The Patanjali Group has created an Indian FMCG giant in a very short span of time on the back of a three-pronged strategy:
Over time, the group has also invested in improving its manufacturing and packaging infrastructure to bring itself on par with well-established competitors.
The group has clearly focussed itself on the mass market, and Patanjali Group’s products become a “go-to” for customers who are more price-sensitive than brand-loyal. This definitely creates pressure on established brands in each of the product segments where the group is now present.
In the growing market for ready-to-cook packaged food, a new entrant would struggle to create visibility and initial demand. However, with the momentum of the Patanjali brand behind it, the group’s new product — instant noodles — has a fighting chance.
I must say, though, that the immediate opportunity would have been bigger had Maggi also not just relaunched in the market. The other aspect to keep in mind is that while a lot of food and nutraceutical products resonate easily with the Patanjali brand, instant noodles seem completely counter-intuitive under this brand’s umbrella. How much consumers will support this new launch remains to be seen.
This 2-4 minute noodles story is still cooking. Keep watching the pot!
The operating environment for the fashion retailers in India is only moving towards a more challenging and competitive direction even though the market is yet to mature. The market has grown over the last two decades on account of brand proliferation and developing retail network and more recently due to new product category creations. High consumer awareness and exposure to international trends has cut the product life cycles short. Topping this up, the last 12-18 months has witnessed the growth of the online platform offering an alternate, convenient and cost effective shopping option for consumers.
It is necessary that fashion retailers manage their operations efficiently both in terms of managing a complex and responsive supply chain at the back end and delighting the customers at the store with great product offers and customer service. Adopting lean practices can help fashion retailers to achieve significant improvements in store profitability and customer satisfaction, making their retail business sustainable through a positive impact on bottom-line.
The concept of lean philosophy, pioneered by Toyota, is built on the premise that inventory hides problems. The basic tenet of this philosophy is that keeping the inventory low will highlight the problems that can be dealt with and fixed immediately instead of maintaining inventory in anticipation of any bottlenecks.
“Lean retailing” is an emerging concept and has already been adopted by retail organisations in the Western countries using technology such as barcodes, RFID (across the product value chain from raw material sourcing through production through final delivery at the retail store) and item-level inventory management and network architectures.
In an ideal scenario a retail organization would be lean at both the store and the distribution center. The organization would leverage technology such as RFID to uniquely identify the movement of its inventory accurately and use fulfillment logic as per the store’s merchandizing principle to have replenishments in tune with customer demand.
Some international retailers that have adopted lean retailing techniques include Wal-Mart, Macy’s, Bloomingdale’s, The Gap and J. C. Penny. Applying lean philosophy to fashion retail in India may sound like an avante garde concept as of now. However, there are some leading large retailers in India such as the Future Group who are early adopters and have already adopted lean practices in their retail supply chain.
An understanding of what lean retailing is and some of its principles can help in appreciating how this concept can make the apparel retail business more sustainable. Lean retailing aims to continuously eliminate “waste” from the retail value chain, waste being defined as any activity/process that is not of “value” to the customer. A fundamental principle of lean retail is to identify customers and define the “value” as those elements of products or service that the customer believes he should be paying for, not necessarily those that add value to the product. Further the value should be delivered to the customer “first-time right every time” so that waste is minimized.
Lean retailing requires simplifying the workflow design in delivering products to customer. Given that the connotation of value is customer-centric, simplifying the workflow design requires streamlining the core and associated processes so that any kind of waste is eliminated. Further pull-system drives replenishment at the stores (and the shelf) based on what customers want “just-in-time” (neither before nor after the time customer demands). This results in a value flow as pulled by the customer.
Those practising lean retail have invested in information technology that allows the stores to share sales data in real time with their suppliers. New orders for a given product maybe automatically placed with the supplier as soon as an item is scanned at the check-out counter (subject to minimum order size criteria). Smaller stores may use visual systems wherein the sales staff can gauge through the empty shelf space the products that have been sold and that need to be re-ordered.
Removing bottlenecks throughout the supply chain is another principle driving lean retail. It entails redesigning processes to eliminate activities that prevent the free flow of products to the customer. Further, lean retail requires following a culture of continuous improvement. Continuous improvement (or “Kaizen”) focuses on small improvements across the value chain that rolls up into significant improvements at an overall level. Kaizens not only can lead to elimination of wasted effort, time, materials, and motion but also focus on bringing in innovations that lead to things being done faster, better, cheaper and easier. Involvement of staff at the lowest levels is very important in Kaizen activities and that means that companies must invest in training, up-skilling their talent pool in Lean Principles.
In the context of apparel retail business, lean retail can help in improving organisational responsiveness to customer needs, the speed with which the products are delivered to them and meet their expectations as per the latest trends. Systematic application of lean principles translates in increased throughput (Sales), with lower Work in Process (Investments) and as per customer requirements of Quality, Design, Trends and Time. Improved information visibility across the chain leads to reduced instances of out of stock and excess inventory at the same time, minimising inventory control costs and reducing shrinkage. At the front-end lean retail may lead to redesigned in-store processes and systems for consistency in frontline behaviors to provide standard customer experience.
With the focus on training and involvement of the workforce, Lean principles have resulted in improving employee satisfaction without increasing labour costs that in turn positively impacts revenues and profitability. Some retailers in the West have reported reducing their store labour costs by 10-20 percent, inventory costs by 10-30 percent, and costs associated with stock outs by 20-75 percent on account of lean retail.
In addition to top-line and bottom-line impact, lean retailing by enhancing the enthusiasm and motivation of the frontline staff creates distinctive shopping experiences for customers.
Inditex, the world’s largest clothing retailer with Zara as its flagship brand, has successfully achieved supply chain excellence following lean principles. It targets fashion conscious young women and is able to spot trends as they emerge and deliver new products to stores quickly thereby establishing its position as the leading fast fashion retailer. The product development processes is based on customer pull-system. Its design team reviews the sales and inventory reports on a daily basis to identify what is selling and what is not. Additionally, regular visits to the field provide insights into the customers’ perceptions that can never be captured in the sales and inventory reports. Critical information about customer feedback is widely shared by store managers, buyers, merchandisers, designers and the production team in an open plan office at the company’s headquarters. Frequent, real time discussions and interactions within the team help them to understand the market situation and identify trends and opportunities.
Further, Zara manufactures the products in small lots and many styles are typically not repeated. Style cues for replenishments are derived from real time customer demand. At the back end, Zara holds inventory of raw materials and unfinished goods with its supply partners which may be local or offshore manufacturers. Typically, the fashion merchandise is produced at the local manufacturing base and quickly delivered while the staple low-variation range is produced offshore at cheaper costs.
Following lean retail practices implies a higher stock turn and frequent replenishments by the suppliers based on real-time sales. Building and maintaining reliable and responsive suppliers through win-win partnerships, is imperative to realize the success of lean retail implementation as high stock turns and frequent replenishments involves the commitment and involvement of the entire supplier base.
Like in any transformational effort, change management plays a critical role in reaping the benefits of lean retail. The whole philosophy requires paradigm shift in attitudes, behaviors and mind sets of those involved upstream and downstream across the value chain. Training, communicating and inspiring the front end staff is thus an important aspect in the overall success and companies need to device a compelling vision that is shared by employees across functions and hierarchy across the entire chain.
For all those who have admired the consistency and presentability of produce in western supermarkets, here’s proof that tough times really focus us on substance and force us to look beyond skin-deep beauty.
Even in fruits and vegetables.
British supermarket Sainsbury has challenged European Union guidelines that restrict the sales of fruits by certain physical standards. Sainsbury’s is questioning EU regulations that prevent selling “ugly” fruit and vegetables. Due to EU regulations such as size of cauliflower (minimum 11 cm diameter) and the shape of carrots (requirement that there should be a single root, not multiple), Sainsbury estimates that up to one-fifth of what is produced in British farms cannot be sold in the supermarket. According to Sainsbury’s estimate, not following these regulations can help to reduce prices by up to 40%, and reduce wastage by up to 20%. The retailer is also trying to drum up customer support by running an online poll (94% responses were in favour of Sainsbury’s move, at the time this column was being written).
So less beauty could mean more veggies in the supermarket, and more money in everyone’s pocket including, hopefully, the farmer.
And this may also vindicate anyone who has complained that the beautiful veggies and fruits in western supermarkets taste inferior to their “ugly” counterparts sold on Asian hand-carts. Give us more substance and less style, any day.
Let’s look at some other substantial issues that merchants should consider.
Remember “I can’t get no satisfaction”? That’s what Mick Jagger and his mates in the Rolling Stones hit the world in the face with in 1965, allegedly in response to the rampant commercialism they had seen in the US.
After 43 years – at least judging by the modern supermarket shelves – apparently we still ain’t getting no satisfaction. In fact, the array of choice tends towards “overload”.
A typical developed country supermarket is estimated to carry over 40,000 SKU’s. Can you think of 40,000 types of items (or even 10,000) that you would need from the supermarket for your home?
So here’s the result. During my travels, if I’m in a store that is unfamiliar I could spend over an hour wheeling a trolley around before reaching the checkout. The first 5-10 minutes are focussed on figuring out the aisles based on my list. The next 10 minutes are spent picking what is actually on my list. And the rest of the time before the checkout is usually spent browsing through the thousands of SKU’s and picking stuff that we never knew we needed when the family made the shopping list.
Now, the guys who run the supermarkets are generally a smart bunch – they’ve figured that the more options you put in front of consumers, the more they buy. My cash receipts are proof of that. But, as American professor and author Barry Schwartz (“The Paradox of Choice”) says, the point where the choice becomes counter-productive is already well-past in developed markets.
With such overwhelming choice, consumers get into analysis-paralysis. And even after they finally purchase something out of the enormous range, you get shades of post-purchase dissonance. Only, in this case the dissonance, the dissatisfaction is not related to a bad product, but: “What if there I had made another choice? What if there was a better product than this? What if there was something available for less?”
During these times, it is pertinent to also put this in the context of business costs. There is surely a cost of providing that humongous choice in supermarkets. Have we considered what the saving could be, if the variety was reduced, if the product range was consolidated?
Consider the time (and therefore cost) spent on product mix and pricing decisions – surely merchandising teams have to be larger if you have a larger product mix, since each person can only handle a finite workload. Consider the cost of logistics of handling a widely diversified range. Consider the efficiencies lost in diverse production mix. So, does the consumer really need, really even want all that choice?
Retailers like the German chain Aldi raise precisely those questions. Aldi sells about 1,100 SKUs compared to the usual 40,000. And it claims that the typical shopping basket in Aldi’s UK stores is 25% less than competing supermarkets.
Indian retailers, of course, are possibly yet to reach that pain threshold of choice. There are possibly some potentially useful choices that are still missing. But even here, it is well worth taking a hard look at the product offering. With availability levels that can dip as low as 50-60%, it is probably worth asking – what if we dropped XYZ product from our range? Would it really hurt our sales or even our image; or would it help us to focus better on the products that really matter?
If we took our attention away from building such false choices, could the business become more profitable and therefore more sustainable?
The US and European markets are often the source of many a management thought and business model related to consumer products and retail, and of “best practices”.
So, in closing, I should share this question someone asked me recently: “when do you think consumer spending will bounce back in the US?” My first response was, “If only I had a crystal ball”. But the next thought in my mind was what if US consumers actually came to a decision that they had “enough”? What if their excessive consumption was no longer the role model for consumers in emerging economies? What if, instead, the frugal consumers of India and China became the global role model?
What would your business model look like then? Would your corporate be more socially responsible? And would it have a better chance of lasting longer?
For those who are interested in taking this inquiry even further, I can recommend John Naish (“Enough: Breaking Free from the World of More”, 2008), John Lane, Satish Kumar, M. K. Gandhi, Alan Durning (“How Much is Enough?”), or any number of ancient Indian, Chinese, Greek or Roman schools of thought, many of them pigeonholed into “religious” or spiritual categories.
You might also like this video of a talk by Barry Schwartz on Ted.com (below).
Do please share the results of your inquiry with us, too.
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.
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