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Getting the retail value chain right

Times of Oman

Monday, August 31, 2009

THE global retail industry today is struggling to get out of the recessionary clutches and finding ways to curtail operating expenses and maintain profit margins.

The consumer driven industry is feeling a dire need to streamline processes and optimise operational efficiencies. Industry experts are of the view that to fight back in this challenging environment, retail value chain can prove a handy tool for retailers to understand and identify performance improvements within the network while at the same time improving the customer experience in every store.

Management guru, Michael Porter theorises in the concept of retail value chain: "The term ‘margin’ implies that an organisation’s capability to realise a profit margin depends on their ability to manage the linkages between all activities in the value chain."

Chhavi Sharma, brand manager (Parfums), Christian Dior, Capital Store, avers: "A retailer’s ability to gain a competitive edge in these times will depend on its ability to gain that margin by focusing on the links of operations, technology and customer relationship management (CRM)."

"Value chain describes the activities within and around an organisation, and relates them to an analysis of the competitive strength of the organisation. Therefore, it evaluates what value each particular activity adds to the organisations products or services."

The concept of retail value chain (RVC) differs from the standard value chain definition. Industry experts say RVC must start and end with the customer – what the customer desires and whether the retailer exceeded those expectations.

A.T. Kearney, one of the world’s foremost management consulting firms, defines RVC through its proven store operations excellence framework, which starts with understanding the voice of the customer and ends with the key interactions and final impression in the core store operations.

Two theories that have evolved in the retail value chain are quick response (QR) and efficient consumer response (ECR). The QR theory was introduced in the context of speciality retailing while ECR was developed in the FMCG segment.

"The focus of QR is to rely on information systems to renew processes. The main thrust is to improve forecasting and follow up orders, to reduce product stock outs and obsolescence costs," says Sharma. Inventory management is a nightmare for any business but more so for a retailer. The focus lies in carrying the right inventory at the right time. Recently, the world’s largest retailer Wal-Mart Stores posted a second-quarter profit fuelled by tight inventory controls beating the Street estimates.

"Wal-Mart has drawn more affluent shoppers away from rivals with its new focus on better brands, better service and cleaner stores. This fiscal year, the chain is remodelling 600 of its 3,600 US stores at a cost of $1.6 billion to $1.7 billion and sprucing up its merchandise even more in the hope of retaining its new customers after the economy recovers," according to an Associated Press report.

Case study

The retail giant’s business model on how it captured and dominated the US retail industry is a classic case study for business schools around the world.

One of the case study reveals that "Wal-Mart made strategic attempts in its formulation to dominate the retail market where it has its presence, growth by expansion in the US and internationally, create widespread name recognition and customer satisfaction in relation to brand name Wal-Mart and branching into new sectors of retailing."

For retailers it is important to understand which activities can be eliminated or simplified, resulting in reduced costs. Recently "Gap posted a slightly stronger than expected quarterly profit as more full-priced sales, inventory controls and cost cuts helped offset declining revenue at all its chains.

Gap has boosted margins by streamlining its organisation, reducing inefficiencies in its supply chain and cutting costs," says a Reuters report.

Cost reduction initiatives are achieved across the retail network through real estate portfolio management or efficiencies gained through technology.
"Within the stores, the store productivity cycle provides an ongoing analysis of primary value chain activities to eliminate, transfer, or simplify retail processes," says Robert A. Ziegler, partner-vice president, A.T. Kearney (Middle East).

Recently, for a global big-box retailer, A.T. Kearney conducted a store operations excellence project to transform the core of the retail value chain at the store operations level. Benefits resulted in increased efficiencies, decreased costs, better category management, and most importantly improved customer experience.

"Retailers must go back to basics at the core of the value chain – store operations – to ensure that every customer interaction provides a positive experience, while at the same time managing costs throughout," says Ziegler.

Industry experts say companies like Zara, The Limited, Gap, H&M, Li & Fung are good examples of buying organisations that effectively manages the logistic chain.

A case study on Zara, the flagship brand of the Spanish retail group Inditex, reveals the fact that the brand focuses on the actual need of the consumers. "It just quickly produces the least amount possible of what is hot with consumers and moves to the next hot style fast. Garment styling for Zara actually starts from the email or phone call received from the stores.

Thus from the beginning Zara is responding to an actual need, rather than forecasting for a distant future," says Devangshu Dutta in his case study on Zara. Dutta is CEO, Third Eyesight, a consulting firm focussed on the retail and consumer products sector.

Seeking the right value




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Organic Truth – Facts and Interpretations

Four months ago in this column (“Organic – Hope or Hype?”) I wrote about the need for customers to make themselves aware of the true nature of organic products, and it is time to reopen that discussion.

Food is an emotive subject with us as consumers, food distribution and retail is big business with us as the trade, and agriculture is a sensitive area of governance.

On top of that, studies are seldom exhaustive enough in terms of sampling, duration of the study, establishment of controls etc., and for every study that proves the superiority of organics, you will be able to find counter-studies and opposing arguments.

In recent years brands have tended to make much of their organic certification. Marketers are known for overstatement anyway, and the promotional language used by some implies (or even explicitly states) that these products are superior to other alternatives. Surely, then, the consumer should be willing to pay higher prices for these “better” products?

If only, if only, facts were that straightforward.

In the earlier column I’d written: “We expect organic products to contain more nutrition and be better for our bodies. While this may be true of organic animal products compared to their inorganic counterparts, it has not been demonstrated for plant products, other than anecdotal experience of taste and appearance.” I had also raised the question: if organic foods are no better nutritionally than inorganic and could be as productive for the farmer, are many of the organic brands just skimming the gullible customer while the going is good?

Well, the debate just got messier. Recently a study sponsored by Britain’s Food Standards Agency last month (July 2009) really set the cat among the pigeons. The report was based on review of existing research papers to find out if organic products were nutritionally superior to inorganic products. And their conclusion was that the studies reviewed did not provide enough evidence that organic food is more nutritious.

Well, what the report really said was that on the basis of the limited number of studies that were deemed to be rigorous enough, there was not enough evidence to prove that organic food is more nutritious.

Okay.

Imagine an examiner saying that he does not have enough evidence to prove that a student who has passed did not cheat. Notice, he is not saying that the student actually cheated. But wouldn’t this statement alone raise suspicion in your mind about the student’s integrity?

Unfortunately, newspapers and electronic media sell headlines, and headlines need to be short and snappy. Here are a couple of examples about this study.

  • Organic ‘has no health benefits’ (BBC)
  • The benefits of “bio” in question (Le Figaro)

These clearly raise questions about any benefit at all from organics.

In the noise, the disclaimers by the team that prepared the report seem to have been ignored. For instance, this one: “It should be noted that this conclusion relates to the evidence base currently available on the nutrient content of foodstuffs, which contains limitations in the design and in the comparability of studies.” The report also states: “This review does not address contaminant content (such as herbicide, pesticide and fungicide residues) of organically and conventionally produced foodstuffs, or the environmental impacts of organic and conventional agricultural practices.”

Like any good research report, it admits that “it is important to recognise the potential limitations of the review process”. And the final line in the Conclusion section of the detailed report says: “Examination of this scattered evidence indicates a need for further high-quality research in this field.”

As a reader or TV viewer, how many of us would be motivated to go to the original source and read these disclaimers as well?

Promoters of organic farming, such as Britain’s Soil Association, of course, have trashed the study saying that it is too narrow having excluded most of the available research papers since they did not meet the review standards, and that it ignored the biggest long-term health impact – that of pesticides and other chemicals used in inorganic produce.

Their opponents, in turn have trashed defendants of organic farming by calling them unscientific and narrow-minded in their own right. They point out that high-output inorganic farming is far more useful to serving the exploding human population, than low-intensity organic farming.

One of the readers of the British newspaper Daily Mail was emphatic that she didn’t “eat organic stuff to get extra nutrition”, but was “happy to pay more to be free from additives”. Certainly that is a significant benefit that motivates most people who are well into organic products. In an unusual open letter, the Chief Executive of the Food Standards Agency clarified: “Pesticides were specifically excluded from the scope of this work. This is because our position on the safety of pesticides is already clear: pesticides are rigorously assessed and their residues are closely monitored. Because of this the use of pesticides in either organic or conventional food production does not pose an unacceptable risk to human health and helps to ensure a plentiful supply of food all year round.”

The other motivation for organics is our attitude towards the environment, which can either benefit us over the longer term or, if we are irresponsible, it could accumulate toxins which only show their impact over decades and generations. But, let’s be honest, are most consumers likely to buy products because of some distant benefit to the environment, or products that benefit themselves immediately?

Possibly the answer lies in the organic sector cleaning up its message.

Are consumers any wiser after this study and the debate? I’m not sure. For now, my take on this issue remains: be aware and make up your own mind about what you want to ingest, because this debate isn’t over yet.

Wi-Fi in Coffee Shops – win-win or win-lose?

At the end of 2006, in an article about market segmentation, I’d proposed a customer segment called “Cafe Workers” who look at coffee-shops as inexpensive real-estate to work out of.  These include professionals, start-up entrepreneurs, small businesspeople and travellers into a city. (Click here to open the PDF file of the article “Slicing the Market“.)

But now, amidst the recession, apparently it is one positioning that some coffee shops don’t want to buy into. The Wall Street Journal reports that there is a backlash from many coffee shops towards customers who enjoy the use of free wi-fi and spend hours occupying tables that should be turning over more. (No More Perks: Coffee Shops Pull the Plug on Laptop Users). Many of the comments on the article are sympathetic towards the cafe owners, calling such customers “moochers”.

While the dismay of cafe owners over customers who abuse the facilities is understandable, could they be doing themselves harm by actively discouraging laptop use? Wi-fi is just one of the sticky aspects of a ‘hanging-around’ culture that the cafes have encouraged in the first place as part of their business model.

By and large, wi-fi enabled cafes around the world are more expensive than the ones which are not. Wi-fi goes along with the more premium positioning, and they should be able to balance the space premium lost on long-term wi-fi users with the grab-and-go customers who are paying higher prices without using the facilities.

That said, in specific cafes or at specific times of day or days of the week when there is a bottleneck, they should be able to limit the length of the IP-lease.

All it takes is a bit of thought and a tiny application of technology, not total disruption of the business model.

Retailers discover potential in the ‘back-to-school’ market

By Gouri Shah

MINT (Exclusive Partner The Wall Street Journal)

Mumbai, Aug 3, 2009

These last few weeks have been hectic for freelance beautician Riddhi Kasurde. Her seven-year old son, Hrishikesh, was getting ready to head back to school—and juggling her work, his classes and a long shopping list had the 30-year-old mother in a tizzy.

Kasurde’s shopping list went beyond the usual school supplies: there was a Rs250 school bag that “looks like one that college students use.” Rs2,000 worth of fabric for his school uniform, Rs500 for the tricycle which was his reward for scoring well in his class I exams and a Rs550 computer game he could use to hone his English and math skills. “I would like to give him all the opportunities that we didn’t have,” she says.

Hrishikesh is the first child in the Kasurde family to go to an English-medium school.

The weeks, between the carefree joys of holidays and stressful months of rote learning, are emerging as a sweet spot for Indian retailers and technology product companies that are tapping the back-to-school market.

Gone are the days of basic satchels, canvas shoes and hand-me-down clothes from elder siblings. Children are now showered with everything from fancy school bags and sports shoes to iPods and gaming consoles.

“Typically after any major exam, parents promise their children that they will buy them something as a reward for a good performance. So, it could be anything from an iPod to a mobile phone to gaming console,” says Ajit Joshi, managing director and chief executive officer of Infiniti Retail Ltd, which runs the electronics and appliance retail chain Croma. “Who wouldn’t jump at the golden opportunity to attract new customers?” he asks.

The burst of back-to-school shopping is not yet of Diwali proportions, but it has enough potential to become one of the highlights of the Indian retailing calendar.

It is already large enough to bring a gleam into many a retailing eye.

Oyo, the brand of children’s clothing, offered hefty discounts this year, along with a chance to win a fully paid family vacation to Singapore. Retailer Croma launched a 24-page Back to School catalogue and ran promotions that bundled products together. It also tied up exclusive deals with brands such as computer maker Acer, to ensure that its new product range was only available at Croma for that time period. Bata launched two-three new types of sporty school shoes this year and also threw in free goodies from Ben Ten, a popular character on Cartoon Network, with every back-to-school purchase.

Office supplies chain store Staples registered high double-digit growth, “over 50%”, on its back-to-school promotions. “One thing is for sure. Indians will spend on their kids, no matter what. But at the same time they are looking for value and are willing to try out innovative products,” says a Staples spokesperson who did not want to be identified, citing company policy.

Other companies, too, bear this out.

“Our sales during the April-June period accounts for almost 40% of our annual revenue,” says Ashim Mathur, national marketing manager, entertainment and devices division, Microsoft India. This means the company sells almost an equal number of X-Box gaming consoles during this time as it does during the festive season in India, considered the peak season for several brands.

Acer India Pvt. Ltd has focused on educational clusters—or cities such as Pune with a high density of educational institutes—to drive sales. “An increasing number of professional courses require students to own their own computers, so what happens is that they invite bids from brands such as Acer, beat down the price and buy in bulk. The cost of each individual laptop is then worked into the student’s fee,” says S. Rajendran, chief marketing officer, Acer India. This season starts in April, peaks in July-August and ends by October. According to estimates by Rajendran, the total market is worth around Rs500-650 crore, of which 90% accounts for individual purchases.

“At this point, retailers will jump on every opportunity there is to shift merchandise and drive sales. Five-ten years ago, June-August was considered the low season for retail, so in that sense back-to-school sales are a useful tool to drive customer impact and cut across the clutter,” says Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy firm.

It is hard to estimate how large the market is. Data from market research firm Indicus Analytics suggests that around 700,000 students in the top five metros come from families with enough purchasing power to interest retailers and companies.

Average spending of around Rs3,000—as was the case with the Kasurdes—would mean an estimated back-to-school market of over Rs200 crore. But throw in the new gaming consoles and digital music players, and the numbers would start looking even more impressive.