Devangshu Dutta
September 14, 2008
You’ve walked into your neighbourhood supermarket with your shopping list. The particular detergent that your spouse had put on the list isn’t on the shelf and the sales associate is not sure whether they have any in stock (maybe you get the standard line: “whatever we have in stock is already on the shelf”).
You’ve forgotten your mobile at home so you can’t call to check whether a substitute brand or different pack size will suffice, so you walk out with the item still on your list.
And into the local kirana store. The brand and pack size that you were looking for isn’t there either, but the shop-owner says that he will have it in stock sometime during the next 3-4 hours, and can send it over to your home. Or, he suggests, you could also buy an alternative brand (or pack size). At the end of that conversation you would have very likely bought the alternative offered, or would have agreed to home-delivery of the item you were seeking. (A study by the Institute of Grocery Distribution in the UK in 2006 discovered that, in case of non-availability, 40% of the customers end up buying the same product somewhere else.)
Some people would be cheering, “Yea, more power to the underdog small retailer”. But the point of this example is not the victory of the local, independent kirana over the chain-store. The point I am illustrating is that the difference in the business models and formats of these two competitors, and the impact of on-shelf availability.
Modern convenience stores and supermarkets, and the format that is being largely adopted by the chain-stores in India, is the western model of self-service. Compared to the kirana-model of “being served”, modern retailers depend on product being available and visible on the shelf. Very clearly, visibility and availability drive sales.
And in the current environment, retailers are or should be looking at squeezing more sales out of their existing stores (see the earlier column – “Priority #1: Same Store Growth”).
On-Shelf Availability is driven by a number of factors – some are within the retailer’s control, while others are not.
On the vendor side, availability is driven by a number of factors. In India, vendors themselves can be small to mid-sized companies, with distribution systems that are poor in terms of information linkages. The supply chain may comprise of several levels of stockists, distributors, and wholesalers, with an inherent and in-built delay in information exchange. In this situation there is always a phase difference between demand (non-availability) and supply.
Other than the phase-difference, the order-fill rates at the vendor’s end can also be poor due to supply constraints. The quantity available in stock for a certain product at a regional or state level can frequently be lower than the requirement, and in such cases the manager, or the distributor, can end up allocating the available stocks.
These causes can lead to availability that is as low as 60-65% on average, even among the popular products. “Good” vendors can have supply rates of 85-90%, but even in these there is a high variance.
However, the interesting thing is that a very high proportion of stock-outs (around 75% according to the 2006 IGD study) can be attributed to problems within the individual store. These include poor in-store disciplines, lack of awareness of the impact of low availability, too much work for the sales associates or the lack of motivation.
(For instance, 35% of sales executives in British study did not plan to pursue retail selling as a long-term career. In a study carried out by Third Eyesight a few months ago, with retail was being seen as a “growth industry”, that figure in India was about 55% and was closely correlated with the frontline attrition rates being witnessed by Indian retailers.)
One of the critical factors in how on-shelf availability is handled is the very different perception various people have of its importance. The store manager or a sales executive may directly correlate lack of availability with lost sales (and lost incentives), while a category merchant may not find it as critical since he or she may be able to balance the margins through the mix of product and the aggregation of sales across stores. The first critical element to be fixed is to have a common view on the importance of availability communicated across the retail organisation.
The second important element is highlighting the visibility of stock within the store – isn’t it surprising that despite the small size of back-office space, how stock that is showing “on the system” can be so invisible?! The product may be stacked in inaccessible boxes, or may have just been kept in the wrong location.
On busy days and during busy hours, merchandise can arrive at the store and simply “disappear” off the radar for a few hours, since the staff may not have had the time to take the stock into the store’s inventory. It sits in the shipping boxes waiting for stock intake, which may well happen after the peak selling hours have passed.
Sometimes the availability issue comes up because the product is very popular, and it becomes virtually impossible to maintain a high availability during the critical selling windows – a typical example may be health and beauty products or popular snacks, where the aggregate availability may be high during the week, but abysmally low during the peaks. A key feature of these categories is also the large number of SKUs, which can be cause for substitutions in the supply chain, and therefore poor availability of a particular SKU.
On the other hand, fresh produce and dairy may show poor availability if daily reports are configured for end-of-day rather than beginning-of-day stock-checks, since fresh vegetables, fruit, fish and dairy may actually be taken into the store during the early hours in the morning.
Many people believe that the best way to tackle these issues is through information technology.
However, IT is only a tool that can enable a business if the processes are robust and people are attuned to a common objective.
The correct sequence, as for many other aspects of business, is to tackle the people issue first. Awareness and common understand can only happen through consistent communication and widespread training. (The 2007 study by IGD (UK) on this issue highlighted the fact that 61% of the sales associates had not received any formal training, while 23% had no communication about on-shelf availability.)
This communication needs to be not just within the organisation, but across the retailer and vendor relationship. This process is, unfortunately, not enabled by the very tactical and adversarial nature of the buyer-supplier relationship. Retail buyers don’t easily share point-of-sale information with vendors due to a variety of real and perceived barriers – confidentiality, power-issues, competitive pressures.
Fortunately, although it is still early days, chain-stores and vendors in India are already beginning to work together. Very often the exercise is actually being led by the larger, multi-national vendors who have been exposed to the concepts of Efficient Consumer Response (ECR) and Collaborative Planning, Forecasting & Replenishment (CPFR) – concepts that have been around for about 15 years.
However, these frameworks require a significant amount of joint business planning as well as point-of-sale visibility being provided to the vendor, and both of those aspects are still weak in the Indian modern retail ecosystem. Such degree of high transparency will only come in with further maturation of the retail businesses and the vendor relationships. Some of the modern retailers are already able to see consistent availability of over 90% through these efforts, and as word spreads, hopefully so will the practice.
Creating a culture of transparency and communicating the desired levels of availability is the foundation on which robust processes can be built for checking and reporting availability, which then can be enabled through technology. The correct sequence, therefore, is People-Process-Technology, and not the other way round.
In closing, let me show the other side of the coin (after all, this column is titled “Devil’s Advocate”!). The additional sales from better availability are very seductive, and can be very profitable, but up to a point. After a certain level, the law of diminishing returns takes over as the cost of maintaining high availability exceeds the additional margin. Particularly in perishables the possibility of product expiry and spoilage is quite high. Of course, during festive occasions there may be no option but to ensure high availability of perishables such as gift packs of snacks and packaged foods, even at the risk of spoilage or expiry.
Having said that, on the whole, modern retailers in India and their vendors do need to focus on on-shelf availability as a key area for increasing the productivity of the existing stores. For many stores, there is significant room an increase in sales. With real estate and operating overheads remaining high, every extra rupee of sales squeezed out of the current square footage will contribute directly to the bottom-line, a fact that Indian retailers cannot ignore today.
Devangshu Dutta
September 12, 2008
You can probably tell that I’ve held the view for some time now that the retail sector needs to pause for breath, and evaluate its growth strategies on some very fundamental parameters. (“Disclaimer”: Having invested 2 decades in the retail sector, I have an inbuilt bias towards the entrepreneurial and organic nature of retail, which is probably evident!)
As I was recently writing an article with the theme of “realism” echoing strongly, I came across this statement by Kishore Biyani of Future Group on 27 August: “I was an eternal optimist; now I have become a realist.” (Bringing Back Retail Realism, from MINT).
Now, with the India Retail Forum coming up next week, it’s interesting to read a mailer from the Retailers Association of India, with this wonderful quote from B. S. Nagesh, of Shopper’s Stop: “We have opened store after store and are in the process of opening many more – 100 … 500 … 1,000 … 5,000 and may be many more. Let us pause for a while for a reality check … Are our customers happy? Are our employees happy? Are our vendors happy? Are our stakeholders happy? Are we happy? …. The answer for all these questions ought to be ‘YES’ but in reality it is ‘NO’ for some. Where we have gone wrong? What do we have to do?… It’s time to share, reveal, reconcile and find ways to amend … And to open up, debate, consolidate and collaborate thoughts before we take the next step.”
I think we may finally get things back on track, with two of the most prominent leaders of the business asking the sector to reconsider and review.
When I wrote an article titled “The Myth and Reality of the Retail Revolution” 2-years ago (in August 2006), some friends looked at the title and said I was being pessimistic. I disagreed, and said that I was being realistic, especially since I ended it by saying that the real retail boom had not yet happened, and we had only scratched the surface. Organic growth will get us there – crash and burn won’t. (To judge for yourself open that article as a PDF – click here.)
What do you think?
admin
September 7, 2008
Do You See Yourself Fitting In?
The Indian retail market is set to be worth anything between US$ 270-300 bn, as per global consultants AT Kearney. The projected growth rate for the organised sector is 35-40% per annum for the next five years at least. “Overall retail is growing at 8-9% but the organised sector is growing much faster,” says Principal, AT Kearney, Debashish Mukerjee. Further, organised retailing is growing at 50-55% in small towns compared to 30% in large cities. Finance Minister P Chidambaram also recently put the figure on the government’s estimated figures for retail in the country at a staggering $ 300 bn.
The apparel retail market is about 6 % of the overall market – valued at $ 16-17 bn and growing at around 10-12% per annum. Also, apparel has among the highest percentage of organised retail at nearly 14%, which is second only to footwear, which has around 35% of organised retail. The question whether retail is a good option for garment exporters at this juncture is not as simple as it seems and many would nod in the affirmative, but the road is long and tedious, and requires among other things, the right product, a good location and more importantly, deep pockets, to make even a dent into the retail market. In the last issue, some of the exporters we spoke to, shared their experiences about the efforts they had made while venturing into retail. In this issue, we offer a few key directions from retail consultants and sector experts.
With a huge talent pool and a potentially large domestic market, the prospects for retail’s expansion seem buoyant. India has a population of 1.2 billion of which over 50% are said to be under the age of 25 and constitute 29% of the country’s urban populace. “The number of people who are going to have an income of Rs 2 lakh + per annum in India may double in the next two years, and these are potential apparel buyers. So, it would be right to presume that the expenditure on apparel will increase,” affirms Mukherjee.
Ernst & Young estimates that retail’s expansion in India is being driven by greater economic growth in the country and its changing demographics; the upsurge in urbanisation and greater credit availability in terms of retail loans for investments in new projects and ventures. “Investor interest in the country is on the rise, and that is a sign of things to come,” observes Manager, Retail and Consumer Products Sector, Ernst & Young, India, Soumya Pal Choudhuri.
These investments have translated into hectic activity for setting up retail outlets and businesses in recent times. “The commercial property market has been growing at 30% since 2000 and there is a demand for 200 million sq ft of commercial space by the year 2010. Retail rentals have gone up by 70% in the last one year and the opening up of retail for FDI has further pushed up prices,” says an industry watcher. He adds that nearly 340 new shopping malls are expected to come into operation by 2008 against 105 now, in Mumbai, Delhi, Bangalore and their suburbs, and that nearly 725 malls are being planned all over India. These figures further accentuate the potential for a retail blitzkrieg in the country.
Existing indigenous retail giants, Pantaloon and Shoppers’ Stop are focusing on re-formatting their business. International players are also looking to capitalise and leave their imprints on the Indian landscape. US-based company Wal-Mart has already tied up with the Bharti Group and is establishing its position in the country. The Bharti Group is expected to invest $ 2.5 bn by the year 2015 to open a chain of hypermarkets, supermarkets and convenience stores across the country. And, the Dubai-based Landmark Group is revitalizing and expanding its operations with its Max Retail Lifestyle stores, which are targeted to touch 100 in number by 2011.
“Activity is high in the top 12-15 cities in the country and in some of the mini metros but the market is stirring in smaller cities as well,” says Devangshu Dutta, CEO, Third Eyesight, a consultancy firm focused on retail and the consumer products sectors. Dutta notes that mid-to-high level brands are focusing on value and in big cities while smaller entrants have experimented with volumes in smaller cities, where they have tried to convert the rural buyer to shift from local tailored clothing to ready-to-wear. “Demand is growing substantially in these small cities and towns for apparel and particularly, in the ready-to-wear segment,” he points out.
Dutta believes that the many segments of apparel retail are growing at different rates altogether. “Some segments are growing at 25-30%. Yet others like ladies western wear could be growing at 50-70% per annum and innerwear could be growing at 4-5%,” he says. “But if we take the size of the apparel retail market at $ 25 bn today and say that it is growing at 10-15%, I see it touching $ 28 bn by 2008,” he adds.
To him, the growth of retail is very organic – adding one customer and one store at a time. “Retail is not only driven by financial power; the venture has to be continuously relevant to the customer. There really is no one template that you can follow as a retail business model or strategy,” he asserts.
Dutta is quick to point out that to enter the retail hemisphere, exporters must maintain a holistic approach to the venture. “They must take operational lessons to make a successful foray into retail rather than go for strategic ones,” he says. “I may even compare retail to the hospitality sector where the quality of service and the product offered is the discerning factor for success,” he adds. This could mean taking a close look at product segments, zeroing-in on the targeted clientele, selecting a network of perfect locations and deciding their marketing techniques.
The idea, therefore, is to find your niche and then make a well-heeled entry into that area. “There are primarily 3-4 core layers where you can fit in,” says Choudhuri. The super premium segment is limited to stores in the top 3-4 metros. It has a select loyal clientele and Choudhuri believes that there is tremendous growth in this segment as it has a skilled work force, and high-level brand recognition and protection. And, with luxury malls coming up, one will see players having ‘top class’ products roll out some really high-end offerings.
Then, there is the premium segment, which currently has international brands like Levi’s and Tommy Hilfiger. “This segment will grow as it is already witnessing a growth in organised retail with the number of malls growing by the day and the ever-increasing footfalls, which are healthy indicators. Players in this segment will partner aggressively with their Indian collaborators as a part of their strategies,” he adds.
“The trends as I see them,” says Mukherjee, “are large retailers launching private labels and their own brands and selling high-end stuff.” For example, Shopper’s Stop selling an Arrow shirt where its margin could be 10% vis-à-vis selling its own shirt at a margin of 25%. Therefore, a good retail strategy would be for a player to launch a private label of good quality, offering a value-for-money proposition in terms of the product. “A private label being sold instead of a branded shirt for a little less may do even better,” he suggests. Garment exporters could see retail growth in this segment, as large retailers will be looking out for quality manufacturers.
Consultants also have some suggestions for the sector and a note of caution to new entrants. “The Indian textile and apparel industry is the cornerstone of the Indian economy,” says Choudhuri. “But it has to re-organise itself, achieve the desired levels of scale, become competitive on cost, reach higher production levels, become technology savvy, create big companies and become exclusive suppliers to its clients. Apparel players should anticipate the pressures and challenges and prepare measures. Production and design systems, and integration and corporate governance are also needed to attract big investments. It is only when all these factors converge will the results start showing,” he concludes.
Devangshu Dutta
August 21, 2008
August is the month when India celebrates gaining its independence in 1947.
So it is quite apt to think about the implications the word “independent” has in the world of grocery retailing as well.
India’s food and grocery retail sector (as most of the other product sectors) is full of traditional “mom-and-pop” operations. Estimates of their share of the market vary from 97% to 99.5% of the total food and grocery sales – but it is given that “independent” retailers rule the roost, and the estimates vary only in the degree of predominance.
The word “independent” in this context differentiates an entrepreneur-run stand-alone operation from a chain store, and encompasses all the kiranawalas and corner shops – traditional, modernizing, as well as the best-of-breed. The business owner-manager of these operations is solely responsible for merchandising, buying, staffing & HR, finance and the rest of it. If he works well, he makes a decent living and helps others to make a living as well. If he doesn’t work well, others may still make a living but he will most likely just scrape by.
In many ways, of course, the word “independent” is related to “freedom”. The phrase “independent retailer” also conjures up a picture of overall economic freedom, of self-ownership of one’s business and economic destiny.
There is freedom from an externally imposed operating framework, freedom in selection of products, freedom in pricing, freedom to service local customers for the store in the most appropriate and locally-relevant way, freedom to manage the cash-flows as the owner-manager wishes to, and so on.
This picture obviously is based on the premise that the independence that is assumed is actually available, as it would be if the market remains hugely fragmented and the supply base also becomes fragmented with many suppliers and brands fighting out for their share of the pie.
Clearly, to anyone who is actually involved in the retail sector that is a huge assumption.
Yes, the supply base is certainly becoming more diverse than earlier as new brands get launched in the market and battle for shelf-space. These brands include not just start-ups or mid-sized companies, but also large companies who are well-equipped to deal with the large incumbents on their own terms. This is surely a good thing for the independent retailer, as it provides him more choice and makes his shelf-space more valuable.
However, there is a quantum difference in the sophistication in organisation, information availability and financial capability between a single-location independent retailer, and even a mid-sized branded supplier, and the balance of power is actually more fragile than it seems. As a supplier grows, it builds up a differentiated position and a distinctive branding and becomes less easily replaceable, while each independent retailer becomes more and more generic, and therefore replaceable. The major differentiating or sustaining factor for most such retailers is their physical location, whose desirability and marketability is not as much within their own control.
When you add large modern retailers into the mix, the economic freedom of the independent looks even more fragile.
Some observers would have us believe that in India modern retailers have little or no impact on the long-term health of independent retailers. This is quite contrary to the ample evidence available from the modernization of retail over several decades in other markets around the world. (Should we chant the old hymn, “But India is different”?)
The fact is that modern retailers don’t suddenly lead to a boom in consumption of food and FMCG products. While there may be some increment due to greater supply and better retail techniques, a new store will invariably take business from existing retail channels. After all, given a choice of a wider variety, a better shopping environment, similar or better products, and similar or better pricing, why would consumers not shift some or all of their spending to a modern retail store?
This, then, brings us to the (sensitive) question – what would happen to the independent retailers in such a circumstance?
Of course, we can take heart from the fact that independent retailers continue to exist even in highly-consolidated and more “developed” markets, and imagine that such a thing will happen in India as well.
Let’s not forget that in some developed and consolidated markets, independents may be supported by local laws and regulations (such as urban planning constraints), while in other places they are supported by the community which may not just show their support by shopping at the mom-and-pop store but also by actively blocking the entry of large retailers and chain stores.
In India the picture is a bit more complex and nuanced.
One the one hand, the consumer is apparently quite happy to enjoy better shopping environments, the convenience of all-under-one-roof. And, while estimates of “wastage” in the food supply chain vary widely, it is widely acknowledged that modern retailers can have a significant positive impact on product quality, value addition, and logistical infrastructure. That is surely a good thing for the country when it is vital to explore every bit of efficiency in food production and its delivery to the population.
On the other hand, regulatory or activist blocks have started to appear already, very early in the growth cycle of modern food and grocery retailing. A few state governments have even taken to banning or at least restricting the growth of corporate-promoted retail chains. Traders’ associations in many markets are quite clear in their perception of the threat from modern retailers to the independent’s normal existence. They express the wish to retain a livelihood threatened by corporate-backed retail operations that are perceived to be competing unfairly with their deeper pockets.
One of the core issues here is the sense of ownership, of being one’s own boss, the dignity offered by being an entrepreneur. Think about what we said earlier about the sense of freedom. Is there a way to retain, or even improve upon that?
The answer may lie in franchising. This may be the bridge between the two sides, and the vehicle for a “co-opted” growth of both.
In a fragmented market like India, it will certainly be a while before corporate retailers can understand and service diverse localities as well as the independents can, or have operations that are as efficient as a kirana-store. As long as independents evolve their own business to offer consumers better service, keep their operating expenses low, manage their inventory closely and retain the energy to run their family business, they will thrive. Imagine if that management capability, sense of ownership and drive became available to a corporate retailer.
At the same time, surely the sourcing scale and marketing muscle that are available to retail chains could be useful to an independent retailer, and help him build more business.
The fundamental successful structure for franchising is identical the world over. The franchiser is an entrepreneur or a company with a product or service that has a market beyond what he can immediately service. The franchisee is an entrepreneur who wants to have the pleasure and privilege of being a business owner, but would also like to benefit from being part of an organisation.
For a win-win, both franchiser and franchisee have to bring something to the table, they both have obligations and responsibilities and both have rights. The framework of the franchise relationship has to be clear in defining these, and yet allow operational flexibility. The partners must also be able to break-away if things don’t shape up the way they have planned, without being too restrictive of each other after the break-up.
The Indian market is not new to franchising. Lifestyle products such as apparel, footwear and others have franchise networks that date back to the 1960s. However, food retail has only seen sporadic attempts at franchising (many of them unsuccessful).
Some of the problems can be tackled by improving the operational and system rigour, while others (such as how do you manage fresh produce consistently at franchise outlets) may be insurmountable in the short term and will require some constraints to be built into the business model.
I believe food and grocery retailers need to explore the option of franchising for faster and possibly more efficient growth, and for encouraging a spirit of partnership in the development of the grocery retail sector. Inclusive growth is a trite phrase, but very true in this context.
India has been and will remain a land of entrepreneurs, and companies would be wise to co-opt that energy.
Who knows – you may even be giving birth to a retail giant. After all, Sam Walton also began his business as a franchisee of another company.
admin
August 10, 2008
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