Practice Head-Consumer & Retail Tata Strategic Management Group

Rajiv Subramanian

Project Strategic Tata Strategic Management Group

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Recently the performance of Indian retailers has dipped significantly.

Learnings from Global Retail

Global trends could provide valuable tips to Indian retailers on what strategy is working. This could then be customised for the Indian marketplace.

Value orientation: Discount chains have been one of the few exceptions in this demand slowdown, with value-conscious consumers flocking to them to get the best deals. Wal-Mart, Carrefour, Loblaw and Aldi are a few of the value retailers who have increased their market share, revenues and profits even in difficult market conditions.

Specialty retail: Retailers with strongly differentiated propositions have managed to hold on to their customers in this ‘season of bargains’. For instance, Best Buy’s differentiation, built on customer service, has helped it cope with the slowdown much better than its main rival, Circuit City, which went bankrupt.

Issues with Indian retail

Indian retail is in a growth phase unlike its counterparts in the developed world. Retailers in India who are performing poorly need to give their business model a re-look and make appropriate corrections. While much has been written about high real estate costs (rent to sales ratio of 7-10%) and escalating manpower costs (5-7% of sales), there are many other focus areas for Indian retailers to work on:

• Undifferentiated ‘me-too’ formats leading to low store sales: This is a result of many factors:
  Hazy profile of target consumer: Most mass retailer brands in India are positioned as ‘everything for everybody’.
  The ‘cookie-cutter approach’: Retail chains across locations typically carry uniform offerings. In many cases, the merchandise on offer is not in sync with the retailer’s target consumer.
• Poor merchandise mix resulting in lower gross margins: Value oriented formats in food and grocery retail, which mostly offer packaged and branded products, cannot hope to turn profitable given the cost of the business in India. In fashion-oriented businesses, poor sales forecasts lead to frequent markdowns.
• Poor location decisions driven by a land-grab mentality: In the race for acquiring sites in the last two years, retailers made decisions that were not in line with business requirements. Today many large and small players are closing unviable stores.
• Below par in-store processes: It is surprising that even when we are talking of a sales dip for organised retail in India, consumers have to wait long periods at cash tills in most stores. This results in poor customer experience and lower loyalty.
• Inefficient back-end leading to significant lost sales and higher capital employed:
  Poor shelf fill-rates: Lost sales in India’s retail sector is not an oft-tracked metric. The average fill rates in India from vendor to retailer warehouse are a quarter less than the 99.5% benchmark in developed markets. This leaves empty shelves and lost sales.
  Low inventory velocity: The improvement potential can be judged by comparing the sales to inventory ratio of Wal-Mart (10.8 times) with Indian retail players like Pantaloon and Vishal Retail (4.2 and 2.4 respectively).

Indian retailers need to identify the relevant areas of improvement for their business and work on them on a war footing. Benchmarking with best-in-class global and Indian players would help them in setting measurable targets.

Building a Profitable Retail Business in India

The comprehensive multi-stage framework below outlines the path to profitability for Indian retailers. This includes the parameters that need to be reviewed, key levers to enhance profitability and the expected outcome.

Stage 1: Customer Insight-Led Business Model: Understand the target consumer, identify a value proposition based on superior consumer insight and build the entire business model around it. This calls for appropriate customer segmentation based on identification of customer needs and shopping behavior. Multiple-store concepts may have to be built to be able to serve varied customer. The customer segmentation and value proposition will also drive the desired store location decision.

Stage 2: Margin Mix Planning: Careful analysis of each stock-keeping unit (SKU)’s role in the assortment is critical to optimise shelf-area productivity. Simultaneously, the margin model should be planned to ensure a mix of fast moving SKUs and high-margin SKUs. Margins can be augmented through sales of accessories/add-ons that have low value but high gross margin contribution. Formulating an effective private label strategy should be a key component of the margin mix model.

Stage 3: Improving Sales Throughput: Optimise SKU depth and explore dynamic re-stocking models to minimise in-store inventory while maintaining a high shelf-fill rate to minimise lost sales. Here retailers need to devise India-specific approaches that can use the lower labour cost to develop solutions that may not work in developed countries. This will also help in optimising shelf-area usage.

Stage 4: Streamlined Back-End: Most retailers focus purely on the front end, without realising that the back-end is the heart of the retail business.

Setting up distribution centres (DCs) to support a small number of stores is not a viable option. Decentralised sourcing directly at store level from a manufacturer’s distributor too is not a good option. Retailers need to plan their store rollout plans based on their back-end capability. Detailed analysis is needed to estimate the size, number and location of DCs.

Transportation from the DC to store needs to be optimised to ensure efficient milk runs and low logistics costs.

While vendors are loathe to give discounts and credits, retailers must push to hasten delivery lead times and minimum order fill rates. In addition to trade terms negotiation, the purchase function needs to focus on re-ordering patterns and order sizes to prevent mark-downs for both fashion and continuous inventory.

Stage 5: Employee Productivity: Critically examine the role and productivity of staff in each part of the retail business. In-store productivity improvement would result in higher shelf fill rates, cleaner stores and quicker checkouts thereby ensuring satisfied and loyal customers. Reduction in in-store staff would help improve the employee cost/sales ratio.

Given the favourable macro economic drivers, modern trade will continue to be a fast growing sector in India. The weaker business models will survive only in buoyant economic conditions or in the absence of serious competition. In a tougher business scenario, such models will face sales and profitability pressure.

In current times, where liquidity is paramount, retailers need to follow a measured approach for business expansion and avoid bypassing retailing principles in pursuing scale. This expansion will be fundamental to building scale, which would spread costs and improve profitability. Most importantly, retailers need to have a differentiated business model that delivers high sales productivity, attractive gross margins and high inventory throughput.