Professor: Venkat S.

Compiled By: Jugal Shah

Retail Management
20 August 2013 12:51

Book: Leivy n Weiz Private Label Strategy - Nirmalya Kimar

Read: 1. Reliance retail has become biggest retail player 2. Governments stand on changing retail regulations
Retail Formats: Parameters: Size Type of items Location TA Checkout counters Variety Assortment Pricing o Premium o Discount EDLP High/low What are the benefits and disadvantage of EDLP? Less promotional and communication cost High predictability of sales Lot of utility value but no excitement

Assignment Question Calculation Case study

What are the benefits and disadvantage of High/Low Clear stock as n when you want Create excitement among customers -> Sales

Shoppers Stop category manager purchased 1000 shirts for 500Rs each. She has three sets of customers. 1. 200 customers are willing to pay price of upto Rs 1000 2. 300 customers are willing to pay price of upto Rs 700 3. 500 customers are willing to pay price of upto Rs 450 what is her profit/loss at each price point and at what price she should sell shirts? Ans-> Cost = 500000 1. Sales = 200000 Loss = 300000 2. Sales = 350000 Loss = 150000 3. Sales = 450000 Loss = 50000 But, If we sell at different price point, Sell first 200, Give discount -> sell 300 and then give more discount and sell 500 Thus total sales = 635000 and profit = 135000 When EDLP is more suitable? Suitable Products: FMCG Suitable for o Low margin items o Essentials o Regular Purchase When High/Low is more suitable Suitable for o High margin items o Not-regular purchase o Impulsive purchase

Formats: 1. Convenient store: kirana stores 2. Food retail Types of food retailers (From Slides) a. Supermarket: reliance fresh, aditya birla more b. Hyper market/Discount stores: reliance mega mart, big bazaar c. Warehouse clubs / Cash n Carry: Metro, walmart (in India) 1) Cater to - Small retailers - Hotels Retailers - Ca - Other B2B d. Convenience store 3. General merchandize What value does Cash n carry bring to these three different set of customers? +Ve All products under one roof Less transaction cost No forced stocking of SKUs Higher Margins due to disintermediation of agents Access to CnC private label brands High product availability Flexibility -Ve No credit No door delivery Many retailers dont have any document of operation Why Cash n Carry has achieved very limited success in India? Major customers - other B2B customers
Why this presence is achieved by foreign players and not Indian players? If ORP enters into Cnc they will end up strengthening their competitors (convenience stores) Wholesale is very unattractive business o Very low margin o Requires huge investment

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General Merchandize: Food retailer parlor: Discount store: Hyper markets (Super Centers) Special store: Sell only one type of item. Mobile store, electronic equipment store eg. Toys r us, mom & me, crossword etc Category specialist: Also called Category Killers. Very big specialty stores. Huge volume n huge discount. Eg Vijay sales, Croma, ezone etc Home improvement store: Category specialist dealing with home improvement eg home dcor, Hometown, ikea Departmental store: cater to SEC-A-premium customers eg. Central, Shoppers stop, lifestyle etc Drug stores: Chain of pharmacies eg. Apollo pharmacies etc Off-price retailers: Sell top brands at a huge discount. They do residual buying-buy whatever is the leftover. Eg. All factory outlets, brand factory, lootmart Value retailer: Specifically target poor people. Hypermarket for poor people. Eg. Local pan shop o Small packages o Located in slum areas o Keep local brands Online retailer: eg flipkart, jabong, amazon Retail Functions: Supply chain management Store management o Identifying location for store o Choosing malls o Store layout o Visual merchandizing o Promotion Category/Merchandize management - Marketing o Assortment planning o Branding and private labels o Buying systems o Pricing Assortment Planning: Deciding what you want to keep in the store Decision is based on Variety Assortment Number of units Objective Achieve targeted GMROI (Gross Margin ROI) Used to measure category performance. Achieve targeted Sales per Sq Ft Bottom up approach Consider two merchandize categories- apparels and FMCG. Annual sale of apparels is 1L, gross margin is 30K and average inventory is 50K. For FMCG, annual sale is 1L, gross margin 15K and average inventory is 25K. Which is more profitable??? Ans-> GMROI = Gross Margin / Avg Inventory GMROI (apparel) = 30K/50K = 60% GMROI (FMCG) = 15K/25K = 60%
Consider 2 products, apparels and Mattresses. Annual sale for apparels is 1L, GM = 30K, Avg Inventory=50K and same for mattresses. Apparels occupy 100sq ft and mattresses occupy 500 sq ft. Which is more profitable? Factors to be established for Assortment Planning: Define categories Decide variety - assortment - number of units for that particular category Decide what brands to be kept Negotiate margins with supplier Decide on pricing and discount to be offered to customer Deliver GMROI and Sales per Sq Ft target Decide whether to appoint category captain or not Category Captain: Appointing a Category Captain essentially means outsourcing category management Eg. Reliance Fresh sales 1 Cr worth of soaps every month of which HUL brands contribute 60% and all other brands put to gather constitute remaining 40%. If Reliance Fresh appoints HUL as Category Captain, HUL will manage the Soap category for Reliance Fresh Disadvantage It may affect sale of other categories Creates confusion among suppliers/consumers Advantage When there is a brand which is almost monopoly Category leader has more knowledge of market Levels of inventory High Inventory or Less Inventory? Less inventory is preferred coz ... Advantage Less inventory carrying cost Less warehousing cost Less losses due to obsolesce Less pressure on retailer to give discount Less inventory could increase sales - more variety - fresh products Shorter cash-to-cash cycle Disadvantage Stock out Higher logistics cost Material cost will increase - as you buy in smaller lots Risk appetite of Category Manager Brands Vs Higher Margin New brands

Category Management: Assortment Planning Brands Vs Private Label Buying System Pricing

Concessional model: Store in a Store model. Category/Store is not managed by Retailer but third party.

Read: Zara - ET Highest sales per Sq ft Changes merchandize every 15-20 days 80% of Zara's merchandize faces unfulfilled demand

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 New brands Product roles

High Sales Value

Niches
Low bill penetration

Stars
High bill penetration

Dogs

Traffic builders

Niches: 10-20% of people are buying it but value or margins are very high Traffic Builders: Large chunk of customers are buying it but I am not making huge margins Stars: Large chunk of customers are buying it and it also gives huge margins Dogs: Very few customers buy and I am making very less margins Why keep dogs? You keep it when people who bought dogs, bought lot of other items ie bill value is much higher than average

Low Sales Value

Size of store Catchment Area Analysis Market share of different brands Consumption habit (Market Basket) Competitors' assortment Gap analysis Buying behavior

Consider two companies, A & B. Purchase credit for A is 30 days, avg inventory = 45 days, sales credit= 30 days For B, purchase credit = 30 days, avg inventory = 15 days, sales credit = 0 days Ans-> Cash to Cash cycle Cash to Cash cycle = Sales credit + Inventory - Purchase Credit For A = 45 days, B= -15 days Wal-mart purchase $40mn of goods from supplier every month and they get average credit of 90 days from supplier. They operate with an inventory of 30 days and their sales credit = 0. Wal -mart makes annual profit of $20bn. How much of their profit come from Cash-to-Cash cycle? Annual interest rate = 10% Ans-> Cash cycle = 0+30-90 = -60 -60 days Purchase - 1Jan, Pay - 1April, Sales - 1Feb Invest 40mn for two month. Interest 40*.1*2/12 = 0.6667 for Jan purchase Total Yearly interest = .667 * 12 = $8.004Bn Consider two category manager, one of Shopper's stop and Central. Shopper stop category manager procure 30 styles of men's casual shirts with 10 shirts per style whereas Central category manager, purchases 10 styles of men's casuals with 30 units per style. Who is taking bigger risk? Ans-> Central Category manager is taking higher risk.
Retailer Style Quantity For Successful sale (70%)

Usually every retailer gets 30-35% profit from negative cash-to-cash cycle

Central

10

30 10

21 7

Shopper's stop 30

If style fails, Shopper's stop will be left with 10 units while Central will be left with 30 units. Case Study: Nolan's finest foods category (Assortment Planning Review Exercise) 1. National sales trend Dominance of national brands Majority of shampoo is sold through food & drug stores Growth is highest in Mass merchandize 2. Differences in shampoo sales trend at Nolan's compared with national trends 3. Is price a factor behind low sales? Competition Price
High

Food #1 Mass Merchandize Drug store Food #2

87 0 0 0 101 0 0 59

Same Low

16

103 N

2 Y

44 Ok

Is Nolan competitive? Y

If price were the only factor, Drug stores should not be doing well but they are growing at 4.2% and In Food n Drug category, Nolan's price are highly competitive. Thus price is not a factor for Nolan. 4. What is causing difference between these trends? Low sales of Bargain bubbles and Elegance Due to low inventory carry 5. Plan of action Increase share in Bargain Bubbles and Elegance Increase assortment of Bargain bubbles and Elegance 6. Problem with Remove Slow seller approach It is not always problem with ptoduct You might not displaying is wrongly or wrong location New items are usually slow seller in beginning Slow seller will tell me what to remove from shelf but not what to add Brands Vs Private Label Decide how much to keep: branded label and private label Why Private labels Margins are much higher Achieve customer-store loyalty

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Achieve customer-store loyalty Trends Share has been increasing Contributes >50% of profit margin

Evolution of Private Labels 1. Initially private labels were launched in unimportant product categories where power of brands were low but today private labels are in all product category 2. Initially private labels were seen as cheap and poor quality but today private label on top with manufacturer's brands in quality 3. Earlier people from low income group purchased private label brands, today all sections of society purchase private label

Price Quality Matrix

Premium Brands

Price versus manufacturer brands Copy cat Brands Value Innovators

What has happened recently Government changed couple of norms Investment in back-end -50% just for initial investment Relaxed MSME norms - MSME = 12r from 6Cr turnover and that also at start from procurement only Thinking to include food-vegetable as part of SMEs Upto state government to decide where they want to allow stores to be opened

Generic

Why gov. had rules what they had As a country we have become very arrogant due to great growth rates and every1 wants a pie of it Protect domestic industry

Quality versus manufacturer brands

Proportion of each type of brand level in retailer portfolio? Copycat: Customer sees clear value proposition in terms of same quality at low price Generics - 10% Usually retailers have only three private labels in each category Copycats - 55%-60% as chances of success are high G,C,P or G,V,P Value Innovators - 15-20% Premium Brands - 10%-20% Compare each of private labels on following parameters Shelf placement Product development efforts Packaging Overall objective of retailer in launching that category It is very difficult for retailer to launch premium store brand, Why? Replicate all activities eg. ad n promotion which is not their CC Difficult to convince customer about value proposition of product above established brands Despite this difficulty, why retailers still trying out premium store brands? Cross-Selling Creates store brand and store loyalty Buying Systems: Staples

Demand

Time Seasonal Fashion Fad A small retail store, has allocated a space of 20units for lifebuoy soap. As on 2nd September, actual stock is 16 units. Lead time = 3 days, Rate of Sale per day = 4. Calculate order quantity Ans: Target Stock = 20 units
Lead time = 3 days

Actual Stock = 16
ROS/day = 4

Sales between order n receipt = 12 So, Purchase order quantity = 20 -16 + 12 Facing 4 10 Depth 5 10 No of stores Store quantity ROS/day Warehouse target Actual quantity Lead time inventory days At warehouse (Days) 10 10 157 750 20 100 10 5 150 400 7 12 *ROS= Rate of Selling

PO Quantity = Target - Actual + Demand during lead time ( + less quantity in stores) 1) Target = 20*10 = 200 + 4*5*10 = 400 Actual = 150 + 157 = 307 Demand during lead time = 20* 7 = 140 400-307 + 140 = 233 2) Target = 500 + 10*10*10 = 1,500 Actual = 400 + 750 = 1,150 Demand during lead time = 1200

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1500 -1150 +1200 = 1550 50 will be loss of sales as product will sold out on 11th and order will be received on 12th

Consider two Shopper's stop category manager, one is managing men's casual and the other ladies casuals. They are planning for Jan-March winter season of 2014. Each of them forecast demand of 5000 units per month and 15000 for the season. Forecasting error is +-50% Lead time = 6 months How will you plan ordering process? When will you place order? How many orders should be placed? Quantity of each order? Ans: Men casual Ladies casual Period
Demand Major Difference between Staple and Fashion product Fashion Staples: 1. Longer lead time Short lead time 2. High forecasting error Less forecasting error 3. Most of the time single Very frequent Replenishment multiple replenishment Purchase can be adjusted 4. Purchase can't be adjusted as per demand As per the demand

1. 2. 3. 4.

J-M
15000

J-M
15000

Lead time Purchase Order

Assume Actual Demand

6 months July
16000

6months +-50% July

4000

Forecasting error +-50%

Quick Response : Shortening the lead time

Impact

Shortage

Loss

Quick Response Lead time for first order is 6 months, 2nd order = 1 month and 3rd order = 15 days

Identifying store location: Hutch Case Study (Store Location) Dalton: PRIZM cluster No. TG No
Yes

Age group No of customers 35-54

Parameter Dalton Population N

Hinesville Y

Big fish, small pond 4727

New homesteaders 6030

(6/20)*6030 = 1809 (total) 1809 * .509 = 921 (female)

Rural Industrial
Shotgun & pickup

12757
8881

Yes
Yes

<24, 25-34 (17/34)*12757 = 6378.5/2 = 3189.25 3189.25*.509 = 1623

35-54 (6/20) * 8881 = 2664.3 2664.3 * .509 = 1356

Red, white blue TOTAL

Hinesville

31123

Yes

35-64

(6/30) * 31123 = 6224.6 6224.6 * .509 = 3168 921 + 1623 + 1356 + 3168 = 7068

PRIZM cluster

No.

TG
yes

Age group

No of customers

Military Quarters 45127

<24 & 25-34 (17/34)*45127 = 22563.5 (total) 22563.5 * .442 = 9973 (female)

Women Apparel expenditure: Location Dalton Area sales per capita TG population TG Sales 206.26 7068 9973 Hinesville Younger Population (median age = 24.5)
Very good store visibility No outparcel

Stores 21 8

Per store sales 1.457*10^6/21 = 69,380.9 1.5432*10^6/8 = 192,900

7068*206.26 = 1.4578E6 9973 * 154.74 = 1.5432E6

Hinesville 154.74 Factor Macro Dalton

Store location is surrounded by many different type of stores Competitors are less Higher population growth
Drought Risk War risk

Identifying store location: Identify reason Trade Area Residential area Commercial area Market area Downtown - one location where there are many markets Outskirts Region Metro Tier 1-2-3 City Rural area Specific site

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 Stand alone Part of building - eg Ground floor Malls Mixed mall, Premium mall, Theme mall, Outlet mall, Other factors Revenue Vs cost trade off eg. rental vs no. of customers Destination vs non-destination store Nearness or Away from the competition For categories in which customers look for variety, it is preferable to be close to competitor (Malls/Area) Anchor store - Biggest attraction of mall/area - Popular store need not to be anchor store Quality of tenant mix Visibility - would be different for different stores/product etc Hygiene factors Parking space , cleanliness etc Terns & Condition between mall developer & retailer Exercise: Do store location analysis for mall
Factors Super Market Hyper Market Cash n Carry Specialty store

Consider two malls A&B. Footfalls for A = 10000/week , B = 10000/week Each mall has 50 stores of different category. Sum of footfalls of all stores for A = 50,000 , B = 20000 Which mall has better tenant mix?
Drug store

Category specialist Departmental stores Value retailers

Large Trade Area

Region

Narrow product line Outskirts Commercial area Market area

Several product lines Commercial area

Metro Tier-1

Residential/ Outskirt Local Market area

Metro Tier 1-2-3

Downtown/ Market area

Tier -2-3

Residential area/ Commercial area

Site

Mall/ Stand alone Cost/Margin/ Volume

Mall/ Stand alone Cost Destination

Stand alone Mall/ Commercial area/ Part of building Cost Revenue

Mall/ Stand alone Revenue Destination

Stand alone/ Mall

Part of Building, Market Area, Residential area Revenue

Revenue/ Cost Destination/ ND

Destination Destination

Destination

Destination

Pricing Techniques: Mark down Price bundling Multiple unit pricing Zone pricing - Different prices for different regions/store location Loss leader pricing - Selling certain items at cost or loss throughout the year Competition based pricing Demand based pricing: usually for private labels Cost based pricing

A company at option of putting an item under loss leader. It is considering two items I1&I2. Avg purchase value per cust per month for I1 = Rs 2000 & for I2 = Rs. 1000 I1 is purchased 3 times a month while I2 is purchased 10 times a month. Company wants to give 10% discount on one of these. So, which item is good to select at loss leader price? Ans: Those items which customers purchase more frequently are more suitable for loss leader category A retailer want to launch a private label whose FC = Rs. 5L/location and VC = Rs. 250/unit. He does test marketing in 4 different market at 4 different prices. Market Price
1 400

Units sold Profit

10000 400*10000 - 500000 - 250*10000 = 1000000

2 3 4

500 600 700

8000 5000 3000

500*8000 - 500000 - 250*8000 = 1500000 600*5000 - 500000 - 250*5000 = 1250000 700*3000 - 500000 - 250*3000 = 850000

Case Study: Brand Valuation of Mall 1. Analyze tenant mix of the mall and identify initiative to improve tenant mix Ans: Comparison across categories and comparison within the category Type of outlet Number of stores % of total Footfall % of total Revenue (Cr) % of total Apparel
F&B

9
15

20.93%
34.88%

15508
32780

15.68%
33.14%

17.42
15.86

13.10%
11.93%

Entertainment Footwear Furniture Jewellery

Music

1 6 3 2
3

2.33% 13.95% 6.98% 4.65%

6.98%

390 8507 1450 1050

15927

0.39% 8.60% 1.47% 1.06%

16.10%

0.1 11.9 5.92 3.06

10.39

0.08% 8.95% 4.45% 2.30%

7.81%

Saree Sports Anchor

TOTAL

2 1 1
43

4.65% 2.33% 2.33%

4095 2268 16926

98901

4.14% 2.29% 17.11%

3.44 4.46 60.42

132.97

2.59% 3.35% 45.44%

Measure performance of store (Within the category): Footfall, conversation rate, average value of purchase Go Beyond Data . . .

2. How they have arrived at numbers ( 65% n 86.65Cr)

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Ans: 65% (86.65Cr) = revenue due to mall brand Assumptions (in case) All F&B revenue is due to mall brands Cat-1: APC<500, if conversion is <4.54, revenue is due to mall brand, if >4.54, difference is due to store brand Cat-2: APC>500, if conversion is <10.8, revenue is due to mall brand, if >10.8, difference is due to store brand (refer pg-428) Store layout, Visual merchandizing, Space Management:

(Grid Layout) - For Super market Cons: Doesnt give complete visibility of store Doesn't encourage exploring

Race track layout Complete visiblity Allows exploring

(Free Form layout) - For very premium stores

Featured Areas: Premium areas inside the store Featured areas are those areas which get higher customer attention Following are some of common featured areas End-CAPS: end of racks Line of sight: keep something at eye-level Point of sale Windows Mannequins Feature areas - dont use for SLOW MOVING ITEMS

1. 2. 3. 4. 5.

How to use featured areas: Keep best brands, best merchandize Charge premium Space Management: How much space to given for different merchandize category? 20% - F&V, 30%-staples, 20%-FMCG etc ... What helps you achieve desired GMROI What items are fast moving and gives higher margin but also manage product basket Overall impact of that item on store Location of merchandize category Demand merchandize - at the back Impulse merchandize - at frond Must manage balance Planogram Diagrammatic representation of the store Presentation Item based Divide sections for different items Idea based You want customers to visualize

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