Progressive Grocer - June 2016

Progressive GrocerHow to increase sales throughput

Various analysts and industry reports suggest that modern retail trade will see more than a six fold increase in revenues over the next five years. In numerical terms, this translates to a CAGR of 17 per cent, reaching an industry turnover of $1.3 trillion by 2020. The share of modern trade in this industry will triple (from 8 per cent to 24 per cent) in the same period. How should the retail sector respond to this staggering growth?

The answer is certainly not simply opening more storesi. The industry has to address this growth challenge through a combination of efficiency gains and effective supply chain management, in addition to opening new stores.

A recent BCG study on the Indian retail sector indicates that the sales throughput (sales/unit area) is 20 per cent of that of international retailers’ii. This implies that smart planning; efficient operations and supply chain management alone has a huge scope of growth that can address consumer demand without the need of aggressively opening more stores.

As the industry grows and matures, the focus will slowly but surely shift to the sales per unit area metric. Eventually, we believe that this will transition into the profit per unit area metric. In such a scenario, given a highly competitive, crowded market like India, what can the retail industry do?

A few things, in our opinion.

Grocery Aisle

Squeeze a bit more

We know for a fact that floor space (or real estate) is the single largest infrastructural or fixed requirement in the retail industry. It is also true that the competition for real estate is the strongest in the urban centres. Rentals in high street in India are comparable to world averages. However, the mass market requires larger format retail stores and this will continue to be a challenge in urban centres in India.

This competition for space does have the effect of pushing up the rentals in the most attractive markets. However, retailers can ensure that they get a bit more from the existing floor space.

An example can be found in Tesco, South Korea

Just like everybody else, South Koreans are busy at home and tired after a long day at work. So offering the opportunity to shop while doing something else has a lot of value. Tesco settled on commuters waiting for their train: they have time on their hands and they must have jobs, so they’re likely to have money but little time. Rather than expect them to search through menus labelled with tiny text that says such unattractive things as ‘fish’ or ‘homeware’, they plastered the glass walls of subway stations with pictures of their products, laid out just as they’d be in a traditional shop. The ‘shelves’ featured QR codes - squares filled with a black and white pattern, unique to the product in question, they’re a more versatile successor to the bar code - which could be scanned by the traveler's mobile phone, building up a shopping basket in the few minutes before the train arrives. If your train comes before your basket is complete, you can carry on shopping without the pictures and codes if you wish.

Here, Tesco has effectively used advertising space and saved on more expensive floor space to drive revenues. A combination of technology, marketing and fulfillment effectively impacting Sales per Unit Area.

Focus a bit more

The future will require that a combination of technology, local awareness and marketing be employed to address customer needs. Some key questions:

  • Who is a typical customer of your store?
  • What does she want?
  • Does she get what she wants as in your store?
  • Do the items you stock deliver the best possible sales and profitability metrics?

In today’s scenario, the modern retail stores stock similar assortment of products and run similar promotions across all stores. While this is certainly an efficient way of managing inventories and sales, whether it is effective needs to be examined. In a diverse country like India, there is likely to be variations across different suburbs.

An example can be found in India

A large multinational Consumer Packaged Goods company wanted to assess retail coverage and brand loyalty of customers in a south Indian city for their detergent brands. They deployed point of sale data capture devices in several modern retail outlet in the city.

These devices captured data for the product category that the company was interested in not just for their brand but also the competitive brands. Overlaying the collected information on Google Maps and using business analytics tools, the company could derive information on the sales of the category in the different parts of the city and also the likely market share.

Thus, the company could create a mechanism to observe & capture consumer behaviour at the retail outlet, analyse the data and create solutions that aided effective fulfilment of demand or servicing additional outlets.

A somewhat similar approach has been taken by retailers in the Western world – Walmart, Macy’s and Kmart. These retailers are designing marketing campaigns and stocking products that appeal to the growing Hispanic population in the U.S.iii iv.

Be more responsive

How often do you go into a modern retail store to be told that what you are looking for is out of stock? The age where the portly gentleman at the cash till knew what you wanted and made sure it was available to you is slowly going away.

Studies in the western world have shown that 72 per cent of stock-outs in modern retail are attributable to faulty in-store ordering and replenishing practices and the remaining 28 per cent are attributable to the planning and supply issues in the supply chain.

Of course, the problem also exists in reverse – over stocking of items that are not really in demand. The multiple offers, discounts and stock clearances provide enough indications in India of the extent of this problem.

Stocks, excess or shortage, have a direct impact on sales and profitability. There are a couple of things that you can do to get more responsive.

Get on-shelf availability

On shelf availability is simply the ability of the retailer to provide the desired product (or SKU) when and where the shopper wants it. Today, this is one of the major challenges in India. Does this mean the stores are empty? No. The stores are stocked with merchandise that do not sell as expected – an inefficient use of expensive floor space.

In our view, this situation reinforces the need to determine a ‘good’ assortment coupled with better/automated techniques to manage orders and inventory. Lower performance in the on-shelf availability metric shows up in lower inventory turns in modern retail in India, as compared to international benchmarks. In specific instances, it has been observed that the modern trade in India is as low as 50 per cent of the Western world on the inventory turns metric. According to a study published in 2013, organisations can expect close to a 10 per cent increase in revenue by improving the inventory turnover.

It is now a well-established idea that forecasting and inventory turns are closely connected. Adopting standardised demand estimation or forecasting approaches in addition to better inventory planning can improve your in-store availability of products. Multiple studies have established that each time a product is not available, your customer would want to (i) substitute, (ii) delay the purchase, (iii) leave for another store, or (iv) cancel the purchase. In each case there is a revenue leakage – and a negative impact on sales or profitability per unit area. Addressing this dimension is in your control – with the right set of tools and solutions. Simply put, for every 1 per cent increase in forecast accuracy, one can get an approximately 0.2 per cent increase in revenuev.

A nuanced approach – combining demand assessment, inventory management, and marketing and promotion activities will provide an answer to the on-shelf availability question.

Streamline your operations

Creating an operational process framework and adhering to it is one of the best ways to ensure consistent customer service and product availabilityvi. You would need to define the operational process frameworks in a manner that promote customer responsiveness and improves her experience rather than making the purchase cumbersome.

Task your store operations team to observe the shelves on a daily basis to identify items that are not displayed but available in the inventory. Establish triggers on exceptions to notify the store manager about restocking the item back on display before declaring a stock out.

Establish standard and repeatable processes for logistics – inbound and outbound. Your customer expects that you will provide for her needs in the shortest possible time. In today’s world, this is a shrinking window. Hyperlocal start-ups commit and fulfil customer orders in under an hour. Better planning and execution will ensure consistent fulfilment of your customer’s demand without costs getting out of control.

Finally, establish continuous training of your staff . Our earlier articles have demonstrated how hiring of trained manpower and investment in training the in-store staff can greatly improve customer experience in the store – shorten waiting time, returns, etc.

Get your pricing right

It is a complex topic - what is the right price? There is a lot of sophistication in the solutions around pricing, but still it remains an inexact science. Henry Vogel of the Boston Consulting Group likes to remind clients that raising prices by 1 per cent can boost profits by up to four times as much as a 1 per cent cut in overheads and fixed costsvii.

Reducing prices on less popular items can help drive volume sales helping you clear out obsolete inventory and improve inventory turns. Increasing and decreasing prices on items, or even during times of the day, can maximise total contribution. This is now in the realm of the possible. Kohl’s Corp. uses electronic price tags in 1,200 stores to change prices for busy and slow times to maximise contribution.

The levers that influence pricing are demand, competition, substitutes and cannibalisation. Mature online retailers like Amazon and airlines are sophisticated in managing price, reacting to price influencers in as little as an hour.

Get your customer service and aesthetics right

Store layout influences the customers’ perception of the store and helps her in deciding her spend. Store atmospherics, s tore layouts & planogram and in store customer service have the largest impact on consumer buying patterns, as per a study published in 2014viii.

Get more from your customers

In the near future, the modern retail industry in India will drive ever greater focus on efficiency and effectiveness. Product availability, customer engagement, customer service parameters will support the effectiveness dimension while planning, forecasting, layout management and logistics will support the efficiency dimension.

In each of these areas, technology is playing a central role. Consistency can be achieved in your operations by a judicious selection of solutions and a systematic implementation programme.

Collect information about your customers methodically and work on a fulfilment approach that gives her the maximum return on her time. This was and remains the most effective way to build an exit barrier.

In today’s world fulfilling your customer’s expectations is an increasingly complex process. Oftentimes, the compromises between customer fulfilment and staying profitable are tricky and non-intuitive.

But, a systematic approach to the solution is what is required for your store to start showing results!

The author is Managing Principal and Manager – Indian Operations, CGN & Associates India Pvt Ltd


i http://www.ibef.org/
ii http://www.bcgindia.com/documents/file181823.pdf
iii http://www.marketwatch.com/story/wal-mart-open-stores-targeting-hispanics
iv http://www.nytimes.com/2013/12/05/business/to-expand-reach-retailers-tak...
v Institute of Business Forecasting and Planning
vi http://www.tcs.com/SiteCollectionDocuments/White-Papers/On-Shelf-Availab...
vii http://www.economist.com/node/1143622
viii http://www.ijstr.org/final-print/aug2014/Retail-Shoppability-The-Impact-...