A lively discussion / debate took place on Retailwire.com about whether retailers were using chargebacks as justifiable penalties for poor performance by vendors or an unjustified means of generating income for the retailers.

The fact is that fees, discounts and chargebacks are becoming more common, and in private conversations – when no retail customer is within earshot – vendors will verify this. Retailers say that such chargebacks are only compensation for vendors not complying with processes that have been clearly laid down and agreed to, since non-compliance creates extra costs for the retailer, or loses the retailer margin.

But is vendor performance really becoming worse with each passing season? Or is it that difficult trading conditions or insufficient skills are making buyers take this easy road to margin?

It’s an open secret that merchandise quality and delays – the two most common causes for chargebacks – are easily overlooked when the market is hot and the product is in demand.

Chargebacks are a dangerous tool in the hands of a lazy, short-term thinking buyer who is incentivised on gross/realised margins from season to season; to him/her they are a quicker way to get to that bonus check for the season. Pragmatic vendors, for the most part, don’t want to antagonise the buyer because that risks not just business with the current retail customer, but any retailer that the buyer moves to in the future.

It’s ironic that vendors are mainly cited as “partners” when it comes to sharing the retailer’s pain. I don’t recall any retailer calling such vendor-partners up to a stage for distributing checks to share extra margin in particularly profitable years. Comments are welcome from anyone who can remember that happening; we’ll all have something inspiring to quote in industry meets, then. (And I’m really hoping some comments quoting such incidents will appear soon!)

The Retailwire discussion on this topic (with comments justifying both sides) is here – “Clothing Vendors Take a Chargeback Hit” – and the original article in Crain’s New York Business is here – “Retailer fee frenzy hits designers“.

Sapna Agarwal & Gouri Shah

Mint, Mumbai, May 18, 2010

Across Mumbai, New Delhi and Gurgaon, children’s apparel and accessories store Okaidi has been inviting customers for happy hour sales over the past week. No, the French chain hasn’t suddenly started selling drinks; it’s offering a flat 20% discount on the purchase of its usual T-shirts, chemises and other items between 10am and noon, Monday through Thursday.

The marketing mantra may sound incongruous outside a bar, but retailers from a range of sectors have started borrowing it to push sales in traditionally lean hours—betting that everyone loves discounts.

“It’s definitely a trend,” says Devangshu Dutta, chief executive of New Delhi-based retail consulting company Third Eyesight, adding that sectors such as organized retail, telecom and entertainment are adopting the strategy.

Retail analysts say that besides boosting revenues, the strategy eases seasonal and peak-time customer load and improves manpower utilization.

Fashionandyou.com, an e-commerce site that sells premium brands such as Moschino, Salvatore Ferragamo, Dolce and Gabbana, Hugo Boss and GAS at hefty discounts, last week introduced happy hours between 5pm and 8pm that let consumers win “free luxury gifts” every 15 minutes.

“We just wanted to offer our consumers some fun incentive to log on to Fashionandyou.com, but once the figures came in, we were surprised to see that the announcement had generated tremendous traction,” says Pearl Uppal, co-founder and chief executive, Fashion and You India Pvt. Ltd, which runs the website.

Uppal adds that traffic has doubled since the website announced the happy hours.

A few months ago, Cinemax India Ltd, which has 94 multiplex screens nationwide, introduced earlier-than-usual screenings of the film 3 Idiots. With 28 shows daily in some places, the first would start as early as 6am, with as much as 50% slashed off the ticket.

“My rentals and manpower costs are fixed. The only additional costs are electricity. But we managed to get a new set of audiences to walk into our theatres during those times,” says Devang Sampat, senior vice-president at Cinemax India.

The shows, which also offered free tea and biscuits, drew college students and senior citizens after their morning walks.

“It worked beautifully,” recalls Sampat, adding that the strategy has worked for other films too, pushing up audience numbers by at least 100%.

Okaidi, for instance, has registered a 200% hike in sales, says Neelu Mundra, sales manager at the Okaidi store in Mumbai’s Atria Mall. “Mornings are usually dull with hardly any walk-ins or sales,” she says, but adds that the promotion has seen sales grow three fold.

Candies, a multi-cuisine restaurant in Mumbai, offers 25% off on food between 8pm and closing time.

“Close to 15% of the day’s products are usually left unsold at the end of the day, but with discounts like this we see all our inventory sold with just 1-2% left unsold,” says manager Ashish Anton.

Dutta of Third Eyesight points out that retailer Big Bazaar offers deep discounts every Wednesday, which has traditionally been a weak day for it, while mobile service provider Bharti Airtel Ltd offers free or discounted rates during some hours to spread its load more evenly.

“It (promotions) typically also serves to attract new entry-level customers who otherwise might not have come—so if you take away the cost of customer acquisition, then these promotions become even more profitable,” says Neelesh Hundekari, principal at global consulting firm AT Kearney.

As a bonus, consumers who go for such promotions also tend to buy at full prices, helping them trade up at no extra cost, he added.

But happy hours pose some dangers as well. Managers at Okaidi are wary of letting the promotion wean away customers willing to buy at full price during peak hours between 5pm and 9pm, which are typically half of total sales.

“The objective is to increase the sale, assuming that the peak hour sales remain the same,” says Kamal Kotak, director, Major Brands India Pvt. Ltd, which manages Okaidi.

“The expectations from this offer is to see an increase in (overall) sales of 25-30%,” he said, adding that if successful, Major Brands could adopt the strategy for other brands they manage, such as Mango, Promod and Aldo.

This may be a challenge but it is not impossible, says Hundekari of AT Kearney. “People are used to different discounts at different times of the year; getting used to different times of the day is not very hard.”

Vishal Krishna
Businessworld, May 17, 2010

The outskirts of Bangalore, home to many large hypermarkets, see a lot of frontier action in retail. Recently, the Raheja Group’s hypermarket, HyperCity, opened a store in Mahadevapura, where the likes of Future Group’s Big Bazaar and the Jubilant Organosys-owned Total already enjoy a loyal clientele. But nobody was more anxious about fresh competition than the manager of More, which also has a store here.

As it turned out, “Our sales were not affected in the weekend in which the new store opened in our catchment,” says Kapil Agarwal, More’s vice-president, operations hypermarket (south), with relief. “The Mahadevapura store hopes to grow by 30 per cent this year.”

The $25-billion (Rs 1.15-lakh crore) Aditya Birla Group’s retail chain is on a quest to garner greater market share in the $350-billion (Rs 16.1- lakh crore) Indian retail market. More’s CEO Thomas Varghese says he has a strategy in place to get the company back on track. This newfound confidence comes after a three-year struggle with runaway overheads that saw More shutting down some 100 stores, in spite of which its balance sheet continues to bleed. Now, More has only 631 stores, including seven hypermarkets. To make up for the closure, More has had to scale up quickly to 3 million sq. ft of more affordable retail space.

Even as it focuses on hypermarkets and consolidates its position in the south, More is betting big on private label products that add up to 320 items or stock keeping units (SKUs). Varghese believes the company can grow only by driving private labels, something that Future Group’s Kishore Biyani has tried successfully at Big Bazaar.

Currently, market leader Pantaloon (Future Group) holds 10 per cent of the $20-billion (Rs 92,000 crore) Indian organised retail space. More expects its turnover to touch Rs 1,500 crore in 2009-10, up 30 per cent from the past year. It also hopes to break-even operationally by 2012, and is aiming to match Pantaloon’s share by 2015. It is a tall claim and tough to achieve: competition is growing and survival depends on large groups’ ability to sustain bleeding retail businesses.

Going Private

More’s private label gamble is one of the reasons why it has to be watched closely. “We are one of the largest private label players in the industry,” says Varghese. “Close to 17 per cent of our sales comes from our private label products. The share is growing by 50 per cent in the food category, and by 20 per cent in the fast-moving consumer goods (FMCG) category.”

In food items such as noodles and sauces, More’s private label sales touch 30 per cent of the sales. This is not unexpected. Globally, Tesco and Wal-Mart earn 55-60 per cent of their revenues from private labels, of which nearly 60 per cent comes from food, and only 45 per cent from FMCG. Like many large retailers, More too has its own brands such as Feasters (food category), Jaan (tea), Kitchen’s Promise (pickle) and Enriche (personal care), across 40 categories.

But industry analysts have reservations about More’s pre-emptive private label strategy. “In terms of branding, apart from quality and the category acceptance, private labels usually succeed when the retailer has managed to build brand equity at the store level,” says Sanjay Badhe, a retail consultant who has worked with the Aditya Birla Group. “More, on the other hand, is betting big (on its private label) even before establishing itself.”

In sheer numbers, More is close to Pantaloon, which has more than 50 private label categories that offer more than 350 SKUs. “The Pantaloon brands are now powerful retail brands that strengthen our lead in modern trade,” says Santosh Desai, CEO of Future Brands in Mumbai. He adds that powerful product brands also act as strong store differentiators in the long term.

Private label precedents have been established already in India. Pantaloon has the highest private label sales — close to 85 per cent in apparel and 35 per cent in food. Shoppers Stop credits 20 per cent of its turnover to private label. More hopes to achieve 30 per cent by 2012.

“We realised the potential of private labels with our project in Visakhapatnam,” says Farida K., assistant vice-president and private label head at More. The company realised that when more private labels were stacked along with FMCG brands, customers did not mind experimenting with More’s in-house brands. Now, More’s private labels account for 30 per cent of all sales in its 17 stores in Visakhapatnam.

More now works with 45 vendors through the 17 distribution centres it has created with warehouse space of 450,000 sq. ft to make timely deliveries. It also sources 25 per cent of its fresh food products directly from farmers, the rest from local mandis, and has eight farmer-linked collection centres across India for vegetables.

While Pantaloon has more than a thousand suppliers, according to Biyani, More wants private label to be its main business as it involves low supply costs, offers margins of up to 70 per cent, and forces FMCG firms to offer better terms of trade.

“Now, our strategy is not about expansion,” says Varghese. “We will add a few stores and keep shutting down unviable ones.” He wants to keep capex costs as low as Rs 1,500 per sq. ft over the next two years — the average capex for a retailer is about Rs 1,750 per sq. ft.

Analysts say More was successful in the south — 60 per cent of its stores are there, and 55 per cent of its revenues come from the region — after its acquisition of Trinethra Retail’s 160 stores, with an established supply chain and process in place. The deal cost More Rs 170 crore in early 2006. It was from Trinethra, a value retailer, that the Aditya Birla Group created the blueprint for More.

Paying For The Past

While More seems to be pulling itself out of trouble, it still has a long way to go. In mid-2006, Kumar Mangalam Birla, chairman of the Aditya Birla Group, gave Sumant Sinha, a former investment banker from the US, the charge of the group’s plans to compete with the likes of Reliance Retail. At that time, Reliance Retail had just announced its
Rs 25,000-crore plan to conquer India’s consumer market.

But when Sinha’s team suggested a strategy of rolling out only 10 branded stores in a region and offered a conservative plan on expansion, the board rubbished the strategy. “The board did not want to lag behind Reliance or Pantaloon, and it wanted to roll out 500 stores in six months,” says a source in the company. “So, the management team just signed properties at higher rates, without processes to support the stores.”

So by 2008, 730 More supermarkets were making high losses to high rentals, exorbitant staff costs and a disorganised supply chain. It nearly ended the conglomerate’s retail dream.

To make matters worse, the entire senior management of the retail chain was either asked to leave or shifted to other departments. In fact, some say the problem with the retail chain was more internal than at the store level.

More’s management and Trinethra’s CEO Pranab Barua had differences over the methods of running the business. Barua is now the member of the board and advisor to the retail chain. “We understand retail is a low-margin business,” says Varghese. “But when I took over the company, the overheads were extremely high.”

Varghese says he had little understanding of retail when he took over as the chief executive in 2008, but he had to act fast. He froze hiring, and shut down properties that had high rentals, which added up to 10 per cent of the company’s turnover.

In 2009, the company was paying a whopping Rs 731 per sq. ft of retail space as compared to Pantaloon’s Rs 573. Since then, More has renegotiated rentals for 90 per cent of its stores (see ‘It’s A Tough Business’ and ‘Repenting At Leisure’). Standard rentals are now below Rs 500 per sq. ft.

“Unless the rent is 4 per cent of the cost of sales, a retail business will not make money,” says Varghese. Usually, builders ask for 5-8 per cent of sales in a revenue-share model or charge high rent in case of lower sales, he adds.
However, a revenue-share model is not the perfect answer. Says Ajay D’Souza, head of research at Crisil, in Mumbai: “What matters is whether there is traction in going into organised retail. Only increased sales will determine if retail companies can sustain even the revenue-share model.”

Hypermarkets And More

As a sign of the times, all organised retail chains are bullish. Says Govind Shrikhande, CEO of Shoppers Stop: “Retail is coming out of the slump, and sales are on the rise.” Lower rentals and revenue-sharing models bring quicker profitability to retail chains, he says.

Retailers such as More see sense in opening hyper-format stores because of the large assortment of customers it caters to, the higher incidence of sales, and the absence of competition from kirana stores, which hit the supermarket end of modern retail.

In effect, hypermarkets allow corporate retailers higher efficiencies than neighborhood stores on equivalent square footage basis. “This happens because, for a given amount of management resource and possibly lower financial outlay, there is significantly greater sales turnover and higher margin,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy in Delhi.

By the end of this year, there will be two more hyper stores from More in Hyderabad, and there is talk of a property being signed for a possible hyper store in Chennai, taking its all-India tally of hyper stores in Mumbai, Ahmedabad and Nagpur to 10. It is expected that the new stores will cost Rs 10 crore each to build. “We want to create world-class hypermarkets,” says a confident Varghese.

The Aditya Birla board had devoted Rs 8,000 crore to its retail venture when it started out. Now, three years, Rs 2,300 crore and several setbacks later, More looks less upbeat. Its struggle for an identity is far from over.

[From BusinessWorld issue dated 17 May 2010]

REVIEW: BEATING THE COMMODITY TRAP: Richard D’Aveni (Harvard Business Press)

In his latest book, Professor Richard A. D’Aveni focusses on a topic that most businesses should be acutely concerned with: the problem of commoditization. In interviews he has accurately described commoditization as “the black plague on modern corporations” and “a deadly disease that’s spreading like crazy”.

Certainly, if one had to pick the ultimate nightmares to keep CEOs awake at night, commoditization would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the last couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. Prof. D’Aveni suggests that maintaining differentiation alone is not enough to sustain business.

A product or service becomes a commodity when it is not distinguishable from competing offerings and therefore not valued above the competition. Prof. D’Aveni views commoditization along two key attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face:

• Deterioration: In a deteriorating market, competitors present low-cost and low-benefit offerings that appeal to the mass market. This is possibly commoditization in its “purest” sense, where the customer ends up valuing the lowest price over and above any other benefit or feature. In this scenario a business can either get stuck in the commodity trap, fighting an ever downward spiral of price and cost minimisation, or could marginalize itself to a niche where it can protect its margins.
• Proliferation:  According to Professor D’Aveni, a proliferating market constantly sees the emergence of new combinations of benefits and price that serve specific segments. This is not about the business offering turning into a true commodity, but extreme differentiation and proliferation of choice do make it difficult for businesses to create a clear value statement that can be priced above competition. Professor D’Aveni describes this as “being squeezed in the middle of a pack of piranhas” which are snapping away pieces of the market.
• Escalation: This form of commoditization is possibly the most prevalent in industries that are prone to disruptive changes (such as technology, consumer electronics and communications). Simply put, extreme competition here results in more for less, as each competitor goes one-up in terms of offering more benefits for the same price, the same benefits for a lower price, or at its most extreme, higher benefits for a lower price. Prof. D’Aveni suggests that companies try and control this downward momentum.

The book suggests competitive strategies that a business could take to avoid getting caught in the commodity trap.  These strategies can be boiled down to the biological choice: fight or flight (escape). Professor D’Aveni echoes the basic warfare strategy laid out by many military and business strategists through the ages. He suggests that businesses need to gauge the opponents, choose their battles, and pick opponents against whom they can win. He also calls for pre-emptive action: where companies can, they should either change the business environment to avoid commodity battles entirely, or initiate the battle of commoditization and control its direction and momentum.

In fact, anticipation and pre-emption is the key to avoiding the commodity trap. To help with this, Prof. D’Aveni offers a relatively simple framework to analyse a current market situation in terms of a price-benefit matrix, and to identify the advance corrective actions to be taken.

The book is short and straight-forward enough to pick through a domestic flight, or to read in the back-seat during a long commute between office and home. The easy to understand framework gets the messages across quickly. In analysing the variations of commoditization, both in consumer and business oriented industries, the Professor also offers up something for everyone.

However, the book’s strengths also turn out to be among its biggest weaknesses. The book would have benefited from more depth to each of the concepts. Skipping quickly from one area to the other, in some places the book risks losing coherence of thought.

Some short books are like downhill hairpin bends on a mountain road; Prof. D’Aveni’s book is one of those. Much as you might be tempted to go fast, it’s advisable to go slow. If you speed through it, you might miss a nugget that actually makes sense to your business.

One of the other grouses I had was with the examples quoted. The predominantly US market examples reduce the book’s relevance for a global audience – the Professor presumes the reader will know the company and its context well enough to understand the lessons being discussed. In some cases the examples are incomplete and possibly even incorrect: one such is the example of Zara. The broad-brush attributes Zara’s business success to turning fashion into commodity, and ignores the fact that fashionability and desirability are a cornerstone of Zara’s offer, not the cheapest price. Others would possibly be far more accurate examples of commoditization in the context of price.

However, if you are sufficiently concerned about the possibility of being commoditized out of profitability, or being marginalised out of market share, I would suggest that you could easily overlook these flaws. The fundamental premise of the book is far too important to ignore. [Beating the Commodity Trap on Amazon]

(This review was written for Businessworld.)

Pradipta Mukherjee / Kolkata

Business Standard, April 15, 2010, 0:26 IST

Cigarettes to hotel major ITC entered the consumer products business in 2007. In three years, it has managed to corner a two per cent market share.

But ITC feels that’s no mean achievement for a late entrant. The consumer and personal care products market is highly competitive, dominated by well-entrenched brands from companies such as Hindustan Unilever (HUL), Procter and Gamble, L’Oreal India, Dabur India and Cavinkare. The lion’s share is with HUL, whose brands – Lux, Dove, Sunsilk and Clinic Plus – have about half the market.

Some analysts agree with ITC’s view. Anand Shah of Angel Broking, says it takes about five years for a brand to break even. If ITC gains 5 to 10 per cent market share in 10 years, that should start earning the company profits, Shah adds.

In absolute terms, two per cent of the personal care market is not a small share. According to Nielsen, the personal care market between March 2009 and February 2010 touched Rs 16,313 crore, which is a growth of 10 per cent over the same period in the previous year. While the men’s personal care market is estimated at Rs 1,429 crore and growing at 10 per cent, that for women is worth Rs 6,678 crore and growing at nearly 21 per cent.

ITC knows it’s a tough fight and is willing to give time. Innovation and extensive marketing are the company’s mantra to strengthen its footprint in the personal care domain.

"We intend to build on innovations to find a foothold in the already cluttered personal care market," says Sandeep Kaul, chief executive of ITC’s personal care business. The Fiama Di Wills transparent gel bathing bar is an example of product innovation which is developed with liquid crystal freezing technology that intends to combine a shower gel in a bathing bar format. ITC’s current personal-care portfolio includes soaps, shampoos and fragrances. These products are marketed under the Fiama Di Wills, Superia and Vivel brands. Superia caters to the mass consumer segment, Vivel targets the premium and Fiama the so-called super-premium market.

According to Kaul, the personal care sector holds immense appeal for ITC due to the category’s size and growth potential.

But the personal care segment in India is immensely competitive. Anand Ramanathan, analyst with KPMG, says, "In categories like soaps, the competition is quite intense. But ITC is likely to combat it with its distribution muscle. However, because of intense competition, ITC would be under margin pressure and so the personal care business for the company would not be as profitable as its other businesses."

"ITC, however, can recover from the margin pressure to some extent with the help of premium products in niche categories," Ramanathan points out.

Devangshu Dutta, chief executive of specialist management consultancy firm, Third Eyesight, says that a market leader like HUL still feels it reaches only 60 per cent of the market. So, even a new entrant like ITC can find potential in the personal care segment.

"ITC has diversified over the last 10 years as part of its strategy to expand into non-cigarette categories. The real challenge will be effective communication and marketing", Dutta adds.

Ramanujam Sridhar, CEO, Brand-Comm, says: "There is a reasonable amount of loyalty among consumers for personal care products, especially in skincare, which can pose a challenge for any new entrant, including ITC.

However, ITC enjoys a strong brand recall and its strongest qualifier is its distribution muscle, which should help the company establish itself in newer categories as well."