisation has two aspects - hardware and software. The prices of both these are crashing. Stores have started adopting computerisation in a big way. Many stores in India will use videoconferencing to be in touch with chain stores, headquarters and vendors. In-store communi~ation has become easier by networking. Computerized inventory control is being used. In the check-out process, computerization is a great help. Check-out involves transaction processing and inventory management. Items are passed against optical scanners, registers, record and display sales. Receipts are generated. Inventory data go to memory bank. Of late, wireless scanners have appeared on the scene. RFID is also in use. UPC labels must be attached to all supplies or else peak efficiency is not achieved UPC symbols cannot be deciphered manually. Electronic point of sale system is an advanced version of computerization at the check-out level. It checks transactions, it charges transactions, it generates sales reports; monitors prices, changes prices, generates messages, analyses profits and stores data. EPOS can be combined with the information system. In many stores, consumers are given the option of self-scanning.

OUTSOURCING Many tasks so far being performed by the retailers are being outsourced. In outsourcing, ·an outside party performs specified tasks against payment. It saves time and costs.

CRISIS MANAGEMENT Crisis comes despite all possible precautions, e.g., a fire may break out or there is water seepage or leakage from the pipe, damage to window displays, a car accident is there in the parking lot, workers' agitation, burglary, illness of key persons, excess rains, demand

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fluctuations, price rise, natural calamities and such other happenings. Crisis management involves: • contingency plans, e.g., backup generators, succession plans, manuals to deal with fire, accidents. • information flow to all concerned parties, e.g., police, employees, fire brigade, customers, media. • co-operative rather than confrontationist attitude. • swift response. • clear chain of command. Crisis affects small retailers highly. They should be well-prepared to deal with the crisis.

Though international retailing is not a new concept, it has received momentum towards the concluding part of the last century. International retailing as against domestic retailing was rare prior to that. The larger retailers, however, have the capacity to cross the borders of their area of operation and enter the international markets. International retailers are generally found in the niche areas and luxury products. Those who have a strong brand image are better qualified to expand internationally, e.g., Body Shop, Tesco, WH Smith and Sainsbury. Retailers still remain confined to their home country. Even those who migrate abroad receive an insignificant percentage oftheir turnover and profit from abroad. Though international retailing has received momentum, it is still at a nascent stage. What drives the retailers into market abroad? Some of the developed markets may be saturated. But this does not explain the migration fully. It is a complex game of push and pull factors. Retailers are moving into markets where the geographical and cultural environments are different. Retailers have to assess an appropriate market entry in this context. The environmental factors playa major role in deciding this entry.

REACTIVE VS PROACTIVE To begin with, the moving out of retailers from the domestic to international markets remained reactive in the sense that they did so in response to market saturation. This is a reactive stance. The proactive stance, however, is one where a retailer actively seeks opportunities abroad, irrespective of the status of the home market.

STRUCTURAL CHANGES In the beginning, manufacturers were in a dominant position and distributors were in a subsidiary position. Coke and Pepsi entered the foreign markets by seeking local distribution networks. However, other companies like Sears and JC Penny could not do so in the European markets, as the markets were unfamiliar to them. There are structural changes in retailing nowadays. Retailers have improved their clout. There are multiple retail organizations. Retail has started consolidating itself. Retailers have improved their financial status. All this has spurred retail internationalization. Push factors consist of market saturation, limited growth opportunities, demographic characteristics like ageing, government ~olicy, operating costs, stakeholders' claims and lack of further competitive advantage on the home turf. Pull factors consist of opportunities abroad,

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economic growth, population growth, conducive environment, favourable operating costs, opportunity to innovate and risk spread. The interplay ofthe above listed push and pull factors decide whether to internationalize or not.

DEFINITION International retailing means the transfer of retail operations outside the home market. Along with retail operations, we also transfer concept (say self-servicing), management expertise, technology and/or buying function across the national borders. International retailing thus, means to carry out retail operations in an altogether different environment-economically, socially, culturally and structurally.

OPERATIONS Retailer's operations are transferred to foreign markets. They may resemble home operations. The brand name may be different.

CONCEPTS Self-service as a concept originated in California, US in 1912. Supermarket appeared in New York in 1930. It took two or three decades for these concepts to travel to Sweden, Germany and France. Convenience store, a US concept of the 1920s, got transferred to Europe in 1970. Internationalization may introduce new formats; hyper-markets developed by Carrefour in France was transferred to Spain and Brazil and later to the UK and US. Concepts may be transferred by the pioneer or by others. A retailer can also get a concept from abroad transferred to his home market, e.g., Sainsbury imported supermarket from the US to the UK in the late 40s.

MANAGEMENT EXPERTISE The skills and techniques of management can be transferred. Here, the culture of the company is also included. Alliances is one way out to do so.

TECHNOLOGY IT, accounting systems, other systems in functional areas, systems at the operational level are also transferable. Technological advantagf! confers upon retailers the competitive advantage. Retailing contours in the host country can change due to such a transfer.

BUYING This is one area which has the greatest impact on internationalization. Retail alliances which are big enough can exercise considerable clout in buying.

RETAIL STRUCTURES Concentration of retail structures is one measure of the retail environment. In developed markets, a few retailers exercise close to 50 per cent of the market. In moderately-developed

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market, this percentage is between 10-20 per cent. The number of stores also indicate the status of the retail. The number declines as the market develops. The employees per retail outlet indicate the size of the retail outlet. The size increases as the market develops. The number of consumers per retail outlet is also a valuable measure. Markets can be advanced on extreme and traditional on the other extreme. There are intermediary markets in between. Though there are differences amongst markets, there are similarities too.

REASONS FOR INTERNATIONALIZATION Retailing on an international level is a capital-intensive business; and the return is not assured. Though there are success stories in international retail, there is no dearth offailures too. Always, operations cannot be transferred. Retailers follow three strategies of growth - sectoral expansion where new sectors are tapped or new formats employed, sometimes unrelated to retail, transfer of the core offer in new markets and combine the two. A combination strategy can ultimately lead to the emergence of a holding company. Retail expansion can just happen. There can be non-commercial reasons, e.g., political, personal, ethical or social. There can be commercial motives. The government policy can influence the decision. The most valid reason is to seek growth opportunities. Apart from external influences, there are internal factors, e.g., opinion oftop management or management philosophy.

DIRECTION OF EXPANSION Retailers at the early stage of expansion prefer markets geographically nearer and culturally similar. Retailers try to enter a market which is structurally less-developed than the home market.

METHODS OF ENTRY Retailers use several organizational forms to enter the foreign markets - shareholding, acquisition,joint venture (JV), organic growth and franchise. Acquisitions are takeovers of the foreign firm. In JV, an indigenous partner is taken. Organic growth refers to opening new outlets. Sharehol.ding refers to acquisition of the shares of a retailer in the selected market. Franchise means the licence to operate under an existing franchisor brand.

IMPLICATIONS OF EXPANSION An international investment in shares or becoming global by replicating a concept in a new market or becoming multinational by keeping the business model same, though with minor modifications to suit local conditions- all these are parts of the international strategy.

The degree of responsiveness to the local conditions put retailers into categories such as multinationals, transnationals and global. Multinational retailers with high degree of adaptation to local environment are at one extreme. Global retailers are at the other extreme. Transnational retailers are in the middle.