RETAIL DOMAIN STUDYThis report is submitted as part of Domain Study at PGPM Class of 2009, under the guidance of Dr. Pallavi Mody, S P Jain Institute of Management & Research, Mumbai.

By Sameer Dhamangaonkar PGPM508_07 Sivaram Gunavel PGPM508_12 Mihir Jana PGPM508_14 Chetan Mahindra PGPM508_23 Prashant Malviya PGPM508_59

Retail Domain Study

EXECUTIVE SUMMARYIndia's retail market has experienced enormous growth over the past decade. Retail is one of India's largest industries, contributing to about 10 per cent of the GDP and providing employment to 8 per cent of the nation's workforce. India's retail sector revenues are estimated to touch US$ 460.6 billion and the organized retail sector is projected to grow to US$ 43.8 billion by 2010-11. Organized retail penetration is on the rise and offers an attractive proposition for entry of new players both domestic and foreign, as well as scope for expansion for existing players. With a number of domestic and international brands available in stores, metros and smaller cities in addition to a wide range of product offerings from food and grocery to furniture and fixtures, the Indian consumer is fast embracing modern retail. The report starts with the global outlook of retail industry, its functions and formats. Evolution of retail in India as this gives a brief perspective of the trends in the Indian retail market. The Government is progressively undertaking reforms and liberalizing the retail sector; thereby attracting significant foreign investments. The policy and regulations along with rural retail opportunities are also discussed. Future of retail along with new business trends and information technology trends and discussed in detail. IT in retail is described in depth, considering business intelligence, SCM, CRM applications and new concepts like e-tailing, Global Data Synchronization, Planograms etc. The changing business scenario of organized retail is presented with case studies on Pantaloon and Wal-Mart. The growing disposable incomes, the consuming class and the increasing standard of living translate to opportunities across all the retailing formats and verticals. The new shopping experience, retailers new face, changing customer preferences are fast catching up in India, with increase in internet connections, increased use of plastic money and large base of young population that spends a considerable time online. Future perspective on Indian Retail is presented to conclude.

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Retail Domain Study

TABLE

OF

CONTENTS

Overview of Retail Industry ..................................................................................................... 1 Global Retail Industry .......................................................................................................... 3 Market Value Forecast .......................................................................................................... 4 Types of Retailers in the Retail Industry ............................................................................. 5 Retail Market Segmentation ................................................................................................. 6 Major Players ................................................................................................................ 6 Retail Opportunities.............................................................................................................. 7 Retail Formats .............................................................................................................................. 9 Retail Functions......................................................................................................................... 13 Demand Forecasting ........................................................................................................... 15 Procurement......................................................................................................................... 17 Logistics and Warehousing ................................................................................................. 18 Category Management ........................................................................................................ 20 Pricing ................................................................................................................................. 21 Pricing Strategy for Retailers..................................................................................... 21 Promotions ........................................................................................................................... 22 Retail Market in India .............................................................................................................. 24 Growth Across Segments .................................................................................................... 26 Future Outlook .................................................................................................................... 26 Advantage India .................................................................................................................. 27 Policy and Regulatory Framework ..................................................................................... 28 Market Entry Strategies For Foreign Retailers in India .................................................. 29 Risks and Challenges ................................................................................................................ 31 Living in Uncertain Times ................................................................................................. 32 Impact on Indian Economy ..................................................................................................... 40 Future of Retail .......................................................................................................................... 45

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Retail Domain Study

Retail Market Dynamics ..................................................................................................... 46 Future Retail Industry Scenario A World of Extremes .................................................. 46 IT in Retail .................................................................................................................................. 49 Business Intelligence and Retailing ................................................................................... 50 Customer Relationship Management ................................................................................. 51 Supply Chain Management and Procurement .................................................................. 53 Alternate Sales Channel ..................................................................................................... 53 Finance and Asset Management......................................................................................... 54 Planograms.......................................................................................................................... 55 E-Tailing.............................................................................................................................. 57 Global Data Synchronization ............................................................................................. 58 Software Packages in Retail ............................................................................................... 59 Key Retail Priorities ............................................................................................................ 60 Retail Trends to Watch ............................................................................................................. 63 Trends in Indian Retail Industry ....................................................................................... 66 Retail Company Overview ....................................................................................................... 71 Pantaloon Retail.................................................................................................................. 72 Wall-Mart ............................................................................................................................ 77 Conclusion ........................................................................................................................... 80 References ............................................................................................................................ 81

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Retail Domain Study

LIST

OF

TABLES

Table 1 Global Retail Industry Group Value ........................................................................... 3 Table 2 Global Retail Industry Group Value Forecast.......................................................... 4 Table 3 Global Top 10 Retailers .................................................................................................. 6 Table 4 Economically Attractive Countries ............................................................................. 8

LIST

OF

FIGURES

Figure 1 Retail Processes ............................................................................................................. 2 Figure 2 Global Retail Industry Group Value ......................................................................... 3 Figure 3 Global Retail Industry Group Value Forecast ....................................................... 4 Figure 4 Global Retailing Industry Group Segmentation.................................................... 5 Figure 5 Global Retail Market Segment ................................................................................... 6 Figure 7 Window of Opportunity Analysis ............................................................................... 7 Figure 8 Top Emerging Market by Volume (May 08 - Nov 08)............................................. 8 Figure 9 Top Five Emerging Market by Value in $m (May 08 - Nov 08) ........................... 8 Figure 11 Organised Retail Mix ................................................................................................ 12 Figure 19 Retail Merchandise and Information Flow ......................................................... 14 Figure 12 Important Retail Functions .................................................................................... 15 Figure 14 Procurement - Leaders and Followers ................................................................. 17 Figure 15 Elements of Logistics Cost ...................................................................................... 18 Figure 15 Important Process Flow ........................................................................................... 19 Figure 16 Retail Supply Chain .................................................................................................. 19 Figure 17 Category Management ............................................................................................. 20 Figure 18 Point of Sale Operations .......................................................................................... 23 Figure 20 Indian Retail Growth................................................................................................ 25 Figure 21 Share of Verticals ...................................................................................................... 26 Figure 22 Future Growth ........................................................................................................... 27 Figure 10 Critical Success Factors for Global Retailers in Emerging Markets ........... 29 Figure 23 Moving ahead towards Customer Centric Model .............................................. 47 Figure 24 A Photographic Planogram for Apparels ............................................................ 55 Figure 25 PHOTOGRAPHIC PLANOGRAMS FOR FMCG PRODUCTS .......................... 56 Figure 26 Spending Shifts Across Retail Channels ............................................................. 61

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Retail Domain Study

Overview of Retail Industry

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Retail Domain Study

The retail industry is a sector of the economy that is comprised of individuals and companies engaged in the selling of finished products to end users in the general public. Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers sell small quantities of those products to consumers.

F IGURE 1 R ETAIL P ROCESSES

The global retailing industry group generated total revenues of $11,326.8 billion in 2008, representing a compound annual growth rate (CAGR) of 4.1% for the period spanning 2004-2008. The specialty retail sector proved the most lucrative for the global retailing industry group in 2008, generating total revenues of $9,066.7 billion, equivalent to 80.1% of the industry group's overall value. The performance of the industry group is forecast to accelerate slightly, with an anticipated CAGR of 4.8% for the five-year period 2008-2013.

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Retail Domain Study

$ billion

Year 2004 2005 2006 2007 2008

$ billion 9646.1 10199.5 10794.2 11395 11326.8

% growth 5.70% 5.80% 5.60% -0.60%12000 11500 11000 10500 10000 9500 9000 8500

$ billion

% Growth 0.08 0.06 0.04 0.02 0 -0.02 % Growth

T ABLE 1 G LOBAL R ETAIL I NDUSTRY G ROUP V ALUE

2004 2005 2006 2007 2008 YearF IGURE 2 G LOBAL R ETAIL I NDUSTRY G ROUP V ALUE

G LOBAL R ETAIL I NDUSTRYThe following are some of the facts about the global retail industry: Market Value The global retailing industry group shrank by 0.6% in 2008 to reach a value of $11,326.8 billion. Market Value Forecast In 2013, the global retailing industry group is forecast to have a value of $14,347.3 billion, an increase of 26.7% since 2008. Market Segmentation I Specialty retail sector dominates the global retailing industry group, with 80% of the industry group's value. Market Segmentation II Europe accounts for 34% of the global retailing industry group's value.

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Retail Domain Study

M ARKET V ALUE F ORECASTIn 2013, the global retailing industry group is forecast to have a value of $14,347.3 billion, an increase of 26.7% since 2008. The compound annual growth rate of the industry group in the period 2008-2013 is predicted to be 4.8%.

Year 2008 2009 2010 2011 2012 2013

$ billion 11326.8 11708.6 12284.6 12944.4 13648 14347.3T ABLE 2 G LOBAL R ETAIL I NDUSTRY G ROUP V ALUE F ORECAST

% Growth -0.60% 3.40% 4.90% 5.40% 5.40% 5.10%

$ billion 16000 14000 $ billion 12000 10000 8000 6000 4000 2008 2009 2010 Year

% Growth 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% 2011 2012 2013

% Growth

F IGURE 3 G LOBAL R ETAIL I NDUSTRY G ROUP V ALUE F ORECAST

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Retail Domain Study

T YPES

OF

R ETAILERS

IN THE

R ETAIL I NDUSTRY

The global retailing industry group comprises of: Internet & Catalog Retail It consists of the total revenue from sale of retail goods online, mail order, television and catalog channels. Specialty Retail It is made up of the apparel, computer and electronics, home improvement, specialty stores, automotive and home furnishing retail sectors Multiline Retail It covers revenues generated through the sale of retail goods via department and general merchandise stores. Broadly retailers can be divided into two types in the industry: S T OR E R E T A I L E R S Those engaged in the sale of products from physical locations which warehouse and display merchandise with the intent of attracting customers to make purchases on site. N O N - S T OR E R E T A I L E R S Those engaged in the sale of products using marketing methods which do not include a physical location. Examples of non-store retailing include Infomercials Direct response television advertising Catalogue Sales In-Home Demonstration Vending Machines E-Commerce Multi level marketingMultiline Retail 14%

Speciality Retail 80%

Catalog and Internet Retail 6%

F IGURE 4 G LOBAL R ETAILING I NDUSTRY G ROUP S EGMENTATION

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Retail Domain Study

R ETAIL M ARKET S EGMENTATIONEurope accounts for 34% of the global retailing industry group's value. In comparison, Americas accounts for a further 32.6% of the industry group's revenue.

M A J OR P L A Y E R SMajor World Players are Wal-Mart, Carrefour, Home Depot, Costco and Target.Rest of World 6.9%

Rank 1 2 3 4 5 6 7 8 9 10

Name of Company Wal-Mart Carrefour S.A The Home Depot Tesco Metro AG The Kroger Co. Target Corp. Costco Wholesale Corp. Sears Holding Corp. Schwarz Unternehmens

Asia Pacific 26.5%

North & South America 32.6%

Europe 34.0%

Country of Origin US France US UK Germany US US US US Germany

Source: 2008 Global Power of Retailing (Deloitte)T ABLE 3 G LOBAL T OP 10 R ETAILERS

F IGURE 5 G LOBAL R ETAIL M ARKET S EGMENT

Wal-Mart accounts for 4.4% of the global retailing industry group's value. In comparison, Home Depot accounts for a further 0.7% of the industry group's revenue. The global specialty retail industry remains fragmented despite the presence of large players such as: Wal-Mart, Home Depot, Best Buy or Costco. Market players include retailers in the apparel, computer and electronics, home improvement, specialty stores, automotive and home furnishing retail segments.

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Retail Domain Study

R ETAIL O PPORTUNITIES

F IGURE 6 W INDOW

OF

O PPORTUNITY A NALYSIS

Opening: A market that is just beginning its modern retail story, in all major cities Peaking: A market that is developing quickly and is ready for modern retail Declining: A market that is still big and growing, but space for new entrants is getting tighter Closing: A market having small window of opportunity for new entrants; such markets generally have a very high penetration of modern retail Key Asian economies, viz. India and Vietnam are in the peaking phase. This means that the next 1-3 years are the best time for foreign retailers to enter India and other countries in peaking zone.

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Retail Domain Study

7.00, 11% 7.00, 11% 18.00, 28% China India Australia 8.00, 12% Russian Federation Poland Turkey 10.00, 16% 14.00, 22%

F IGURE 7 T OP E MERGING M ARKET

BY

V OLUME (M AY 08 - N OV 08)

651.80, 9.12% 1147.10, 16.04% 2301.00, 32.18% Russian Federation Republic of Korea Brazil Australia 1174.80, 16.43% 1874.90, 26.22%F IGURE 8 T OP F IVE E MERGING M ARKETBY

China

V ALUE

IN

$ M (M AY 08 - N OV 08)

Market Risk by attractiveness country (25%) 2007 Country (25%) 1 India 67 42 2 Russia 62 52 3 China 75 46 4 Vietnam 57 34 5 Ukraine 41 43 Source: A T Kearney Global Retail Development 2007

Market saturation (30%) 80 53 46 76 44

Time factor (20%) 74 90 84 59 88

GRDI Indicator 92 89 86 74 69

T ABLE 4 E CONOMICALLY A TTRACTIVE C OUNTRIES

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Retail Domain Study

Retail Formats

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Retail Domain Study

Major retail formats are as follows: Department Stores A department store represents a retail outlet that stocks a wide variety of merchandise ranging from apparel, toiletries, cosmetics, toys, and jewellery to appliances and furniture. Department stores usually sell goods at fixed price with guarantees and allow exchanges and refunds. They operate as a part of retail chains with several outlets in different parts of the country or across several countries. Supermarkets The supermarket format is one that is departmentalized into self service stores and offers a range of food and household articles. A typical supermarket is situated in a convenient area preferably near residential localities. These stores generally occupy a large area of space with parking lots. In India, the stores mainly focus on the price proposition offering products at lower prices to attract the customers. Hypermarkets The hypermarket format represents a supermarket that has the features of both a supermarket and a department store. Hypermarkets are mainly located in the outskirts of major towns and cities. These stores operate on a very large set-up with extensive parking lots. Hypermarkets offer products ranging from fresh groceries to clothes, jewellery, hardware, sports equipment, motor accessories, books, consumer durables, electrical equipment and computers. A hypermarket can be termed as a big discount store that stocks about 60 per cent food and 40 per cent non-food items. The hypermarket formats are also termed as 'Godzillas' of retailing due to their vast scale of operations. They usually have an extremely complex supply chain offering value-for money to the price conscious public.

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Retail Domain Study

Discount Stores A discount store format is also a type of department store selling products at prices lower than that in other retail outlets. The discount stores offer a wide assortment of goods with quality assurance at competitive prices. They mostly have large scale setups and purchase in bulk directly from the manufacturers at deep discounts, and as such were able to pass on the benefits to their customers. The discount store concept in India is quite new. It has gained much popularity among the middle class of Bangalore, Hyderabad, Mumbai and Kolkata. Some popular discount stores are The Loot, My Dollar. Specialty Stores Specialty stores are another retail format selling specific merchandise with focus on a single category. These stores offer a large range of selections within a single merchandise category. Prominent examples of such stores in India include chains such as Planet M, Music World and Crossword. Specialty stores mostly attract customers with a predefined buying mindset that often lead to impulse sales too. These stores have strong customer loyalty programmes. A recent trend is specialty malls like Gurgaon's Gold Souk. Convenience Stores Convenience stores are those stores that are open 24x7. They stock most essential and fast moving consumer goods like food items (both grocery and packaged foods), beauty and personal care products and an array of products of day-to-day use. In India these are mostly located at fuel retail stations. Some well known players in this area are In&Out and My Mart. Kiosks and Food Court Counters Kiosks are usually retail outlet structures, which are open on all sides and mostly engage in selling consumer goods like edibles and snacks, newspapers and magazines, etc. Now another new dimension is getting added to the concept of kiosks. A number of lifestyle products, fashion accessories stores and entertainment kiosks are being added to the list. The concept of kiosks finds relevance as an efficient medium of retail due to the space constraints. Most of the kiosks are located in high streets, malls, multiplexes, etc.

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Retail Domain Study

Source: Technopak Edelweiss Research

F IGURE 9 O RGANISED R ETAIL M IX

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Retail Functions

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Retail Domain Study

The following illustration gives an overview of the retail functions.

The following illustration depicts the flow of retail merchandise and information.

F IGURE 10 R ETAIL M ERCHANDISE

AND

I NFORMATION F LOW

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Retail Domain Study

The various important retail functions are illustrated as follows

F IGURE 11 I MPORTANT R ETAIL F UNCTIONS

D EMAND F ORECASTINGModern demand-forecasting systems provide new opportunities to improve retail performance. Although the art of the individual merchant may never be replaced, it can be augmented by an efficient, objective and scientific approach to forecasting demand. Large-scale systems are now capable of handling the mass of retail transaction data organizing it, mining it and projecting it into future customer behavior. This new approach to demand forecasting in retail will contribute to the accuracy of future plans, the satisfaction of future customers and the overall efficiency and profitability of retail operations. Retailers face several challenges when it comes to forecasting: Scale of the problem (large number of stores and items to forecast) Intermittent demand (slow and erratic sales for many items at the store level)

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Retail Domain Study

Assortment instability (frequent new-item introductions and seasonal assortment changes) Pricing and promotional activity

The following softwares are available for demand forecasting in retail: SAS Demand Forecasting for Retail SAS Demand Forecasting for Retail uses SAS' unique high-performance forecasting engine to automatically diagnose, model, execute and reconcile forecasts across multiple merchandise levels and locations. It allows creation of forecast projects and manages forecasts with a built-in forecast repository and versioning system. SAS Demand Forecasting for Retail produces results at any level of the product and location hierarchies down to the SKU/store level. Oracle Retail Demand Forecasting for Retail Oracle Retail Demand Forecasting uses time series forecasting algorithms and stateof-the-art modeling techniques to create accurate forecasts with little human intervention. The solution handles forecasting at a low level of detail (such as at the item, by store, by day level), forecasting for new products, and forecasting for products with sparse sales, highlighting the anomalies for review. The various benefits associated with using these softwares for demand forecasting are as follows: Highly accurate forecasts It generates forecasts based on underlying trend, seasonality promotions, inventory effects and other known causal factors Faster implementation A retail-specific data model and workflow that provide enhanced usability Business-driven results By seamlessly integrating with existing planning processes, it helps identify opportunities and improve profitability Soft lines ready Includes models for fashion forecasting, short lifecycle products and intermittent demand High scalability Supports the entire organization down to the individual store SKU level for all types of retailers Reduced workload Automated exception-based forecast management reduces the need for manual inputs and forecast updates.

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Retail Domain Study

P ROCUREMENTExcellence in procurement, both merchandise and non-merchandise, can be key to improving both top-line and bottom-line growth in the retail industry. As per the study done by A.T. Kearney, they have seen that the leading companies in every industry push their procurement function from a transaction-based business necessity into a strategic weapon capable of delivering significant competitive advantage. When approached strategically, excellence in procurement is a key lever to create value and competitive advantage for retailers. Now the question is, how are these leaders doing it? How can they keep their advantage? What must other retailers do to match their impressive performance in a challenging industry? The study concludes that while revenue growth understandably remains at the top of most retailers' agendas, industry leaders also consider cost management a high priority. They employ a balanced approach to procurement to ensure that margins remain high and operating costs low to shield against the very real possibility of suppressed top-line growth. Leaders in procurement are also leaders in financial performers.

F IGURE 12 P ROCUREMENT - L EADERS

AND

F OLLOWERS

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Retail Domain Study

L OGISTICS

AND

W AREHOUSING

In the Retail Supply Chain, efficient logistics services help organised retailers streamline their operational dynamics, achieve business targets and attain higher levels of customer satisfaction and profitability.

F IGURE 13 E LEMENTS

OF

L OGISTICS C OST

The warehousing is a crucial component of the Retail Logistics value chain. Warehousing is typically used for stockpiling for managing demand-supply gaps over a long period. In modern retail set up, traditional warehouses are being replaced by Distribution Centers (DC) which are accurately managed resulting in better ordering and free flow of information and products in both directions. Apart from storing the products, DCs carry out various value added services which include MRP tagging, repackaging, quality checking and bundling with promotion items. Special care for perishable products, hazardous products and products that require specific conditions for transportation and warehousing are also key components of the value added services.

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Retail Domain Study

F IGURE 14 I MPORTANT P ROCESS F LOW

F IGURE 15 R ETAIL S UPPLY C HAIN

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Retail Domain Study

C ATEGORY M ANAGEMENTCategory Management lacks a single definition thus leading to some ambiguity even among industry professionals as to its exact function. Three comparative mainstream definitions are as follows: Category Management is a process that involves managing product categories as business units and customizing them (on a store by store basis) to satisfy customer needs (Nielsen) The strategic management of product groups through trade partnerships which aims to maximize sales and profit by satisfying consumer and shopper needs (Institute of Grocery Distribution) Marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit (SBU) (Business Dictionary)

Basically Category Management is a retailing concept in which the total range of products sold by a retailer is broken down into discrete groups of similar or related products; these groups are known as product categories. Examples of grocery categories may be tinned fish, washing detergent, toothpastes, etc. Each category is then run like a "mini business" (Business Unit) in its own right, with its own set of turnover and/or profitability targets and strategies. An important facet of Category Management is the shift in relationship between retailer and supplier: instead of the traditional adversarial relationship, the relationship moves to one of collaboration, exchange of information and data and joint business building.

F IGURE 16 C ATEGORY M ANAGEMENT

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Retail Domain Study

Category Management is a philosophy for strategically managing a retailers or suppliers business that recognizes categories as strategic business units for the purpose of planning and achieving sales and profit goals. Inherent in this philosophy is the belief that simply managing at the department level does not provide adequate strategic focus. The process of category management implies a change in the way in which suppliers are viewed. The implication of category management relies on collaborative and cooperative supply partnerships. Category Management requires a focus on team organization that spans both suppliers and retailers organizational boundaries. The reasons for emergence of category management are: Consumer changes Competitive pressures Economy and efficiency considerations Advances in Information technology

P RICINGSetting the right price is the key for any retailer. The right price, on right product, on right time in right market can boost the sales and profits of any retailer. Therefore sound pricing strategies are important for a successful retail business. From consumers perspective, price is always a consideration as on important feature of the entire offer in the purchase decision of a particular product. Retailers should understand the characteristics of the people who shop at their stores, reasons for why they shop at their stores and the degree of consistency between the price perception of consumers and the stores price philosophy.

P R I C I N G S T R A T E GY

FOR

R ET AIL ER S

Different types of pricing strategies are adopted by different retailers based on product, store format and timing in market. Some of the key pricing strategies are: Market skimming: The products are priced high initially; then gradually the retailer brings down the prices. Such type of pricing is effective for goods which have a relatively inelastic demand

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Retail Domain Study

Market Penetration: The products are priced low; this is just the opposite of market skimming. This is suitable for products which have a high elasticity of demand Price Bundling: Retailers bundle 2-3 products together. This is useful for those products which have a high tendency of selling together Leader Pricing: In this type of pricing strategy deep discounts are offered on a few items. For example the retailer sells eggs at a cheaper rate, so when a customer purchases the groceries along with that he/she is induced to purchase eggs. Every Day Low Pricing (EDLP): In EDLP the retailer sells the goods at relatively low prices at all times. The price offered may not be lowest but remains more or less same throughout the year. For EDLP to work for any retailer volumes are a must. EDLP is most famously practiced by Wal-Mart. Odd Pricing: In this type of pricing the products are priced at odd prices like 199, 299, 399 etc. The main idea behind this type of pricing is to create a physiological advantage. The consumers feel the prices are cheap and this induces more purchases. Single Pricing: In this type of pricing all the goods are priced at the same rate. The Dollar Store is the classic example of this type of pricing.

P ROMOTIONSRetail Promotions is broadly classified as all the communication that informs, persuades and/or reminds the target market or the perspective segment about the marketing mix of the retail form. The retailers seek to communicate with customers to achieve a number of objectives. These objectives include increasing store traffic by encouraging new shoppers to visit the store, increasing share of wallet for all shoppers or specific group among them, increasing sale of a given category, and developing the store image or the retail brand. The retailers communicate with customers through many vehicles: advertising, sales, promotions, publicity and personal selling.

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Retail Domain Study

F IGURE 17 P OINT

OF

S ALE O PERATIONS

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Retail Domain Study

Retail Market in India

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Retail Domain Study

The Indian retail market is the fifth-largest retail destination globally. It is estimated to grow from the US$ 330 billion in 2007 to US$ 427 billion by 2010 and US$ 637 billion by 2015. Retail contributes to 10 per cent of Indias Gross Domestic Product and provides employment to 8 per cent of Indias working population. Higher disposable incomes, easy availability of credit and high exposure to media and brands has considerably increased the average propensity to consume over the years. Global Retail Development Index - GRDI India ranked first for the third consecutive year on the Global Retail Development Index 2007, conducted by AT Kearney across 30 emerging economies. India is ranked as the most preferred retail destination for international investors. Global Consumer Confidence Index - GCCI India ranked first for the fifth time on the Global Consumer Confidence Index June 2007, conducted by The Nielsen Company. Indians were judged as the worlds most optimistic consumers, with high financial confidence about their income for the next 12 months. Indian retail showed a growth rate of 49.73 per cent with a turnover of US$ 25.44 billion in 2007-2008 as against US$ 16.99 billion in 2006-2007. Organized retail segment is expected to grow from five per cent to about 14 to 18 per cent by 2015.

F IGURE 18 I NDIAN R ETAIL G ROWTH

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Retail Domain Study

G ROWTH A CROSS S EGMENTSIn India, the food and beverages segment accounts for the largest share over 74 per cent of the total retail pie. Traditional retail dominates food, grocery and allied products sector, with grocery and staples largely sourced from the Kiranas and push-cart vendors. The apparel and consumer durables verticals are the fastest growing verticals.

F IGURE 19 S HARE

OF

V ERTICALS

F UTURE O UTLOOK Retail sector revenues pegged at US$ 460.6 billion by 2010-11 Organized retail projected to grow to US$ 43.8 billion Modern retail is expected to adapt and imbibe from the traditional formats Unorganized formats converging from organized formats, in the form of mushrooming village malls

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Retail Domain Study

F IGURE 20 F UTURE G ROWTH

A DVANTAG E I NDIAFastest Growing Economy GDP growth rate of 9.4 per cent posted in 2006-07 is highest ever in last 18 years. With the first quarter growth rate for 2007-08 estimated at 9.3 per cent, the economy is well poised to continue its growth story. Young India Two-thirds of Indias population is under 35 years age and more than 60 per cent of the population will be in the working age group (15-60) till year 2050. Potential Untapped Market Indian Retailing giant, Pantaloon Retail India Limited, captures a mere 0.3 per cent of total market in India, compared to Tesco Plc, Englands 14.3 per cent and Wal-mart USAs 20 per cent, signaling out the large untapped potential

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Retail Domain Study

Abundant Availability of Skilled Labour Over 37 million students were enrolled in about 150,000 pre-college institutes and over 11.7 million in 14,000 higher education institutions in 2005-06 and focussed courses on retail management

P OLICY

AND

R EG ULATORY F RAMEWORK

FDI up to 100 per cent is allowed under the automatic route for cash and carry wholesale trading and export trading and FDI up to 51 per cent is allowed, with prior government approval for retail trade in Single Brand products.

Value added tax (VAT) has been introduced and implemented in most states and union territories, and across most industry verticals (except a few like textiles) to resolve the multiple taxation issues and maintain uniform prices across the countries. Octroi has been abolished in many states to further trade in the retail sector. The government is working towards reducing impediments by introducing a singlewindow clearance mechanism. This would reduce the entry and establishment timelines for new players in the market and facilitate timely and hassle free approvals. The government is releasing large tracts of undeveloped land for retail development in the Mumbai and National Capital Region (NCR).

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Retail Domain Study

The Agricultural Produce Marketing Committee Act (APMC), which curtails direct sourcing of agricultural produce (grocery, food grains, etc), is proposed to be amended soon, with a Draft Model Act being legislated by the government. The new act promotes direct marketing to corporate by farmers, setting up of farmers/consumers market and contract farming.

M ARKET E NTRY S TRATEGIES F OR F OREIGN R ETAILERS I NDIA

IN

Positioning: There are two successful positioning planks for retailers in India (1) Value retailing and (2) Specialty retailing. Experience and research suggests that the strongest proposition for the Indian consumer is value for money. Value retailing implies pricing to be lower than existing retail options for the consumer i.e. local kirana stores for households, wholesalers for small retailers, etc. A value retailer must have anchor categories that sell at significantly lower price than competitive formats. For value retailing format to succeed, the most critical factors are an efficient supply chain model, leadership in sourcing and efficient store operations. While value retailing appeals to multi Page 29

F IGURE 21 C RITICAL S UCCESS F ACTORS R ETAILERS IN E MERGING M ARKETS

FOR

G LOBAL

Retail Domain Study

category consumers, single-category consumers would be attracted to specialty retailers. Such retailers would have the largest product range within a category, offer the best deals and have the most educated sales staff on specialty categories like electronics, apparel, medicine, etc. The success of specialty retailing is also based on the ability to offer a customer a differentiated shopping experience, an experience that is far superior to a multi-category large format store. The most successful retail format in India for some time to come will be the kirana store concept. Indianized store format will work the best for global retailers. The GRDI study has shown that the adapted retail format concept is the key success factor for most retailers in emerging markets. While the format can be anything from a neighborhood store to a hypermarket, it is best decided by a bottoms-up analysis of the infrastructure, consumer and geographic realities of the location.

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Risks and Challenges

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Retail Domain Study

There is no doubt that the organised retail industry is on a high growth trajectory. Favourable demographics, steady economic growth (improving prosperity), higher disposable incomes, and easy availability of credit are providing the necessary impetus to the growth of modern retailing formats. However, there are several challenges that continue to stifle this growth. There is agreement among most players in the industry that the growth of organised retailing can be faster than projected 35%, if some of these issues are addressed proactively.

L IVING

IN

U NCERTAIN T IMES

In the past few years, Indias retail journey seemed picture perfect with the most attractive stops still unexploited and under-penetrated. This was the scenario till a few months ago. Enter the global meltdown and India did not find itself completely insulated from its harsh effects. As per the Cartesian survey, almost all key industries in India have been negatively impacted by the slowdown and retail is no exception. With the Q3 growth numbers of FY2008-09 at 10-12 percent as against 35 percent of the previous year, the happy grins are fast turning into nervous smiles. While the sector is still registering decent growth, the heavy investments made during the boom period may weigh the retailers down. Disappointing Footfalls Although retailers are trying their best to combat this slowdown through constant promotional offers and deep discounts, consumers are expected to cut down on their discretionary spending. With the global recession having no clear end in sight, consumers see sense in saving for a rainy day. Liquidity under pressure The slowing sales are resulting in lower inventory turnover and increasing working capital requirements for retailers. This in turn has resulted in liquidity pressures for many retailers. To free the cash that has been locked, a large number of companies have been trying to reduce the inventory on their books and shorten working capital cycles.

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Roll out delays to compound problems The organized retail space was expected to receive investments to the tune of USD 25 billion over the next 4-5 years5. However a significant delay in retail real estate development and opposition to organized retail has resulted in delays in investment. A large number of retailers have not been able to meet their stated expansion plans. Currently, with higher cost of funds and a slowdown in demand, developers are likely to delay more projects in the near future.

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Real estate Availability and high rental costs The real estate costs for the Indian organised retailers are 8-20% of sales compared to 3-4% for the retailers in other countries. This adversely affects the economics of organised retailers, especially the relatively smaller retailers. This is a result of a combination of several factors including the following: Most Indian cities suffer from poor city planning that has not provided for enough commercial space, resulting in high speculative real estate prices. The stamp duty rates in India (5-14%) are among the highest in the world. For example, stamp duty rates in the UK range from 0-4%. Archaic laws like the Urban Land Control Ceiling and Regulation Act and the Rent Control Act complicate the usage of land and reduce transparency in transactions. Over the last year, rentals in the key catchment areas have increased 80-100% due to the mismatch between supply and demand for real estate; overall, rentals have increased ~40-50%. The last budget has proposed levying 12% service tax on rental payments, which is likely to adversely affect the retailers who are already battling escalating rentals. This proposal is being disputed and the hearing on the same is expected soon.

Crowding in unattractive locations Another reason for slow growth in organized retail is poor choice of locations. Clustering is a common theme in retail in India and retail malls appear wherever real estate is available rather than where they are actually needed. This has resulted in attractive city centers being devoid of malls and newly developed areas having too many.

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Inability to compete with traditional retail Organized retailers have not been successful to provide services that match those of kirana stores. The true reason of their troubles is that the business capacity of the kirana shop owners and buyers is high in India. Mom and Pop stores already have a model that is preferred by consumers and is also cost efficient. The big stores are still trying to get their model right in providing an alternative to neighborhood retailers who offer convenience, credit and personalized service. Over reliance on debt funding The rapid expansion in retail space in recent years was largely debt funded. This has resulted in substantial leverage, which has added to retailers financing risks in the recent scenario. The declining interest coverage clearly indicated that a large number of retailers are highly leveraged and are battling high interest payments. Whatever be the reason, we believe that players who take immediate strategic measures are likely to be the dark horses. Be it store rationalization, change of supply chain, consolidation of operations, improvement in IT infrastructure, retailers need to think quick to protect their margins and toughen up for more challenging times.

Improperly developed malls Several industry players who attended the National Retail Summit were of the view that quite a large percentage of malls, already developed or under construction, are not designed keeping in mind the requirements of modern retail formats. Quite a few of the malls are developed with the idea of selling off the retail space, rather than managing it on a long-term basis. In most cases, the space is sold to the highest bidder without paying much heed to the mix of retailers who will occupy the mall. As a result, there is a fair possibility that such malls may not become destinations of

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choice because of poor retailer mix. With the passage of time, there is a good chance that the customer tastes and preferences also change. However, since the ownership of retail space in such malls is with several parties, changing the retailer mix to suit customers requirements becomes a difficult task. As a result, such malls can fall out of favour with the customers. In several developed markets, the developer leases the mall space on long-term contracts rather than selling the space upfront. At regular intervals, the developer reviews the tenancy mix to weed out retailers that are not able to attract good footfalls. This helps the long-term sustainability of the mall. The scenario, as discussed above, is however quite different in India with the concept of mall management not having caught up. Most of the mall developers do not follow a scientific method of selecting the retailer mix before the construction begins. As a result, the level of utilities available in such malls may be far lower than what is required by the traffic generated by the retailers in these malls, resulting in severe pressure on the mall infrastructure. On the basis of the above-mentioned factors, several industry observers are of the view that quite a few of the malls being developed will come up for redevelopment in 5-6 years, as they may not be able to keep up with the changing consumer tastes and preferences. Underdeveloped supply chain Efficiencies in supply chain will determine which retailers will succeed in the long term; in view of this, it looks like that the bigger companies that have more financial muscle to make significant investments will have a distinct competitive edge. The supply chain infrastructure in India is however still quite underdeveloped. There has been a lack of any meaningful investments by the existing retailers in developing robust and scalable supply chain. Retailers of food and groceries have not yet invested enough in setting up a cold chain system; hence, there is enormous wastage. Moreover, there is a very low level of automation in the supply chain and point of sale systems. There is little real-time link between suppliers, warehouses, Page 36

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and retail stores. This results in cost inefficiencies in the system, leading to increased delays and shortages. The other reason for underdeveloped supply chain is the inconsistency in tax regime among states. Non-uniform VAT regime, multiple points of taxation, and taxes like octroi, and entry tax in some states prevent development of optimal supply chain models, acting as deterrents for organised retailing. Underdeveloped supply chains, lack of strong cold chains, poor warehousing facilities, bad roads, etc. have been contributing to increased logistic costs for the retailers. Globally, the logistics cost component to the total retail price is around 5 percent, while in India it is as high as 10 percent. Absence of a mature Third Party Logistics (3PL) industry Poor infrastructure (roads, communication and power) makes logistics and transportation in India extremely difficult. Further, internal operations of retailers, such as warehouse processes and distribution, are usually fairly ad hoc and inefficient. Retailers are keen to outsource their logistics to 3PL. But there is an absence of a mature 3PL player providing high service levels at competitive prices. Fragmented supply base The supply base is highly fragmented with a large number of intermediaries squeezing the margins of all involved, which also includes the retailer. This not only has an adverse affect on the margins but also results in cases of mishandling, theft and increased instances of shrinkage. Reliable and Integrated infrastructure Large retail franchises depend on reliable and integrated infrastructure. Telecommunications modernization has been a success story in India. The other critical sectors, notably roads, ports, air cargo facilities, and electric power, are seeing increased investment but are still well below international standards.

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Policy and taxation hurdles India suffers from several policy and taxation hurdles. If these issues are addressed effectively, modern retailing could grow significantly. The government has still not granted industry status to retail. This makes financing from banks difficult, resulting in high interest rates, which ultimately pushes up capital costs. Approximately 37-45 licenses are required to start a retail operation. This causes considerable delay in starting a new store operation. Inconsistent agriculture and fertilizer subsidies by states lead to price anomalies and variation for the same product, thereby leading to supply chain inefficiencies. The government has only allowed 51% FDI in retail and that too in single brand retail. Further, talks to bring in FDI in multi-brand retail have met with severe opposition. These factors have restricted the entry of foreign retailers into the country, who could have otherwise significantly contributed in improving the supply chain and level of technology usage in the sector. Inadequate human resources The retail industry is manpower intensive. Countries with high penetration of modern retail employ 10-12% of their workforce in retailing. Given Indias large working population, the issue is not shortage of manpower, but competency gaps that exist because of absence of vocational training facilities for the organised retail sector. Most industry players feel that there is a significant shortfall of resources trained in retail specific skills sets, including supply chain management, merchandising, vendor management, facilities management, customer relations, and branding. This has resulted in high attrition rates and rising people expenses, hindering aggressive ramp-up of most retailers.

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Protests against organised retailers In the past few months, there have been protests in Uttar Pradesh, and the communist-ruled Kerala and West Bengal, including violent demonstrations last September that forced Reliance Fresh, the food stores arm of Reliance Retail, to shut their shops and lay off staff. Thousands of traders, hawkers, farmers, and workers are protesting against the entry of large domestic corporations like Reliance, Spencers, and foreign players like Wal-Mart into the retailing space. These protests are on the back of the belief that the entry of the corporations into the retail sector will negatively impact the livelihood of the intermediaries and the traders, who form a large share of the society currently. These protestors are demanding a national policy that is agreeable to all the stakeholders including small traders, shopkeepers, wholesalers, and vendors be put in place, since retail is the second-largest employer in the country and the livelihoods of 40 mn people are likely to be affected if the entry of big players is allowed at such an alarming pace. On the back of these protests, the government has deferred the proposal to allow FDI in multi-brand retail till a study is made to ascertain the impact on traditional retailers by the growth of organised retail. In case of any adverse decision on this front, the growth plans of organised retailers will be severely hampered. The impact will be pronounced in the food and grocery space, as most of the players are targeting this segment. In India, unlike in the industrialized countries, labor is typically not the critical cost factor in establishing a business, and this may make a business model based on replacing labor with technology vulnerable.

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Impact on Indian Economy

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The lure of Indias retail sector lies not only in its size, but also in its vast potential. The retail sector is expected to grow by 25 percent annually and hit the 400-billiondollar mark within the next few years. Retail growth in China is expected to be just over half the rate in India, making India the next frontier in retail expansion. The retail sector accounts for 7 percent of employment and 10 percent of the countrys GDP. Despite its size, it is still dwarfed by Chinas retail sector, which may be as much as two-times larger than Indias. Additionally, only 3 percent of Indian retail is organized. The other 97 percent consists of small shopkeepers and hawkers running mom-and pop stores. This unorganized portion accounts for much of Indias large informal economy. Today, organized retail operations, chain stores, and international investment are starting to move in, leading at least part of the retail sector to dramatically increase its scale of operations and integrate itself more closely into the international economy. This move will produce significant gains for the economy, potentially reducing farm-to-market losses of agricultural products, encouraging infrastructure improvement, and driving the training of the middle segments of the labor force. It will also produce losers, notably those of Indias 50- plus million small shopkeepers and hawkers who will be displaced by the modernized retail sector. More fundamentally, the growth of the retail sector will create new dynamics and relationships in the Indian economy and between the Indian and global economies. FDI Regulation As the retail sector continues to grow, the government is starting to liberalize its protectionist policies. Foreign investors have long been limited to entering the Indian market through franchising, licensing, or wholesaling. Using these methods, Nike, Adidas, and Benetton have already become common names in India. As apart of Indias ongoing economic reforms, foreign retailers are allowed to own 51 percent of single-brand outlets. Thus far, however, the worlds largest retailers have had mainly wholesale operations in India. The German firm Metro and Shoprite from South Africa have opened wholesale operations. Wal-Mart has also signed a joint Page 41

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venture with Bharti, under which it will provide the supply-chain and cash-andcarry type of wholesaling for a new wave of Bharti retail stores. They have recently opened their first cash-and-carry joint venture store in Amritsar on an investment of $7 million, and they plan to open at least 15 outlets across the country in the next three years. The stores will be run under the brand name of Best Price Modern Wholesale. Unemployment Concern The concern about allowing these major operators to move into retail stems mainly from the concern that large-scale liberalization will adversely affect the large, unorganized retail sector. In a country like India that is struggling to find sufficient employment for its ever-expanding workforce, a retail model that relies on replacing low-skilled labor with technology inspires understandable skepticism. Moreover, the contrast in modernity between Indias urban and rural areas will become that much more visible. As a result, any move to bring in foreign investment in retail will be controversial and emotional. Modernization and new Job opportunities The combined effort of foreign retailers and local firms to gain their piece of the retail pie will bring some disruption to the existing small-scale retail sector, including an estimated 12 million small shopkeepers and 40 million hawkers as well as their families. The large operators, especially the foreign ones, have been looking at ways to mitigate this impact. Wal-Mart, in anticipation of entering the retail market directly, has outlined a plan to help compensate local retailers who might be displaced through a three-month retraining program to convert small-shop owners into sales workers. Modernization will also create demand for jobs staffing warehouses, supply centers, and transportation routes. Such plans will not eliminate the controversy surrounding foreign investment in retail. Wal-Marts Page 42

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reputation in the United States as a hard-nosed employer bent on minimizing employee benefits will certainly influence the political response to any decision to liberalize the retail sector. Expansion of manufacturing sector Currently, Wal-Mart sources between 70 and 90 percent of its goods worldwide from China, providing a considerable boost to the Chinese manufacturing sector. In a recent interview, Raj Jain, president of Wal-Mart operations in emerging markets, estimated that Chinese and other international sourcing will account for less than 10 percent of the goods provided by Wal-Mart in India. India also has a low cost of labor, and its manufacturing productivity is constantly improving. India could therefore provide a legitimate alternative to Chinese manufacturing not just in India but also throughout the world. Benefits to Indian Agriculture Potentially standing to gain the most from a more organized and better-equipped retail sector is Indian agriculture, especially perishable crops. Currently, 35 to 40 percent of fruits and vegetables grown in India perish in transit because of poor transportation methods and a lack of refrigeration. In a recent study by the consulting firm CRISIL, it was estimated that organized retailing could increase farmers incomes by 37 percent. This would boost both GDPCRISIL estimates by 1.7 percentage pointsand the standard of living of a population that has gained relatively little from Indias two decades of faster growth. Foreign retail firms could also help fund much needed improvements in infrastructure. Food processing is underdeveloped in India, adding only 7 percent to its value as opposed to 40 percent in China. Thus, the increased emphasis on food processing holds great potential for further increasing employment rates in India. Emergence of India as the retail sourcing hub Riding on the back of a strong manufacturing industry, India is fast emerging as an important global sourcing hub for top international brands India has had a continued presence in the global scenario as one of the leading exporters of apparels and textiles. The expiry of the Multi Fiber Arrangement has further widened the global markets for apparel. Many international brands have identified India as one Page 43

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of the important supply centres for procurement of textiles and apparels. Wal-Marts sourcing operations was estimated at US$ 1 billion, Tescos around US$ 100 million and Marks & Spencer around US$ 145 million from India for the year 2005- 06. Unilever sources major portion of their fast moving consumer goods from its wholly owned Indian subsidiary, Hindustan Unilever Limited. Adidas, Next and Calvin Klein are expected to follow suit, with Adidas opening its first office in Bangalore. Rural retailing Rural retailing constitutes more than 95 per cent of total retail revenues, with more than 70 per cent of Indias population concentrated in the rural areas. Rural hypermarkets are growing at a blistering pace meeting the unique requirements of the rural consumer. The range of services provided by the rural retailers extends from creating a platform to buy and sell farm produce, to banking services, to restaurants etc. One of the key players in the rural retail segment is ITC with its Choupal Saagar initiative. ITC has 14 outlets in operation presently and plans to increase the number to 700 over the next 7-10 years. ITCs Choupal Saagar retails products and also acts as a procurement hub for ITCs e-choupals where farmers are offered better rates for their agriculture produce, compared with the prevalent market rates for the same. Other examples of players and their services in the rural retail segment are DSCLs Hariyali Kisan Bazaar and Indian Oil Corporations Kisan Seva Kendra. DSCLs Hariyali Kisan Bazaar has over 70 outlets presently and the company proposes to operate a total of 200 outlets over the next 12 months. The outlets provide a spectrum of offerings including agronomist-consultations, agri-inputs, and financial services, apart from the conventional retailing services. Indian Oil Corporations Kisan Seva Kendra offerings extend over fuel, agri-produce, fast moving consumer goods and other value added services. The company has a network of over 1400 outlets presently. Reliance Retail and Pantaloon Retail India Ltd. are expected to undertake more ventures to capture the vast untapped potential in the rural retail segment.

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Future of Retail

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R ETAIL M ARKET D YNAMICSIn recent years a confluence of market forces has created an extremely challenging environment for retailers.

F UTURE R ETAIL E XTREMES

I NDUSTRY

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In particular, these mega-trends are driving toward a world characterized by market bifurcation.

Retailers must target their most profitable customer segments.

F IGURE 22 M OVING

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C USTOMER C ENTRIC M ODEL

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Customer-centric retailing is redefining business model and retailers will undergo systematic changes. There is a shift in loyalty from Push to Pull platform.

Better store experience translates to improved business results for retailers.

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IT in Retail

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B USINESS I NTELLIGENCE

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Business Intelligence (BI) refers to the ability to collect and analyze huge amount of data pertaining to the customers, vendors, markets, internal processes, and the business environment. A data warehouse is the corner stone of an enterprise-wide business intelligence solution; various analytical (OLAP) and data mining tools are used to turn data- stored in the data warehouse - into actionable information. The information economy puts a premium on high quality actionable information - exactly what Business Intelligence (BI) tools like data warehousing, data mining, and OLAP can provide to the retailers. A close look at the different retail organizational functions suggests that BI can play a crucial role in almost every function. It can give new and often surprising insights about customer behavior thereby helping the retailers meet their ever-changing needs and desires. On the supply side, BI can help retailers identify their best vendors and determine what separates them from not so good vendors. It can give retailers better understanding of inventory and its movement and also help improve storefront operations through better category management. Through a host of analyses and reports, BI can also improve retailers' internal organizational support functions like finance and human resource management.

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C USTOMER R ELATIONSHIP M ANAG EMENTThe Customer Relationship Management (CRM) strategy should include: Operational CRM: Automating interaction with the customers and sales force Analytical CRM: Sophisticated analysis of the customer data generated by operational CRM and other sources like POS transactions, web site transactions, and third-party data providers.

A typical retail organization has a huge customer base and often customer's needs are fairly differentiated. Without the means to analyze voluminous customer data, CRM strategy is bound to be a failure. Hence, Analytical CRM forms the core of a retailer's customer relationship strategy. Marketing and sales functions are the primary beneficiaries of Analytical CRM and the main touch points from where the insights gained about the customer is absorbed in the organization.

Following are some of the uses of Analytical CRM: Customer Segmentation Customer segmentation is a vital ingredient in a retail organization's marketing recipe. It can offer insights into how different segments respond to shifts in demographics, fashions and trends. Campaign/ Promotion Effectiveness Analysis Once a campaign is launched its effectiveness can be studied across different media and in terms of costs and benefits; this greatly helps in understanding what goes into a successful marketing campaign.

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Customer Lifetime Value Not all customers are equally profitable. At the same time customers who are not very profitable today may have the potential of being profitable in future. Hence it is absolutely essential to identify customers with high lifetime value; the idea is to establish long-term relations with these customers. Customer Loyalty Analysis It is more economical to retain an existing customer than to acquire a new one. To develop effective customer retention programs it is vital to analyze the reasons for customer attrition. Business Intelligence helps in understanding customer attrition with respect to various factors influencing a customer and at times one can drill down to individual transactions, which might have resulted in the change of loyalty. Cross Selling Retailers use the vast amount of customer information available with them to cross sell other products at the time of purchase. This effort is largely based on the tastes of a particular customer, which can be analyzed using BI tools based on previous purchases. Retailers can also 'up sell' - sell more profitable products - to the customer at the time of contact. Product Pricing Pricing is one of the most crucial marketing decisions taken by retailers. Often an increase in price of a product can result in lower sales and customer adoption of replacement products. Using data warehousing and data mining, retailers can develop sophisticated price models for different products, which can establish price - sales relationships for the product and how changes in prices affect the sales of other products. Target Marketing Retailers can optimize the overall marketing and promotion effort by targeting campaigns to specific customers or groups of customers. Target marketing can be based on a very simple analysis of the buying habits of the customer or the customer group; but increasingly data mining tools are being used to define specific customer segments that are likely to respond to particular types of campaigns.

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S UPPLY C HAIN M ANAGEMENT

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P ROCUREMENT

Supply chain management (SCM) promises unprecedented efficiencies in inventory control and procurement to the retailers. With cash registers equipped with bar-code scanners, retailers can now automatically manage the flow of products and transmit stock replenishment orders to the vendors. The data collected for this purpose can provide deep insights into the dynamics of the supply chain. Some of the applications of BI in supply chain management and procurement are: Demand Forecasting Product Movement and the Supply Chain Vendor Performance Analysis Store Front Operations Market Basket Analysis Out-of-Stock Analysis

A LTERNATE S ALES C HANNELThe success of a retailer in future would depend on how effectively it manages multiple delivery channels like the Internet, interactive TV, catalogs, etc. A single customer is likely to interact with the retailer along multiple channels over a period of time. This calls for an integrated strategy to serve the customer well, which requires smooth flow of information across channels. To ensure smooth flow of information customer data needs to be collected from different channels in one data warehouse. Customer relationship strategy can then be built around this customercentric data warehouse. BI can be used for analysis of alternative sales channel in the following ways: Web Log Analysis This involves analyzing the basic traffic information over the e-commerce web site. This analysis is primarily required to optimize the operations over the Internet. Typically such type of exercise will let analyze the user navigation of a particular website, determination of popular keywords and knowledge of referrer site. Web Housing This involves integration of web log data with data from other sources like the POS transactions, third party data vendors etc. Channel Profitability Data warehousing can help analyze channel profitability, and whether it makes sense for the retailer to continue building up expertise in that channel. The decision of continuing with a channel would also include a number of subjective factors like outlook of key enabling technologies for that channel. Page 53

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Product - Channel Affinity Some product categories sell particularly well on certain channels. Data warehousing can help identify hidden productchannel affinities and help the retailer design better promotion and marketing campaigns. AND

F INANCE

A SSET M ANAG EMENT

Following are some of the uses of BI in finance: Budgetary Analysis Data warehousing facilitates analysis of budgeted versus actual expenditure for various cost heads like promotion campaigns, energy costs, salary, etc. OLAP tools can provide drill down facility whereby the reasons for cost overruns can be analyzed in more detail. It can also be used to allocate budgets for the coming financial period. Fixed Asset Return Analysis This is used to analyze financial viability of the fixed assets owned or leased by the company. It would typically involve measures like profitability per sq. foot of store space, total lease cost vs. profitability, etc. Financial Ratio Analysis Various financial ratios like debt-equity, liquidity ratios, etc. can be analyzed over a period of time. The ability to drill down and join inter-related reports and analyses provided by all major OLAP tool vendors can make ratio analysis much more intuitive. Profitability Analysis This includes profitability of individual stores, departments within the store, product categories, brands, and individual SKUs. A major component of profitability analysis is the costs incurred by stores/ departments and the cost of acquiring, storing and allocating shelf space to particular product categories, brands, or SKUs.

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P LANOGRAMSA planogram is a diagram of fixtures and products that illustrates how and where retail products should be displayed, usually on a store shelf in order to increase customer purchases. They may also be referred to as plano-grams, plan-o-grams, schematics (archaic) or POGs.

F IGURE 23 A P HOTOGRAPHIC P LANOGRAM

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A PPARELS

A planogram is often received before a product reaches a store, and is useful when a retailer wants multiple store displays to have the same look and feel. Often times, a consumer packaged goods manufacturer will release a new suggested planogram with their new product, to show how it relates to existing products in said category. Because the most basic planograms are little more than text-boxes stacked and sorted, basic planograms can be created in any type of painting or word processing program or even on the back of a napkin. The use of planogram software however, enables a user to do much more advanced and detailed analysis. Most planogram programs even automatically add product images to products, in addition to providing dynamic shading and labelling to better show opportunities in the set. Following are the few companies that offer planogram creation software: Mockshop: Mockshop automates the production of planograms for the fashion industry. Intactix: JDA Intactix offers a variety of space management solutions. Logical Planning Systems: Shelf Logic2000 planogram design software vendor.

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MarketMAX: Provider of merchandise analysis, planning, and optimization solutions. Their Planogram Manager is a PC-based application for developing planograms. Apollo: Apollo is space management software that has been around for over 20 years. It is a product of Information Resources. Spacemate: Ingen Spacemate is software for creating, viewing and editing planograms. Various rules can be applied to the products in order to produce an optimal planogram.

F IGURE 24 PHOTOGRAPHIC PLANOGRAMS FOR FMCG PRODUCTS

The following are some of the major business benefits from planograms: Consumer driven store-specific planograms increases value leading to lifetime customer loyalty. Targeted store-specific planograms lead to maximum in-store compliance resulting in an accurate understanding of product distribution. Accurate store-specific planograms ensure optimum supply chain efficiency that results in higher availability to consumers, maximum stock turn and the most efficient use of space. Introducing focused store-specific planograms leads to increased sales and profitability, reduction in stock and operational costs and an overall improvement in bottom line contribution. Tailors assortments including product launches and group-specific go-tomarket strategies, so that you can improve cluster results and meet true local demand. Increases movement at full retail value while lowering carrying costs and decreasing out-of-stocks and excess inventory, so that you can enhance your overall profitability

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Streamlines space and floor planning, so that you can increase your space productivity and optimize your capital investment Translates merchandising strategy into tactics, so that you can drive consistent store execution of your corporate strategic and assortment decisions.

E-T AILINGElectronic retailing, or e-tailing, refers to the practice of selling goods and services over an electronic medium like the Internet. Many traditional brick-and-mortar firms like Toys 'R' Us and Barnes and Noble also sell their wares via Web sites. Other companies, such as Amazon.com, rely solely on the Web to conduct business. While books, CDs, and computer software and hardware are the most common goods sold by e-tailers, clothes, cosmetics, perfume, plants, toys, and other types of merchandise also made their way to the Web in the late 1990s. One of the first and most well-known e-tailers, Amazon.com got its start in July of 1995. Because the business-to-consumer (B2C) model was relatively new and unproven then, Amazon had to develop its own architecture and manage its own site. As online shopping grew in popularityaccounting for $3 billion in consumer spending in 1997 and $7.1 billion in 1998technology vendors like IBM Corp. moved into ecommerce and began offering to build and even oversee sites for companies wanting to launch an e-tailing venture. Benefits of E-Tailing No real estate costs E-tailers do not have to maintain expensive showrooms or warehouses in prime locations; they operate through their web sites and thus save drastically on the real estate costs. The real estate costs in the metropolitan cities are sky high. Besides this, the maintenance costs of a virtual store vis--vis a physical store is much less. Easy and comfortable Easy and comfortably -obtained info is another advantages that shopping on the Net offers. On the Internet, product information is just a few clicks away, all accessed in the comfort of a home. Traditional retailing stands out in stark contrast: the consumer searches frantically, runs up and down, and grills a poorly trained store assistant who is unable to help him out. In the bargain, valuable time is lost. Simply put, shopping on the Internet for, say 15 minutes could save a two-hour trip to the Page 57

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mall. Consumers prefer to save this time so that they can devote more time for their professional and domestic priorities. Better interaction with the customers The greatest benefit of online commerce is its ability to establish interaction en-masse. Interaction refers to the ability of reaching the customers on an individual basis and reacting appropriately to responses of individual customers. Interaction is a vital tool for mass customization. Examples are many and include online marketing of flowers, software books and education. This has also led to greater satisfaction among the online buyers. Mass Media A supermarket has limited area of operation. It caters to customers of a city (and/or its suburbs), but a web site can be accessed from any part of the country or for that matter from any part of the world, thus increasing the potential customer base.

G LOBAL D ATA S YNCHRONIZATIONAccurate data helps at all stages of the supply chain, from purchase order to delivery, from storage to the retail shelf. Suppliers are finding that by synchronizing data across their entire supply chain infrastructure, they can enjoy the following benefits: Lower costs for shipping and logistics Fewer discrepancies in shipments to retailers Reduced number of invoice write-offs Improved outbound logistics processes Faster time to market with new products

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S OFTWARE P ACK AGES

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R ETAIL

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K EY R ETAIL P RIORITIESMultichannel convergence The number of shoppers crossing channels increased 8% from 2004 to 2005, bringing the total in the US to nearly 40 million households. As cross-channel shoppers become more mainstream, their demands will have more of an impact on retailers regardless of channel. But most retailers arent organized to provide a holistic experience to consumers, either because their eCommerce organizations are too separate to mesh well with stores or because store systems and processes arent structured to handle meeting online shoppers needs. Customer service in stores Retailers have been declaring each year the year of the customer for decades, and 2007 will be no different as retailers continue to turn to customer service as a differentiator. Multiple pressures drive renewed attention to customer service: Cross-channel shoppers bring different expectations of what customer service really means, and consumer centric retailing initiatives work to reshape stores to fit the needs of shoppers specific to each location. Add in the other trends for 2007, like supply chain data foundations that make it easier for retailers to tap into and use expanded product data, and merchandising renewal that enables local market assortments. Without technology to bring it all together and help manage the increase in complexity, retailers will be hard pressed to make customer service improvements stick. Supply Chain Data Foundation Global data synchronization (GDS) and the challenges of sharing clean data between trading partners have put renewed focus on supply chain data foundations. Adding to the interest is the potential for data proliferation as RFID adds more product and location numbers to the mix and the pressure that consumer-centric retailing initiatives are putting on customer data foundations. Retailers that dont take a holistic approach to mastering their data risk perpetuating silos as different groups build out their own solutions to increasingly interconnected data entities. Retailers who learned the hard way about the importance of data cleanliness in recent data synchronization efforts will turn back to master data management (MDM) and product information management (PIM) as foundational efforts required to get the most value out of GDS initiatives. Also, RFID will increasingly be wrapped into

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these efforts, not from a tagging and reader infrastructure perspective but from a data perspective so that MDM and PIM will be ready for RFID when it comes. Merchandising renewal Though users and vendors alike often refer to merchandising systems as if they were a well-integrated suite, the reality is that merchandising applications can be as siloed as the worst tangle of best-ofbreed applications. But changes in the pricing process, in demand forecasting and demand management, and the pressure of localized assortments have forced a re-evaluation of existing merchandising silos. Optimization Price optimization in particular has been a hot topic in the past, and adoption of all retail optimization technologies doesnt look to be slowing down in 2007. But implementation efforts to date face challenges from data cleanliness, cultural resistance, and process implications. Retailers struggle with organizational changes required to support optimization technologies, as adoption moves from a trial run that tacks optimization on to the end of a larger process to a commitment to an integrated part within the overall merchandising process.

F IGURE 25 S PENDING S HIFTS A CROSS R ETAIL C HANNELS

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Retail Trends to Watch

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SALES GROWTH IS EXPECTED TO DECLINE IN MOST RETAIL SECTORS ASCONSUMERS CUT BACK ON SPENDING IN 2009

The retail industry, as with all other industries is in the heart of a deep global recession. The knock on effect of the credit crunch has left consumers struggling to cover costs, shopping for essential items only and being very picky about product and price. For many retailers, sales growth is declining. In 2009, the focus will be on keeping afloat by being creative with minimal budgets to help cut costs and maintain market share.

One area of consideration will be minimizing loss through theft. In tough economic times, retailers are hit by rising shrink rates and falling retail sales, crime and theft loss directly impacts on the bottom line. The hard business climate will inevitably lead to higher levels of shrink and this will become increasingly more noticeable Page 64

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against falling retail sales. Loss prevention at the checkout has increased in priority over the last year, including in Nordics where it has not been a common issue prior to the downturn, and is expected to continue to be an area of focus in 2009. Retailers will be looking for other ways to reduce costs, such as ways that make it cheaper and easier to communicate and share data as well as ways to reduce inefficiencies in-store, the back office and throughout the supply chain. The biggest cost to a retail business is its staff so inevitably staff cuts are often the first consideration in a cost cutting exercise. Retailers will be seeking ways of making the workforce more efficient so that the same levels of customer service are achieved with fewer staff members. CUSTOMER LOYALTY WILL BE CRITICAL FOR SALES GROWTH IN 2009; A FOCUS ON IMPROVING THEOVERALL CUSTOMER EXPERIENCE IS KEY

Increasing sales revenue means increasing the return on footfall. To do this, retailers will need to know their target market: know who their customers are and know exactly what they want and expect from their shopping experience, from the store design right through to the delivery method. To continue attracting loyal customers the majority of the retail industry will be expected to cater for and respond to the changes in their target market through personalizing the shopping experience, online and in-store. Value retailers are partially exempt from this rule, where other issues such as ensuring stock is on the shelf will be a focus. Making certain that the correct products are in stock and on the store shelf, ensure the POS system is in working order and having enough staff to handle queries instore will help retailers maintain market share. However, staff cuts and in some cases, store closures are inevitable as retailers look to control costs. Retailers that are faced with store closures will look for new ways to keep customers in store closure areas by encouraging previous store customers to instead buy online in order to maintain market share. No matter what the customers preferred shopping channel is, the retailer must offer a joined-up experience, to encourage loyalty and repeat purchases. Consistent branding and design, product offerings, gift card and loyalty schemes will help to ensure the fickle customer has a positive experience.

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INVESTMENTS THAT PROVIDE RETURNS IN LESS THAN 12 MONTHS WILL BE TOP PRIORITY, RATHERTHAN LENGTHY SYSTEM OVERHAULS

Investments in 2009 will be expected to positively contribute to the financial year end. Retailers will be focusing on two areas in 2009: Technology and services which help to cut operational costs and provide a return on investment in a short space of time, ideally within 3 6 months. Due to rising crime rates, loss prevention will earn more attention in 2009. Data mining applications are relatively cheap, quickly implemented and provide proven returns. Advanced workforce management solutions will also prove a cost effective and popular way of controlling staff costs. Cost effective technology that is implemented quickly and almost immediately shows improvement to sales revenue. Improving the customer experience in order to maintain or improve levels of loyalty is expected to be a key issue in 2009. Kiosks, category management, BI and customer feedback systems will play a key part in retailers customers experience improvement strategies in 2009.

LARGE SCALE AND LENGTHY PROJECTS WILL BE PUT ON THE BACK BURNER As capex is cut in 2009, IT budgets will suffer. Minimal large scale IT contracts will be signed in 2009, whereas those projects that are already underway will likely experience delays as a result. Vendors managing costly systems and telecom infrastructure upgrades will be the losers in this environment. A trend towards large outsourced services contracts in retail could be these vendors saving grace.

T RENDS

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I NDIAN R ETAIL I NDUSTRY

The Indian Retail Sector is at an inflexion point, with changing demographics driving growth of organized retailing and driving growth in consumption. With changing demo