DEFINITION AND SCOPE OF RETAILING
The word ‘retail’ is derived from the French word ‘retailer’ meaning ‘to cut a piece off’ or ‘to break bulk’. In simple terms, it implies a first-hand transaction with the customer.Retailing involves a direct interface with the customer and the coordination of business activities from end to end – right from the concept or design stage of a product or offering, to its delivery and post-delivery service to the customer. The industry has contributed to the economic growth of many countries and is undoubtedly one of the fastest changing and dynamic industries in the world today.
Retailing and the Marketing Mix
Retailing forms an integral part of the marketing mix and includes elements like product, place, price, people, presentation and promotion. Place relates to the distribution and availability of products in various locations. Customers are first introduced to the product at the retail store. Organizations sell their products and services through these retail outlets and get feedback on the performance of their products and customers’ expectations about them. Retail stores serve as communication hubs for customers. Commonly known as the Point of Sale (POS)’ or the Point of Purchase (POP), retail stores transmit information to the customers through advertisements and displays. Hence, the role of retailing in the marketing mix is very significant.
GLOBAL OVERVIEW OF RETAILING
With total sales of US$ 6.6 trillion, retailing is the world’s largest private industry, ahead of finance (US$ 5.1 trillion) and engineering (US$ 3.2 trillion). Some of the world’s largest companies are in this sector: over 50 Fortune 500 companies and around 25 of the Asian Top 200 firms are retailers. Wal-Mart, the world’s second largest retailer, has a turnover of US$ 260 billion, almost one-third India’s GDP. As many as 10% of the world’s billionaires are retailers. The industry accounts for over 8% of GDP in western countries, and is one of the largest employers. According to the U.S. Department of Labor, more than 22 million Americans are employed in the retailing industry in over 2 million retail stores.
KEY DRIVERS OF RETAILING IN INDIA
In the pre-liberalization supply-led market, the power rested clearly with the manufacturers. In today’s demand-led market, it’s the consumer who calls the shots. Over the last decade, there has been a significant evolution in the Indian consumer, mainly due to the liberalization of the consumer goods industry that was initiated in the mid-eighties and accelerated through the nineties, combined with a growing consumerism driven by the media, new opportunities and increasing wealth. Although this change is most noticeable in the metros, it has affected consumers in smaller towns as well. Many retail organizations have customer relationship management (CRM) programmers that help find out about their customers’ purchase patterns. This also enables them to design a comprehensive benefit package for them. Retail organizations like Shoppers’ Stop have used customer loyalty programmers with success, increasing their active base of consumers and delivering innovative benefit plans for them. They also focus on getting a larger share of sales from the loyal base of consumers.
Recent Format Developments
New retail formats have begun to supersede conventional ones. Independent big-box multi-brand department stores have started selling footwear as a category, especially in metros and cities. Malls are another new shopping format that is growing rapidly in the metros. Many upcoming footwear retailers are obtaining space inside the mails as mall partners to take advantage of the ready footfalls available. For the existing independent Bobcat stores it is expensive now to run campaigns and promotions to attain the required footfalls and expected conversion.
Merchandise Presentation and Visual Merchandising.
Bobcat pioneered the concept of show window displays in India with a style that was unique to the company. It was professionally managed, with an exclusive team handling the motif and the design. Every moth the direction to decorate the show windows were given by a mailer prepared by special decorators. Sales personnel in each store were trained to be window decorators too. Recently, these windows had to be done away with because the company thought that they should follow the contemporary practice of free-access retailing, where all merchandise pairs are displayed in open shelves to enable customers to help themselves. Remember, in India footwear is always tried on a footstool and bought after considerable service extended by the sales person personally. Free-access retailing may work when there is adequate space inside a store to move around. The effect of such ‘pigeon-hole’ free access is that they give an impression that they are Bobcat’s R-Pair outlets.
STORE DESIGN AND THE RETAILING IMAGE MIX THE SPACE MIX
For the retailer space is money. The store has to be planned in such a way that it optimizes the selling area and minimizes the non-selling parts. The selling area is used to present the merchandise and the non-selling part is account for by circulation space, aisles, staircases, lifts, facilities, the back area, etc. The area in a typical department store is: selling area about 60%, circulation area 15% and back area 25%.If the store has any extra area, it is given to concessionaires to complement the store offering mix and to de-risk space. Examples are Planet M in Shoppers’ Stop, Planet Sports in Pyramid and Ways in Lifestyle.In a garment retail store, planning the size of the customer segment is intercepted and there wardrobe mix of garments and accessories mapped. This then determines the number of styles and the range width of the category. Then a business plan is made based on the integration with space.
The selling space is then configured in terms of size and location of goods based on the mix of staple, convenience and impulse merchandise Staple Goods are the core USP of the store. These constitute about 55% of the store offering and are4 kept at the central and deeper ends of the store. This enhances visibility, since the customer has to pass through the entire store to reach them. The shirts and trousers section in department stores form the staple merchandise. Similarly, grains and sugar are the staples in a supermarket. Convenience goods are no-fuss basic merchandise that constitute about 30% of the store and are bought in multiple units. These need to be in convenient locations in the store to ensure conversions. Undergarments and white basic cotton T-shirt in a department store are convenience merchandise.Impulse purchase merchandise-which usually constitutes about 15% of the store and has the highest of sale-is given maximum exposure in order to tempt the customer into buying them. Candies in a supermarket and socks and hair accessories in a fashion store are impulse purchase items and are kept near the cash counters and entrances/exits. The customer picks them up after shopping for convenience and staple merchandise. The locations of various goods are chosen carefully to ensure that the customer is exposing to the entire store, thus increasing the possibility of a purchase.Talking about space management and optimization in a retail store, Ajay Mehta, COO of Times Retail (Planet M) says: “Space management does not end with just optimization, but has a much larger opportunity for merchandise promotion and display which not only can profit for a retail organization but entertain and delight customers too”.
EFFECTIVE RETAIL SPACE MANAGEMENT
The sight of a good retail store with attractive windows and an enticing entrance induce the customer into entering. The customer enters the store and often keeps walking inside following the walkway wherever it leads, or sometimes takes a while to look for directions within the store. Sometimes the customer’s attention is drawn to certain displays and merchandise presentation before he move on. To reach his destination inside the store, the customer tends to follow directions to reach there, especially in a big-box format. Seldom does he realize that subconsciously he is directed to ‘walk’ the entire store and thus exposing him to all that the store has to offer. This is achieved through a well thought-out and laid-out retail floor design.Effective retail floor space management is critical to the successful operation of a retail store, as more and more sales from the same space would lead to increased margins for the organization. According to R. Siam, CEO of Crossword: “Space planning is integral to the success of any retail store since the biggest investment in retail is in space”.
Let us now look at the ground rules for effective floor space planning and management. At the same time, let us get an insight into the customers’ physical and emotional needs that contribute to store design conceptualization and space planning.
STORE LAYOUT: THE CIRCULATION PLANT (THE “SILENT GUIDE”)
Once inside the store, the customer needs to be guided silently to where he/she wants to go and also expose him/her to the offering. This can be achieved by planning the circulation and the location of the merchandise.
FLOOR SPACE MANAGEMENT
One of the common problems in retail floor management in India is lack of attention paid to space productivity. Usually space productivity. Usually space productivity does not figure in the Key Result Areas of either the Store Operations or Buying and Merchandising departments. But ideally both should pay attention to this area. Store Operations, since it is responsible for reorders and replenishment, and Buying and Merchandising because it is accountable fro the Gross Profit Return (GPR) on the space occupied by the merchandise.
Parameters to Judge Space Performance
How the space performs can be judge by:
-The sales output and the ensuing margins.
-The inventory holding that leads to sales and the ensuing margins.
In a nutshell the performance parameters are sales and margins and their direct relationship to the stock holding on the retail floor.
Sales per square foot, or top-line plan (sales): Here, space productivity is measured by sales volumes and value achieved per square foot per day.
Margins per square foot or bottom-line plan (gross margin returns on footage, or GMROF): Here, space productivity is determined by the average inventory holding per square foot per day and how it measures against the ideal level of stock holding planned for a designed space in the store. Stock-turns in such designated space play a vital role in earning good revenue returns on the space occupied when they are optimized.This space performance measurement can be done for any of the rungs in the SKU hierarchy: a department/division, a category/class, a sub-category/ sub-class, a brand and even for any style or size options.Says G.S.M. Ghana, former Senior Vice-President (Retain) at Bata India Ltd: “One must analysis statistics of the value of merchandise and margins broken down to the space occupied by micro-groups of merchandise in the store. This will help retailers develop a blueprint for profitable deployment of especially in chain store operations. In addition, not only should merchandise categories be placed in the right locations that will maximize profitability but such placement should help attain uniformity for comfortable shopping by customers.”
Space Audit: Non-treaded and Black Holes.Any successful retail store audits its space productivity from time to time. This audit looks at the various retail functions and activities for which space is employed and analyses returns in order to optimize them. It compares the performance of each function or activity with others in relation to space occupied.Hot Spot Analysis: Hot spots are areas where the off take or merchandise is the highest. Similarly, there are warm spots and cold spots, where merchandise sales are lower. An analysis of these hot spot, warm spots and cold spots is made periodically and steps taken to convert cold spots to warm spots and warm spots to hot spots while retaining the best sales and the stock-turns of the spots.Such audits reveal non-treaded space, where there in no customer traffic, and less treaded space which ha slow traffic. The possible reasons for these are analysis and hurdles and bottlenecks identified and removed to ensure that there are no non-treaded and black hole areas.
Efficiency of Selling Space to Non-selling Space: The utilization of selling and non-selling spaces-back area, facilities area, etc.-are periodically monitored for there efficiency in deliveries. A good retailer always aims to optimize selling space to improve the bottom-line, while taking care not to compromise on the efficiency of deliveries of the non-selling space.
Ground Rules for Successful Space and Layout Management
Remember the golden rule of the retail floor space planning and management game-the convenience of the customer comes first.Provide the greatest opportunity for the customer to walk around the stores and browse through all the merchandise displayed, for it is the browsers who turn into buyers-buyers of a large basket size.Optimize the trading space to achieve maximum sales, while not neglected the non-trading area for customer convenience/concessions in order to ensure that they spend a longer time store and increase revenues.Make the right floor space management decisions after every space audit, effecting the necessary course-corrections on time as space costs a good deal of money.
Appeal to all the five senses of the customer by creating an aesthetic and functionally effective ambience (which should eventually become the credo of a successful store) so that you can cling to the mind-space of the customer and Bering him back to the store again and again. Remember, a retail floor designed, planned and managed well with the target customer in mind helps to make an emotional connection with the buyer.
The term ‘merchandising’ is unique and exclusive to the retail industry. It refers to the entire process of inventory planning and management in a retail organization. Merchandising, when done properly, leads to an increase in the return on investment (ROI). The greater the ROI, more the profitability.
For a retailer, the objective of merchandise planning is clear: achieving the following seven ‘RIGHTS’
– The Right Product
– The Right Place
– The Right Quantity
– The Right Quality
– The Right Price
– The Right Mix or Assortment
– The Right Time
In order to satisfy every customer’s needs, the retail store must have the right product in the right place, in the right quantity, with the right quality, at the right price, with the right mix of sizes or variants and at the right time. The function of merchandising is to achieve all these ‘rights’ so that sales are high with an ideal level of inventory holding and thus more profits.
Merchandise Hierarchy.While planning the merchandise mix, a retail organization has to start with a clear definition of its merchandise hierarchy. The merchandise hierarchy is a disciplined way of grouping the merchandise mix at different levels, starting from a high-level grouping to the lowest level of the stock-keeping unit (SKU).The merchandise hierarchy forms the platform needed to create the store’s merchandise mix. The merchandising for the store dictates the different divisions and the lower rungs that the store must have in the hierarchy.
Building the store’s merchandise mix by following the concept of merchandise hierarchy has its advantages:
(a) One can define in terms of ratios the mix of elements at each level of the hierarchy.
(b) One can analyze and drill down through the rungs of the hierarchy to the problem areas, if any up to SKU level.
(c) One can remove or add elements following security escalations.
This means if the store’s merchandise decisions have to be taken based on the performance, say, of the millions of SKUs contributing to the formation of the merchandise pyramid for the store – the peak being the divisions – decisions at the lower rungs can be taken by front-line personnel. Those at the higher levels, which would impact the merchandise proposition / image of the store, can be taken by the higher-ups.
SKU: To use an example (see Fig. 12), a 410-size white shirt of solid design at the price-point of Rs. 750 (all options in the last level) having a button-down collar of the Arrow brand in the full sleeves sub-category or sub-class of the shirts category belonging to the men’s department of the apparel division in a organization is an SKU. The levels in the merchandise hierarchy may be different for various products categories. For instance, in a supermarket, the levels may be:
Department: Packaged Food
Options: 250g, 500g, 1kg.
The first step in the process of range planning is merchandise assortment planning. This is a mix in percentage terms at every rung of the store’s merchandise hierarchy.The first element in the merchandise plan is the Strategic Plan. This is normally taken at the high level and used to set out the critical success factors for merchandising in terms of sales, margins and stocks.A category-level margin plan is also created to plan the gross margins that each level (up to the SKU level) contributes to the store. The definition of the merchandise and the assortment planning based on the hierarchy levels help in analyzing weekly sales, stock and intake plan etc. at the category, sub-category, brand or SKU levels. With this, one can also identify any problems in sales or inventory holding at any levels and take corrective action. It is here that Open to buy (see ‘The Buying Function’ below) is planned in the process of buying. This is normally the first significant success factor in the implementation of the planning process.
Example of an assortment of shirt 20 pieces in stock:
Small / 2, Medium / 6, large / 7, Extra Large / 4, Extra Large / 1 = 20 pieces
Such an assortment plan helps replenish items to the store stock after they are sold by establishing minimum and maximum levels of stocking units. For instance, in the above example if the assortment ratio is planned as per the planned stock-turn for the store as 20 pieces, then the maximum stocks that are available in the SKU can only be 20. The replenishment trigger can be planned so that it is set off when the stock reaches a minimum specified level after sales. Another way of planning replenishment – which is done generally in high-turnover categories – is to trigger off reorders as and when the merchandise is sold with a cap on the maximum stock holding.
Pangram: There is another type of Assortment plan that is emerging now. It is a graphical range plan called the pangram. This short of plan moves away from the purely numerical type of planning that has been used until now and allows the range to be put together in a visual way. Typically digitally stored images are manipulated into collage-type storyboards. Space planning software packages like that of AC Nielsen support such graphic base stock mapping, which helps in easy replenishment planning and effective store space utilization.
Thus merchandise assortment planning and base stock – numerical and visual-numerical methods respectively – enable one to take account of the space utilization in a store by calculating the Return on Space Employed or Returns on Footage.
THE BUYING FUNCTION
Buying for a retail organization is a critical function of merchandising. The process begins with the preparation of the buying plan, called ‘Open To buy’ or OTB. It is helps retailers project and control future buying so that the flow of merchandise in the store matches anticipated sales at desired stock turn rates to give a positive cash flow.For organized buying one need to follow the OTB planning, since it prevents over-buying, eliminates confusion and enables the organization to make more profits.
So what exactly is OTB? OTB refers to merchandise budgets for purchase during a certain period of time for which the stocks have not yet been ordered. It is also the process of forecasting sales and purchases. OTB is a planning tool that assists in setting budgets for sales and merchandise inventory levels and in monitoring the current status of the OTB amount, which is the amount remaining to be ordered to meet the budget.Every retailer needs to use an OTB plan, as most tend to overstock when sales increase and under stock when they are low. Often a small increase in sales leads to excessive buying that ultimately affects the retailer fix the ideal amount of stock that should be on hand at the beginning of any given month and the quantum of new merchandise to be received during the month.
Ann efficient OTB plan has the following elements:Forward Sales Planning (Sales Forecast): The sales plan ought to be prepared for the entire year with month-wise details of planned sales. A good OTB plan helps one to react to variations in sales plans (as the current month comes to an end), reschedule deliveries and cancel or alter purchase orders for future deliveries, as the case may be.
Forward Cover: This is based on the planned stock turns for the retail out fit. Form instance, if the planned stock turns for the store is four times in a year, and then the ideal stock holding at any point in time should be equivalent to three months’ stock cover.
Stock Required: This is based on the forward cover planned month is month 1, then the stock required will be the sum of the planned/forecast sales of months 2, 3 and 4.
Opening Stock: The value of the opening stock is a flow calculation. In OTB planning, the first entry is an estimate. From the second month onwards, the opening stock is the closing figure of the previous month.
Intake Requirement: This is the difference between the required stock and the opening stock.
On Order: These are stocks that have been already ordered and due for delivery during the relevant period.
Open to Receive: This figure is arrived at by deducting the stock on order, if any, from the intake requirement. This figure indicates the OTB quantity.
Closing Stock: To arrive at this figure, one needs to take the opening stock, subtract the sales, and add the on-order and open-to-receive quantities.
Advantage of an Open to Buy Plan
The OTB plan enables retailers to estimate in advance the amount
It helps ensure the right inventory level to support planned sales and to attain the best Gross Margin Return on Inventory (GMROI).The OTB plan places restraints on merchandise commitments so that the stock receives the right merchandise at the right time and not before or after.
It enables a continuous flow of fresh merchandise into the store month after month during the seasons.
The OTB plan establishes goals so that the actual performance can be compared with the plan and corrective action taken inn the required areas.Above all, an efficient OTB plan provides the organization more opportunity for profit.Retailers who follow a well-formulated POTB plan are successful in their merchandising and buying efforts. The merchandise management system employed in the organization generally support such statistical techniques in the OTB plan, but it is the buyer’s insight and decision-making capability that help deliver best result.
MARKUPS AND MARKDOWNS IN MERCHANDISE MANAGEMENT
Markup is the percentage amount (calculated on cost) added to cost in order to arrive at the maximum retail price for a product. Hence,
Markup = percentage of margin calculated on cost added to arrive at the maximum retail price.
Cost = Maximum Retail Price – Margin
Margin = Maximum Retail Price – Cost
Maximum Retail Price = Cost + Markup
Markup is based on cost and is expressed in percentage terms.
Problem: What is the markup percentage for a dress that cost Rs. 200 and retails for Rs. 400?
Markup % = Difference between MRP and cost (Rs.400 – Rs.200) ÷ Cost (Rs.200) x 100
= Rs.200 ÷ Rs. 200 x 100
Sometimes the retailer needs to look at the cost of an item and determine what that item should retail for It is fixed if the target customer is willing to pay that price. Markdown is the amount reduced from the maximum retail to arrive at the new retail price. Markdown is calculated as a percentage of MRP. Problem: What is the markdown percentage for a dress whose original MRP is Rs. 400 and the new retail price after markdown is Rs.200?
Markdown % = Difference between old MRP and new MRP after markdown (Rs.400 – Rs. 200) ÷ old MRP (Rs. 400) x 100
= Rs. 200 ÷ Rs. 400 x 100
Markdowns are done when product sales low are or when the season draws to a close and the product line needs to be cleared from the shelves. Merchandise is also marked down when inventories are high, when saleable merchandise is shop-soiled or when certain price-off promotions are done. Markdowns are also affected when products that have manufacturing defects but are still saleable are found at the floor level. It is essential that the markdown percentage is kept at the lowest, as it directly affects the returns on gross margins in a retail store.
The Current Scenario in India
Retailing in India is plagued by weak gross margins compared to those in global retailing. While apparel retailers manage to get gross margins of 30-33% after struggling a great deal with vendors and brand markets the food sector has to settle for just 15-19%.
The lifestyle garments and related accessory retailer Shoppers’ Stop has four in-store private label brands that contributed approximately 25% to its turnover, growing 5% over the previous year. The private label of a Delhi-based apparel retailer Robyn Retail contributed approximately 21% to total sales last year.
I grocery, Food world’s private label brands account fro around 21% of total sales. It is reported that the company plants to increase the share of its store brands to 27% of total sales by the time the first phase of the private label initiative is over. Food World expects to extend its private label brand to 38 sub-categories from the 22 it currently has.
West-side, the apparel retailing initiative from the house of Tatars, is a success story with a strategic approach to private brand retailing (approximately 80% to 85% of the merchandise retailed comprises its own brands). The store is said to be struggling in the area of men’s apparel, which is truly brand-led, and is said to be contemplating accommodating a few ‘must have’ men’s brands in its outlets in addition to its core private labels.