Amity Business School

Channel Institutions
MBA M&S Class of 2013, Semester II

Distribution &Logistics Management Retailing

Swati Bhatnagar

Retailing

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Retailing consists of activities involved in selling goods services to ultimate consumers for personal consumption. Buyer is the ultimate consumer unlike an institutional or business purchaser. Buying motives for a retail sale is always personal or family consumption One needs to understand the differences in serving these different segments even though they are served out of the same retail establishments. Retail success comes in many shapes, sizes & cultural origins. Most of the top retailers are transnational, crossing country borders to expand business.

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Choosing a retail positioning strategy

The retailers positioning strategy significantly affects its competitiveness & performance. Retailers make choices about cost-side & demand side characteristics of their businesses. On the cost side, the focus can be margin & inventory turnover goals. On the demand side ,the retailers choose what service outputs to their shoppers.

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Financial & Cost- side Positioning: Margin & inventory turnover goals
Traditional retailing (of high margin-low turnover)has transformed to modern retailing systems of low margin & high inventory turnover & minimal service levels.e.g Home Depot, an advanced retailer is able to combine low margin & high turnover with excellent personal service. A low margin- high turnover model orients towards generating higher operational efficiencies and then pass on the savings generated to the customers. A typical retail package of low margin high turnover format involves reduction in service output levels

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Economic & operating drivers of various retail chain types

Chains
Apparel speciality (e.g. The Limited)

Economic drivers
High gross margin High inventory turnover

Operating drivers
Merchandise management,markdown control Merchandise management Low cost, high sales productivity Low investment ;high sales productivity

Discount. E.g Wal mart

Low operating expense High fixed asset productivity

Category killer e.g Home Depot

Departmental store e.g. Federated

Low operating expense

Low cost, high sales productivity

Merchandise management

High gross margin

National Chain e.g. JC Penney

High gross margin

Merchandise management

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One of the key decisions to take in a retail format is on which path to follow low margin- high turnover or high margin- low turnover? This plays a key role in making the company achieve its financial target. This appropriate pathway is guided through SPM i.e. strategic profit model The same influences margin & turnover dimensions of retail strategy

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Some ratios used in SPM

Net profit margin/profit margin/net margin :-This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and all expenses, except income taxes. Net Profit Before Tax Net Profit Margin Ratio = _____________________ Net Sales Asset Turnover :- This ratio is useful to determine the amount of sales that are generated from each dollar of assets. Asset Turnover = Revenue Total Assets Financial leverage :- gives an idea of the company's methods of financing or to measure its ability to meet financial obligations Financial leverage = Total assets Net Worth

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In a scenario of a slowdown wherein there is a huge pressure on margins, the company tends to pursue asset turnover. Consequently, the emphasis comes more on sales per square foot ( reflects space & location productivity) , sales per employee ( reflects labour productivity) & sales per transaction ( reflects merchandising program productivity) Based on the same there are three interrelated measures of performance that help retailers determine profitability, GMROI, GMROL, GMROS GMROI Gross margin return on inventory investment- the same is gross margin percentage times the ratio of sales to inventory ( at cost) i.e GMROI = Gross margin * sales to inventory ratio Helps the retailer to evaluate inventory on the return of investment it produces & not just on the gross margin percentage

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To enhance the GMROI ,ECR initiatives like JIT, EDI linkages b/w manufacturers & retailers have been adopted with the aim of reducing average inventory levels while maintaining sales.

GMROL- gross margin per full time equivalent employee. Should optimize & not maximize GMROL. An irrational increase in the average sales force reduces the average GMROL
GMROS- Gross margin per square foot- is basically a measure which indicates how well the retailers are using their unique asset i.e shelf & floor space allotted for suppliers products. Measures like DPP & GMROI places pressure on suppliers to attend on issues like 1) gross margins their brands permit retailers to earn, 2) sales volume ( in units) their brand generate 3) amount of shelf space/ floor space their brands occupy & 4) costs incurred in storing handling & selling their brands.

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Demand side positioning

The demand side positioning is essentially oriented on the SOD s which the retailer is trying to address. Some of them are :-Bulk breaking -Spatial convenience -Waiting & delivery time -Product variety -Customer Service possibilities Bulk breaking -one of the classic functions of a retail intermediary, allows the consumer the opportunity to purchase in small units- BO GO, pricing of multiple units Spatial Convenience- products are generally classified as convenience , shopping,& speciality goods. The extent of search shopping activity varies between the categories & the consumersegments.

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In the current environment location decisions are slowly being overpowered by convenience in terms of speed & the ease to access Waiting & delivery time : consumer differ in their willingness to tolerate out of stock products when they shop. The same also varies across different purchase occasions Retailers can respond to the demand for low waiting time by holding extra safety stocks , but the same involves cost He needs to gauge how damaging to its business an out of stock occurrence will be Even the elapsed time in the store can be viewed as an element of total waiting & delivery time. A classic no waiting outlet is the vending machine. Sophisticated technology allows the vending machine operators to track what is sold & when the machines are out of stock, thus maximising sales potential, given the inherent impulse nature of vending purchases

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Product variety: In retailing the service output of products is represented by two dimensions breadth & depth. Breadth represents different classes of goods making up the product offering i.e the collection of product lines Depth or assortment refers to the extent of product brands or models offered within each generic product category. Discount stores generally dont stock all brands thus have low assortment whereas a speciality store would have a complete & deepest assortment of models , size, prices etc. The variety & assortment dimension of retailing operations demands the attention of top management, because decisions in this area colour the entire picture of the enterprise.

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Customer service

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All major retail innovations of this century have relied on manipulating the customer service variable. Retailers can adopt friendly behind the counter sales assistant to help locate & compare merchandise or offer an expert advice enhancing the whole locate- compare-select process At times the savings that can be passed on to the consumer by eliminating certain kinds of in- store assistance or improving the productivity of a downsized workforce are substantial. Customer service is a costly benefit to provide but retailers continue to invest in it because of the substantial benefits it can generate.e.g. provision of shopping carts in retail stores. Such investments made in customer service does involve an expenditure on channel functions but does takes a cost from the customers shoulders

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Strategic issues in retailing

There are some major strategic issues faced by the retailers and the suppliers need to understand the same An important consumer trend in the current environment is increasing importance of convenience. Some of the major issues are pertaining -increased levels of retailer power -increasing reliance on private labels -emergence of power retailers ; category killers

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Importance of convenience to consumers

Convenience is measured by the time required to make a purchase -getting in & out of the store & -getting delivery of the purchase product. Shortage of time & increasing no. of working woman has fuelled an intense demand for convenience Today consumers value speed & convenience more vis a vis price.

Provision of first rate service- bold, fast, unexpected, innovative & customised service helps achieve remarkable differential advantage.
The same has spawned all sorts of convenience marketers. The time starved shopper prefers outdoor shopping centres anchored by superstores such as Wal Mart or Sam s Club Delivering customer satisfaction at profit- the main goal of marketers is becoming difficult to achieve.

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Increased power of retailers

There has been a reversal of power from suppliers to the retailers. - The sales of most items ( through grocery, drug & mass merchandising chains) have not been growing rapidly. Competition has evolved into a market share game. - Better prices coupled with excellent locations , appealing stores & reasonable service has led to survival & success for the retailers. - The supermarkets still remain the major outlets for packaged goods. - However,lot of other alternative formats like warehouse clubs, deep discount drug stores and mass merchandisers have been expanding at the expense of supermarkets.

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Secondly, retailers are continuously concerned about increasing their productivity. Cant raise prices much , but its possible for them to reduce costs. Thirdly, they are under immense pressure to evolve into profit centres rather than simply inventory management. Now responsible for capital management, service levels, turnover, retail margins and pricing, quality control, competitiveness and variety, operating costs, shelf space & position & vendor float and terms . Fourthly, choice of products has gone up immensely. In the American market more than 30,000 new SKUs are introduced each year. Abundance of new products but the store sizes have not increased significantly. The manufacturers woes are aggravated all the more because of dismal performance of new launches. Fifth, diffusion of information technology .It is now virtually possible to capture item- by item data through scanning devices, at their electronic point of sales terminal. E.g UPC code

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Use of UPC code in retail product replenishment :Wal Mart example 1. The UPC is scanned .
The SKU of the product is registered in Wal- marts data base, along with a description of product.

2. Item locator program

If the store runs out of this UPC, wal-marts item locator Can find the closest store which has that SKU, stock can the be Ordered over phone. 3. Data transmission Data is a shared multiple times per day with Wal mart HQ Via satellite 4. Retail link Wal marts database is shared with2500 of its 10,000 suppliers. Sales history of the UPC is available with the manufacturer which helps Him product rescheduling. 5. Forecasting Collaborative forecasting & replenishment programs are carried out

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Even suppliers have contributed to the influence of retail buyers. They engage in many many allowances in bribing : their way to the retailers shelves. Some of these allowances are : Forward buying on deals Slotting allowances Failure fees Payment for participation in newspaper inserts Deepest case allowances Highest possible payments for displays & shelf placements Guaranteed returns at full retail Manufacturer supplied labor for shelf sets etc.

Illustration of few

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Forward buying on deals Manufacturers experience wide swings in demand during trade promotions heavily. Temporary wholesale price cuts cause the retailer to engage in forward buying i.e buying significantly more products & stockpile it until it runs down again. This strategy clearly increases the quantity sold but plays havoc with the cost prices & manufacturer marketing plans . The increasing use of EDI technology has decreased the problem of forward buying somewhat. CRP ( continuous replenishment programs) have been particularly useful to assess the reorder level. A related problem is diverting. Manufacturers offer a regional trade promotion ; some retailers and wholesalers buy in bulk & then distribute it in areas where the discount is not available. This severely upsets suppliers efforts on tailor made marketing efforts for different regions

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Slotting allowances
Manufacturers pay retailers funds known slotting allowances to receive space for new products Whenever a new product is introduced, the manufacturer pays the retailer extra amount for a slot for a new product. The manufacturers argue that slotting allowances are deliberately kept high to prevent their access to store shelf space, whereas the retailers argue that the manufacturers should also share the risk of failure of new products.

Failure fees
Here the wholesaler usually imposes a fee whenever it has to pull a failing product from its ware house. Generally a time period is allotted to a new product, if the same fails to reach a minimum sales target, the fee is imposed.

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Emergence of private branding

Private labels also known as store brands have off late become very popular. E.g Marks & spencer runs its own private brand under the label of St. Michael. Private labels are a way of generating loyalty to their store rather than to the manufacturers brands. It also helps them earn extra profits because private label merchandise fetches higher gross margins as compared to the branded merchandise. Increasingly private brands of large retailing companies are being positioned as the leading brand in their assortment

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a) b)

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c)

d)

e)

Private brands are categorised into 5 basic types Store name identification program ( Products bear the retailers store name or logo. E.g Gap, Benetton Retailers own brand name identity programs ( a brand image independent of the store name that is available in only the companys store e.g. Kenmore & Craftsman [ Sears] Designer-exclusive programs ( merchandise designed and sold under a designers name in an exclusive arrangement with the retailer e.g Halston III [ JC Penney] Exclusive licensed name programs (celebrity-endorsed lines or other signature label lines developed under exclusive arrangements with the retailer.e.g Allen Solly [Federated department stores] Generic programs ( goods that are essentially unbranded)

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a)
b) c)

Private label goods typically cost 10 to 20% less than other brands, but their gross margins are as much as twice as high for non store brands The use of private branding has resulted in even greater power for retailer in the channel of distribution in the following ways In this case there is more retailers initiative for fashion direction, trend setting & innovation Retailer is responsible for marketing to consumers as opposed to an orientation as a distributing agent of the supplier There is more strategic concern on the part of many suppliers with marketing to important retailers as opposed to the direct concern with the consume market. But private label management is not trivial for retailers. Many of them are uninspired in design, mainly because retailers have little talent on marketing process. However retailers can clearly target those customers who seek value for money through private labels If done well, they are formidable competitors to national brands, however if not executed properly, the product design may soon become obsolete & the retailer may suffer.

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Power retailing & category killers

Power retailing is not restricted to just one type of format. It incorporates speciality stores, discount stores, electronc superstores etc. The attributes which make power retailing successful are : Willingness to take risks via market testing & trend forecasting Ordering early and selling merchandise in high volume with emphasis on increasing GMROI Investing large sums in information systems that can deliver instant sales trend data from multiple locations commitment to deliver value Commitment to make shopping easier The assortment of some private labels are so deep that they have become known as category killers. The assortment is generally very deep and low priced relative to traditional retailers. Customers dont mind making special trips to purchase items and are overlooking the benefit of one stop shopping convenience like Wal Mart, Target , Kmart etc.

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Retailing Polarity: Price sensitivity or flight to quality

Some of the major trends in retailing have contributed to an increased polarity in the retail trade . On one hand you have the emergence of tightly managed , limited line, highly focused specialty chains like Gap, the body shop etc. On the other hand there is an aggressive growth of large discount stores happening which are based on high turnover & low margins format. They rely on the state of art warehouse technology , EDI, SCM& self service to move mass merchandise. Specialty stores are soon becoming classic examples of high touch marketing. e.g No Kidding, Massachusetts based specialty toy store which is quite a contrast to mass merchandiser Toys R U. A successful example on the high tech, warehouse technology side of retail spectrum is IKEA, the Swedish retailer that operates one of the worlds largest volume furniture chains. Its vision is to offer a wide range of home furnishings of good design and function at very low prices so that majority of the population can afford to buy.Offers child playrooms, baby changing rooms , Swedish restaurants. One of the main strategy of IKEA is that it sells furniture as unassembled in flat packs which is able to reduce transport volume by 70 %

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Emergence of Global retailing

Though retailers have traditionally lagged behind other industries in the race to globalize however now they are increasingly choosing to globalize their operations. The same is driven by factors such as slow growth in home markets & overwhelming attractiveness of overseas markets that offer less intense competition & weakening barriers of foreign market entry. However some difficulties do come up in expanding to foreign markets. E.g. - Need for quality real estate locations - Need to develop physical logistics operations comparable to home country - Need to develop supplier relationships in new markets - Differences in zoning, pricing, taxation, labor laws, hours of operation - Need to offer local attractive products, packaged and positioned in a culturally sensitive manner.

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Strategic responses by suppliers to growing power of retailers

Some steps which the manufacturers have taken are :Have taken up more channel flows & developed new channel technologies. E,g. VF corporation Change the role of price promotions in the total marketing mix to retailers & consumers Expand the product line to counteract the popularity of ever more upscale store brands Divest non marketing functions and redirect spending towards new product development & marketing Expand the no. of channels used to distribute product in order to reduce dependence on few retailers All these steps are directed towards building& maintaining value of their core brands. They use innovations , new product development, increased investments towards brand equity rather than consumer promotions and are using multiple channel judiciously in order to reach the market